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!

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!

Pension Plans Underserving their Clients

I have written about the pensioners I once had as clients, and how it took some ingenuity on my part to ensure many of them received their pension cheques during postal strikes. What I wanted to touch on in this post was the lack of clear guidance to those same pensioners and spouses provided by many pension plans, large and small.

Being a conscientious individual, when someone complains that a mistake has been made, I normally take them at their word and start to investigate how I or my firm let them down so the error can be rectified. While serving as the pension clerk at a large trust company, I began to hear complaints about pension cheques not being received. All too often, this was accompanied by tears and words of frustration from an elderly recipient dependant upon the timely deposit of these funds. What I learned, however, was that misdirected pension cheques were rarely the reason for these complaints. Far more often, and much sadder, the reason for the missed cheques was that the original pensioner had passed away and not chosen an on-going joint and last survivor option for their company pension. It was left to me to explain this reality to a grieving and cash strapped widow or widower.

I faced this situation many times as a pension clerk, and again as a service representative in a financial institution. We often received complaints that the financial institution had lost their money, when in fact it had never been sent.

As sad as this was, even worse was the situation where a surviving spouse delayed advising the pension plan of the death of the original pensioner. Often they would receive one or two pension payments before notification was made, and the financial institution had to reverse the payments, debit the account of the surviving spouse (occasionally putting them into overdraft) and repay the pension plan.

Why is it that pension plan do not shoulder the responsibility of keeping their members up to date on the pension options chosen. and the consequences upon the death of the original pensioner? It could be as simple as a message on each and every pension statement alerting the pensioner to the limitations of the option they chose. Even though the pension option was made by the pensioner originally, situations change, people divorce and remarry (even after retirement), people's memory fades and spouses may live with incorrect assumptions about the continuation of the pension plan.

For example: a life only pension option should provide a monthly or yearly statement that clearly says "This pension will cease upon the death of the original pensioner." A pension started today with a 10 year guaranteed period should provide a monthly or yearly reminder "This pension provides lifetime payments to XXXX as the original annuitant, but, upon his/her death, will only provide payments to the year 2017 to the named beneficiary. If XXXX dies after 2017, this pension will cease.

As a financial planner, obviously I am biased here, but I believe every pension plan should employ an independent financial planner to provide mandatory retirement and investment seminars for both employees and retirees. These seminars are an additional tool to educate and remind retirees on the consequences of their chosen pension option. Pensioner and spouses should attend whenever possible. This would go a long way to preventing the frustration and financial hardship faced by many who must cope not only with the death of a spouse, but also the end of the pension payments they have come to depend upon.

Who Owns the Client - Part 1

After a successful start in financial sales, I wanted to learn more about my business by gaining experience in a different arena. I applied for, and received, a transfer to the pension department of my large firm. As the pension payments clerk, my main responsibility was to ensure thousands of pensioners from many different backgrounds received their monthly cheques. Or not. I learned that one of the more unpleasant aspects of the job was to claw back payments that had been made to a surviving spouse after a pensioner passed away. Not everyone chose a joint and last survivor option. More on this in a later blog.

You may recall, during the late 1980's, Vancouver was subjected to more than one lengthy postal strike. This caused frustrations for almost everyone, but was felt most keenly by those who relied upon the mail to deliver much needed funds for living expenses. EFT, or electronic funds transfer, was available but looked upon with suspicion by some of our elderly pensioners. I don't believe we had more than 50% of our pension cheques delivered by EFT in those days. Many elderly pensioners relished the opportunity to take a physical cheque down to their bank and chat with the tellers for a few moments while making their deposits. The mail strikes hit them hard.

My job did not require me to take any further action. Pensioners who needed their cheques had been offered EFT in the past and declined. They had the option of coming in and picking up their cheques or paying for a courier to deliver the cheque to their homes. Once these options had been exhausted, I was still left with about 30% of my monthly cheques undelivered to individuals who needed them. My company took no further action; in fact, the pension plans were earning extra interest on the uncashed funds every day. But my conscience couldn't stand it!

These were my pensioners. I spoke with many of them monthly. I knew their names, their kids and grandkids names, where they had worked, what job they had done, etc. I heard about their illnesses, their vacations, marriages, divorces, often things I didn't care to know! I got personally involved even though I would never meet most of them face to face. I had to find a way to get them their cheques.

