Do you know the difference between a financial salesperson and a financial advisor? The salesperson knows all there is to know about his or her products and feels they are well suited to the needs of all who approach them to make a financial purchase. The advisor knows all there is to know about his or her client, and only recommends a financial product that they believe will suit that client's individual needs, objectives, risk tolerance and financial goals.
Are you working with a salesperson or an advisor?
Friday, September 12, 2008
Tuesday, May 20, 2008
What a Steal!
I get alot of industry e-mails and propositions, most of which end up being immediately deleted. But there was one that showed up in my in-box today that I took a closer look at. Not because I was impressed by the investment opportunity that was being promoted. Rather because I was taken aback at how genuinely bad it appeared to be. This e-mail was sent to investment advisors who are in a position to recommend or sell the investment to their clients.
Let's start with the name. The investment is called the Spectrum Long/Short Style CAD Index Income Notes, Series 2 from BNP Paribas (Canada). I've believed for some time now that the more one wants to hide the sorry truth about an investment's prospects, the longer and more convoluted a name you will give it. But that wasn't the most interesting thing about the announcement. Nor was it the fact that I have never heard of BNP Paribas (Canada). Have you? No, the most interesting item in the announcement of this new investment was, in the words of a colleague, the red flag number that jumped right out at me.
That number was "4%". This is the amount of commission an investment advisor could earn for selling this product to a client. That is a very attractive number to a commissioned-based investment advisor.
And what, you may ask, is in it for you as a client in return for your investment?
From the investment's website at www.portfoliosolutions.bpnparibas.com (my comments are italicized):
Let's start with the name. The investment is called the Spectrum Long/Short Style CAD Index Income Notes, Series 2 from BNP Paribas (Canada). I've believed for some time now that the more one wants to hide the sorry truth about an investment's prospects, the longer and more convoluted a name you will give it. But that wasn't the most interesting thing about the announcement. Nor was it the fact that I have never heard of BNP Paribas (Canada). Have you? No, the most interesting item in the announcement of this new investment was, in the words of a colleague, the red flag number that jumped right out at me.
That number was "4%". This is the amount of commission an investment advisor could earn for selling this product to a client. That is a very attractive number to a commissioned-based investment advisor.
And what, you may ask, is in it for you as a client in return for your investment?
From the investment's website at www.portfoliosolutions.bpnparibas.com (my comments are italicized):
- Your money is locked up for the 5 year term of the notes
- This type of instrument may not provide you with any income stream or return prior to the maturity date
- There is no guarantee you will get back more money than you invested in the notes
- You will not have any direct or indirect ownership interest or rights in the underlying securities
- There is no guarantee that there will be a liquid market to facilitate disposition of the notes for you if you decide to dispose of your notes prior to maturity - you may not be able to sell them at all prior to maturity
- The notes are not qualified by prospectus or registered under any securities laws. No Canadian or other regulatory authority has recommended or approved the notes, nor has any such regulatory authority reviewed or passed upon the accuracy or adequacy of any relevant information statement - there is no prospectus for you to review in advance
- Because the Calculation Agent is the affiliate of BNPP, potential conflicts of interest may exist between the Calculation Agent and you
- They continue to point out other areas of potential conflict of interests - To the extent that we or our affiliates serve as issuer, agent or underwriter for such securities, our or their interests with respect to such products may be adverse to yours. You are effectively being warned that they will put their financial interests ahead of yours.
With the prospect of a 4% commission dangled in front of them, I can only hope that investment advisors will disclose most, if not all, of the details I have outlined above along with their sales pitch to aid you in making an intelligent investment decision.
Sunday, March 9, 2008
Three Questions
Last month, during the frenzy of RRSP season, the National Post asked three questions of a number of financial experts. Somehow they neglected to call me, so I thought I would answer these questions in this blog.
1. What is the dumbest financial move you have seen someone make?
I had a client who transferred the commuted value of their pension from a national company. While most of it went into a locked-in RRSP, about 1/3rd was transferred into a regular RRSP. The locked-in RRSP has a maximum dollar amount that can be accessed each year, the regular RRSP does not.
The transfer itself was not the dumb move. The reason for the transfer was.
This client and their spouse were unable to create a budget to accommodate the monthly payment the pension would have provided them. By transferring the pension into RRSPs, they were able to access virtually as much money as they wanted each month.
They retired early, were in good health and had no other source of income or savings. They were as yet too young for CPP and OAS. They had no financial or retirement budget so lived as though they had a regular and unending amount of funds to draw upon. By the time they came to me for financial counselling, they had depleted more than 1/3rd of their RRSP accounts in a matter of 4 years. Even worse, we were in the throes of the 2001/2002 equity meltdown.
