All posts by Jonathan Chevreau

A million reasons young people should contribute $6,000 to their TFSAs the moment they turn 18

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My latest Financial Post column looks at how Millennials and other young people can create a million-dollar retirement fund if they start contributing $6,000 to a Tax-free Savings Account (TFSA) the moment they turn 18. You can find the full column online by clicking on the highlighted text: The Road to the million-dollar TFSA is getting shorter for Millennials. It’s also in the print edition of Wed., Feb. 26th, under the headline “The road to saving $1 m for millennials: TFSA likely the best way to start.” (page FP3).

I’ve always been enthusiastic about the TFSA since it was first possible to contribute money to them in January 2009. My wife and I, as well as our daughter till recently have contributed the maximum to them from the get-go, always early in January to maximize the power of tax-free compounding. All three accounts have done very well. (I won’t reveal the balances but they’re consistent with heavy equity exposure through most of the bull market we appear to have been in at least until this week.)

Suffice it to say that our daughter’s TFSA has done better than ours, despite her not having contributed in the last two years because she has been working out of the country. She insisted in owning most of the FANG stocks (including Apple) and even Tesla, which was underwater until very recently but began to make headway in recent months.

It’s purely by chance that having been born in 1991, our daughter became 18 just in time for her first TFSA contribution, which naturally we funded in the early years. We viewed this as maximizing our wealth and minimizing taxes for the family as a whole.

And that’s exactly the thrust of the FP article, which cites several experts who will be familiar to most readers of the Hub: Aaron Hector of Doherty & Bryant Financial Strategies, Matthew Ardrey of TriDelta Financial, Adrian Mastracci of Lycos Asset Management. Mastracci created the chart below that appeared in the FP story:

There was also valuable input from BMO Private Wealth’s Sylvain Brisebois, who created a spreadsheet to estimate the impact of missing contributions in early years. If you can’t start until 25, a six per cent return generates $1,049,000 by age 65, $600,000 less than the $1.63 million earned with the extra $42,000 you’d have saved and compounded starting at 18. Another scenario is contributing for seven years between 18 and 25, then using it to buy a home. Assuming no more contributions the next 10 years and resuming $6,000 contributions at 36, by age 65 you’d have $829,000. Brisebois also created a scenario where you only contribute $3,000 a year, which generates $815,000.

As we experienced in our family, a long time horizon favours Millennials, who can afford to take a little more risk in return for stronger returns. That in turn translates into either a bigger nest egg 40 to 45 years from now, or it means you can get to the magic $1 million mark 5 or even 10 years ahead of schedule. Of course, if you’re even younger than a Millennial (technically they must be age 24 in 2020 to qualify) so much the better, and all these principles apply equally to Generations X, Y or Z.

For that matter, as I have often written, TFSAs are equally attractive for those already in Retirement. Unlike RRSPs, you can keep contributing to your TFSA long into old age: I had a friend who proudly told me she was still contributing after she turned 100!

Mind you, after the Coronavirus fears of the past week, who can really say? Not so good for aging Baby Boomers and retirees but of course if you’re a Millennial any young person with multi-decade time horizons, it should be viewed as good news when stocks go on sale.

 

 

RBC leads Big 5 banks in Retirement planning, Dalbar study finds

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The big 5 banks ranked by DALBAR in order of client preparation for Retirement

The Royal Bank of Canada (RBC) topped the list of big Canadian banks in serving the Retirement needs of Canadians, according to a new DALBAR study released this month. A first of its kind, the study — released on Feb. 5th and covered in the trade press — sought to assess how the Big 5 handled Retirement conversations through its retail branch network. It also rounded out the study with research on smaller banks, credit unions and regional financial institutions: 1,800 Canadians were polled, all with ten years or less until Retirement. 57% were males and and 74% had portfolios in excess of $100,000.

 

5 major alternative Financial Institutions ranked by client preparation for Retirement.

In this press release, DALBAR said “Retirement is an ever-growing concern for many Canadians, with increasing life expectancies, diminishing pensions, and a rising cost of living: the retirement nest egg has become more important than ever.”

Well, you’ll get no argument from me on that score, now that I’ve personally started to draw down on my own little nest egg. (Our family uses both RBC and TD, both for banking and through their online brokerage divisions. That’s typical, by the way: 29% of those polled had retirement money with more than one institution.)

