Onus Consulting Group

LinkedIn Poll -- What's your biggest challenge regarding your finances?

2011-11-07T01:39:00.001-05:00

Useful LinkedIn Poll...

2011-11-07T00:26:00.004-05:00

Steadyhand Investment Fund's Chris Stephenson recently concluded a poll on LinkedIn. The question:

What is your biggest challenge regarding your finances?

a) Cash Flow - Saving Vs. Spending

b) Managing Debt

c) Choosing the right product/service

d) Finding a trustworthy advisor

"Cash Flow - Saving Vs. Spending" won with 58% of the vote, although I thought it would be much higher. Regardless, I thought I would share my vote and subsequent comment on the page:

Saving Vs. Spending. Figuring out your balance goes as much as to figuring out you and who you are. What is your relationship with money? Everything else regarding personal finance can honestly be figured out. With this, Spending Vs. Saving becomes the age old question of "Who am I?" Are you that generous friend who picks up the check for dinner? Does that become your image and then you feel you always have to? Or are you that cheapskate who can only buy a birthday card on a loved one's birthday? Does saving involve sacrifice? Such a well-educated and hard working society, do we feel we deserve to sacrifice?

Or is out of the easiness of being able to take on so much debt that the blame should rest on the financial institutions or on our governments for allowing it to happen? Yes, one can legitimately make these points and pray they bail us out should we require it because how could they allow this to happen? That being said, if we can figure out ways to save, at the end of they day, we will come out on top.

Honestly, I think not only is it the greatest challenge regarding our finances but the greatest challenge for our age. As our world sees some of the biggest economic issues to erupt in a generation, it all comes down to the fact that the developed world has to save more, be less dependent on credit and spend less. And, yes, hopefully, the middle class will emerge in the emerging markets and pick up the slack...(not through racking up debt!)...

A Hilarious Animated Take On The Federal Reserve: Xtranormal (VIDEO)

2010-11-17T13:24:00.001-05:00

To be perfectly honest, I don't feel really qualified to explain how Quantitative Easing will help employment. I'm not sure that it will exactly. Of course as you know, the idea behind QE is to drive long term interest rates down and raise the price of bonds to drive investors back into equities (by making bonds more expensive, it will yield less compelling folks to invest in stocks to have a chance for a decent return). It's a play on behavior and it's a risk.

I have no academic source to cite but that seems to be happening with both the bond market and the equity market (they have been climbing). Retail investors are climbing back in, and with folks investing again and with businesses better able to raise capital...

You're right...How is this serving the end game of getting people back to work? Getting businesses hiring again? Listen, I'm not certain that QE is the solution or is being sold as such...Bernanke embarked on an even more intense QE round beginning in early 2009 and we've seen where employment has been during that time.

All I'm responding to is the populist backlash against a legitimate idea (which may fail) by competent people with good intentions.

Discourse is really bashing this measure (and perhaps rightfully so), but it'd be great to see a couple more pundits speaking of its merits. What if this does bring confidence back?
About Ben Bernanke
Read the Article at HuffingtonPost

A Hilarious Animated Take On The Federal Reserve: Xtranormal (VIDEO)

2010-11-16T15:45:00.001-05:00

Alright, that's pretty hysterical, but I must say with so much QE and extraordinarily low interest rates, inflation should be significantly higher than it is right now. The economy is broken.

More shockingly, folks seem to be leaving fixed income and being driven back into equities (the purpose of QE that nobody, including Bernanke, was certain would happen).

The subjective 'maybe' of confidence returning seems to be happening (yes, for all the criticizing, QE is working), and very well might if this sovereign debt crisis in the PIIGS and potential currency war doesn't serve to be leading reasons for bringing the pessimism back.

We're only in the first month. There's still a lot left to be seen, but hey, Bernanke might just deserve some credit. As I have been, I still am pessimistic, but I'm shocked he and company [Treasury and the rest of the Fed] have gotten this far. Folks have forgotten the armaggeddon mentality that was present just 2 years ago September.
Read the Article at HuffingtonPost

Barton Biggs the Hedgehogger Part 2 -- The Pulse of the Markets Before the Credit Crisis of 2008

2010-08-06T12:36:00.005-04:00

Why was Hedgehogging on my reading list in the first place?

While the common reason to pick up this book would probably be Biggs being a longtime hedge fund manager, it was also really when the book was published that caught my eye: Although published in 2006, most of it seemed to have been written in the summer of 2005, three years prior to the infamous Credit Crisis of 2008. While much will be made of the rumblings that were taking place in the summer of 2007 and perhaps a little earlier, the year 2005 was a year rife with the fingerprints of a bull market in the eyes of a lot of folks (including the forecast of Biggs himself).

The value of reading a candid book by a hedge fund industry insider (probably the least transparent area of the investment industry) really brought a sense to the tone of the world at that time. Although Biggs himself was bullish, he did cast doubt on that sentiment. In particular, talking about the housing bubble and conceding the trillion dollar point on derivatives, stating “…it is true that derivatives, which are designed to mitigate specific risks, at the same time may actually be increasing systematic risk because every financial institution is entwined in the web.” (Biggs 123) As he just described the vehicle that really exacerbated what took place, such arguments being made as early as 2005 do suggest that folks did have enough to work with to draw the credit crisis as a reasonable conclusion.

The argument was out there. While folks might say, “Of course, of course but who would have known that liquidity would dry up as it did. That banks would cease lending, not just to businesses to allow them to grow or ordinary folks, but to each other.” Yes, a valid point, but the enablers…the causes to this effect…were well known, and it seemed actively discussed as problems that could cause a bear market. Hedgehogging helped illustrate that it wasn’t as much as a blind side a great many have suggested.

Moreover, David Swensen, who, as Biggs tells it, saved the Yale Endowment since he took over as Chief Investment Officer in 1985, didn’t “…believe that the lows of this bear market have been made.” (Biggs 160) In addition, oddly enough, he did also speak of “Vince” (pseudonym), who gave quite the apocalyptic vision of the downfall of the US.

Furthermore, another bubble is about to burst. Existing home prices have been rising 7% to 8% a year, financed by Fannie and Freddie. Luxury real estate values from Park Avenue to Beverly Hills and from Southampton to Aspen will collapse. In the aftermath of every burst financial bubble in history, paper wealth of all types evaporates. (Biggs 103)

And, he went on to say:

Secondary consequences take time--years--to happen, particularly when central banks cut interest rates drastically and flood the system with liquidity. But they can only be postponed not averted. In three years, the American economy will be in depression, the S&P 500 will be at 500, and there will be a revolution in America. (Biggs 103)

Not bad, eh? Reading the book at the time, it seemed like the obscene prediction, but he nailed the Great Recession (except the S&P never went lower than the high 600s) and the dramatic cutting of rates. I don‘t know about a “revolution,” but the Tea Party movement does sometimes seem a little irksome. ;)

Source:
Biggs, Barton. Hedgehogging. Hoboken: John Wiley & Sons, 2006.

Barton Biggs the Hedgehogger Part 1 -- A Review

2010-08-05T09:57:00.005-04:00

This long weekend, with the facebook newsfeed rife with exciting activities, I decided to spend some time getting some of my overdue “assigned” reading done. I picked up Hedgehogging by Barton Biggs, a hedge fund industry veteran. Biggs joined Morgan Stanley in the early 70s as a partner responsible for setting up, at the time non-existent, research and investment management departments at the firm. He stayed there for 30 years before leaving to co-found Traxis Partners.

While it isn’t Gatsby, the book is entertaining. Biggs begins the book speaking of his experiences with the Triangle Investment Club, a monthly meeting of 25 hedge fund and aggressive long-only money managers. Using that anecdote as an anchor, he goes on to a series of other stories relating to his conversations with money managers while also sharing his personal journal entries detailing his thoughts as he went about raising money for his hedge fund. Biggs had no reservations about sharing his perspective and those of others in his circle. His outlook on everything from the markets [bullish] to gold [doesn’t like it] were openly shared.

