All posts by Graham Bodel

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.



4 sensible financial literacy books as gift suggestions

Santa Clause putting a shiny Christmas present into a stocking. Isolated on white.Want to give the gift of financial literacy to a loved one this Christmas?

We have a few stocking stuffer ideas,  following the just-completed Financial Literacy Month in Canada. Throughout November,  there were lots of articles out there on the importance of financial literacy and even more opinions about how to improve it.

Some argue for it to be taught in schools:  aren’t our schools stretched enough for resources as it is?  Some say parents should make it a priority to teach their children about money but many parents struggle with money concepts themselves and “do as I say, not as I do” isn’t always convincing.  Many argue very credibly that the financial services industry in Canada generally works to separate people from their money rather than to educate them about how to best grow their money.

We’re not sure what the answer is but agree it’s an important subject.  If you’ve already read David Chilton’s The Wealthy Barber and are ready to move on to the next step, here are a few investment books that are sensible and concise.

*We first published this list in February 2015 and have received positive feedback!

1) The Investment Answer – Daniel Goldie and Gordon S. Murray – 2011

The Investment Answer – Daniel Goldie and Gordon S. Murray – 2011

Publisher summary:

“What if there were a way to cut through all the financial mumbo-jumbo? Wouldn’t it be great if someone could really explain to us–in plain and simple English–the basics we must know about investing in order to insure our financial freedom? At last, here’s good news. Jargon-free and written for all investors–experienced, beginner, and everyone in between–The Investment Answer distills the process into just five decisions–five straightforward choices that can lead to safe and sound ways to manage your money.”

2) The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns – John C. Bogle – 2007

The Little Book of Common Sense Investing- The Only Way to Guarantee Your Fair Share of Stock Market Returns – John C. Bogle – 2007

Publisher summary:

“Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game. Common sense tells us-and history confirms-that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns. To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C. Bogle.”

3) The Empowered Investor: A Canadian Guide to Building a Better Investment Experience – Keith Matthews – 2013

The Empowered Investor- A Canadian Guide to Building a Better Investment Experience – Keith Matthews – 2013

Publisher summary:

“With The Empowered Investor: A Canadian Guide to Building a Better Investment Experience, author and advisor Keith Matthews answers the call for a clear, intelligent guide for Canadians looking to invest wisely. Dispensing with jargon and hype, The Empowered Investor is an easy-to-read finance and portfolio management book that offers a down-to-earth treatment of a complex subject with an accessible style that will appeal to novices and experts alike.”


4) Exchange Traded Funds for Canadians for Dummies – Russell Wild and Bryan Borzykowski – 2013

Exchange Traded Funds for Canadians for Dummies – Russell Wild and Bryan Borzykowski – 2013

Publisher summary:

“The fast and easy way for Canadians to understand and invest in ETFs – Exchange-traded funds (ETFs) are an increasingly popular part of the investing landscape, being less volatile than individual stocks, cheaper than most mutual funds, and subject to minimal taxation. But how do you use this financial product to diversify your investments in today’s ever-changing market?

Exchange-Traded Funds For Canadians For Dummies shows you in plain English how to weigh your options and pick the ETF that’s right for you. It tells Canadian investors everything you need to know about building a lean, mean portfolio and optimizing your profits. Plus, the book covers all of the newest ETF products, providers, and strategies, as well as Commodity ETFs, Style ETFs, Country ETFs, and Inverse ETFs. The only book on the market catering specifically to Canadian investors.”

5 more suggestions

Editor’s Note: For a list of  5 more financial book suggestions, read this article from Saturday’s Financial Post: Here’s a look back at some of the best personal finance and economics books of 2016.

graham-bodelGraham 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 November 29th here

Sorry but this is one broken record worth listening to …

Needle head and broken vinylLast month S&P Global published its 2016 mid-year SPIVA Canada Scorecard, which compares the performance of actively managed Canadian-based mutual funds with their benchmarks.

The conclusion is clear: actively managed funds, after fees, underperform their benchmarks over time.  Investors may be better served using passively managed alternatives such as index tracking mutual funds and exchange traded funds (ETFs).

This evidence is so consistent and presented so often it almost sounds like a broken record, but given how many Canadians still pay high mutual fund fees for under-performing funds, we believe it’s a broken record still worth listening to.

Before we dive into the data, it’s worth noting a few important methodological points highlighted by S&P:

  1. The study compares the performance of each fund to that of a benchmark selected to provide a sensible “apples to apples” comparison.
  2. The survey looks at both “asset-weighted” and “equal-weighted” average fund performance and the conclusions drawn are similar.
  3. The study accounts for “survivorship bias”, that is it includes funds that were closed or merged with other funds over the relevant time period.

Many funds don’t even survive, let alone outperform

This last point is really important.  According to the study, only 58% of Canadian Equity funds actually survived the last 5 years.  One can only assume that those funds that didn’t survive were not stellar performers.  US and International Equity funds fared a little better with 70% of US funds and 84% of International funds surviving the full 5 years.

So how many funds survived and outperformed their benchmark?  In the Canadian Equity category, only 29% of actively managed funds outperformed their benchmark over the last 5 years.  Those aren’t very good odds considering that it’s nearly impossible to predict in advance which funds are likely to outperform.

Diversifying outside Canada important, but performance of active US and International Equity funds is worse

The Canadian stock market is fairly concentrated in certain industries and specific large cap stocks so it’s important for Canadian investors to diversify outside of Canada.  Unfortunately those looking to diversify using active US and International Equity funds won’t be happy with the SPIVA results.  Only 14% of International Equity funds outperformed their benchmark and 0% (yes, none!) of US Equity funds outperformed their benchmark over the 5-year period.

So maybe you’re feeling lucky and think your Canadian Equity manager has some sort of advantage and will be one of the lucky out-performers.  Once you look to diversify outside of Canada (and you should) the odds drop dramatically (and infinitely in the case of US Equity managers!)

The study only takes us to half-way through 2016.  We wonder how active fund managers have fared through the latter half of the year with such tumultuous events as the US election.  Given that most market pundits not only didn’t predict the outcome of the election correctly but missed how the market would react in response leads us to believe that when the next SPIVA scorecard is published, the same old broken record will still be spinning.

The data speaks for itself but we’ll conclude by saying that when you invest in “the market” by holding passive investment funds or ETFs, you get the market return with a fair degree of certainty. You will not experience the additional uncertainty of whether your chosen active fund will outperform or underperform the market.

Peer reviewed academic data shows that over longer periods of time very few active funds are able to outperform the market and those funds that do are nearly impossible to identify in advance.  The fees for passive investment funds and ETFs are much lower than those for active funds. Again, active fund management comes with lower average investment returns after fees and less certainty of performance versus the market.

graham-bodelGraham 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 last Friday (November 18th) here.