All posts by Graham Bodel

Unfair or not, get ready for these 3 big corporate tax changes

“We see these approaches to managing people’s affairs through a private corporation as creating an unfair playing field … We’re trying to tighten these loopholes to make sure that it’s fair.”

Doesn’t sound like taxes for small business owners are going down, does it?  The above is from federal finance minister Bill Morneau’s July 18 announcement outlining some of the measures the government is proposing to help level what they perceive to be an unfair playing field.

Since the announcement we’ve been thinking about the potential implications of these changes and digesting comments from a variety of different tax experts.  We agree with one expert who opined that “fairness is subject to personal interpretation.”

Unfortunately adhering to these proposed changes won’t be subject to personal interpretation so the bottom line is that we encourage all small business owners, especially those using private corporations in conjunction with saving for retirement or for the benefit of their families as a whole, to seek expert tax advice ahead of these changes coming into effect.

How did this come about?

Taking a step back, the reason that small businesses were given preferential tax treatment in the first place was to encourage them to reinvest in growth opportunities, employ more people, contribute to the Canadian economy in a more meaningful way and that would be good for Canada – hard to argue with that.

Of course all rules, especially tax rules, end up with unintended consequences.   The current government feels many small business owners and their families have been taking advantage of opportunities (loopholes) in the legislation that allow for further savings when it comes to their personal taxes. Furthermore, they seem to be particularly concerned about the increased “corporatization” of certain professions that has taken place over the last 10 to 15 years in order to reduce tax bills. As not everyone is a small business owner, the tax advantages are deemed to be unfair to those who aren’t.

What are the specific areas that are deemed to be unfair?

1.) Income sprinkling

Income sprinkling is a strategy where a business owner looks to save tax by distributing income, dividends and capital gains to other members of his or her family in order to take advantage of multiple sets of graduated tax rates (i.e. pay other family members who are in a lower tax bracket) or exemptions, in order to lower the overall family tax bill.   Continue Reading…

It’s tough managing money: somebody has to do it, but not necessarily you!

Protecting and growing your retirement nest egg is one of your most important financial responsibilities.  Ensuring that your nest egg is sufficient to fund your lifestyle in retirement often means putting at least part of it at risk in the stock market.

Unfortunately, too many people are swayed into believing that being a successful stock market investor means you have to actually beat the market.  Beating the market is really, really difficult, especially over longer periods of time.  It’s a tough job, but why is it so difficult?

Picking outperforming stocks is hard

A recent article from one of our favourite authors and commentators, Larry Swedroe, highlights some data points from studies that indicate why stock pickers might have such a tough time beating the market:

  • The Russell 3000 Index of the largest 3000 US stocks delivered an annualized return of 12.8% between 1983 and 2006
  • While that’s an impressive return over that period and achievable for anyone investing in a Russell 3000 Index fund (if there was one in 1983!), trying to beat that index by picking stocks would have been a formidable task – here’s why:
    • the median annualized stock return was only 5.1% and the average stock actually lost money, -1.1% annually
    • 39% of stocks lost money
    • half of the stocks that lost money lost at least 75% of their value
    • 64% of stocks under-performed the Russell 3000 Index
    • just 25% of stocks were responsible for all of the gains.
    • only 48% of stocks returned more than one month Treasury bill returns

No wonder it’s so difficult to beat market indices. Outperforming stocks are really hard to find!

Even the pros find it difficult

Continue Reading…

Don’t panic, Mom’s money is safe with an “advisor”

Toronto’s big banks: CBC puts focus on misleading job titles

“Integrity has no need of rules.” – Albert Camus

“If it is not right, do not do it.  If it is not true, do not say it .” – Marcus Aurelius

Words to live by, no?  Unfortunately, the financial services industry in Canada doesn’t tend to screen for existentialists and stoics.  I’d take Marcus Aurelius or Seneca as my financial advisor any day, even if they weren’t one of the rare advisors in Canada who are required by law to act in their clients’ best interest.

The headlines have been ablaze in the last few weeks with furor over alleged mis-selling at Canada’s banks.   Most recently, CBC’s Go Public investigators published a piece about misleading job titles:  a grand conspiracy perpetrated by the Canadian financial services industry in which the English language is manipulated to dupe unknowing consumers.  (See: ‘I feel duped’: Why bank employees with impressive but misleading titles could cost you big time)

“What’s in a vowel?”

Specifically, the authors suggest that by calling their employees “advisors” with an “o” instead of “advisers” with an “e”, banks are intentionally granting staff license to engage in all sorts of nefarious product mis-selling and conflicted behaviour.   Continue Reading…

Banning Investment Commissions – moving beyond “if” towards “how”

On Tuesday,  the Canadian Securities Administrators (CSA) released a much awaited consultation paper, “Consultation on the Option of Discontinuing Embedded Commissions.”

We say “much awaited” half tongue-in-cheek.  Much in the same way that a large number of Canadians have no idea how or how much they pay for investment products / advice, we expect even fewer are aware of the potentially seismic shifts that are taking place in the regulation of investment advice and advisor compensation practices!