As for drawbacks, I found the book mildly discursive where Biggs went from point to point without any sort of noticeable fluidity. The upside to that is he did cover a lot of ground. To name a few:

Jewelry as a currency in apocalyptic situations

The quality and history of the Yale endowment

His thought on art as an investment

Private equity as an investment vehicle

Fibonacci’s numbers and the unlikelihood of using them to track the markets

Money managers liking golf

The wide array in topics indicate that Biggs really wanted to get out everything in his mind from the past few decades. Although a creative writing major at Yale, this was his first publication. Prior to his career in financial services, he attempted a career writing short stories. So, to finally have a debut book, you can tell the passion to lay it all out there was evident. He is genuine from start to finish.

Although it can easily be argued that he overdid it a little with the anecdotes, it brought charm to the book. Unfortunately, anecdote is the operative term for these stories. There really couldn’t have been considered proper case studies as we really couldn’t get an academic sense of these folks investment styles. He basically started each story describing a manager with several adjectives, including always “attractive” or “handsome,” and ending it giving us a sense that managing money is a really tough job. However, there were useful subjective snippets that we were able to take from these stories.

An odd thing about the book, aside from using too many exclamation marks, is how he ended it. He basically went into this bio about John Maynard Keynes, who he admired as a hedge fund manager. Don’t get me wrong. An incredible figure in our history, but it just came out of nowhere, and the book ended after detailing Keynes life. The last line being “It’s an incredible story!” Yeah, it is. But, so what? What does that have to do with anything?

That being said, considering reading this book has inspired four blog posts, who am I to judge? The following blog entry will not cover the entire book, but a concept from the book that got me thinking. If that isn’t an endorsement to read this book, then I don’t know what is…

Coming Up:
Part 2: The Pulse of the Markets Before the Credit Crisis

Toronto and the G20

2010-06-29T04:29:00.002-04:00

Although this blog is meant to be the corporate blog to my company, Onus Consulting Group, I feel today I'm going to write, rather extemporaneously, about something not financial services related.

The G20 summit hit Toronto this weekend, and it has been the talk of the town. As early as the week before, RCMP, OPP and municipal officers were seen walking the streets of Toronto. The town was definitely abuzz with expectation. Although the G20 is a new forum with Toronto being their fourth summit, it seemed just yesterday the enormous impact the anti-globalization protests brought to the WTO talk in Seattle. It was clear that these thoughts had not been lost on many.

In the interest of full disclosure, I am not anti-G20 and the only activist cause I've ever really embraced is investor advocacy. I had really nothing to protest or march against. Although perhaps a "down with the Deferred Sales Charge on mutual funds" might have crossed my mind, I realized that if it sounded ridiculous to me, just imagine the thoughts on the minds of the public I'd be catering to.

My academic interest in the demonstrations against the G20 summit was just too much for me to stay away. Of course not being a "plugged in" activist, I didn't really know where to begin, so of course, I grabbed the latest issue of NOW Magazine. Old reliable, distributed each week, it has been Toronto's first free weekly and is going on 30 years. A left-leaning newspaper with very much an activist streak, their twitter feed was ripe with protests in the city and other updates as early as the Monday of the week of the summit. NOW ended up being the perfect resource. They had released a special summit issue with a headline reading, "G20: GET SERIOUS." I discovered I could stay at a protester's camp complete with a pancake breakfast. As well, there were an adopt-an-activist program where you could put up a protester for the night.

Picking the right protest was almost like picking an entree on a menu: There was quite the selection each with their own nuance. There was one focused on channeling your protest using the power of "music, speakers and global meditation." As well, there were a few where confrontation was encouraged. No thanks. Of course, I went with the house special. The People's First Rally was organized by the Council of Canadians, Greenpeace, Oxfam, Ontario Federation of Labour and the Canadian Labour Congress. I don't know who taught me that rule, but when choosing to observe a well run demonstration, the ones put on by organized labour certainly will never be a bad bet.

On Saturday morning, I woke up excited. Recharging the battery to my video camera, I then wondered if the pouring rain outside would hurt the turnout. Whatever. I had to check it out. The next thing that crossed my mind was should I go prepared? Do I need a gas mask or at least a hankerchief? Maybe a book of band-aids? Thinking about the power of stereotypes, I realized it might be a little more useful if I just carry an umbrella and wear a soccer jersey and some nice dress shoes coupled with a satchel (not a backpack) of scholastic magazines. Hmmm...Would it be enough? Perhaps instead I should don a red sweater with a large yellow letter on it wrapped around my neck? Large, black, round plastic rimmed glasses? Khakis? A white Lacoste polo shirt? Okay, I know I'm getting carried away, and I don't have any of that stuff.

I got there and was impressed to see the number of people. Literally, thousands enveloping the entire area. Not only the unions, but a slew of other causes were represented by a sea of flags and incredibly done banners...Campaigning for human rights in Iran...Bring Al-Khadr back to Canada...Anti-capitalism...Pro communism. You could tell it was every activist's dream. I did notice, at this time, that there were a group in black with bandanas covering their face. But, quite frankly, at the time, I was thinking they were the most boring of the lot. They weren't saying anything.

Another thing I noticed that I wasn't the only individual that was drawn to the event simply by its intrigue. They were dozens, if not hundreds, of people not chanting...not marching...just holding cameras and taking pictures. The spectacle of the occasion was simply too much to pass up. Where there were rows of riot police, people got up close and took pictures, some having their friends pose in front. It was quite amazing actually. The police for their part looked quite nervous, as best I could tell. For all the training, this must have been as new to them as it was to the demonstrators.

The whole thing was really quite harmless. We started at Queen's Park (College and University) moved south to Queen. Once we got to Queen and University, we couldn't go anywhere but either back where we came from or west. As we walked, there was a line full of police on the south side of the street in their regular attire except they were wearing yellow jackets and behind them was a row of police in riot gear. The police in the front didn't seem to be holding a line, and people, mostly the touristy folks like myself, were taking pictures of the riot gear police. We could have been at a museum and the riot police were the exhibits.

When I got to Queen and Spadina, there certainly was a restlessness within the crowd. With Queen blocked off from going any further west and the south of Spadina blocked off. There was nowhere else to go, but back to Queen's Park, which was not a far walk at this point. It was while I was making note of this that a flare went off. It was the group that I noticed before wearing the black (and would later become infamous as The Black Bloc or anarchists), but it was at this point that they started either lounging at the intersection or making their way back east on Queen. Again, I didn't put two and two together... that the flare was a signal, but it seemed, in retrospect, that was indeed the case.

By the time I got back to Queens Park, everything seemed quite merry. The large masses of people had evolved into a more dispersed crowd. Protests were still going on, but in a much more decentralized fashion. Okay, well, what else could there possibly be to see? Noting that I did have some work to do, I decided to call it a day. I might as well catch the last few minutes of the Ghana Vs. US game. I made my way to my brother's place to watch the game. I guess he didn't miss much. Glibly explaining to him that Toronto was a great place to respectfully demonstrate, the sidebar in the soccer match started reporting the violence literally minutes after I entered. I can go into all that, but quite frankly, so many others have done that rather well.

I am glad my entire experience of the G20 summit was one of peaceful demonstrations. It was impressive to be of the opinion for a few hours that Toronto was a great place to respectfully reflect your displeasure on a grassroots level. The importance of such an institution (and I'll call it that) is vital to our democracy. And, honestly, the police officers working the streets were great, as best as I could tell. For such a pain of a job, they did really well.

Of the demonstrations, they were some great stories and some ones that just made me roll my eyes. The team at the Canadian Labour Congress was by far the most organized, but their neon orange with yellow striped security vests initially confused me as to whether they were working the summit or protesting it. One demonstration I do want to give respect to are the Vietnamese. Their protest against human rights violations in Vietnam and persecution of bloggers was a story I, myself, had not been familiar with. Quite frankly, their grievances were quite similar to the ones put forth by the Iranians, who were also being represented. While we are always conscious of Iran, the Vietnamese story is not one we hear about.

Although it might not seem that way to some, learning of an injustice makes me realize that the peaceful protests did bring victory this G20 weekend.

Who are you going to call? Ponzi Busters!

2010-06-21T12:15:00.004-04:00

There was an article in the Toronto Star today about a Canadian Ponzi buster, Vedant Rajput, who managed to harness an investor uprising, aided in capturing the perpetrator and, as well, located a portion of that man's wealth.

