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moneysense.ca, 11/10/07
This and That
- Jeremy Siegel holds forth on what he thinks is ahead for financial markets.
- Ellen Roseman points out that you could be dinged for fraud committed using your debit card and offers some tips to deter fraud.
- Thicken My Wallet recently posted about his experience with debit card fraud.
- Jon Chevreau argues that most average investors should use a financial advisor.
- Derek Foster reveals some surprising details about his strategy to Ellen Roseman, including his big bets on beaten down U.S. mega caps like Wal-Mart (WMT) and Johnson & Johnson (JNJ).
- With a high dollar, Canadians are more interested in shopping for bargain cars, books and clothes in the U.S. when we should be, arguably, shopping for quality stocks instead.
- Tom Bradley wonders why investors, both amateur and professional, commit the same mistakes over and over again.
moneysense.ca, 11/10/07
For all the reasons that the CAD$ is so strong and the U.S. dollar so weak to be clicking at one time….to me means there is bound to be some type of reversal in the mid to long term. I believe now is a great time for Canadians to buy U.S. stocks. Especially Canadians that are poorly diversified outside of Canadian equities.
Moneygardener. Regarding investments, I don’t even bother with the exchange rate as I have two separate accounts for trading in the USA and trading in Canada. But I still couldn’t agree with you more.
I just look at the stock valuations in the USA and there are so many bargains to be had on both the NYSE and NASDAQ in terms of P/E ratios and Dividend Yields that I couldn’t even possibly list them all. Meanwhile, here on the TSX, I already own all of the investments that I don’t consider to be overvalued. As a result, my US brokerage account is currently fully invested and my CDN brokerage account is sitting on about 30% in cash and short term securities (mostly cashable GICs).
By the way, for a while I had been considering getting into the financial services “industry” and I had started taking some courses. The first thing they start to teach you is the code of ethics – but right after that, they teach you which investments put the most money into YOUR pocket as the advisor, not the best investments for your clients. As far as I can tell, they’re all a bunch of scum bags trying to take your money and stick it in their own pockets. I wouldn’t advise anybody that I’m acquainted with to use an investment advisor. But I only use the term “scum bag” in the nicest of ways…
It seems like the Wealthy Boomer link is truncated somehow (at least for me using Firefox).
The Derek Foster stuff is interesting. I’m actually a little bit surprised that he went out of his way to provide Ellen Roseman with the details of his investing history. I guess the only reason that he cares that people are questioning is he has a new book out.
One point that is made by Ellen Roseman that I have talked about before is that Derek’s portfolio isn’t his only source of income. Obviously he is making some money by selling books and that is helping him either increase the value of his portfolio or supplement his lifestyle. However, I don’t think this reduces the power of the investing strategy he is using. He is still financially independent, he probably doesn’t have to write books and articles, it just helps to supplement his income. I just don’t think he is ‘retired’ in the sense that most people think about being retired (as a permanent vacation).
0xCC: Thanks for pointing out the broken link. It’s fixed now.
MG, Phil: Actually, with our strong dollar, even EAFE equities are on sale. The C$ is up against most currencies, just not as much as against the dollar.
Phil – I couldn’t agree more about financial “advisors”. I feel the same way about real estate agents – commissioned salespersons who just want the deal to get done.
I don’t hold it against them personally – the problem is the way their compensation is paid.
MG – I think you are right – I’ve increased my US holdings this year.
Mike
Thanks for the mention. Hope to do some updates on this.
IA’s- As Fourpillars writes, the industry is slanted that way. Its not that IA’s are personally greedy or “scumbags”; the institutions that hire them are- another reason to buy diversified financial companies.
As a complete side-note, I read that Foster sold 2,000 copies of his first book and he made $150K revenue out of it? That is pretty good in publishing! Granted he published with a small publisher but most Cdn. authors are lucky to get a 30% royalty.
TMW – that would work out to $75/book, he must have sold more than that.
I thought he sold something like 50k or 100k books? What is considered a ‘best seller” in Canada?
I seem to remember reading somewhere that Derek sold 15,000 copies of Stop Working. He published independently, so it’s possible his royalties are higher.
Two quick things on Phil’s comment…
1. Phil, ethical advisors (there are some) do not need a code of ethics to know right from wrong. Codes of ethics are better than nothing, but again – right is right and wrong and is wrong – and a true code of ethics need not be any longer than that.
2. And I swear that I not being sarcastic here – Given your views (which you certainly aren’t alone in), why don’t you go into the financial “industry”. If your competition are just “scum bags”, it would seem to me that you would quickly separate yourself from the rest of the pack and have clients beating a path to your door.
I worry that I don’t sound sincere in this question, but I assure you I am truly interested in your comments on why you don’t get into an industry given your views. If you did get in, do you have an idea how you would set yourself up, what initial costs and ongoing overhead you would face, and how you would invest client money (i.e commission, hourly fee, etc) and what your breakeven point would be, and what you would earn in your business?
I hope you think it would be interesting as well because I think this would make for some interesting and constructive discussion.