Percentages of clients polled at major banks and other financial institutions

“RBC representatives used their experience and expertise to ease client fears, imparted useful knowledge about closing retirement shortfalls, and made the client feel it was a financial coaching experience instead of a transactional one,” DALBAR said. To me, the significant phrase their was “financial coaching experience instead of a transactional one.” Clients rated their experience with RBC to be one of “financial coaching” 70% of the time, higher than the 53% rate at the other big banks.

Only 50% of bank reps introduced the benefits of proper financial planning, although 82% of clients were promised a financial plan. Only 44% of the meeting featured itineraries. And while CIBC, RBC and National Bank led in offering followup meetings with 90% or more of clients, Scotiabank (number 2 overall) led in talking about digital retirement tools at 80% of meetings.

DALBAR vice president Anita Lo said many Canadians realize that government safety nets alone (i.e. CPP/OAS/GIS) are not enough to support healthy retirement lifestyles, so “this is the time for the banks to shine in helping Canadians plan for retirement.”

No surprise that when it comes to Retirement (and I’d argue just about everything else), Canadians prefer speaking to a real person for financial advice instead of relying on online information: DALBAR cited a CIBC study that found that’s the case for 70% of us.

Wide variance in placement of CFPs and PFPs before clients

Staffing with personnel with key financial designations is obviously a plus. DALBAR found RBC places staff with either the CFP or PFP designation 83% of the time for client conversations about Retirement, compared to just 40 across financial institutions generally. Continue Reading…

Questrade Poll find many investors still oblivious on how fund fees hurt performance

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MoneySense.ca: Photo created by pressfoto – www.freepik.com

My latest MoneySense Retired Money column looks at a press release slated for release next week from discount brokerage Questrade Inc. You can find the full column by clicking on the highlighted headline: Canadians are still paying too much in investment fees.

According to the RRSP study commissioned by the independent discount brokerage (a copy of which was provided to me in advance) finds 87% of Canadians don’t know or underestimate the difference that a 2% or 1% fee has on their portfolios over the long run (of 20+ years).

While the majority think Canadian mutual fund management expense ratios (MERs) are too high compared to the rest of the world, given the increased regulatory climate of greater disclosure, I was surprised by the finding that almost half of mutual fund investors still don’t even know what they’re paying for mutual funds.

There are also disturbing generational differences. According to Questrade, 28% of Canadians agree that paying more for an investment will give them better returns. That’s in contrast to the operative principle behind the surge in indexing and ETFs that “Costs matter,” and the lower the costs the better. Yet Millennials seem ripe for the picking here: 42% of investors aged 18 to 34 believe paying more for investments will give them better returns (vs  just 18% of the 55+ cohort).

Or as the teaser under the main headline at MoneySense puts it: Millennials and Gen Z missed the memo on how much management fees erode returns over the long term, according to a new Questrade survey.

Questrade estimates a 1% decrease in fees over a typical 30-year investing horizon could result in 27 to 29% more money in one’s retirement kitty, assuming a 7 to 8% return in a tax-sheltered account and a portfolio between $1,000 and $50,000. But try telling that to the group of investors Questrade polled: 87% either didn’t know or underestimated the difference a 2% fee makes versus a 1% fee’s impact on the value of their portfolio over the long run. 41% think a 1% cut in fees adds 20% or less to the long-run value of their portfolios. And only 43% of RRSP investors believe cutting fees from 2 to 1% will have a big impact on returns over 30 years.

Questrade notes that on average we still are paying 2% or more in fees, which “are some of the highest fees in the world.” It cites this research from Morningstar.com, which looks at fees in 26 countries worldwide.

47% of mutual fund investors still don’t know what fees they’re paying

I find it shocking that a whopping 47% who invest in mutual funds still don’t know what fees they’re paying. A majority (52%) think Canadian mutual fund fees are too high but a third don’t know if a 2% fee for a mutual fund should be considered high. Continue Reading…

Articles 2 & 3 in my MoneySense mutual fund series: Best Mutual Fund Companies you never heard of; Fixed-Income Funds

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MoneySense.ca: Photo created by freepik – www.freepik.com

MoneySense magazine has now published the entire package of three mutual fund articles they commissioned me to write. You can find the first article by clicking on the highlighted headline: DSC mutual funds and the future of investment advice. It ran on January 16th. The second ran last weekend, around Jan. 25th, while I was away in Cuba for a week.