The story is incredible. When investors are hard done by, they are so shell shocked it takes time for it to even sink in. He not only sought restitution for himself, but he proactively took off on an odyssey across the world to seek justice. It is an impressive story, and my hat is off to the man's tenacity.

http://www.thestar.com/news/world/india/article/826182--canadian-helps-crack-alleged-ponzi-scheme-said-to-be-india-s-biggest

Veritat Advisors -- Worthy of Praise

2010-06-20T22:42:00.004-04:00

Every once in a while I run into a financial services company that really impresses me. I feel it would be almost irresponsible to not be public about my praise. Based in the United States, Veritat Advisors was brought to my attention by the insightful Chris Stephenson of Steadyhand Investment Funds.

Veritat Advisors quite basically is a financial planning service offered online. Now, wait! Before I lose you, I'd like to recognize that it is an uncomfortable dynamic for a lot of folks. To take a professional service that is offered online seriously might be tough for some people.

That being said, Veritat Advisors set their company up in a manner in which a financial advisor can take on a client anywhere in the US, not just the city they’re a resident of. They have a virtual console in which a client can see their advisor on a webcam and be presented slides, presentations, etc. Their fees are low, and they offer the fee-only compensation arrangement charged monthly ranging from $25-$40/month after a $250 initial fee. Even their most basic service guarantees a financial plan, which they go over once every quarter. They say they are legal fiduciaries, which is amazing.

For financial advisors to become a fiduciary is something I’ve been really passionate about seeing in Canada. As it stands, Canadian financial advisors can’t legally just become a fiduciary, but many like to deputize themselves as such (do you ever hear “we hold ourselves to a fiduciary standard?”)…it is something, but we can do better.

This is just from what I can see. They say their financial plan is comprehensive, but I haven’t seen it myself. The FA whose profile I was able to look at is well educated (CFP and MBA) and certainly is qualified to write a comprehensive financial plan. They have an optional portfolio managementfee of 0.5%, which is low. It’s really amazing value, but they don’t give any suggestions on to what investment counselor they may be using (my guess it has to be a strong indexing approach as, although US has cheaper management fees than Canada, they aren’t that low).

That all being said, the service is based online and over the phone. If you feel face-to-face meetings are important, they would certainly be under par in that department. However, their online client console does seem like quite an able substitute.

It must be pointed out that I’ve never been a client of Veritat nor have I formally evaluated their service as I would an advisor for the Onus roster. My conclusions are based strictly on observations made in the manner in which they present themselves on their website. However, with a 14 day free trial and 30 day money back guarantee, they’re putting their money where their mouth is, as a client can walk after the financial plan is done for them. That’s quite a risk and illustrates confidence.

The bottomline is if these guys are as advertised, this is a pretty amazing service, and Canada would be well served to have a similar shop like this.

‘Z’

Now, Canada, there are better ways to seek retribution

2010-03-23T22:06:00.002-04:00

A recent Reuters news segment shows a group of German pensioners appearing in court for kidnapping their financial advisor! Now, remember, folks, if you feel hard done by there are a number of ways to seek retribution. ;)

It's pretty funny. Check it out.

http://www.reuters.com/news/video/story?videoId=60847190&videoChannel=-9991

Get in the spirit! It's RSP season.

2010-01-22T15:05:00.007-05:00

For financial advisors out there, it's just that time again. "That time." ... A period where everything just makes sense for a people or person. For bears, it's springtime when they come out of hibernation with plenty of food and no hunting allowed. For Brazilians, it's whenever there's a World Cup to be won. For Jay Leno, it's whatever time he successfully usurps the latest successor of The Tonight Show.

For financial advisors, that time of the year where the glory and significance of their profession is felt by the masses is RSP season. A time when personal finance and retirement goals is at the forefront of all baby boomers' minds. We, as Canadians, are an engaged bunch. During the summer, kids are on summer vacation, the sun is shining and the BBQ is waiting to be lit up. In the fall, it's back-to-school shopping, work speeds up and the latest of whatever is on TV. During Christmas, it's Christmas.

And after the holiday season, that 6 weeks between mid January and the first day of March, Canadians are on high alert. Their credit card bill from this past holiday season has come back and wait... your deadline to contribute to your RSPs is fast approaching. Now, the thing about RSPs is that you can contribute to them throughout the year, but for reasons mentioned in the previous paragraph, many wait until the deadline is coming up. During such a time, it's time to think about financial goals. Spending. Saving. Maybe you don't feel that way, but between the half dozen TFSA vs. RSP articles you keep bumping into and the relentless advertising on TV, you know you should.

One such ad features a couple sitting at a Scotiabank office in which the husband for the life of him can't look at his financial statement. We all chuckle (and I say that loosely) as the wife darts the statement in front of her husband's eyes, who keeps looking away. Maybe we're chuckling or maybe we're rolling our eyes, but the theme of the commerical does bring some truth. A good many of us hate seeing how much we've spent. A good many of us hate seeing how little we've saved... And by merely avoiding these uncomfortable emotions, many of us procrastinate dealing with these important issues.

As much as one might dread a meeting where all such things are acknowledged, one could very well come out of such a meeting feeling cleansed. The more you know, the more confident you become. Just talking will bring clarity. The lady ends the commercial by making a legitimate point: The fact that you're here is a great first step.

This will be my only plug for the retail investment industry this season and since I always lament about everybody itching to be pitching... Let this plug carry some legitimacy. Talk to your financial advisor. If you don't have a financial advisor, poke one's brain (or many). They might try and win your business, but if you're not interested, it can easily be repelled. If you're self-directed, talk to a person at your discount brokerage where you can ask questions about your account or a new service...

I guarantee there's something new to be learned and just talking about this stuff could very well bring some added clarity to these issues in your head. Clarity could be incredibly useful after these last couple years.

'Z'

The problem with a Shariah Index Fund

2009-05-28T06:54:00.013-04:00

Standard & Poors announced yesterday it is launching a Shariah compliant version of the S&P/TSX 60, which, while their first in Canada, will be their 52nd Shariah compliant index fund. For Standard and Poors to come out with investment products sensitive to a large demographic of individuals (Muslims) is a wise move and should be applauded. Shariah is the body of Islamic religious law, which is the third most prevalent legal system in the world after common and civil law. The term "Shariah compliant" suggests that the holdings in this index represent holdings that meet the criteria as prescribed by Islamic law. However, I do want to cast some healthy doubt on this idea of Shariah compliant indices.

Standard & Poors has a "Shariah Supervisory Board" composed of Islamic scholars that decide what investments do or do not qualify. This is where the confusion arises. For one, there are five schools of law in Sharia (four in Sunni Islam and one in Shia Islam). How likely is it that the group adequately represents the proportional sentiment of each school of thought? "Shariah law is open to interpretation and religious boards frequently hold different views on key Shariah issues," El Waleed M. Ahmed writes in the Arab Times.

For example, companies, whose business consists of alcohol, gambling or pornography, would not qualify for the index. This is probably a universal sentiment. However, they go further. "Companies which have high levels of debt or high levels of interest earnings are also screened out," Alka Banerjee, S&P Index Services Vice President, tells CTV. As most public companies (if not all) have either debt, income derived from interest earnings or both, who decides what is considered "high?" In this case, a group of Islamic scholars decided that, currently, companies that have debt under 33% of market capitalization qualify for the index.

How did they come by 33%? Why not 40%? Or 20%? Each number would have an effect on the resulting portfolio. The idea of a group of layman (and I'm sure they are incredibly pious individuals yet unqualified in portfolio management) picking companies out of an index based on a subjective criteria that might differ from one school of thought to another...perhaps we could be chucking darts at a dartboard?

Therefore, it feels like active management without the active management! An actively-managed investment by a group of people that are religious scholars not financial professionals.

Of course, what's important to keep in mind here is the intention of Standard and Poors, which is to the best of their ability to create an investment product that Muslims can invest in. Muslims, for their part, actually might forego investing in such products based on the fact that they could be investing in companies not compliant with their beliefs. Taking advantage of this effort does, at least, give them an opportunity to illustrate they are trying.

Click "announced today" or "Alka Banerjee" to read yesterday's news release.