By now, I knew quite a bit about the operations of a large financial institution, including the fact that each of them had a daily bag of documents, forms, and other mail delivered inter-office via private courier every day. I decided to phone every pensioner who had not received their cheque and ask which bank they dealt with and their account number. I would them hand deliver the cheque to the main Vancouver branch of their bank, usually within close walking distance of my own office, and ask the staff to send the cheque inter-office to the pensioners branch for deposit. Privacy laws would not allow this information to be shared today, but these were different times. I managed to deliver 80% of the cheques I still held on to this way.

So what's the punch line, you ask? It is this: looking out for my pensioners and putting them first did not win me any accolades from my firm. I didn't do it for the praise (although the thanks I received from many clients were heartwarming) but thought there might be some internal recognition for my ingenuity. I was wrong. Not only were my efforts unappreciated, my request to deliver cheques during normal working hours was refused. I did all of this work on my lunch hour each day. I made the mistake of owning the client.

I Didn't Know What I Didn't Know

My career in banking started about 25 years ago as a teller at a national trust company, later absorbed by the Royal Bank. I had a couple of years experience as an account cashier at the old Eaton's, so handling relatively small sums of money was nothing new. I was good at my job and was quickly promoted to a desk job, handling term deposits and mutual funds. As is common with most financial institutions, I was the newest employee so I was expected to handle the majority of the client enquiries, both in person and by phone. It was irrelevant that I knew next to nothing!

I remember clearly one of my favorite clients. He was a young Asian businessman, and would bring in $1,000 cash each week and buy a 5 year compounding term deposit. I understood that this cash was the weekly net proceeds from his small business, where he and his family worked hard 7 days a week. In five years time, he would have these term deposits plus interest coming due each and every week, at which time he could then choose to use the cash for business or family purposes, or reinvest it for another 5 year term.

I continually complemented him and expressed admiration at his financial discipline. He went away happy and I felt I had done a good job with a satisfied client.

Nothing could be further from the truth.

If I knew then what I know now, I would have spent much more time with him, making numerous inquiries prior to recommending an investment perhaps more suitable for his and his family's needs. Here is a partial list of what I would ask him:

• Term deposits produce interest income , which is fully taxable. Would he be interested in discussing other types of investments, which are more tax efficient?
• The term deposits were all set up in his name only. Can he take advantage of income splitting between his wife and his children?
• Is he incorporated, and if so, perhaps these investment should be made in the name of the corporation.
• Has he considered tax sheltering some of the proceeds in a registered retirement savings plan for himself or his wife? She could make personal contributions, or if she was not employed in the business, he could make spousal contributions.
• Does he have any debt, such as a mortgage, that might be a better use for some of these funds?
• Does he have a savings plan in place for his children's education?
• Has he considered making the term deposits joint ownership with his wife? In the event of his premature death, this would at least avoid probate on the deposits.
• We knew that the funds would not be touched for at least 5 years. Did he have the risk tolerance to consider an alternate investment, such as equity mutual funds, that had the potential to grow at a better rate than what interest income was paying?

You get the idea. The point is certainly that, even though this client felt he was well served, he did not in fact receive the advice he should have. And sadly, I know now that even if I had the knowledge, I could not have spent that amount of time with him. Front line individuals must be quick; there is always a line-up.

Things have changed somewhat since I started in the financial business. I don't find that front-line staff are any more educated in providing quality advice. But they are far better trained at spotting and referring opportunities to a more senior staff member. In fact, they are expected to do so and likely have a component of their pay structure based upon their referrals. When you must use a live teller for any transaction (they are called CSRs today, Customer Services Representatives), you will inevitably be probed for a so called "need" that you didn't know you simply must have. "Have you bought your traveller's cheques yet for your summer vacation?" "Have you made your RRSP contribution?" "Have you made your children's RESP contribution?" "You don't have one of our Visa cards yet. Let me give you this pre-filled application. Simply sign here." Every financial institution that I am aware of puts their staff through intensive sales technique training.

There is a huge difference between providng advice and selling products. Far too many investors need advice but are only getting a sales pitch. More on this later.