Hi Rob,
The opportunity that I was looking at is basically where you are technically self-employed, but you work and represent this umbrella company. Unfortunately, they only sold life insurance and more traditional mutual funds. I believe we need to have some life insurance and I think mutual funds are a good way to diversify your holdings when you first get started. But eventually when your portfolio gets much larger, it’s more efficient (in my opinion) to hold stocks and bonds in a self-directed discount brokerage account. And in my opinion, you also shouldn’t “load up” on life insurance, you should only buy as much as you “need” versus “want”.
But the way that this company works (and I’m sure many others do as well) is that you don’t really get paid up front by your client when you first sign them up – with the exception of some small administrative fee that they pay that goes into your pocket. The big money comes from the retainer fees which come out of the MERs for the mutual funds, so it’s like a commission, if you will. Therefore the higher the fees, the more commission that you make. And segregated funds are mutual funds with an insurance plan stapled to it – the insurance company takes a cut of the returns in exchange for guaranteeing that you don’t take a loss when you eventually sell the fund. They were really pushing the seg funds because they earned the most commission – the mutual fund pays you a piece of the MER in your commission and the insurance company takes their cut and also pays you a separate commission. Anyways, selling the seg funds to risk averse investors is the way to make tons of money for people who would otherwise buy GICs or something, basically taking advantage of them because most people know that a diversified mutual fund of stocks and bonds is unlikely to go down if the outlook is far enough out. That’s why the insurance companies can pretty much just pocket the cash from those seg funds.
Anyways, I can go on forever about it, but just suffice it to say that it’s all a huge ripoff and I wouldn’t sell any of these products to my own friends and family.
There are soooooo many products that are good for the advisor but are of very questionable value to the client (does that say my take on seg funds in almost every situation is similar to yours in a way that is diplomatic and politically correct enough?) The good advisors protect their clients from buying bad investments.
One of the hardest things about the advising business is setting up in a way or with a dealer that you can be independent in your investment recommendations. I could be paid an absolute fortune to give this up, but that would be like stealing client’s money so it just isn’t going to happen.
There is a conflict of interest in every industry and everyone we buy things from be it cars, groceries, medical care, vacations, etc.. I believe that financial advisors basically choose what they earn – the bad ones make as much as possible even if that means ripping people off and the good ones make sure they add more value then they earn…..just like every other industry.
Your answer was extensive and obviously took some time to compose so thank you for that. You described how that bad situation worked you didn’t really say you could feasibly set up an advisory business that operated within your ethical parametres. Do you think it is possible to do this?
The battery in my computer died at the end of that last post…
For me, I’ve all but given up looking at getting into the retail brokerage side of the industry. Since then, I’ve been trying to figure out how to get into private equity instead – I am an investor in some private equity funds as well as asset management firms.
The private equity fund business model seems to make the most sense to me. Basically you buy shares of the fund and the team puts the money to work either buying equity (usually meaning a takeout of some business) or debt. So, all the investor is concerned about is the total return on investment… If the management firm takes too much money out of the fund or if the fund performs poorly, then the fund would probably get hammered in its share price.
So, the management firm is directly influenced by its fund’s performance, unlike some mutual fund that gets paid a 2% MER for holding onto shares of Royal Bank or something equally as ridiculous (meaning we can all do that in our brokerage accounts without paying an annual fee). And for mutual funds, it doesn’t matter if the fund does well or poorly, the manager continues to make their millions.
That is interesting because I feel the management fees on most private equity arrangements make mutual funds look like razor thin ETFs.
I don’t think I am asking my question clealy enough so
I’ll try one last time –
Philosophically speaking…do you think it is possible to run a retail operation that adds value for clients, is financially feasible in terms of covering overhead and wages, and does an ethical job for clients?
Or do you feel it is impossible so everyone is doomed getting and paying for financial advice and even ethical advisors can’t possibly add suffient value to justify their cost.
I think an advisor can be invaluable to someone who has neither the interest nor inclination for DIY finances. I’ll give an example: A friend of mine does all the right things -works hard, lives below her means and has a decent sized nest egg. She used to have an “advisor” who basically sold her a jumble of mutual funds (deferred sales charges, high MERs, the works) and offered nothing in return – no asset allocation advice, insurance or tax advice, nothing. I’ve been trying to get her to learn the basics of investing by loaning her books and suggesting she should clean up her portfolio but you can’t push a friend too much in money matters without sounding nosy or worse annoying.
It turned out that many colleagues in the office are using an advisor they are all very happy with and she got a referral. The advisor charges 2% (inclusive of fees, commissions etc.) of assets but from what I can tell, my friend now has an asset allocation plan and has the basics set up right – like bonds within a RRSP or cash parked in a money market account or cashable GICs. I would argue that my friend made the right choice in going a professional advisor who knows his/her stuff. Yes, the advisor costs money but I’d say that she earns her fees and my friend knows exactly what she is paying and she can be the judge of the results.