Why it is important to tell if your mutual funds are 'closet indexers' and 3 ways to identify it

2009-05-01T15:22:00.010-04:00

Pundits and casual observers will debate the pros and cons of mutual funds. Mutual funds are probably the most mainstream vehicle of active management, at least as far as retail investors are concerned. It is the appropriate strategy for critics of the efficient market theory, which is the idea that prices on assets, such as stocks and bonds, reflect all known information. The idea is to take advantage of mispricing in the market. As the strategy is in the hands of a money manager, volatility can be managed by investing in less-risky, high quality companies rather than in the market as a whole. It can also allow investors to take on additional risk to exceed higher-than-market returns. Furthermore, investments that are not highly correlated to the market help diversify a portfolio. This is the argument for active management, and this is where a problem arises.

Closet indexing is a when an active manager doesn't stray too far from the benchmark in their stock selections. They are "...pretending to be a stock-picking manager when you're [they're] really putting together a portfolio not much different from whatever index is the benchmark for your category of fund." (Stoffman 218) With a closet index fund, the MER is more than 2%, which is whopping considering that an index fund or exchange-traded fund charges significantly less.

Money managers are assessed by their ability to beat their relevant benchmark, which is the market index that best represents the portfolio they are managing. Trying to beat their index by a significant amount carries greater risk, so there are mutual fund managers that will fill their portfolio up with investments that make up their index, which means they'll never significantly underperform or overperform by a significant amount.

I'll try and update this blog entry with a more recent static but over 5 years ending June 2008, S&P 500 outperformed 68.6% of actively managed large cap funds, S&P MidCap 400 outperformed 75.9% of mid cap funds and S&P SmallCap 600 outperformed 77.8% of small cap funds. (Dash, Pane) The index has outperformed the majority of active managers. Therefore, following the index will mean outperforming a majority of their peers (also known as their competition), making it easier for the fund company to sell their funds. This does not provide value for the client and undermines a reason for pursuing an active management strategy in the first place, which is to do better than what the markets are doing. It's the reason a client pays a higher fee in the first place.

Following me? The investments and their allocation are incredibly similar between the fund manager 'actively-managing' and the benchmark he or she is being compared to. Therefore, if you're invested in a mutual fund that is a closet indexer, you will see far more value if you invest in an index fund or ETF that tracks these benchmarks themselves. With this, you are paying a significantly lower fee to get a similar result.

A mutual fund manager is guilty of being a closet indexer when (Stoffman 107):

1) It has a high R-squared (gives you a correlation between a fund and its benchmark index). The closer the R-squared is to 1, the more likely a closet indexed fund.

2) Check the annual report of an actively managed and its benchmark index fund. Check to see if similar stocks are held with similar proportions.

3) Compare recent returns of your actively managed fund and its benchmark. Do the returns of the managed fund regularly trail the index by its MER?

Sources:

Dash, Srikant and Roseanne Pane. “Standard & Poor’s Indices Versus Active Funds Scorecard, Mid Year 2008.” Standard & Poors McGraw Hill Companies November 18, 2008.

Stoffman, Daniel. The Money Machine. Toronto: Macfarlane Walter and Ross, 2000, p. 202.

Hot Stock Picks for a Rallying Market -- Our Response to a Huffington Post Blog Entry (Part 3)

2009-04-22T21:19:00.006-04:00

Now, my concern isn't of the Jim Cramers of the world being given a high enough platform. It is of professionals giving their suggestions and foresight on what's happening with genuine intentions. Yes, I believe those people are out there. Personally, I would like to nominate PIMCO"s Bill Gross and Mohammed El-Erian, who run the world's largest bond fund. More obvious examples are Warren Buffet and George Soros, who at many times have conflicting assessments. But, these assessments are explained, and these explanations give viewers at home added insight, a more practical education and, with time, a sharper filter to decipher useful information from the static.

While this populist rage against financial news continues, in blogs like Solin's for example, its merits shouldn't be lost.

About Financial Crisis
Read the Article at HuffingtonPost

Hot Stock Picks for a Rallying Market -- Our Response to a Huffington Post Blog Entry (Part 2)

2009-04-22T21:18:00.005-04:00

A couple years ago, it would have seemed unthinkable for me to orchestrate a defence of the financial news media. The thesis of Solin's blog entry could easily have been mine.

Granted, pundits try and predict where the market is going and what the public should be doing with their money. They peddle their education as a means to win credibility and identify themselves not just by their names, but the firms they are promoting. With this, the public gets their perspective, and, although the hard way, they fortunately are learning to take it with a 'grain of salt.' Bob Doll at Blackrock, Solin's example, does put himself and his firm out there with every prediction. A blown call reflects, not just on him, but on Blackrock. People cannot be chastised for putting forth their opinion to the public. Whether they're talking rubbish or not, their credibility is put on the line. And, as we listen to their opinions, we develop a filter of our own of who speaks with the most merit. For examples, viewers of Mad Money, including Jim Cramer's more ardent followers, will take his suggestions with a greater trepidation. I will be shocked if I meet anybody who regards him as an oracle.

About Financial Crisis
Read the Article at HuffingtonPost

Hot Stock Picks for a Rallying Market -- Our Response to a Huffington Post Blog Entry (Part 1)

2009-04-22T21:15:00.003-04:00

Two occurrences last Friday made me come back to this Huffington Post blog entry by Dan Solin. One, it was the 20th anniversary of CNBC's founding. The second was Jim Cramer's highly spirited retort to Mr. Solin's public mockery of "In Cramer We Trust" on CNBC. Cramer was so incensed that he interrupted Solin's interview to give him a piece of his mind. Where was that energy during his interview on The Daily Show, I wondered? Unfortunately, Cramer took the opportunity to attack John Bogle and defend his own prowess. It is with thoughts of financial news and their market-timing pundits, such as Cramer, that I write today.

Mr. Sorin's contribution to empowering Americans to take control of their financial future is nothing short of exemplary. While I haven't read "The Smartest Investment Book You'll Ever Read," I have heard great reviews. To him, I say, stay passionate.

However, in the great zeal seemingly everyone has taken in bashing pundits and financial news; I feel somebody needs to hear a rebuttal. While, undoubtedly in a perfect world, we would like to see the type of investigative journalism that would bring a greater credibility to outfits like CNBC and Bloomberg, if we had the option between the manner in which media coverage is conducted today or no coverage at all, which should we go with? If trashing the pundits that make bold predictions dissuades them from presenting their thoughts on the market, will it be worth it for us?

About Financial Crisis
Read the Article at HuffingtonPost

C. Warren Goldring -- Canadian Mutual Fund visionary passes away.

2009-04-14T18:36:00.005-04:00

One of the Canadian mutual fund industry's forefathers, C. Warren Goldring, passed away today at 81 years of age.

Along with Allan Monford, he combined assets of small Canadian investors in order to gain access to the New York Stock Exchange. They named the fund American Growth Fund, which would later become the name for the entire fund family, the ninth largest mutual fund firm in Canada with an assets under administration of $34.5 billion. The year was 1957, and it was the first time the small Canadian investor had been given access to the US market. For all my issues with mutual funds, Goldring, himself, brought about an early foreshadowing of a more empowered Canadian investor. It is a sad day for Canada's retail investment industry.

Below is a picture (courtesty of AGF.com) of C. Warren Goldring with AGF's current President and CEO, his son, Blake Goldring, at American Growth Fund's 50th anniversary in 2007.

Sources: Canadian Press, AGF.com

Brilliant Frontline Documentary: "Inside the Meltdown"

2009-04-14T08:34:00.014-04:00

The dramatic story that just took place detailing step-by-step the unravelling of the financial system. Of course, today's problems didn't just appear, but this documentary brings incredible insight into the players and their sentiment. The first of a three part series on the crisis.

With great difficulty, I will avoid elaborating and, instead, encourage you to watch the documentary yourselves. It begins as news of the possible fall of Bear Stearns ripples through the markets, and it continues with the fall of Lehman Bros and the disasterous results that follows, including the current experience at AIG.

An excellent description into the minds of those involved as they assessed moral hazard versus systemic risk.

The idea was to link to the Frontline page, but there seems to be a broken connection. So, we'll embed the documentary on this post. There is no doubt that the people at PBS will approve. Please visit www.frontline.com for great complementary resources to this material.