You can find the second article here: The best Mutual Funds you’ve never heard of.

The first article looked specifically at the gradual decline of the once-ubiquitous DSC sales structure, or Deferred Sales Charge. It recaps recent regularatory developments surrounding DSC, and addresses the related issue of embedded compensation for financial advisors, or so-called Trailer Commissions. These are gradually being eliminated in various Western nations (notably the UK and Australia/NZ) and they are also being phased out in all Canadian provinces, with the conspicuous exception of Ontario.

The lesser-known “Direct-to-Consumer” mutual fund families

The second article looks at two particular “camps” of mutual fund providers: the big-name Embedded Compensation firms you may have heard from (because they can afford to advertise) and a lesser known camp of Direct-to-Consumer managers whose names may be less familiar because they don’t generally have embedded compensation and whose fees are lower and typically mean they don’t have as much money to throw around on big marketing and advertising budgets. The article focusses on four firms in particular you may not have heard of, except through family referrals and word of mouth: Beutel Goodman, Leith Wheeler, Mawer, Steadyhand.

Space precludes mentioning that in the good old days of mutual fund mania (the 90s) there were several other direct-to-consumer firms that either were acquired or are now a shadow of their former selves: the list includes Altamira, Saxon, Sceptre and a few others. We also look at two deep value firms that are still around but get so much publicity about their performance that they can hardly be dubbed as “firms you’ve never heard of.” They are Irwin Michael’s ABC Funds and Francis Chou’s Chou & Associates.

Actively managed mutual funds may also work for Fixed Income space

MoneySense.ca: Photo created by pressfoto – www.freepik.com

The third article, which ran January 30th, looks at the related topic of whether mutual funds can make sense in the fixed-income space, given today’s minuscule interest rates and the relatively higher impact investment management costs can have on active management of fixed-income investments. You can find it by clicking on the highlighted headline: Can Active Management pay for itself in Fixed Income Funds?

Arguably, GICs, direct investments in government and corporate bonds (or strip bonds) is more cost-effective, and if you prefer the “basket” approach that mutual funds provide, fixed-income ETFs. But the article links to some surprising research that even in fixed income, actively managed mutual funds may be able to recoup their fees and “add value” to investment returns.

MoneySense: Mutual funds still have a place, especially those without Embedded Compensation

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MoneySense.ca: Photo created by snowing – www.freepik.com

MoneySense magazine has begun to publish a package of three mutual fund articles they commissioned me to write. You can find the first article by clicking on the highlighted headline: DSC mutual funds and the future of investment advice. It ran on January 16th.

The first article looks specifically at the gradual decline of the once-ubiquitous DSC sales structure, or Deferred Sales Charge. It recaps recent regularatory developments surrounding DSC, and addresses the related issue of embedded compensation for financial advisors, or so-called Trailer Commissions. These are gradually being eliminated in various Western nations (notably the UK and Australia/NZ) and they are also being phased out in all Canadian provinces, with the conspicuous exception of Ontario.

The lesser-known “Direct-to-Consumer” mutual fund families

When it’s published, the second article will look at two particular “camps” of mutual fund providers: the big-name Embedded Compensation firms you may have heard from (because they can afford to advertise) and a lesser known camp of Direct-to-Consumer managers whose names may be less familiar because they don’t generally have embedded compensation and whose fees are lower and typically mean they don’t have as much money to throw around on big marketing and advertising budgets. The article focusses on four firms in particular you may not have heard of, except through family referrals and word of mouth: Beutel Goodman, Leith Wheeler, Mawer, Steadyhand.

Space precludes mentioning that in the good old days of mutual fund mania (the 90s) there were several other direct-to-consumer firms that either were acquired or are now a shadow of their former selves: the list includes Altamira, Saxon, Sceptre and a few others. We also look at two deep value firms that are still around but get so much publicity about their performance that they can hardly be dubbed as “firms you’ve never heard of.” They are Irwin Michael’s ABC Funds and Francis Chou’s Chou & Associates. Continue Reading…