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Timeless Financial Tip #9: Beware Conflicted Financial Advice

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Lowrie Financial: Canva Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

There’s only so much you and I can do about life’s many surprises. Some things just happen, beyond our control. Fortunately, to make the most of your hard-earned wealth, there is one huge and timeless best practice you can control: You can (and should) avoid seeking unbiased financial advice from biased sales staff.

How do you separate solid investment advice from self-interested promotions in disguise? Here’s a handy shortcut: Are the investments coming from your friendly neighborhood banker? If so, please read the fine print — twice — before buying in. Due to inherently conflicting compensation incentives, most banks’ investment offerings are optimized to feed their profit margin, at your expense.

Compensation Incentives Matter … a Lot

I’ve been covering the conflicted compensation beat for years, like in On Big Banks, Conflicting Compensation and Bad Behaviour, and my message has remained the same, for all the same reasons:

Compensation drives behaviour.

It’s human nature.  It’s true for Canadian bankers and their investment offerings. It’s also true in the U.S. and around the globe.

For example, a 2017 Consumer Federation of America report, “Financial Advisor or Investment Salesperson?” reflects on this very conflict:

“After all, people expect salespeople to look out for their own interests and maximize profits, but advisors are expected to meet a higher standard. … Investors who unknowingly rely on biased salespeople as if they were trusted advisors can suffer real financial harm as a result.”

Let’s imagine I’m a banker, on a bank’s payroll. Pick a bank, any bank. Assume I’m at any level, from teller to VP. Here’s how my compensation package is likely structured:

  1. I can expect to earn more if I promote my employer’s proprietary Widget X products over any comparable, but generic Gadget Y offerings. Sure, Widget X will cost my customers more. But by helping me and my bank thrive, aren’t we both better off?
  2. I and my team may even score special perks if we exceed our Widget X sales quotas. There may be contests, celebrations, or at least positive performance reviews.
  3. In fact, if I don’t sell enough Widget X’s (or if I sell too many Gadget Ys), my performance reviews may suffer. I could lose my job, or at least not rise in the ranks.

Under these sales-oriented conditions, guess which investment product I’m going to recommend as often as I can? As a bank employee, I may well care about my customers. But the bottom line is that they don’t determine how much or little I am paid for my efforts. When my bank’s profits rise or fall, so does my career.

“Our Way or the Highway” Investments

In theory, banks have plenty of flexibility to structure their investment lineup however they please. They could promote the same low-cost, globally diversified, evidence-based mutual funds and ETFs that independent, fee-based, evidence-based financial advisors typically deploy.

Instead, most banks tend to heavily promote their own, proprietary investment products: built, managed, and priced in-house.

In its title alone, a 2023 The Globe and Mail report speaks volumes about this approach: “Pervasive sales culture at Canadian banks designed to push customers into high-fee products.” Its authors observe:

“The commission earned from selling the bank’s products may be five times higher than on a GIC, for example. In this way, the system incentivizes the sale of funds with higher fees, even when a GIC might be a better fit for the client.”

Suitable vs. Fiduciary Advice

At best, your bank’s compensation conundrums may leave you paying more than necessary for sound investments. Worst-case (and from what I’ve seen, more likely), you’ll end up overpaying for the “privilege” of holding investments that fail to fit your short and long-term personal financial goals.

That’s because your banker may be required to offer products that are broadly “suitable” for you, but as I’ve described before, like in What is the Cost of a Financial Advisor?, they don’t have to be the best choice for you.

There’s a big difference between suitable versus fiduciary advice. Your banker’s role as an “adviser” may sound comforting. But make no mistake. Regardless of their title or compensation, they are not in a fully fiduciary relationship with you; they don’t have to always place your highest, best interests ahead of their own. Continue Reading…

How to find your likely estate value and lifetime tax bill (for free!)

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By Ted Rechtshaffen, CFP

Special to Financial Independence Hub

In my role as a Portfolio Manager, Financial Planner and President at TriDelta Private Wealth, the number one question that people ask is “Will I run out of money?”

This question comes from people with a $10 million net worth, a $3 million net worth, and a $300,000 net worth.  There may be different levels of angst involved but they still wonder.

The fundamental issue is fear.  Even if it isn’t rational, there is always a bit of fear about running out of money.  Even if running out may mean different things to different people.

