All posts by Robb Engen

Banks repaid Millions to overcharged investors, which got me thinking

Posted By Robb Engen | November 3, 2016

CIBC agreed to repay $73 million to more than 80,000 customers who were overcharged for their investments since 2002. The majority of those affected were in fee-based accounts and were found to have paid double fees on some investments that had embedded commissions. Meanwhile, some 24,000 CIBC clients were not told they qualified for lower-cost mutual funds because of the size of their investments, and were instead sold similar funds with higher management expense ratios.

Incredible, yet not surprising when you consider this is the same bank that makes its senior clients apply for free banking rather than granting it automatically when clients turns 60.

It should be noted that CIBC self-reported the fee problems to the Ontario Securities Commission when it uncovered the issues during an internal review. The OSC has settled similar voluntary cases with three Bank of Nova Scotia divisions, three subsidiaries of TD Bank, and with mutual fund giant CI Funds, which repaid $156 million to 360,000 clients who bought mutual funds over a five-year period.

How many other ways will Canadian investors get fleeced by an industry that cares more about protecting its compensation model than it does about looking out for the best interest of its clients?

When will the Canadian Securities Administrators (securities regulators) finally get around to banning trailer fees – the embedded commissions that puts advisors in a clear conflict of interest and which a mountain of evidence suggest influences fund recommendations?

Since we’re talking about overcharging investors, here’s a thought:

The banks are suddenly feeling so ethical and generous by volunteering to repay fees that were overcharged. So let’s have some fun (or maybe cry a little) and apply that to the more than $1.32 trillion (!) that Canadians have invested in mutual funds.

We already know that Canadians pay some of the highest mutual fund fees in the world – the Investment Funds Institute of Canada estimates the average total cost of ownership of mutual funds for clients is 2.2%.

We also know, thanks to Professor Douglas Cumming’s research on mutual fund fees, that the average trailer fee on a fund is 0.3%.

Let’s say Canadians demand that the average mutual fund fees be reduced to 1.5%. That’s lower than many other countries, but still higher than fees in Australia and the U.S. (according to Morningstar).

To get there we’d have to ban trailer fees (saving 0.3%) and maybe by doing so we’d miraculously find that dealers no longer have the incentive to sell higher fee funds and so the average comes down to 1.5%.

How much will Canadian investors save if this hypothetical scenario came to pass?

$1.32 trillion x 2.2% MER = $29,040,000,000 ($29.04 billion) in fees paid by Canadian mutual fund investors.
$1.32 trillion x 1.5% MER = $19,800,000,000 ($19.8 billion) in fees paid after lowering the average MER by 0.7%.

That’s a savings of nearly $10 billion. Now the IFIC says that 4.9 million Canadian households invest in mutual funds, so if we divide the amount saved by the number of households then each household should receive a nice $1,885 rebate.

Final thoughts

Mutual fund assets continue to grow because for the Canadians who want to save and invest, the easiest way for them to do so is by visiting a bank advisor or mutual fund salesperson. But those advisors have a conflict of interest, selling their firm’s funds that may be suitable but not in the best interest of their client because of high product fees and incentives that reward the seller.

Lower cost products such as ETFs exist, but investors have to do their research and go it alone (or use a robo-advisor service) to realize the savings. That’s why, despite widespread attention over the last 5-10 years, the total Canadian listed ETF assets is only $107 billion, or just one-tenth of the mutual fund market.

So while investors patiently wait for securities regulators to ban trailer fees, I think Canadians should demand to be repaid the $10 billion that they’re being overcharged each year from mutual fund fees.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on October 30th and is republished here with his permission.

Robb Engen’s 4 biggest Investing Mistakes

Posted By Robb Engen | October 14, 2016

Learn from your mistakes - motivational words on a slate blackboard against red barn wood

I was 19 years old when I first started investing. I diligently set aside money every paycheque, starting with $50 every two weeks and eventually increasing that to $200 per month, to save for retirement inside my RRSP. Sounds like I was off to a great start, right? Wrong!

Even though my intentions were in the right place, my first attempt at investing was a complete disaster. Here’s why: I didn’t have a plan

It’s good practice to save a portion of your income for the future, even at a young age. The problem for me was that I was still in school and didn’t have a plan – I had no clue what I was saving for.

I had read The Wealthy Barber and The Millionaire Next Door and so I knew the earlier I started putting away money for retirement, the longer I’d have compound interest working on my side, and the bigger my nest egg would be.

Unfortunately, I was saving for retirement at the expense of any other short-term goals, like paying off my student loans, buying a used car, or saving for a down payment on a house.