Wells Fargo earnings surprise sends market higher

2009-04-09T14:21:00.002-04:00

On the surface, it's incredible news, and it's been a catalyst for the markets' rise today. It sounds a little too rosy though. I'm skeptical. Such news coming up on the wake of the US government possibly ousting the banks' CEOs, and they aren't actually reporting record profits but saying they "will" report record profits. They're making it a point to let us know early?

Great report and great news though. If it's true that their merger with Wachovia is going smoother than expected, it really is fantastic to hear. However, transparency has been such an issue during this downturn, and it shouldn't be viewed as unfair to view this sudden revelation with a good degree of suspicion.
Read the Article at HuffingtonPost

Cramer Versus Cramer Part 3 -- The Uptick Rule

2009-03-20T01:42:00.009-04:00

Last blog post, we reviewed some important moments of Jon Stewart's interview of Jim Cramer following their rather public feud. The post was dedicated to amplifying an important question Stewart asked Cramer. Now, it's important to discuss Cramer's response.

Cramer: Okay. First, my first reaction is absolutely we could do better. Absolutely. There's shenanigans and we should call them out. Everyone should. I should do a better job at it. But my second thing is, I talk about the shorts every single night. I got people in Congress who I've been working with trying to get the uptick rule [see first 1:40 of the clip below]. It's a technical thing but it would cut down a lot of the games that you are talking about.

The uptick rule was introduced by Securities and Exchange Commission in 1938 as a solution to the bear raids (see previous post) being used during that period. The intention of the uptick rule was to make it difficult for excessive short selling. An uptick occurs when a stock trades upward. The uptick rule stated that short sales could only be made on stocks with an uptick or if the stock price remained the same provided that it is higher than the last posted price.

This has been helpful because when one trader or hedge fund takes a large short position, nothing will stop the whole group from leaping on board and driving that stock down. With short selling, the investor is selling first and then buying back at a later date. If everybody is short selling, there is a high volume of selling going on, pushing the stock down. The company, which very well might have solid fundamentals, is being reduced to rubble as traders and/or hedge fund managers place their short sales like flies hovering around a steak that has been left outside during a hot summer day. Yes Yes Yes, folks. An awful simile, isn't it? The point is, if the short sellers cannot move when the stock price is going down, the stock's cascading descent is slowed considerably.

It was revoked in 2007. While there is a great deal of conjecture as to why, the official reason was to analyze how the markets did without the uptick rule. The rule had existed for decades, and the underlying rationale was that it quite possible made no difference. Behind the scenes, however, there was a great deal of talk that lobbying from private interest groups were at play. Those against it felt that there was no proof that it prevented a stock from plummeting. Others went further, claiming that it deterred all forms of short selling even during an uptick and prevented proper price discovery, which is considered an abhorrent thought by many.

Although the relevance of the uptick rule on the markets, particularly a bear market is subject to debate. Regardless, the public outcry to reimplement the uptick rule has grown so strong that Congress has no choice but to act. Whether the solution is reimplementing the uptick rule as it was before or in some other form, it has yet to be decided.

I'd like to end this series of posts, which were inspired by the Cramer Vs. Stewart interview, with a clip from Jim Cramer . Like I said, I've never been a fan of his on-screen persona, but this clip contradicts what Jon Stewart was accusing him of, which was basically ignoring the plight of the retail investor. Watch the first 1:40 of the clip. He describes the bear raid and then promotes the use of the uptick rule, an argument he could have presented more passionately on The Daily Show.

No matter how bad his recommendations have been (and trust me, they have been bad), his intentions shouldn't be construed as malicious.

Cramer Versus Cramer Part 2 -- A Bear Raid

2009-03-19T18:17:00.017-04:00

In my last post, I expressed a great deal of frustration with the lost opportunity Cramer and Stewart passed up to educate an engaged audience. Probably one of the more notable examples of this came when Jon Stewart presented Jim Cramer with video clips of himself from 2006. The Daily Show pointed out segments like:

Cramer: You know a lot of times when I was short at my hedge fund and I was positioned short, meaning I needed it down, I would create a level of activity beforehand that could drive the futures. It doesn't take much money.
Cramer: I would encourage anyone who is in the hedge fund unit 'do it' because it is legal. It is a very quick way to make the money and very satisfying. By the way, no one else in the world would ever admit that...

What was he talking about? You can tell Stewart's entire 'beef' of the interview lay in getting Cramer to justify such comments. Of course, Cramer didn't. Neither really explained what he was talking about. It was just assumed it was understood.

I thought it would useful to do a quick breakdown of this dialogue. Stewart was trying to motivate Cramer to discuss a "bear raid." A strategy, although more common during the early 20th century, that involves taking large short positions (and/or colluding with others to take large short positions) and spreading unflattering rumours of the target firm with the set goal of dragging the share price down. The group profits between the original share price and the price that the share price has been dragged down to. This brings a "surer thing" to big-wig traders and hedge funds, while leaving the retail investor, saturated in the buy-and-hold philosophy, out to dry.

A recent example that comes to mind of rumours being spread in the market to get a share price down was when rumours were flying that a healthy Steve Jobs was terminally ill. Every time those rumours gained traction, it sent Apple shares down. There is a great deal of speculation attributing these unsubstantiated rumours to hedge funds. While, today, the poor Jobs has actually taken time off to deal with some sort of illness, traders and hedge funds managers, I believe, have been poking at his health for years.

An unusual thing was that Cramer in the 2006 video commented this behaviour was perfectly legal, which is not entirely true as it might represent securities fraud.

Next blog post we'll review Cramer's response, mentioning a little thing called the "uptick rule." Huh? Uptick rule?

Cramer Versus Cramer Part 1

2009-03-15T15:59:00.012-04:00

Do you remember watching an entire show at a particular time to wait for a particular segment? It really almost feels like something our great grandpappies did. Comedy aside...today, we can simply be alerted to snippets of information by our peers or by certain publications and the relevant piece can easily be found online. Such was the case this weekend when a brilliant pathologist friend of mine took me through clip by clip of the battle between The Daily Show's Jon Stewart and Mad Money's Jim Cramer. Now, this had been the news of the week all last week. Had this been a past era (and by "past era," I mean a few years ago), the favoured water cooler conversation of the moment would totally have been missed by myself.

It all began with the Daily Show putting together a very effective onslaught of CNBC's coverage of the financial markets. The piece was a substitue to a cancelled guest appearance by CNBC's Rick Santelli, who was due to explain his opposition and subsequent reporting of homeowners being saved from foreclosure with government bailout funds. Part of the collage of attacks were clips of Mad Money's Jim Cramer giving bad calls on Bear Stearns and Bank of America. Cramer, taking exception to the comments, went on a media blitz undermining Stewart, and we had ourselves one of the more compelling media personality rivalries this year.

Stewart's attack was legitimate and eloquent. It made a point stressed by investor advocates for years: the ineffective coverage of news organizations. Numerous clips were played illustrating the CNBC's staff lack of effective reporting and greater priority being placed on being the mouthpiece for the companies they were reporting on than any sort of investigative journalism. However, Stewart's observations was hardly old news. For example, it was Vanity Fair that first commented on the suspicious Enron, not the Wall Street Journal or Financial Times.

It was Cramer's appearance on the Daily Show after much bickering back and forth that I want to draw attention to. The two men were given a huge audience to discuss incredibly important issues, and Cramer simply chose to be Jon Stewart's punching bag, acknowledging everything coming out of Stewart's mouth while not taking an opportunity to amplify the issues. My personal resentment of the show, Mad Money, has existed since the show came out. But, in all fairness, Cramer failed to point out his definition of Mad Money, which was "...not retirement money, which you want in 401K or an IRA, a savings account, bonds or the most conservative of dividend-paying stocks." Furthermore, the challenge of having an avenue in which everyday you are putting a buy or sell recommendation on a stock to be evaluated by a broader public is a tough gig. Nobody else does it (not on such a grand scale anyway). Cramer's past hits and misses is noted at the end of each show, and his lack of success can easily be evaluated. Mutual fund managers do have to provide disclosure on their top holdings but not in real time, and hedge fund managers do not have to talk about it at all.

