Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

How pairing fee-only planners and robo-advisers can save you money

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Woman meeting financial adviser in officeCute Robot

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

The financial services industry would have you believe that individual investors don’t want to pay upfront for investment advice – in fact, the industry claims that investors prefer to pay for financial advice through fees that are part of their mutual funds.

But we all know mutual funds in Canada cost too much and the relationship between investors and financial advisors is mostly transactional in nature. Embedded commissions and trailer fees might make sense for investors who are just starting out, but over the long term this conflict of interest will be expensive and lead to poorer outcomes for investors.

An unconventional pairing

With the relatively new arrival of fee-only financial planners – advisors who don’t sell products but offer unbiased and objective financial advice for a set fee – and the emergence of robo-advisors – online investment management services – there is an opportunity for Canadians to access a better form of financial advice that costs less than the traditional bank advisor-mutual fund model.

That’s right, pairing a fee-only financial advisor with a robo-advisor (or DIY, if that’s your thing) can actually save you money and lead to better investor outcomes.

Here’s an example Continue Reading…

Expanded CPP may not increase retirement income: Fraser Institute

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cpp_image2As the Globe & Mail and Financial Post both  reported Tuesday, a new study by the Fraser Institute finds that an expansion of the Canada Pension Plan (CPP) may not raise incomes of retirees because people will save less on their own.

The report, which is to be released today, found that private savings fell as CPP contribution levels rose between 1986 and 2008. CPP contribution rates were 3.6% of earnings in 1986 (half from employers, half from employees) and rose to the current combined level of 9.9% by 2003.

Impact varies with income and age

The study found the impact of higher CPP contribution rates varies with income and age. So for households with annual income under $34,140, a one percentage-point increase in contribution rate resulted in a 1.56-percentage-point fall in private savings. But middle-income households earning up to $59,920 cut their savings by 0.72 percentage points: less than the full amount of the CPP increase. And high-income earners making over $59,920 were found to have almost no change in their saving rates as CPP rates rose.

The report’s co-author, Charles Lamman told the Globe that relatively few Canadians are under saving for retirement: mostly the elderly, widows and singles, and those without a work history that makes them eligible fort the CPP. So for those people, a CPP expansion would not be helpful.

The Financial Post version of the story can be found here. The Post also ran a piece by the report’s authors on its FP Comment page: Shifting Retirement Savings. You can also view a video commentary on the report on the Fraser Institute’s website, here.

Weekly Wrap: Horrendous market timers, Big Mac Index, NHLers defrauded by advisers

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Collage with flying euro clock in a hand on a background of sky and grass.A piece on market timing is a “must read” for anyone who takes market-timing gurus and newsletters overly seriously. Read A Visual History of Market Crash Predictions. (Note the reference embedded in the URL to “the clowns of Wall Street.”)

Yes, all the big fear-monger names are there, including Harry Dent Jr., Robert Prechter, Marc Faber and even a few Marketwatch columnists and the generally respected Mark Hulbert.

As the piece says, you need to remember that almost everyone has something to sell, and the pundits mentioned generally are in the business of selling newsletters, books, market-timing services or related items. And since Fear is a more visceral emotion than Greed, the scarier the headlines these prognostications generate, the more publicity the market prognosticators are likely to reap, and with that more sales of their products or services. As they say in the newspaper business, “If it bleeds, it leads.”

And admit it, would YOU buy a book bearing the calm and sensible title “Markets will fluctuate, stay diversified for the long run and have a sensible asset allocation?” A better title might be “Ignore these idiots.”

Reader reaction to Eternal Truths series

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The case for dividend ETFs

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Money tree with coins. EPS8 vector.Here is my monthly ETF column for the Financial Post, titled Jonathan Chevreau: Why Dividend Funds are a smart financial move.

The piece mentions several dividend ETFs from manufacturers like BMO, Vanguard and iShares but also presents the views of a few ETF specialists who are not as enthusiastic about these products.

Well suited to TFSAs

Personally, I think Canadian dividend funds are particularly well suited to Tax-Free Savings Accounts: they’re diversified, provide dividend income, have reasonable fees and don’t result in any withholding of tax that may occur with foreign dividend ETFs. The latter are better held in RRSPs, in my view.

Of course, those who are cautious about the stock market will prefer to stuff registered plans with fixed-income vehicles like GICs and put their dividend ETFs into non-registered (taxable) accounts that let Canadians benefit from the dividend tax credit.

The case for being “an owner, not a loaner” was made by me in the fifth “Eternal Truth” of Personal Finance in the recent series that ran in the Post, both online and in the paper. You can find that piece as well as a short (1-minute) video under the headline Embrace Risk, Pay Less Tax. You can find the whole series here. Continue Reading…

Robo advisers here to stay: Dan Hallett

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Hallett
Dan Hallett (Twitter.com)

Good piece by High View Financial Group’s Dan Hallett in the Globe & Mail the past 24 hours.

In Why robo-advisers are here to stay, Hallett notes that the user-friendly online investment advisory firms removes the sometimes intimidating barrier of dealing with human advisors face-to-face: “Leveraging the power of user-friendly technology removes that barrier for the tech-savvy while creating a scalable platform for these firms. This keeps costs low; a key benefit of Robo-Advisors.

(Note on spelling: the G&M spells it robo-adviser in the headline but robo-advisor in the story itself. The Hub prefers robo-adviser but some guest bloggers spell it the other way.)

In any case, this is a nice example of a market “naturally establishing a pricing floor for basic investment advice,” Hallett writes, “i.e. 35 basis points (0.35%) per year of the value of client portfolios plus tax and product fees.”

Hallett predicts some traditional advisors could get pushed out of the business: every Robo-Advisory firm he’s looked at is a licensed portfolio manager and hence a legal fiduciary.

Some Drawbacks
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