Tag Archives: mutual funds

Mutual Fund Deferred Sales Charges designed to hide bad news

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By Michael J. Wiener

Special to the Financial Independence Hub

Mutual fund investors caught by deferred sales charges (DSCs) understand their downside.  They’d like to sell their funds but face penalties as high as 7% if they sell.
DSCs are set to be banned across Canada (but only restricted in Ontario) in mid-2022.  Until then, mutual fund salespeople masquerading as financial advisors can still sell funds with DSCs to unsuspecting investors.
[Editor’s Note: last week, Ontario announced it would be joining the other provinces in banning DSC as of mid-2022.]

Before DSCs existed, it was common for advisors who sold mutual funds to get a “front-end load,” which is a fancy term for giving some of an investor’s money to the advisor or the advisor’s employer.  So, an investor might invest $50,000 with an advisor, but the first account statement might show only $47,500.  The missing $2500 was a 5% front-end load offered as an incentive to the advisor to hunt for mutual fund buyers.

Not surprisingly, investors didn’t like to see a big chunk of their savings disappear like this.  Mutual funds had a problem.  They needed to give commissions to advisors so they would sell mutual funds, but investors didn’t like to see some of their money disappear.  The solution to this dilemma came in two steps.

Raising Annual Fees

Mutual funds charge annual fees to investors called the Management Expense Ratio (MER).  MERs are expressed as a percentage of invested assets, and while they seem small, they build up to intolerable levels over decades.  Many mutual fund investors don’t know about MERs and don’t notice their corrosive effects.

One way to cover the cost of advisor commissions is to simply raise a fund’s MER.  This works well when investors stay for the long term.  When investors stay longer than 5 years, a one percentage point  increase in the MER covers a 5% up-front advisor commission.

But what happens when an investor sells out of the fund after less than 5 years?  In this case, the mutual fund can’t recover the advisor commission.  Even, worse, advisors would have an incentive to move investor money frequently from fund to fund to collect more commissions, and investors wouldn’t mind because it wouldn’t cost them anything.

Deferred Sales Charges (DSCs)

Someone had the bright idea to charge investors penalties when they leave a fund too soon.  Today, it’s common for DSC funds to charge investors as much as a 7% penalty for withdrawing their money in the first year.  This penalty typically declines each year until it’s gone after investor money has been in a fund for 7 years. Continue Reading…

Death and Taxes, Cross-border Style

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Dollar Printing: Global Macro Shifts; Franklin Templeton Investments Licensed from Gettyimages

By David Cieslowski, CPA, CA, CFP, CIMA

(Sponsor Content)

As Benjamin Franklin famously wrote, “… in this world, nothing is certain except death and taxes.”  For US citizens, as well as some Canadians who own US assets, the first may be swiftly followed by the second.

In the United States, an estate tax is applied to the transfer of the taxable estate of every deceased  American citizen, resident or non-resident, including green card holders or others with dual US-Canadian citizenship. Even Canadian citizens who have never stepped foot in the United States, but hold US securities or other US assets, could find their estates subject to a tax on situs assets, which are defined as assets with a tangible or intangible direct US connection or location.

The low-down on US estate tax

Estate tax falls into the category of transfer taxes, as opposed to income tax. It can be substantial; those in the top marginal tax bracket may pay up to 40% on estates with assets of more than US$1 million. Moreover, for US citizens and residents this tax applies to assets held worldwide. Real estate ownership alone can easily exceed those limits.

Fortunately, the reality is somewhat more encouraging. Only around 2% of the US population actually pays estate tax, largely because of exclusions that effectively spare all but the largest estates.

The two most common exclusions are:

  • Annual exclusion of US$15,000 per person
  • Lifetime credit of US$11.7 million for 2021 and indexed annually. Something of a political football, this credit can rise or fall along with changes in government[1]. The current credit limit is set to expire at the end of January, 2025.

These annual exclusions are portable, meaning they can be used by any descendant of the deceased.

The gift that keeps on giving: to the IRS

In the battle of wills between those determined to transfer all of their wealth to succeeding generations and those determined to “tax to the max,” many strategies have been tried and failed. Gifting assets to relatives while the owner is still alive has been one of the more popular tactics. Not surprisingly, the IRS employs two additional taxes to thwart such attempts at tax-free wealth transfer.

The first is a garden-variety gift tax. For non-spouses, annual exclusions are the same as for estate taxes. For spouses they are more generous: unlimited for spouses who are US citizens and $159,000 for 2021 (indexed annually) for spouses who are not. Continue Reading…

The great thing about managing Other People’s Money

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By Michael J. Wiener

Special to the Financial Independence Hub

 

The great thing about managing other people’s money is that you can dip into it to pay yourself.  This might sound unethical or illegal, but it’s perfectly legal if the owners of the money agree to it.

I use the word “agree” in a technical sense here; you really just have to get people to sign a document that points to other documents that bury the details of how you pay yourself from their investments.  You might think that once people notice some of their money is missing, they would become wise to your scheme, but most people don’t notice.  You might think that once such schemes are exposed in the media, people will see that they’ve been had, but most people who read essays like this one just don’t believe it applies to them.  The sad truth is that millions of Canadians allow others to take their money this way.