As the title of the paper suggests, the regulators are considering banning the practice whereby investment advisors are compensated by investment product dealers directly through the payment of commissions embedded in fees charged on products such as mutual funds, structured products and others.  Conflict of interest is the key issue that the paper’s summary highlights, as follows :

1.) Embedded commissions raise conflicts of interest that misalign the interests of investment fund managers, dealers and representatives with those of investors;

2.) Embedded commissions limit investor awareness, understanding and control of dealer compensation costs;

3.) Embedded commissions paid generally do not align with the services provided to investors.

The discussion is moving past “if” and heading towards “how” embedded commissions should be banned

Continue Reading…

The two crucial success factors that often elude investors

There are two crucial success factors that often elude investors:  the ability to save consistently and the discipline to stick with a saving and investment plan over time.

Successful investing is a long-term proposition.  In the short run, financial markets are very unpredictable, gyrating to a complex and increasingly-interconnected information flow that changes by the second.  Sentiment and trendiness rule the short run, as markets oscillate around a more predictable long-term relationship between risk and reward.  As the great investor Benjamin Graham once said:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Furthermore, we believe most investors are confused about what it is that is difficult and what it is that is straightforward about investing.  Let’s start by looking at some essential yet straightforward steps for creating a sensible portfolio that should put you put you in a good position to achieve long-term investment success:

1.) Decide whether you’re going to do it yourself or use an advisor.  While it may seem obvious: you want to ensure that if you do choose to work with an advisor that he or she will act in your best interest.  In Canada, the vast majority of advisors are not required by law to work in your best interest – that doesn’t mean they won’t, but be aware – Robb Engen addressed this issue in a recent piece on Jonathan Chevreau’s Findependence Hub – Commission-based advice & suitability: a dangerous combination

2.) Decide how much risk to take.  Risk is most effectively assumed by exposing your portfolio to broad asset classes with different risk characteristics.  For example, stocks are riskier than bonds but that risk is usually rewarded with higher returns over the long run.   Your portfolio should be allocated to different asset classes so that it’s appropriate for your risk profile.  And we don’t just mean you take a questionnaire and allocate according to your score: your allocation really has to reflect your specific financial situation, taking into account both near and longer term goals.

3.) Pick what type of securities or funds in which to invest.  A sensible portfolio should be diversified effectively across geographies, industries and other dimensions of risk.

4.) Pick investment products that keep costs low. Compound interest is a modern miracle: costs work in the same way but against you, and the other side of that miracle is a curse.  For example, mutual fund fees in Canada are among the highest in the world, which can take a huge dent out of your nest egg over the long run.

5.) Trade only when necessary. Trading should be kept to a minimum and is really only necessary when a portfolio strays too far from its target allocation, you have new savings to invest / you need to withdraw funds, or your situation has changed by a magnitude that requires a new allocation.

So go create a low-cost diversified portfolio that suits your risk profile and trade when necessary to rebalance back to target:  it’s actually very straight forward.  There are wonderful products on the market for both do-it-yourselfers and those who want to work with advisors.  The merits of such an approach are evidenced in volumes of peer-reviewed academic literature, in the publicly available records of investment fund performance and anecdotally from scores of investors.

It all starts with saving

Unfortunately it’s easier said than done.

While the investing side as described above may, on the surface, seem fairly formulaic and mechanical, it doesn’t properly address two extremely important elements that are essential to long-term investing success.

The first may seem obvious but is not easy: saving. Without money to invest in the first place it’s hard to benefit from a long-term investment plan!  But saving is really hard.  It forces you to ask yourself some tough questions:

  • What do I need versus what do I want?
  • Can I live within my means?
  • Can I ignore what other people think is important and focus only on what is important for me and my family?
  • Am I comfortable with delaying gratification in order to save?
  • How much do I need to save to accomplish what I desire in life?  What do I desire in life?
  • What is worth sacrificing today so I can benefit later in life?

The second is not so obvious and is really difficult: discipline. Successful investing means that at times you’ll be fighting some very difficult impulses and emotions.  Again, you need to answer some difficult questions:

  • Am I prepared to buy an investment that has decreased in value dramatically?
  • Am I prepared to sell an investment that is skyrocketing, that everyone is talking about at cocktail parties and “getting rich” from?
  • Can I ignore the pundits and market commentators?
  • Can I stick with the plan even though my emotions tell me to do the exact opposite?

Now you might be saying sure, I won’t let my emotions get the better of me.  Believe us when we say it’s much more difficult in the heat of the moment to stick with the discipline that’s required.  Most investors, both amateur and professional, fall victim to psychological pitfalls and stray from their discipline precisely at the moment they need it most, usually around market peaks and troughs.

By all means, engage in an investment process to deliver long-term success. Do your research and take your time to set it up correctly but don’t forget about the really hard part: saving enough to allow you to benefit from investing and maintaining the discipline to reap the rewards over the long run.  If you feel you can’t avoid the psychological pitfalls alone, get some help!

Graham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original ran on December 14th, here.