Of course, for those with more wealth, the related question is almost always “Am I paying too much in tax?” and “Is there tax smart things that I should be doing that I am not?”

While we do a lot of work in each area with Canadians, we decided to build a free tool to help answer that number one question.  We have done this through our TriDelta My Estate Value calculator.  By someone entering in several core pieces of financial information, the calculator does some pretty heavy lifting.  Behind the scenes are actuarial tables to show life expectancy, tax tables, and a variety of stated assumptions around inflation, real estate and investment growth expectations.

The output is an estimate of your likely estate value in future dollars, along with a lifetime estimate of your income taxes paid.

You will find the calculator here:

My Estate Value Calculator – TriDelta Private Wealth

Donation Calculator

One other tool we have put together is a donation calculator.  It takes the information from the My Estate Value calculator and provides some ability to see the impact of annual charitable giving.  What if you gave $5,000 a year?  What would be the impact to your likely estate value and to your lifetime tax bill?  What if you gave $10,000 or $20,000 a year?  One of the reasons that we put this together is that many Canadians would give more to charity of they felt confident that they could afford to do so.  This calculator helps to show in real time the impact of higher levels of giving.  The link is here: Donation Planner – TriDelta Private Wealth

We have found that even among the free tools online, most are focused on retirement savings, and deliver a monthly savings target.  The My Estate Planner calculator is focused on the years after retirement, and what potential estate you will be leaving to your family and/or charity. Continue Reading…

Artificial intelligence is evolving in different ways – how can you best profit?

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While Get Rich Quick publishers use AI for email advertising, investors combat their spam with AI-based anti-spam programs. Meanwhile, what’s the best way to profit from AI with less risk?

Image courtesy Pexels/ThisIsEngineering

AI continues to make gains, mostly in communications. (In contrast, early adopters are still waiting for a licensed, insurable, road-worthy self-driving car.) You also hear a lot about AI-related start-ups. Most seem aimed at improving existing devices and/or cutting business costs. Many have highly specific goals.

Meanwhile, AI will keep attracting investment interest.

Here’s how AI has changed one industry

As you’ve probably noticed, a boom is underway in the investment-newsletter publishing business, at least in its “GRQ” segment. (GRQ is an acronym for Get Rich Quick.)

GRQ publishers sell newsletters and related products to subscribers. Their expertise is in newsletter marketing, not investing. Many publish numerous newsletters that may offer conflicting advice. When one publication puts out a stream of bad recommendations that drive off too many customers, the publishers change the publication’s name and/or investment specialty. That way, they always have one or more fresh titles that still have customer appeal and can operate at a profit.

GRQ publishing has been around for many decades, if not centuries. But it really went into high gear in the early 2000s. That’s when email began to replace postal mail as the main carrier for newsletter advertising, and costs began to plummet.

In the days of postal mail advertising, it cost a publisher perhaps $1 per “name” to offer a newsletter subscription to prospective customers. Publishers had to create, print and mail elaborate mailing pieces. They had to rent prospect names from direct competitors, or from other publishers in the same or related fields.

Compared to the costs of paper/postal mailings a decade or two ago, today’s costs of email advertising are close to negligible. Now publishers spend heavily in other areas: direct marketing consultants, specialized writers of advertising copy for email marketing, and so on.

Some newsletter publishers seem to be using AI to help them create email ads in ever larger numbers, to send to investors who never asked for them: spam, in other words. Continue Reading…

Most near-retirees would keep working if they could reduce hours and stress

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Statistics Canada

Canada’s aging population means more retirees but most Canadians contemplating retiring say they would keep working if they could reduce their hours and stress. That was the top line of a Statistics Canada Daily release issued early in August. It was also the subject of a CBC Radio interview I conducted that aired in multiple cities on Thursday, Nov. 2.  Here’s the link.  Go to Episodes, then Nov. 2nd, then click on the line that says Canadians would choose to work past 65 under certain circumstances.

The interviewer is CBC Business columnist Rubina Ahmed-Haq, who focuses on money, workplace and financial wellness.  The 4-minute interview with me and others touched on most of the topics this site does, including semi-retirement, entrepreneurship, Findependence and Victory Lap Retirement (the latter a book I co-authored with ex banker Mike Drak.). At the outset I clarified that I myself am still working at at 70, albeit self-employed through this web site and regular writing and editing for MoneySense.ca.