I didn’t have any short-term savings

Speaking of RRSPs, what was a 19-year-old kid doing opening up an RRSP when he’s only making $15,000 per year?

There were no real tax advantages for me to save within an RRSP when I was in such a low tax bracket. I’m sure I blew my tax refunds anyway, so what was the point?

Granted, the tax free savings account hadn’t been introduced yet, but I would have been better off using a high interest savings account for my savings rather than putting money in my RRSP.

I didn’t have a clue about fees and tracking performance

Like a typical young investor I used mutual funds to build my investment portfolio. I was encouraged by a bank advisor to select global equity mutual funds because, as I was told, they would deliver the highest returns over the long term.

What the bank advisor didn’t tell me was that the management expense ratio (MER) on some of those mutual funds can be 2.5 per cent or more, and high fees will have a negative impact on your investment returns over the long run.

Bank advisors also don’t tell you which benchmark these funds are supposed to track (and attempt to beat) so when you get your statements in the mail it’s impossible to determine how well your investments are doing compared to the rest of the market.

I drained my RRSP early

I didn’t have a good handle on my finances in my 20s and often resorted to using credit cards to get by. Without a proper budget in place, and no short-term savings to fall back on in case of emergency, I had no choice but to raid my RRSPs to pay off my credit-card debt and get my finances back on track.

Taking money out of my RRSP early meant paying taxes up front. Withdrawals up to $5,000 are subject to 10 per cent withholding tax, while taking between $5,000 and $15,000 will cost you 20 per cent, and withdrawals over $15,000 will cost you 30 per cent.

Your financial institution withholds tax on the money you take out and pays it directly to the government. So when I took out $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000. In addition to the withholding tax, I also had to report the full $10,000 withdrawal as taxable income that year.

While I can’t argue with my reasons for selling, my dumb decisions beforehand cost me a lot of money and left me starting over from scratch.

Final thoughts

We all make investing mistakes – some bigger than others. If I had to do things over again today I would have done the following:

Create a budget – A budget is the foundation for responsible money management. Had I used a budget and tracked my expenses properly from an early age I would have lived within my means and kept my spending under control.
Open a tax free savings account – Yes, the TFSA wasn’t around back then but for today’s youth it makes much more sense to save inside your TFSA instead of your RRSP like I did. You can put up to $5,500 per year inside your TFSA and withdraw the money tax free. You contribute with after-tax dollars, so you won’t get a tax refund, but you’ll likely be in a low tax bracket anyway, so contributing to an RRSP won’t give you much of a refund either.
Make a financial plan – We all have financial goals and even at a young age I should have identified some short-and-long term priorities to save toward. I’d take a three-pronged approach where I’d use a high interest savings account to fund my short term goals, my TFSA to fund mid-to-long term goals, and eventually open an RRSP to save for retirement. No doubt I’d be much further ahead today if I took this approach earlier in life.
Use index funds or ETFs – Now that I understand how destructive fees can be to your portfolio, I’d look into building up my investments using low cost index funds or ETFs. The advantage to using index funds is that you can make regular contributions at no cost while achieving the same returns as the market, minus a small management. Some brokers also offer free commissions when you purchase ETFs.

Did you make similar mistakes when you first started investing? How did you overcome them?

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on August 7th and is republished here with his permission.

How much will my Defined Benefit pension pay in Retirement?

Posted By Robb Engen | September 23, 2016

I contribute to a defined benefit pension plan at work. How much will I get from the pension plan in retirement? That depends on when I retire or leave the plan. Hang on, we’re about to get math-y.

Normal retirement age is 65 and I joined the pension plan in 2009 at age 30. Retiring in 2044 (the year I turn 65) would give me 35 years of pensionable service.

The pension plan has a retirement calculator on its website. Curious about the amount of retirement income I’d receive at various ages, I took a look. The calculator just needed a couple of inputs: current salary, plus an assumption for future annual salary increases (I used 2 per cent).

Retiring at age 65 would max-out my pensionable service and give me an annual retirement income of $46,000 in today’s dollars. But what happens if I don’t make it until 65? Retiring five years earlier at age 60 changes the equation substantially.

Retiring at 60

8 Habits that will kill your Retirement Dreams

Posted By Robb Engen | September 2, 2016

A growing number of Canadians plan on working longer because they haven’t saved enough for retirement. We see it at a macro-level; Canadian households owe a record $1.65 in debt for every dollar in disposable income; meanwhile, the personal savings rate in Canada stands at a paltry 3.9 per cent.

There are plenty of reasons why we owe too much and save too little. The economy stinks, people get laid off, and salary increases are few and far between.