How to consume 25 to 50% of your savings over a quarter century

Average Canadians invest much of their savings in mutual funds, segregated funds, and pooled funds offered by banks, insurance companies, and independent mutual fund companies.  The bulk of these savings are invested in funds whose managers dip into the funds to pay themselves and their helpers at a rate that will consume between one-quarter and half of investors’ savings and investment returns over 25 years.  This fact seems so incredible that most people will feel sure that it is wrong or at least that it doesn’t apply to them.  But this draining of Canadians’ savings is real.

There are laws that require sellers of funds to disclose how much they take out of people’s savings each year.  For example, when you first bought into a fund, you might remember receiving a large document called a prospectus that you found to be incomprehensible.  Don’t feel bad; it’s designed to be incomprehensible because it contains news you wouldn’t like that might stop you from buying the fund.  At least once a year your account statements have to include information about fees that get deducted from your savings, but these disclosures are often confusing, and they don’t have to include everything you pay. Continue Reading…

Money, health, and family top worries in COVID-influenced RRSP season

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By Scarlett Swain

Special to the Financial Independence Hub

As Canadians turn their attention to their investments during this COVID-influenced RRSP season, an annual online study conducted for Questrade by Leger (www.leger360.com) last month unveiled some compelling findings regarding trends and changes Canadians are likely to make when investing.

As part of our ongoing commitment to improving the financial security of Canadians, we set out to learn about what issues are currently top of mind, how they might impact investing, and what we can do to help investors on their journey to financial security. To no surprise, most respondents chose money, health, and family as their top three worries. We also saw some interesting behavioural trends to note.

Despite the pandemic, our research showed that Canadians continue to be very committed to making contributions to their retirement savings, while evidence suggests investors are placing importance on ensuring their investments go farther.

Most will contribute as much or more this year

A majority (69%) of respondents with an existing RRSP plan to contribute the same amount as last year (or more) to their RRSP this year, showing an unwavering commitment to their retirement. The number is even higher amongst those with a TFSA, with 85% planning to contribute more or the same amount to their TFSA. Half (50%) said given the impact and uncertainty during this pandemic, they are more likely to invest for the long term or for retirement, while 44% are actively seeking lower fee options this year, and 39% are investing more this year to get better returns. Continue Reading…

Precious Metals are the bedrock of the financial world

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By Nick Barisheff

Special to the Financial Independence Hub

Precious metals are the bedrock of the financial world. They have permanent value and are the oldest form of money in the world. If you don’t own physical gold and silver, your investment portfolio lacks a sound foundation. Precious metals are often sought after as a store of permanent value, and as a method of diversifying portfolios.

While cash, bonds, stocks and real estate offer investors financial diversification, precious metals underpin all other assets, particularly during times of economic turbulence and market turmoil.

Imagine an upside-down pyramid containing successive layers of asset classes.

Exeter’s Pyramid

That’s what the late John Exter envisioned when he devised a model ranking assets based on their risk level and financial soundness. The American economist and central banker placed risk-free gold at the apex of the inverted pyramid, below Federal Reserve cash, U.S. treasury bills, notes and bonds, AAA-rated corporate bonds, paper currencies, certificates of deposit (CDs), bank deposits, commercial paper, state and municipal bonds, junk bonds, segments of the Eurodollar market, Third World debt, insolvent borrowers and thrifts. [See graphic on the left]

A monetary researcher and visionary, Exter understood how gold’s scarcity and trustworthiness made it foundational in an unstable financial world. He knew gold would endure amid expanding debt and an unlimited supply of paper currencies, which he referred to as “IOU Nothings.”

Exter’s original gold-based pyramid is a simple yet timeless way of viewing a top-heavy financial infrastructure, which today is burdened by $1 quadrillion in unregulated derivatives, $270 trillion in snowballing global debt and trillions more in unfunded liabilities. In an overleveraged and indebted world, gold is the keystone, supporting all other assets that bear greater risk and loss potential.

Consider these examples:

  • Cash deposits and government bonds lose value to inflation in a low-interest or negative-interest rate environment.
  • Corporate and municipal bonds can become worthless when companies fail and cities default due to excessive debt.
  • Stocks can decline during stock market crashes and may become worthless.
  • Even real estate investments can decline in value when financial bubbles pop and property markets collapse.

All investments ebb and flow with the economic tides. Less stable ones drift like shifting sand. Some wither and perish in the barren financial desert. Physical precious metals endure through the ages. They withstand market chaos and weather financial storms. They retain value. Physical bullion will never become worthless. That’s why gold, silver and platinum are essential in a balanced and diversified portfolio.

Paper-based precious metals investments are riskier

Not all precious metal investments are alike; however, some are riskier than others, especially paper-based products.

Trading precious metals contracts — such as futures and options — on the commodity exchanges is the most speculative, along with owning stocks of startup mining companies that explore for gold and silver deposits. Continue Reading…