For all my criticisms of "Mad Money," Cramer should have pointed out that the show does succeed in giving people a way to educate themselves about the markets in an entertaining manner. For every verdict Cramer renders on a company, he does talk about his reasons and about the company themselves. It has made people more engaged, increasing their IQ of publicly-traded companies. Of course his theatrics and yelling, while aggravating myself, also did entertain his audience bringing an audience bored with the normal presentation of business reporting into the mix.

This all being said, my love for the Daily Show and Jon Stewart is quite strong, as watching these clips did provide a sense of satisfaction. Vital issues for investor (and this means all of us) rights were being presented to a mainstream audience. There seems to be a definite interest for business news to not spark widespread selling, and this does mislead the public. Stewart was right to define the participants in the markets into two groups: the retail investors saving for retirement and the cowboys (and girls) on the institutional side. Keep up the good work guys.

My next blog post is going to be about the behaviour of hedge funds in this whole mess. During the interview, Cramer, a former hedge fund manager, was questioned about the comments he made in an interview several years ago. Neither of the two gentlemen fully explained the issue. Stay tuned.

If you guys have not checked out the interview yet, follow this link:
http://watch.thecomedynetwork.ca/the-daily-show-with-jon-stewart/best-of/jim-cramer-interview-uncut/#clip149637

A Simple Explanation of the Credit Crisis

2009-02-27T08:07:00.005-05:00

A terrific explanation considering how simple he kept it. It is presented in an entertaining and easy-to-understand way, although this does come at the expense of overgeneralizing some parts.

The following is the thesis project of Jonathan Jarvis toward the completion of his MFA.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Fareed Zakaria, brilliant guy!...Canada Vs. USA?

2009-02-12T12:00:00.009-05:00

Being Canadian, you have definitely been part of, if not been a witness to, the Canada vs. United States debate. Which is the better country, we have felt the need to ask? As a means of strengthening our identity, we have resorted to the practice of comparing ourselves to the United States. Such a practice, it can be argued, has been found to stress our inferiority complex not rid ourselves from it.

Although the need for us to make such a comparison can be argued, it can be saved for another day as this week's Newsweek column from the great Fareed Zakaria must be recognized. Fareed Zakaria, editor of Newsweek International and the former managing editor of Foreign Affairs, writes a terrific Newsweek column comparing the two countries, focussing on why Canada is proving themselves to be greater particularly during such uncertain economic times. Enjoy! As a proud Canadian, there is no doubt that you will...

http://www.newsweek.com/id/183670

Industry Spotlight -- The Wholesaler (Part 2)

2009-02-06T07:41:00.006-05:00

Last blog post, we introduced you to the wholesaler. It is a job in the financial services industry you never hear about but may play a significant role in the mutual fund you invest in. To review, in order to get financial advisors to carry their investment products, mutual fund firms employ “wholesalers,” whose job it is to persuade advisors to understand why their funds are better than the rest of the industry.

In this entry, we're going to further explore some dynamics in the wholesaler-financial advisor relationship.

Now, it would be a great to think that an advisor uses their analytical prowess to decipher the mutual fund that is going to beat the index year after year. However, such prowess, particularly for the larger funds and more prevalent asset classes (for example, a Canadian equity fund), is not significantly different from one mutual fund company to another. With this in mind, the advisor's assessment of giving a mutual fund firm his or her client's business shifts to more subjective traits. One of those traits is their relationship with their wholesaler [another can be the trailer fee, which we'll discuss another time].

In essence, the wholesaler-financial advisor relationship is much like the relationship between a financial advisor and their client. Like financial advisors, wholesalers earn a commission (8 to 12 basis points, we've been told, of the assets they are responsible for bringing under management), while earning a salary as well. Like financial advisors, wholesalers are responsible for recruiting their clients (in their case, the financial advisors) and nurturing them.

It is important to note that wholesalers are given what are called expense accounts (according to several sources, a typical expense account can range anywhere from $20,000 to $50,000 for a geographic area depending on the firm) to, among other things, entice advisors to carry their products. These incentives could be, for example, tickets to shows, sporting events or dining out. In the past, such incentives were out of control with all-expense paid trips and more lavish attempts to win a broker's loyalty. Fortunately, much of this has toned down in the last few years. That being said, a financial advisor's loyalty can still be won in such ways. In fact, in many cases, it is the advisor who has come to expect special treatment in return for them investing millions of their clients' money with a specific firm.

Now, yes, all is fair in love and war, but when you think about it, there can be about 20 wholesalers for the typical mutual fund company (maybe four wholesalers assigned to Ontario, for example). And these five figure expense accounts per wholesaler would be more beneficial to the Canadian client lowering the fund's MER. Of course persuading advisors to carry their products is important, but eliminate or reduce the expense accounts, I say. Let a financial advisor pick a mutual fund on the merits of the fund alone. Let the wholesaler's job be solely to preach the merits of their fund.

The feeling is, though, this is not the start of a groundbreaking movement.

Industry Spotlight -- The Wholesaler (Part 1)

2009-02-03T21:09:00.009-05:00

Wholesaler (in the context of financial services): an employee of a mutual fund firm whose sole responsibility is to promote their firm's mutual funds to the financial advisor community.

Their job is to persuade advisors to understand why their funds are better than the rest of the industry. Keep in mind, this is an informal term used by the retail investment industry. Actual job titles for this position are Vice President (Sales), Regional Sales Director, etc....but within the brokerage community, they are referred to simply as "wholesalers."

The need for this profession resonates in the sales-driven culture of the industry. The mutual fund industry, to say the least, is quite saturated with there being an array of different types of mutual funds, which might specialize in a specific sector, geographic location and/or asset class. Financial advisors, who invest their clients in mutual funds, have a huge selection to choose from. As most mutual fund firms carry a wide selection, a financial advisor will typically only use the investment products of a few firms that he or she is comfortable with. For example, virtually every fund company, such as AGF, Franklin Templeton or MacKenzie Financial, has a Canadian equity fund, a global equity fund, Canadian balanced fund, etc...and many advisors will simply keep their clients invested in an array of funds of a single fund company or two. Generally, not use six different mutual funds at six different firms.

The next post will explore how wholesalers accomplish this, as well as a couple criteria that the financial advisor uses to assess a mutual fund...one that you're less likely to know about, as they don't necessarily bear any benefit to the client.

Newsflash: Conservatives on probation

2009-01-28T18:46:00.005-05:00

Beware, Conservatives! You are on probation.

You have to give credit to the Conservatives for finding a budget that the Liberals are willing to support. You have to give credit to the Liberals for giving, at least, the impression that it was exactly on their terms. You have to give credit to the New Democrats for giving voters the avenue of opposition.

Regardless of our stance on the issues and the actual details of the budget, our parliamentary democracy, which a short time ago seemed seriously handicapped, has started to look effective again.

Hear ye! Hear ye! Parliament is finally in session.

Open a Tax-Free Savings Account! -- Part 4

2009-01-13T14:48:00.003-05:00

Today, we'll close with reviewing the final method you can use a Tax-Free Savings Account: Opening a Self-Directed TFSA.

Self-Directed TFSA --

Opening a self-directed TFSA is basically do-it-yourself investing within a Tax-Free Savings Account. You can even employ a passive management strategy through investing in ETFs.

Now, some of the largest tax-free savings for Canadians will come in the capital gains made through investing in equities. The downside, however, is that you can't write-off your capital losses. So, speculative investments while having a greater degree of upside will also bring the potential for greater losses because of no tax write-off.

Again, you can always invest through the brokerage of the bank you work with. However, our concern is that brokerage fees will be included in this $5000 amount. Fees, while always important, make more of a difference because paying too much will lower your contribution room. Furthermore, again, be particularly careful about administrative fees.