That said, we’re often our own worst enemy when it comes to taking care of our finances. Here are eight habits that are killing your retirement dreams:

1. You don’t watch your spending

It’s tough to stop a money leak when you have no clue where your money is going. Small daily purchases do add up (latte factor, anyone?), but these spending categories can bust your budget much faster – big grocery bills, dining out too frequently, filling your closet full of new clothes, one-click online shopping, and expensive hobbies, to name a few.

The solution: Write down everything you spend for three months. I guarantee you’ll have an ‘a-ha’ moment at best, and at worst discover something useful about your spending habits that you’d be willing to change.

The goal of course is to spend less than you earn. It’s one of the major tenets of personal finance.

2. You want the newest ‘everything’

Fashion and décor trends change, technology constantly evolves. Staying ahead of the curve means shelling out big bucks for the latest and greatest products. The problem is your capacity to buy new things will never keep up with the pace of innovation and change. It’s an endless cycle.

The solution: Wait. Early adopters pay a hefty premium to be first. Look no further than televisions, where the latest innovations can initially go for between $5,000 and $10,000 – 10 times what they’ll cost in a year or two.

The bigger issue is the psychological need to always have the latest gadget or be at the cutting edge. Ask yourself whom are you trying to impress.

3. You have the constant need to upgrade

Fewer than half of all iPhone users hang onto their smartphones until they stop working or become obsolete. Most want to upgrade as soon as their provider allows it – usually every two years. A small percentage upgrades every year whenever a new model is released.

While spending a few hundred dollars on a new phone every other year might not hinder your retirement plans, it could be a symptom of a bigger problem. The constant need to upgrade your technology, your car, and even your home can be a big drain on your finances.

Nearly three in 10 homeowners get the urge to move every five years, and 14 per cent actually want to move every year.

The solution: The same buy-and-hold approach that you take with your investments can also apply to your major purchases. The Globe and Mail’s Rob Carrick suggests a 10-year rule for homeowners to combat the odds of a housing crash and to save on transaction fees.

Extending the life of your purchases, even by a year or two, can free up cash to pay down debt or save for retirement.

4. You treat credit-card debt as a fact of life instead of a hair-on-fire emergency

Life can be expensive but there is no excuse for using credit cards to support your lifestyle. Despite what your friends or coworkers might say, credit card debt is not a fact of life. This may come as a shock but you can save up in advance for a vacation or new kitchen appliances.

The solution: Nothing can ruin your finances quite like high-interest credit card debt compounding every month. Stop everything and assess your income and expenses. Cut discretionary spending, put any savings plans on hold, and throw every cent towards your highest interest debt until it’s gone.

5. You use low interest rates as an excuse to finance depreciating assets

Borrowing to invest can make sense when your expected return is greater than the cost of the loan. But it’s a mistake to take out a loan -– even at today’s low interest rates –- to finance consumables and depreciating assets.

Common reasons to take on debt today include weddings, vacations, furniture, and vehicles. A home equity line of credit can provide flexibility to pay for big purchases, but the habit of borrowing from your future self to pay for today’s consumption is a major retirement killer.

The solution: You need a financial plan. Most of us can wrap our heads around saving for retirement but we struggle prioritizing and funding our short-term goals. A good plan helps you identify what’s important in both the immediate and distant future and steers your savings towards the appropriate goals.

Put a dollar amount and a timeline on your goals and start saving. Trust me, it’ll feel great to pay for your next vacation or big-ticket purchase in cash.

6. You’re too complacent

Doing nothing is often the best course of action when it comes to a volatile stock market, but financial inertia can cost you in other ways. Some of us can’t find $50 a month to save for retirement, yet we pay $15 a month or more in bank fees, won’t drive half a block to save money on gas or groceries, and don’t bother returning items of clothing that don’t fit.

Worse examples of complacency are when people don’t take advantage of their employer matching RRSP program, don’t shop around for a better rate on their mortgage, or continue to pay high fees on their investments.

The solution: Sometimes we need a wake-up call or major life event before we start taking our finances seriously. Once you see how much complacency is costing you that’s usually enough to motivate you into taking action.

7. You put off retirement savings until a later that never comes

“We’ll start saving for retirement once we’ve paid off our credit cards-line of credit-mortgage.”

There are so many priorities competing for your hard-earned dollars. Sadly, retirement savings is easy to put on the back-burner while you deal with more immediate needs like a big mortgage, two car payments, a new trailer, and some expensive seasonal hobbies. Retirement is far away and you can save later, right?

If you’re already killing your retirement dreams with the previous six habits then later might never come.