The Ethical Businessman

For most of his working career, my father was a shoe salesman. He was a district manager for a shoe company, and managed stores and trained staff all around southern Ontario. Some of my fondest early memories were of visiting him at one of his stores and darting behind the curtains into the cavernous labyrinth called the shoe storage area with hallways that seemed to never end.

I started working for my father at age 16, behind the slipper bar during Christmas break from school. My clientele were mostly local businessmen, looking for a last minute gift for their wives. I sold alot of slippers to men, young and old, clueless about the size of their wife's feet, and can only imagine how many returns my father had to deal with in January after I returned to my studies.

In the summers, I graduated to the main sales floor, and learned to fit shoes properly and match a customers request to the proper product. I watched my father and the other sales staff for tips on handling customer requests, and started picking up lessons that I carry with me to this day.

One of the most valuable lessons I learned didn't even strike me as notable at the time I observed it. It was something I took for granted, and I had no idea that it would have a profound effect on how I conducted my own business years later. My father knew his customers and his product like the back of his hand. He didn't even have to go into the storage area to know exactly what he had, and in what sizes. But more importantly, he also made a point of knowing what styles his competitors were offering, particularly if it was a brand that was popular with his customers.

When he ran out of stock, or out of a particular size, he would redirect his own customers to a competitors store, if he knew that store also carried the same shoe in stock. His customers loved and respected him for his knowledge and his honesty; his bosses were not quite so generous with their praise. In their opinion, what my father should have done is convinced the customer to buy a different shoe from him, even if the substitute was considerably different than the original shoe requested. Today, we would call that a bait and switch tactic, something I suspect we all have experienced.

I know my father's ethics were not unique, but they seem unusual today in a world where marketing is designed to separate us from our hard earned cash in exchange for products we never knew we wanted or needed until we were convinced by the sales person. In addition, knowledge levels of sales staff are generally apathetic. Asking if a competitor carries a brand name item that your favorite store has run out of usually elicits a blank stare or a flat no from the sales staff, leaving you to hunt and find the product on your own. Even worse, you may be lied to. I once priced custom drapes at a large downtown department store. As the price quoted was quite high, I asked if they ever went on sale. The saleswoman adamantly claimed that this particular brand of drapes NEVER went on sale. Within a week, I saw a large ad for this department store, with the drapes I desired on sale. I bought them somewhere else.

At first, I didn't realize that I carried my father's passion for ethics and honesty with me as I began my financial services career. I naively believed everyone conducted business the same way! When I began working for a large trust company in the mid-80s, I was taught they had superior products and enough variety that a client never had to look elsewhere for their financial needs. The trust company indoctrinated us in the same manner used by most companies, and we were disloyal if we didn't believe what we were told. Sales staff today, much smarter than I was 25 years ago, refer to this as "drinking the koolaid".

In my next post, I'll elaborate on how difficult it can be to maintain one's ethics while the world around you rewards sales at any cost.

First Steps......

I recently joined the ranks of the self-employed. On June 1st 2007, I launched the website www.moneyorwealth.ca to promote my Financial Organization business. As website text must be brief to attract and sustain reader interest, I have opted to start this blog to explain my reasons for starting this business. I'm sure anyone who deals with a financial institution will find something of interest in my journey.

First a confession. I am a slow learner. It has taken me the better part of 25 years while working for various financial institutions to accept that they are not the warm and fuzzy advice-driven organizations they would like us to believe. I thought perhaps it was just my bad luck to accept employment with firms who advertised themselves as client focused and advice driven, only to find that image shattered by expectations of high monetary targets and multiple product sales. Not so. Regardless of where I worked, or the level of financial education attained, if you didn't focus on sales, you were doomed. Banking is a business, and a very profitable, one based on the ever increasing earnings reported each quarter. It is also a very aggressive business, and the many players are constantly maneouvering to snatch profit share from each other.

They would like us to believe that this competition leads to greater variety and choice for financial consumers. In reality, what it often leads to is aggressive sales tactics, confusing products, high costs, and a trail of investors who pay too much for products they often don't need or understand. Even worse are those trusting investors taken in by the promises of financial advisors who act illegally, driven by greed, and lacking any morals. If this industry was not so bottom-line driven, would they continue to be as successful in perpetrating these scams as they have been in the past?

So how did I get on my high moral horse? Next blog, let me introduce you to my father.