The discount brokerage we recommend is Questrade. Their trading fees are incredibly low at $4.95 to $9.95/trade. Generally, such low prices come with a minimum portfolio size or making a certain number of trades in a quarter. This isn't the case with Questrade. In the interest of full disclosure, our support has led to us to becoming an affiliate of theirs. If you do sign up, place "gatsby786" as an Affiliate ID will get you a $50 rebate after your first 10 trades. Only sign up with Questrade, though, if you intend to invest....they give you 0% for cash in your account. Terrible value.

http://www.questrade.com/trading/tax_free.aspx

It is important to note: If a do-it-yourselfer, though, you cannot short sell, buy on margin or exceed level 2 of option trading (no naked options or no spreads) with a TFSA. This shouldn't be a hinderance to most of you.
---------------------------------

In conclusion:

With these three main programs (Savings TFSA, Mutual Fund TFSA and Self-Directed TFSA), you can pretty much invest anything as you would your RRSPs or a non-registered account. You're charged nothing for withdrawals, and you don't have to make withdrawals by a specific date.

It's important to note that you can have TFSAs in more than place. For example, this year you can have $3000 at PC Financial (for your interest income) and $2000 at Questrade (for your do-it-yourself investing). Your contribution limit for your Tax Free Savings Account is monitored by the CRA (Canada Revenue Agency) themselves. Theoretically, you could open an account and deposit $10,000 ($5000 over the limit this year), but you would face a 1% penalty. You can open up an TFSA in 6 different places and deposit how ever much you like. Nobody would care (well, I would hope your banker would be nice enough to tell you). The key is keeping track of your contribution room.

Hope that helps....Surely more thoughts and comments will follow as the life of this brilliant new savings vehicle goes on.

Open a Tax-Free Savings Account! -- Part 3

2009-01-12T20:41:00.004-05:00

Okay, in the previous posts we did a brief overview of TFSAs and the best Savings TFSAs out there. In this post, we're going to cover one of the methods of having an Investment TFSAs: Mutual Fund TFSA.

Mutual Fund TFSA:
If you want to invest in mutual funds, your bank will have a decent program, and you can use their bank-owned no-load funds. As they are no-load funds, you won't be charged going in, and it is key to keep your fees to a minimum as they'll be included in the $5000 limit.

Fees for TFSA SHOULD be none! Watch out for administrative and withdrawal fees. TD has such fees unless you sign up for eServices. If TD is your bank, sign up for eServices. Don't pay the fees. The only fee you can tolerate paying are transfer fees. With the exception of BMO, virtually all the shops charges a transfer fee if you're transfering accounts to another firm.

It is curious to note that CIBC will not have Investment TFSAs until April. This is a whopping delay considering everybody else has some sort of program.

The one thing to be stressed is do not let them charge you administrative or withdrawal fees of any sort. There is more likely to be such administrative fees on the bank's brokerage accounts, so verify if this is the case. Especially in the early years of the TFSA, your little bit in tax savings should not be offset paying such fees.

Open a Tax-Free Savings Account! -- Part 2

2009-01-08T13:06:00.005-05:00

Now, Onus has done some homework about which TFSA is the best, and the answer lies in what you want to do. Generally, there are currently three different ways to open up a Tax-Free Savings Account. We'll be going through the Savings TFSA today.

A Savings TFSA is simply a place to save your cash with no wish to invest. For this method, you want to find an investment savings account that pays the highest interest rate while allowing your capital to be liquid. One of the beauties of the Tax-Free Savings Account is its ability to remain tax-free if withdrawn. Locking yourself into a GIC eliminates this advantage for a certain period. It is important to note that a couple of the Banking Representatives immediately suggested their GICs as a way to increase the rate of return. You'll probably note that some of these rates beat the GIC rates of most banks (with the exception of some of the longer-term ones).

See our breakdown of the rates of return below...keep in mind, these are variable rates and subject to change.

PC Financial Tax-Free Interest Plus Savings Account 3.75%/year
HSBC Direct TFSA 3.75%
CIBC Savings TFSA 3.0%
BMO Savings TFSA 2.75%
ING Savings TFSA 2.7%
Scotia Savings TFSA 1.75%
TD Savings TFSA 1.75%
RBC Savings (that option was not available we were told...we would have to invest in GICs)...However, Ellen Roseman posted a 2.5% for RBC in her Toronto Star article, "Still Time for Tax-Free Savings Accounts," which makes more sense.

If you're not looking to invest and simply to save your money, your answer is some sort of investment savings account. Both PC Financial and HSBC deliver.

Learn about the Investment TFSAs in our next post!

Open a Tax-Free Savings Account! -- Part 1

2009-01-06T17:46:00.005-05:00

Alright, people...It's time! Go out and get a Tax Free Savings Account. Now! Go Go Go...

If you're 18 or over, a Canadian resident can invest $5000 each year in the account and allow its holdings to grow tax free. Keep in mind, each year...so the first year you have $5000...next year, you have $10,000...the year after, you have $15,000... and so on.

While there is no upfront tax reduction for putting money into a TFSA, your investments won't be taxed, so this means your capital gains, dividend yields and interest income are protected. However, it also means your capital losses can't be written off. Furthermore, you won't be taxed when withdrawing your money from the account, and there is no requirement to make withdrawals by a certain age.

Now, I've been telling friends and family informally to sign up for one, and the general retort goes something like this: "The most a high-income taxpayer in Ontario would save on a $5000 deposit is $115 in tax if he or she earned a 5% interest rate. Who cares about a measly $115?"

Yes, this is not an overwhelming amount of money...But, assuming $115 means nothing to you, you need to think long-term. If the maximum contributed for 10 years, assuming no growth and a 5% return, no taxes are due on $2500 of investment income, which means $1150 for that year! And it continues to the next year ($1265)...and the next year (you get the point)...absolutely marvelous!

Now, you might not have a need as you may not have savings or investments. However, your parents or your spouse might, and there's nothing saying they can't use your room. Additionally, the contribution room won't go away, so it won't hurt to at least have an account (provided they don't charge you annual fees).

People, People, People...You're looking at the greatest savings vehicle since the RRSP. Don't ignore a great thing!

Which Tax Free Savings Account is the best? Stay tuned for our next post!

A Tale?

2008-12-28T21:01:00.006-05:00

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going to Heaven, we were all going direct the other way -- in short, the period was so far like the present period, that way of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
-- Opening Sentence (and paragraph) of A Tale of Cities

And so Charles Dickens described the build-up to the French Revolution. Reading this book as a child, the story was introduced in an abridged version in which there'd be a page of content followed by a picture describing what was read. This sentence followed a picture cut into two images: the French aristocracy feasting at a grand banquet and a group of children dressed in rags desparately in need of food.

Now, of course, we are not living in the time of the French Revolution, but could not this very quote, published in 1857, be used to open up a newspaper, book or periodical to describe the last few months?

It certainly is amazing on how timeless some prose can be.

Will Canada ever have a federal securities regulator?

2008-12-18T09:54:00.001-05:00

"Canada is currently the only G-7 country without a common securities regulator, and Canada's investors deserve better." -- Rodrigo de Rato, IMF Managing Director 2004-2007

We couldn't have echoed the words better ourselves, particularly in Canada's political climate. Love, hate or apathy toward the Conservatives aside, Flaherty's pet project since his party became government has to be respected. There really should not be doubt in the minds of most that a national securities regulator will make this country's investment climate better and more efficiently regulated. The inclusion of a national securities regulator, in some form, in the Conservatives' recent budget was taken with a huge sigh of relief. It actually seemed like things were going to get done. Now, of course, reckless politics has put this noble endeavour into jeopardy, and Canada is not better for it.

Canadian securities regulation is currently conducted by 13 provincial or territorial securities commissions, which are regulatory agencies of their respective provincial government or territory. Their job is to protect investors, as well as promote fair and efficient business practices, which is done by enforcing their province's Provincial Securities Act -- a set of laws and regulation outlining what participants in the market can do.

It is intuitive to realize that monitoring the securities regulation for 13 different jurisdictions is cumbersome at best. At worst, Canadian public companies, who are looking for either equity or debt financing, have to consider the costs of complying with 13 different sets of rules. These additional costs particularly hinder smaller companies, which can be argued are in greater need of capital in order to grow. Furthermore, quite simply, paying thirteen groups of people to do the same job, is a terrible use of resources. Particularly, considering there are more individuals earning six figure salaries in the Ontario Securities Commisssion than there are in the SEC. How much of taxpayers' money is being spent on these thirteen regulators when the job can be done with one?