They found themselves in a financial spiral. They took the maximum payment from the locked-in RRSP and then took whatever amount they wanted over and above that figure from the regular RRSP. This was bad enough but then when tax time rolled around, they had to withdraw even more funds to pay for their taxes.
There really was nothing to be done for them unless they were willing to help themselves. When we last communicated, they had not yet come to grips with the reality of needing to curb their spending and stick to a strict budget.
2. What is the most common mistake?
After 25 years in this business, the most common mistake I see over and over is people who delegate all decision making for their finances to their financial advisor. These are usually the same people who will spend hours researching and choosing a new car or vacation, but who don't have the slightest interest in their own money.
People, that's how you get taken advantage of.
Now I'm not talking about those of you who admit they don't know much about finances, but at least ask questions and try hard to understand. I'm talking about those of you who couldn't care less and act as if they have much more important things to deal with. I actually once had a client who wanted to buy some mutual funds and wouldn't answer my questions about their risk tolerance, time frame, investing preferences, etc. They eventually lost it and yelled at me to simply sell them something.
Sounds unreasonable but in this busy, busy world, it happens more often than you might think.
3. What is the number 1 rule you never break?
I have diversified my RRSP between 6-8 different funds from a single family of funds, chosen for their long term performance as well as low MERs. When I make a RRSP contribution, without fail I always deposit it into the one fund that performed the worst over the previous 12 month period. This isn't always an easy decision and it rarely pays off immediately, but I have yet to be disappointed over the long term.
I once overheard someone compare buying a fund or stock when it looks the worst to cliff diving. In order to not smash themselves against the rocks below, cliff divers have to have the courage and conviction to dive when the waves have receded and they only see rocks below them. By the time they get down to the rocks, the waves have rushed back in and they safely hit the water.
It takes courage and conviction to buy a fund or stock when it looks the worst. But, assuming you have done the necessary research in advance, this can be the best time to buy.
1. What is the dumbest financial move you have seen someone make?
I had a client who transferred the commuted value of their pension from a national company. While most of it went into a locked-in RRSP, about 1/3rd was transferred into a regular RRSP. The locked-in RRSP has a maximum dollar amount that can be accessed each year, the regular RRSP does not.
The transfer itself was not the dumb move. The reason for the transfer was.
This client and their spouse were unable to create a budget to accommodate the monthly payment the pension would have provided them. By transferring the pension into RRSPs, they were able to access virtually as much money as they wanted each month.
They retired early, were in good health and had no other source of income or savings. They were as yet too young for CPP and OAS. They had no financial or retirement budget so lived as though they had a regular and unending amount of funds to draw upon. By the time they came to me for financial counselling, they had depleted more than 1/3rd of their RRSP accounts in a matter of 4 years. Even worse, we were in the throes of the 2001/2002 equity meltdown.
They found themselves in a financial spiral. They took the maximum payment from the locked-in RRSP and then took whatever amount they wanted over and above that figure from the regular RRSP. This was bad enough but then when tax time rolled around, they had to withdraw even more funds to pay for their taxes.
There really was nothing to be done for them unless they were willing to help themselves. When we last communicated, they had not yet come to grips with the reality of needing to curb their spending and stick to a strict budget.
2. What is the most common mistake?
After 25 years in this business, the most common mistake I see over and over is people who delegate all decision making for their finances to their financial advisor. These are usually the same people who will spend hours researching and choosing a new car or vacation, but who don't have the slightest interest in their own money.
People, that's how you get taken advantage of.
Now I'm not talking about those of you who admit they don't know much about finances, but at least ask questions and try hard to understand. I'm talking about those of you who couldn't care less and act as if they have much more important things to deal with. I actually once had a client who wanted to buy some mutual funds and wouldn't answer my questions about their risk tolerance, time frame, investing preferences, etc. They eventually lost it and yelled at me to simply sell them something.
Sounds unreasonable but in this busy, busy world, it happens more often than you might think.
3. What is the number 1 rule you never break?
I have diversified my RRSP between 6-8 different funds from a single family of funds, chosen for their long term performance as well as low MERs. When I make a RRSP contribution, without fail I always deposit it into the one fund that performed the worst over the previous 12 month period. This isn't always an easy decision and it rarely pays off immediately, but I have yet to be disappointed over the long term.