I was asked about the FIRE movement (Financial Independence/Retire Early) and I explained that while there are many FIRE proponents who claim to have “retired” in their 30s, in my experience these people have not really retired: rather, they have ceased to be salaried employees with the commuting grind, bosses and meetings and all that comes with it. Most have in reality become self-employed or semi-retired entrprepreneurs: in fact, many of the FIRE bloggers I have read are running web sites that accept advertising, and/or writing books that pay royalties and in some cases are on the speaking circuit accepting speaking fees. Having done all of these myself over the years, that’s not my idea of full retirement!

10% of 70-plus cohort still working at least part-time

Statistics Canada

Going back to the Statistics Canada Daily, it reported that in June 2023, 21.8% of Canadians between ages 55 and 59 were either completely or partially retired. That doubles to 44.9% for those aged 60 to 64, and doubles again to 80.5% for those 65 to 69. By the time Canadians reach my age (70), it plateaus around 90% who are at least partially retired.

Interestingly, as I may have alluded to on-air, I can think of several people who are working well past 70, including some prominent journalists and financial gurus. I guess both are seen by proponents as a relatively satisfying occupation, particularly those who like myself do both by writing (or editing) about money.

Not surprisingly, for those who are completely retired, the main factor in determining the timing was financial: usually having qualified to start receiving pension benefits. This was cited by 35% of the men and 28.2% of the women who reported being completely retired.

Continue Reading…

16 Business Leaders share their best Real Estate Investment Advice

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Alena Darmel – Pexels

Aspiring homeowners and families looking to invest in property often seek expert advice. To provide a range of perspectives, we’ve gathered sixteen pieces of advice from CEOs, founders, and other industry professionals. From understanding the market rather than chasing it, to securing a property warranty, this article offers a wealth of insights for property investment.

 

 

  • Understand, Don’t Chase, the Market
  • Consider Property’s Rentability
  • Diversify Your Real Estate Investments
  • Seek Immediate Return on Investment
  • Research and Plan Your Investment
  • Leverage Home Inspection Power
  • Invest in a Fixer-Upper
  • Consider Total Cost of Ownership
  • Have a Clear Exit Strategy
  • Start Small in Property Investment
  • Diversify Your Real Estate Portfolio
  • Think Long-Term for Value Appreciation
  • Look into Emerging Neighborhoods
  • Define Your Investment Goals
  • Establish a Clear Budget
  • Secure a Property Warranty

Understand, don’t chase, the Market

If there’s one piece of advice I consistently circle back to, it’s this: don’t just chase the market, understand it. Now, that might sound a bit cliche, but let me unpack that for you with an example and a personal anecdote.

Many aspiring homeowners or investors get drawn into this frenzy of buying property anywhere there’s a buzz. You know, a new major employer coming into the area, a big infrastructure project announcement, or maybe where there’s a sudden spike in property values. But here’s the twist: not every “hot” market is suitable for every investor. — Shri Ganeshram, CEO and Founder, Awning.com

Consider Property’s Rentability

I’d suggest considering the “rentability” of the property. If your circumstances change and you need to move, having a property that’s attractive to renters can provide a steady income stream. 

Look for properties with features that are in high demand in the rental market, such as a good layout, modern amenities, and proximity to employment centers. I’ve seen clients turn unexpected relocations into opportunities by choosing properties that are easy to rent, thereby securing a secondary income source. — Alexander Capozzolo, CEO, SD House Guys

Diversify your Real Estate Investments

Different types of real estate investments, such as residential properties, commercial properties, or vacation rentals, can react differently to market fluctuations. By spreading your investments across various property types, I’ve seen how it can reduce the overall risk associated with real estate investing.

I’ve witnessed that diversification can provide a more stable income stream. For instance, while one property might experience a vacancy, another may continue to generate rental income.

I’ve found that different markets may perform differently at various times. By advising clients to invest in properties in different geographic locations, I’ve seen them benefit from a broader range of market conditions. — Ritika Asrani, Owner and Head Broker, St Maarten Real Estate

Seek Immediate Return on Investment

One piece of real estate investment advice I’d give is to focus on buying property that can give you a return on investment (ROI) immediately. That’s because when interest rates are high, property prices decrease, making it harder to know what kind of appreciation you can expect in the future.