The solution: There’s a reason why ‘pay yourself first’ is such a powerful savings tool. Money is automatically whisked out of your account before you get a chance to spend it. Like some kind of magic you barely notice and are somehow able to live on the rest.

8. You keep your long-term savings in cash

You actually managed to get some money from your chequing account into your RRSP or TFSA. The problem now is that it’s sitting in cash – you actually need to take the next step and buy an investment such as a mutual fund, ETF, stock, bond, or GIC.

This is a uniquely Canadian problem as investors have nearly $75 billion in excess cash sitting in their portfolios.

The solution: Whether it’s risk-aversion or analysis paralysis, you need to take action and get your retirement savings working for you. Speak with a financial planner who can help you make sense of your investment choices and risk tolerance. Read books, blogs, and magazines to try and educate yourself about investing and how to build a portfolio.

A good place to start is with the model portfolios listed on the Canadian Couch Potato blog.

Final thoughts

It’s true, we do plenty to sabotage our own retirement dreams. The good news is that it’s never too late to take control of your finances and start saving for retirement. Start by fixing bad habits that have a negative effect on your finances.

Save enough and you can retire on your terms.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on August 28th and is republished here with his permission.

Confessions of a Rewards Credit Card Addict

Posted By Robb Engen | August 1, 2016

A credit card with the name The Rewards Card and a present shown on it illustrating the benefits, refunds and rebates you can earn by using a membership account

It was all about practicality when I applied for my first rewards credit card and started using it to earn free groceries.

After a while I “graduated” to a cash-back credit card, which paid a higher percentage back on grocery and gas spending.I liked the simplicity of funnelling my spending onto one no-fee cash back credit card and getting a little something back for my effort.My attitude changed a few years later when I started doing research into travel rewards credit cards and other premium cards that came with loads of benefits along with an annual fee.What I found was that some credit cards offered better perks in certain spending categories, but not in others. I decided I could maximize my rewards credit card points by using one card for groceries, another one for gas, one for dining and entertainment, and yet another for everything else, including travel.Finding the best rewards credit cardSo I applied for many credit cards over the next three years. The type of cards that found their way into my wallet typically came with big perks; sign-up or welcome bonus points worth hundreds of dollars in cash or travel, annual fees waived in the first year, and the ability to earn more points at partner retailers when you used your card.I guess you could say I got greedy. I was addicted to finding the best rewards credit card and racking up rewards.Most cards wouldn’t last a year in my wallet before I ditched them and moved on to the next round of tempting offers. The rewards cycle went something like this: apply for a credit card, cash in on the bonus offers, cancel the card within 12 months (before the annual fee kicked-in), and Bob’s your uncle.

I eventually realized what a dangerous game I was playing and ultimately came to my senses. Dangerous because I applied for so many credit cards, and had access to so much credit, that my credit score took a major nose-dive (shameful for a personal finance blogger).

Besides, it was a royal pain balancing my budget every month with spending on multiple cards – each one with a different due date. Enough was enough.

This time I’d go back to funnelling all of my spending onto one card. But which one? I thought about the cards that had staying power in my wallet, the ones I held onto for longer than a year.

What did they all have in common? High earning rates in lots of spending categories, not just one or two. Flexibility when it comes to redeeming points, including the ability to book travel with any provider and use your points to cover fees and taxes. Outside of the box incentives help, too, like free checked bags, priority boarding, or a complimentary airport lounge pass for you and a guest.

That may sound like I’m being picky but Canadians are a rewards savvy bunch and many are also looking to get more from the credit cards they carry. According to a recent TD survey, cardholders want and expect greater choice and flexibility for what their reward program offers, as well as new and creative ways to earn and redeem points.

Sound familiar?

The same TD survey said many Canadians own more than one credit card, with nearly nine in ten (89 per cent) owning a least one card for an average of 1.9 credit cards each.

This humble blogger thinks Canadians are leaving money (rewards) on the table by not finding one program that meets their needs and then sticking to it.

Here’s the thing: funnelling all of your spending onto one rewards credit card is the best way to earn points quickly and maximize the rewards potential of that program.

Final thoughts

In today’s competitive travel rewards landscape, it shouldn’t be hard to find a rewards program that let’s you have your cake and eat it too.

But, as the TD survey says, with such a wide variety of rewards programs available, and so many ways to collect and redeem points, make sure you understand how the earning and redemption mechanics of the card work in order to get the maximum benefit from it.

My advice is to dig into your budget and understand where you spend your money (and how much you spend each month). Only then can you determine which credit card rewards program best matches your spending.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site and is republished here with his permission. The post was originally created in partnership with TD. All thoughts and opinions are Mr. Engen’s.

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