I once overheard someone compare buying a fund or stock when it looks the worst to cliff diving. In order to not smash themselves against the rocks below, cliff divers have to have the courage and conviction to dive when the waves have receded and they only see rocks below them. By the time they get down to the rocks, the waves have rushed back in and they safely hit the water.
It takes courage and conviction to buy a fund or stock when it looks the worst. But, assuming you have done the necessary research in advance, this can be the best time to buy.
Saturday, February 23, 2008
PH&N Sells Out
The investment community, especially here in Vancouver, was shocked by the news that PH&N had been purchased by RBC. The usual promises were made about no offices being closed, no staff losing jobs, etc. Well really, who believes that anymore. RBC said exactly the same thing in the early 1990's when they took over Royal Trust. Look how well those promises were kept.
We were fed the same nonsense about why the move was contemplated to begin with - "our clients demanded it." These would perhaps be the same clients who chose PH&N to begin with precisely BECAUSE they were small, BECAUSE they were independent, BECAUSE they were a boutique firm, BECAUSE the service was personal, BECAUSE the statements and tax slips arrived faster than any other financial institutions, etc. Who is PH&N kidding? Private clients and institutional clients alike had the choice of investing with RBC well before this decision was made and chose not to.
PH&N clients will now have to get used to RBC driven initiatives such as marketing, being cross-sold every conceivable product under the sun, telephone calls that require you to press 1 for this, 2 for that, slower statements, the high probability of additional fees on investment and retirement accounts and branch staff who have no clue what PH&N is all about.
Or not. Thank goodness we still have independent choices such as Leith Wheeler and Steadyhand.
We were fed the same nonsense about why the move was contemplated to begin with - "our clients demanded it." These would perhaps be the same clients who chose PH&N to begin with precisely BECAUSE they were small, BECAUSE they were independent, BECAUSE they were a boutique firm, BECAUSE the service was personal, BECAUSE the statements and tax slips arrived faster than any other financial institutions, etc. Who is PH&N kidding? Private clients and institutional clients alike had the choice of investing with RBC well before this decision was made and chose not to.
PH&N clients will now have to get used to RBC driven initiatives such as marketing, being cross-sold every conceivable product under the sun, telephone calls that require you to press 1 for this, 2 for that, slower statements, the high probability of additional fees on investment and retirement accounts and branch staff who have no clue what PH&N is all about.
Or not. Thank goodness we still have independent choices such as Leith Wheeler and Steadyhand.
Friday, February 15, 2008
For Your Valentine
Every February candy, flowers, and gifts are exchanged between loved ones, all in the name of St. Valentine.
The entire month of February has long been associated with romance. Here in Canada, it has sadly also become associated with a last minute scramble to make RRSP contributions. Hardly romance inspiring!
I “propose” we put the romance back into February and show our families just how much we love them by setting aside the time to prepare or update your Will and/or Power of Attorney. Not romantic, you say? Let me prove you wrong.
There are many certified financial planners who have an interest and added qualifications in estate planning. While I recommend you use a lawyer to prepare the estate documents, financial planners can be invaluable in helping you address the many questions you need to consider before seeing the lawyer. Questions such as:
· Have you provided adequately for your dependants?
· Have you established a safe location for your important papers (will, insurance, tax returns, bank and investment account records), and do you loved ones know where that is?
· Should you leave an inheritance outright, or is it better to consider a trust?
· What are the tax implications to your estate plan?
· Have you considered probate costs and how to pay them?
It takes time and effort to put an estate plan in place. Don’t expect it to be a weekend project. Just as you carefully chose the individual who you will spend you life with, so you should carefully plan how to protect and provide for your spouse, children and any other family members if you can’t be there with them.
The individual who prepares a Will relieves their family members of the following concerns:
· How and to whom your assets will be distributed after your death
· What charitable organizations you may wish to benefit from a gift
· Who will care for any minor children and at what ages those children may receive any cash bequests
· Where and in what manner you wish to be laid to rest
The individual who prepares a Power of Attorney has spared their loved ones the following decisions:
· How and by whom your assets will be managed during your lifetime if you can’t do it for yourself
· Who will pay your daily bills if you are incapacitated
· Who will make the decisions concerning your care and welfare if you am unable to make them for yourself
About 10 years ago, I finally persuaded my parents to prepare Wills and Power of Attorney documents, naming each other as executors, and my eldest sister and I as back-ups. About 5 years ago, my mother began exhibiting symptoms of dementia. My sisters and I are comforted by the fact that, whatever happens, we know what our parent’s wishes are and have the ability and the authority to carry them out when the time comes.
That to me is a true gift of love.