Hi Rob,
I will have to start off by saying that I don’t have enough industry experience about how compensation is made to answer your direct question. But from my limited experience researching into it, I would have to say that a fixed fee-for-advice model would be the only one that would work within that ethical framework for a retail advisor business, but it wouldn’t really be feasible in the compensation side since the income would be sporadic. So, to answer your question, based upon my limited knowledge of the industry, is “no”.
Hence, I think the best balance may be found in a private equity fund sort of structure. You are correct that the performance fees when they exceed some benchmark (like the TSX composite) make mutual fund MERs pale in comparison. However, if they fail to exceed that benchmark, they make very little compensation – and if they continually fail to exceed that benchmark, then the fund gets whacked. As a result, they have to be very prudent and that is how these private equity managers earned the adage of being the “smart money”.
As I mentioned before, I am an investor in some of these funds. When I read some of these reports by some of the PE fund managers, some of the businesses in the portfolio earn them returns of over 100% per year when realized. Of course some of them barely break even or take a small loss on the transaction. It seems to me that the average fund return is somewhere in the 15-20% annual return range. And that is why I like to remain invested in some of these funds – it’s like a mutual fund of private companies often earning double digit annual returns. So does it bother me that they take a 25% performance fee on the amount of money that they make above the return on the S&P index? Not if they continue to give me the fund holder 15-20% a year!
Anyways, that’s just one man’s lonely opinion.
thanks Phil – I appreciate your comments
Perhaps instead of becoming a salesman (which is what it basically is) you can charge a fee and publish what you are doing with your own money. People pay to see what you are doing and that is the way you can give out advice… and say what you want. You won’t directly be telling them what to do, just what you would do and are doing with your money. This free’s you up from becoming a full time salesman for a mutual fund/insurance company when you’re clearly more interesting in the investing and finance than the salesmanship of it all.
I’m a fan of private equity as well. I was astounded when I found out that of all the companies in Canada and the US that generate over $100 Million in revenues per year, only 1/3 are public and hence listed on a stock exchange. 2/3 of the mid to large cap companies in North America are private.
How you can NOT put private equity into your portfolio is beyond me. It is similar to the “diversify by increasing foreign content” argument that states Canada’s stock market represents only 3% of the world’s public equity – why limit yourself to 3% of the market?
Same philosophy – why limit yourself to 1/3 of the North American market?
Nabloid: I disagree with your premise because something that’s suitable for Rob may not be suitable for you or me. That’s why people with no interest in learning about financial planning definitely need an advisor – they need a plan suitable for their circumstances. Also, investing is just one part of FP – taxes, insurance, estate planning etc. should also be considered.
Phil: I wouldn’t call private equity compensation arrangements reasonable. After all, it’s the 2-and-20 crowd we are talking about. They earn their 2% whether they win or lose, so how is their compensation better than mutual funds? Also do you have any studies showing the average returns is better than publicly-traded equity? Do the average returns include those funds that flamed out? Also over what time period did they earn 15%-20%? Equity markets have returned as much over the past five years.
Preet: Comparing international equities to private equity is not reasonable. Adding international equities boosts portfolio returns and reduces risk. Can you make the same claim for private equity?
CC. First of all, for disclosure, I own some private equity funds but also own some shares of private equity managers. As a result, I get it both ways.
Now, as far as investing in mutual funds vs other funds like hedge funds or private equity funds… There is no straight answer that one is definitively better than another. But my point is that PE funds show you in their GAAP cash flow statement exactly how much they are compensating themselves out of your fund. Do mutual funds do the same? Some do, some don’t, but my point is that they aren’t REQUIRED to do so. They only give you an MER % ratio (which may or may not include other fees) and they leave it up to you to calculate how much % of your cash that they are taking. Meanwhile, PE funds are run exactly like a business and are subject to the exact same GAAP accounting rules as any other business.
In the same manner, the PE fund is required to disclose such things as their balance sheet and many also provide forward-looking statements. Do mutual funds do that? No, not most of them – but they don’t have to, either. So, PE funds have to disclose everything and you can read it all before purchasing their fund. As an investor, we can read the quarterly reports and make our own informed decision before choosing to invest in the fund or not.
I know you’re a fan of indexing, so it probably never happens to you. But for me, many times in the past, I’ve invested in mutual funds and then within a few months, a new manager manager was hired who has taken the fund in a whole new direction that I didn’t like. And the part that bugged me was that there was no disclosure of any of this in any forward looking statements.
Phil – I don’t have an opinion about whether MFs are better than private equity funds but I think you are comparing apples to oranges a bit. PE funds have to show more accounting because the companies they invest in don’t have to (because they are private). Mutual funds on the other hand invest in public companies which are already required to do a certain level of accounting so the mutual fund doesn’t have to do it for them.
As far as fund managers leaving – I don’t think it matters whether a fund invests in public companies or private, you always run the risk of key people leaving. I doubt you will ever see a “forward looking statement” from a private equity fund indicating that their key manager will be jumping ship shortly.
Mike