As a bonus tip, invest where there are median-priced homes to maximize your returns. For example, if you invest in a $300,000 house with an 8% versus a 4% interest rate, the mortgage difference would be just $615 per month. 

On the other hand, if you invest in a $1 million property with the same interest rates (8% versus 4%), the mortgage difference you’d pay would be over $2,000 per month.

Ultimately, to maximize your returns and minimize risk as an investor, buy properties that will give you cash flow from day one and limit your mortgage payments. — Ryan Chaw, Founder and Real Estate Investor, Newbie Real Estate Investing

Research and Plan your Investment

Thoroughly research the local real estate market dynamics. Understand not only current property values but also potential growth or decline in the area. In our global property management experience, we’ve seen the value in choosing properties located in areas with growing job opportunities, infrastructure development, and a strong community presence. 

Additionally, always factor in the long-term perspective: real estate typically appreciates over time, so patience and a well-planned strategy can yield returns. Consider your investment goals and financial capabilities carefully. Determine whether you seek rental income, capital appreciation, or both. Calculate a budget, including property purchase, maintenance, and potential vacancies. 

Finally, don’t underestimate the significance of a property management company, especially if investing in different locations or operating remotely. Their expertise can help navigate property investment complexities and ensure your investment thrives. — Johan Hajji, CEO and Founder, UpperKey

Leverage Home Inspection Power

One tip I’d offer is to leverage the power of “home inspection” before finalizing any deal. A thorough inspection can reveal potential issues like structural damage or outdated electrical systems, allowing you to either negotiate the price or avoid a money pit.

I‘ve had clients who saved thousands by using the findings of a home inspection to negotiate a lower purchase price, turning what could have been a costly mistake into a savvy investment. — Gagan Saini, CEO, JIT Home Buyers

Invest in a Fixer-Upper

My career in remodeling and carpentry started with a real estate investment. I bought a home in disrepair for very little money and began piecing it together, learning how to perform various construction tasks along the way. 

At first, I just got one room livable. Then, at night and on weekends, piece by piece, I finished the kitchen, then the bathroom, then the basement. If you enjoy problem-solving and working with your hands, you’ll enjoy a fixer-upper much more than a property that you paint and resell. — Rick Berres, Owner, Honey-Doers

Consider Total Cost of Ownership

One piece of advice would be to think long term and consider the “total cost of ownership,” not just the purchase price. This includes property taxes, maintenance, and potential homeowner association (HOA) fees. 

I recommend it to create a detailed budget that accounts for these ongoing costs to ensure the investment is sustainable in the long run. Clients who’ve taken this holistic approach have been better prepared for the financial responsibilities of property ownership, avoiding unexpected financial strain down the line. — Erik Wright, CEO, New Horizon Home Buyers

Have a Clear Exit Strategy

Have a solid exit plan from the get-go. It’s not just about buying a property; it’s about understanding how you’re going to profit from it. Are you looking for long-term rental income, or do you plan to flip the property for a quick return? 

Having a clear strategy helps you make informed decisions and ensures that your investment aligns with your financial goals. Real estate can be a fantastic wealth-building tool, but knowing your exit strategy keeps you on the right path to success. — Loren Howard, Founder, Prime Plus Mortgages

Start Small in Property Investment

Start small. For aspiring homeowners or families looking to invest in property, it is important to start small. While it may be tempting to jump into a larger, more expensive property as your first investment, starting with a smaller and more affordable property can be a smarter financial decision in the long run. 

By starting small, you will have less risk and financial burden, allowing you to learn and gain experience in the real estate market without being overwhelmed. Additionally, starting small will also give you a better understanding of your financial capabilities and help you make more informed decisions for future investments. 

Furthermore, starting with a smaller property can also provide potential for quicker returns on investment. With lower purchase prices and potentially lower maintenance costs, you may be able to see profits sooner than with a larger, more expensive property. — Keith Sant, CMO, Eazy House Sale

Diversify your Real Estate Portfolio

I would advise diversifying your portfolio if you’re searching for real estate investment tips. Think about making investments in a variety of real estate, including commercial, residential, and even holiday rentals. This diversification can create several income streams while reducing risk.  Continue Reading…