The entire month of February has long been associated with romance. Here in Canada, it has sadly also become associated with a last minute scramble to make RRSP contributions. Hardly romance inspiring!
I “propose” we put the romance back into February and show our families just how much we love them by setting aside the time to prepare or update your Will and/or Power of Attorney. Not romantic, you say? Let me prove you wrong.
There are many certified financial planners who have an interest and added qualifications in estate planning. While I recommend you use a lawyer to prepare the estate documents, financial planners can be invaluable in helping you address the many questions you need to consider before seeing the lawyer. Questions such as:
· Have you provided adequately for your dependants?
· Have you established a safe location for your important papers (will, insurance, tax returns, bank and investment account records), and do you loved ones know where that is?
· Should you leave an inheritance outright, or is it better to consider a trust?
· What are the tax implications to your estate plan?
· Have you considered probate costs and how to pay them?
It takes time and effort to put an estate plan in place. Don’t expect it to be a weekend project. Just as you carefully chose the individual who you will spend you life with, so you should carefully plan how to protect and provide for your spouse, children and any other family members if you can’t be there with them.
The individual who prepares a Will relieves their family members of the following concerns:
· How and to whom your assets will be distributed after your death
· What charitable organizations you may wish to benefit from a gift
· Who will care for any minor children and at what ages those children may receive any cash bequests
· Where and in what manner you wish to be laid to rest
The individual who prepares a Power of Attorney has spared their loved ones the following decisions:
· How and by whom your assets will be managed during your lifetime if you can’t do it for yourself
· Who will pay your daily bills if you are incapacitated
· Who will make the decisions concerning your care and welfare if you am unable to make them for yourself
About 10 years ago, I finally persuaded my parents to prepare Wills and Power of Attorney documents, naming each other as executors, and my eldest sister and I as back-ups. About 5 years ago, my mother began exhibiting symptoms of dementia. My sisters and I are comforted by the fact that, whatever happens, we know what our parent’s wishes are and have the ability and the authority to carry them out when the time comes.
That to me is a true gift of love.
Friday, December 28, 2007
Top 2008 Financial Resolutions
Don’t you just love a fresh new year? January 1st arrives with renewed optimism to accomplish all those goals you didn’t find time or energy for last year. Lose those last 10 pounds? You bet! Get a raise? Oh, boy! Corner office, here I come!
Of course, the problem with January 1st is that it is followed by January 2nd, then January 3rd, etc. Reality sets in, hope fades and we are all back to the same life habits we thought we left behind with the old year. What happened?
Making New Years resolutions inevitably means breaking, or at least bending, old habits. The further you try to deviate from what is normal and customary, the harder it is to establish a new pattern of bahaviour. However, all is not lost. I can’t help you with the diet, but I can offer you a few financial resolutions that will ease your mind and guide you towards a more comfortable financial year in 2008.
- Decide upon a small number of reasonable financial goals and put them in writing. You may decide to finally pay off a low balance car loan or put an extra $5,000 against your mortgage in 2008. Whatever you choose, putting your goals in writing increases the likelihood that you will fulfill them.
- Contact your financial institution and commit to making automatic monthly contributions towards a savings plan, no matter how small. Getting the money out of your chequing account equates to getting it out of your mind. The amount in your savings account will grow quickly.
- Resolve to read more and educate yourself on financial issues and products, but remember, once the news is printed, it is yesterday’s news. Don’t make spur of the moment decisions without first consulting your financial planner or financial advisor.
- Gather together and organize all your important financial papers. Buy yourself one of those accordion files and label various sections for your financial statements, your Will, your insurance papers and your pension plan information. While you’re at it, review each document for any beneficiary designations to make sure they are up to date and reflect your wishes.
- Take action to finally break the habit of scrounging together a last minute RRSP contribution by setting up automatic monthly contributions. Arrange it by payroll deduction, if possible. Ask your payroll office to reduce your withholding tax on the amount going directly towards your RRSP. This means you won’t get a huge refund next year on your RRSP contributions. So what? It also means you haven’t made an interest free loan to the Government for a whole year. Congratulations! Good planning.
- Contact your financial planner or financial advisor and make one or more appointments scattered through-out the year to discuss the following:
1. Portfolio diversification. Early in the New Year is an excellent time to review and rebalance your portfolio back to previously agreed upon asset weightings. By all means, give yourself some flexibility to deviate perhaps 5% over or under your target figures. But any more than that and you may as well not have targets at all. Financial discipline is a good thing.
2. Tax efficiency. Are you taking advantage of every opportunity to minimize taxes on your portfolio? Does your RRSP contain the bulk of any interest bearing investments, while your non-registered portfolio holds Canadian dividend equities and a mix of U.S. and International equities? Remember, however, that being tax efficient is not a solitary goal of your portfolio, it is one of many. Be open and straightforward with your financial planner or advisor about your personal tax situation and they will help to construct a portfolio that is best suited to your needs.
3. Fees. Are you getting good value for your costs? Are there products available that will provide you with a satisfactory return at an acceptable level of volatility with minimal costs? Ask how your financial planner or advisor is compensated and understand the differences between fee-for-service and commission-based planning. Above all else, remember that the higher your total out-of-pocket costs, the greater the negative impact to your portfolio return.
- Keep the above commitments!
Once you have fulfilled these resolutions, you can turn your attention back to that diet you always intended to start. However, whether you succeed in losing those last 10 pounds or not, you can sleep comfortably knowing your financial house is in order. Happy New Year everyone!
Wednesday, November 14, 2007
Talking For a Living
I have neglected my blog for several weeks while attending what I began to call Entrepreneur School. This is an excellent 2 week program offered only in Vancouver for professionals interested in starting a business in consulting or contracting. Fourteen participants, strangers at the beginning and a closely knit network by the end, work through a number of learning sessions facilitated by consultants who are specialists in various capacities. From marketing to public speaking, accounting to small business law, the sessions were of great value to all who participated. The only odd moments occurred when a consultant strayed away from their area of expertise, and began to pontificate on a topic which happened to be a specialty of one of the participants. The participant was uncomfortable because some of the information given was simply wrong. I began to wonder how many people are influenced by the actions of a consultant going off topic.
Consultants and investment advisors have a lot in common. Essentially they both talk for a living. Regardless of my job description, when I was an investment advisor, I talked for a living. I talked about the markets, the value of the dollar, housing problems, the U.S. deficit, Bre-X, Enron, Portus, whatever was in the news that affected my clients' investment portfolio. I talked so my clients could make an informed decision based on facts rather than emotions. Unfortunately, the investment road is paved with the broken dreams of those who were TALKED INTO bad investments (the emphasis is deliberate). You've heard the expression that certain things are sold, not bought? Investment products all too often fall into that category. When a fast talking advisor persuades you to buy something, there is often a greater advantage to him or her in the form of a commission or bonus. When an advisor patiently explains the product, outlines the negatives along with the positives, answers all your questions and avoids the hype, it may be a less exciting meeting but you can be sure they are trying to put your interests ahead of their own.
At the end of the day, I want investors to be comfortable questioning the advice they receive from any financial professional. Don't be arrogant, and please don't pretend to know more than you actually do. You are only fooling yourself. The financial professional is supposed to know more than their clients. I often tell my clients that I couldn't sit at their desks and do their job, why would I expect them to know more about my job than I do. However, I do expect you to question me on why I have made the recommendations I did, and to provide me with enough accurate and current information about your financial situation to be able to make appropriate recommendations. And if a financial professional ever starts giving you advice on, say, carpentry, please look for a new advisor!
Consultants and investment advisors have a lot in common. Essentially they both talk for a living. Regardless of my job description, when I was an investment advisor, I talked for a living. I talked about the markets, the value of the dollar, housing problems, the U.S. deficit, Bre-X, Enron, Portus, whatever was in the news that affected my clients' investment portfolio. I talked so my clients could make an informed decision based on facts rather than emotions. Unfortunately, the investment road is paved with the broken dreams of those who were TALKED INTO bad investments (the emphasis is deliberate). You've heard the expression that certain things are sold, not bought? Investment products all too often fall into that category. When a fast talking advisor persuades you to buy something, there is often a greater advantage to him or her in the form of a commission or bonus. When an advisor patiently explains the product, outlines the negatives along with the positives, answers all your questions and avoids the hype, it may be a less exciting meeting but you can be sure they are trying to put your interests ahead of their own.
At the end of the day, I want investors to be comfortable questioning the advice they receive from any financial professional. Don't be arrogant, and please don't pretend to know more than you actually do. You are only fooling yourself. The financial professional is supposed to know more than their clients. I often tell my clients that I couldn't sit at their desks and do their job, why would I expect them to know more about my job than I do. However, I do expect you to question me on why I have made the recommendations I did, and to provide me with enough accurate and current information about your financial situation to be able to make appropriate recommendations. And if a financial professional ever starts giving you advice on, say, carpentry, please look for a new advisor!
Subscribe to:
Posts (Atom)