The International Organization of Securities Commissions, IOSC, comprises of 182 members, which make up 90% of the world's securities markets. Of those 182 members, only Canada and Bosnia do not have a national securities regulator. What a pair! It can be easily observed from the quote above that our situation is viewed as fragmented by the international community. A united front will surely give Canada a stronger voice in the regulation debate, which is now a vital global issue. What's the problem? Well, by several accounts, the Ontario Securities Commission seems to take the lead on the majority of the initiatives. It is due to this influence that several other provincial securities commissions, particularly British Columbia, Alberta and Quebec, fear that a national securities regulator will mean ceding their influence to the Ontario Securities Commission. To them, it seems to be a question of maintaining their autonomy.

On November 20th, we celebrated a Canadian Heritage Day, the birthday of Wilfrid Laurier, one of the greatest Prime Ministers in Canadian history. Laurier presided over a time in which this great country came into its own as its people witnessed the expansion of the West and a significant wave of immigration. But, it was his attitude toward conciliation that cemented his legacy and drew the admiration and awe of many. That same week, hearing the Throne Speech outlining the government's agenda for the coming year, it was so easy to think: How fitting that the federal government is now going to sit down with the provinces and figure this out.

Unfortunately, the rejoice was shortlived. Hopefully, with Parliament set to reassemble next month, not for long...At a time of great change in the world economy, isn't it time Canada got on with it?

Death of a Canadian Hero...Ted Rogers (1933-2008)

2008-12-02T20:53:00.004-05:00

In an earlier blog post, Rogers Communications was lambasted for charging obscene prices for, at the time, data plans of the newly incoming iPhone. Entitled "The Power of the People" http://www.onusconsultinggroup.com/2008/07/power-of-people.html), we applauded the successful grassroots effort to charge a more reasonable price and encouraged a greater consumer advocacy lobby in this country.

Today, though, those thoughts are put aside to mourn the death of one of the greatest visionaries Canada has ever seen. Like it was said when writing about Tim Russert, there will be no shortage of obituaries making their way into the press over the next few days, so we'll refrain from making this blog post one of them. However, it must be pointed out the contribution this man made to Canada in which he pursued a vision with unwavering dedication. His unrelenting ability to tolerate debt in order to achieve his goals was legendary. To take such risk, surely, it was not so much about making money, as it was about making a difference. Starting with FM radio stations, he went into cable and a great deal followed. Entering into new markets, successfully lobbying our government and winning licenses in a country where such a feat is challenging for any new entrant, he serves as an inspiration for any entrepreneur. It made this country a better one for all Canadians. In doing so, he went up against the titans becoming one in the process.

Canada is a better place for Ted Rogers. Thank you, Mr. Rogers, for being you.

'Z'

Second Opinion's Advisor Scorecard asks the right questions...

2008-11-19T20:31:00.004-05:00

Not too long ago, Second Opinion Investor Services introduced the Advisor Scorecard, a straight-forward True/False evaluation of your financial advisor. We loved the concept of displaying such a tool for all Canadians to take advantage of. Moreover, a point system was introduced in which the individual filling out the evaluation could give their advisor an actual score out of 100 based on their responses. Thus far, almost 900 people have filled out the scorecard, and a 60 has been dubbed the average score....Translated as: You are fortunate to be with a competent advisor. One point lower, however, and you "...might need to monitor results."

This particular blog entry is not intended as a review, so there will be no explaining perceived strengths and weaknesses of the evaluation itself. Perhaps another time. We simply want to draw attention to this terrific concept. Second Opinion has the right idea. Are you fortunate enough to be with a competent advisor? Check it out...It is the season.

http://www.advisorscorecard.ca/

Seeing the success of a noble grassroots campaign, makes me take pride in our own.

2008-11-05T21:37:00.005-05:00

And so goes my Twitter entry on election night.

This week we saw history. Well, every week we see history, but it was absolutely remarkable seeing Obama's victory in the 2008 US Presidential Election. It was remarkable seeing the effect the victory had on Canadians and the world. As proud Canadians, why does this matter to us? Yes, America has just elected their first African-American President, but he's gone futher than that. He has captured people's imaginations, and the citizens of his country feel empowered.

In March, with Obama vying against Hillary Clinton for the Democratic nomination, we wrote a blog entiled, "Obama Consulting Group," where praise was heaped on the process-oriented approach that he had embraced. As we said at the time, instead of focussing on the issues alone, he focussed on the the concept of changing the way politics had been done and what a government should do. Promoting this belief to the grassroots, he was able to spark a movement that did not end on election night. Go to: http://change.gov/ Already the tools to bringing transparency to Washington are there! His platform. His agenda. His blog. The opportunity to share your story.

It is this belief in the grassroots approach that inspired the founding of the Onus Consulting Group. Frustrated with the way business was conducted by the retail investment industry, the company was established with nothing but the belief that Canadians deserve transparency and the ability to decipher great financial advice. With full-service financial advisors given a great deal of flexibility regarding how they can conduct their business and charge fees, with our investor advocacy lobby relatively week, with embedded fees galore; the only logical solution, to us, was to ignite change from the bottom-up. Raise awareness among the public. Find those financial advisors that do exemplary work and refer them to Canadians who deserve it.

Will it work? If an African-American can get himself elected President with a similar grassroots approach, anything is possible. Hence, our jubilation this week.

An anniversary to remember

2008-10-29T10:02:00.004-04:00

"Economics as a subject matter is normally lacking in drama; change for better or worse is incremental and often discovered in a scholarly way only after the fact."

And so the brilliant John Kenneth Galbraith wrote in his book, A Journey Through Economic Time, then going on to name one notable exception: Black Tuesday.

Today is the 79th year anniverssary of the infamous stock market crash of 1929, that sparked the Great Depression. If the great Galbraith had lived, he would now have two exceptions as we are in the midst of a similar historic economic time, the credit crisis of 2008.

It's important to pay tribute to this significant moment in world history. The lessons learned during that time has given us great insight to deal with our present day problems, while serving as a precendent regarding how weak the economy can get.

79 years ago.

Got to be...Are you underperforming or outperforming your relative benchmark?

2008-10-24T21:12:00.006-04:00

Wow, so sorry fans, it has been ages, since I've written....The last couple of months have been incredibly intense, and while I've been tempted to write on several occasions, the dynamic at the office has been such that's it has been hard to tear myself away from the day-to-day. Very unwise, said the incredibly helpful SEO consultant, I met at an expo a couple weeks back.

"You got to be blogging at least 2 or 3 times a week," he said.
"But..."
"Got to be."
"But, the purpose of us having a corporate blog was to give Canadians insight regarding our thoughts in improving the retail investment industry, giving them a pulse for the way our company thinks and believes. We weren't really thinking about search engine results."
"Got to be."

Okay, with "Got to be" the theme for this blog entry, I will proceed. Obviously, writing a blog entry once every month is a little too infrequent. I acknowledge that.

Anyway, if you are a subscriber to this blog, you are fully aware of the state of the economy. Many of you have probably inundated yourselves with all sorts of commentary about what's going on. You can pretty much find a pundit point in every direction. Up...down....sideways.

As horrific as this loss of wealth has been for Canadians, for the first time since Onus was founded, people are engaged. They are conscious of what's going on. This concern, although it has come with a cost, should be cause for victory in the sense that many Canadians are no longer taking anything for granted and are asking the right questions.

Listen, people, there's no sugar coating it. A financial advisor that says that his clients are completely unscathed is either inaccurate or lying (for me to say which would be inappropriate, for I would have to qualify their intentions). If you have any exposure to the markets, your portfolio has suffered. The relevant question is: By how much? Was your asset allocation appropriate?

If you have questions regarding your current situation, allow me to outline an important one and give you the tools to answer it: How is your porfolio doing compared to your relative benchmark? A relative benchmark tells you the performance of your investment portfolio relative to a market index (for example, the Dow Jones Industrial Index). Money managers and investment analysts are evaluated by their ability to outperform their relative benchmark. As a client paying active management fees (assuming you're not employing indexing strategies), you're paying for your investments to be able to do better than the respective index. Otherwise, you could seriously reduce your fees by investing in index funds or ETFs while getting better returns then an active manager.

How do you calculate the return of your relative benchmark?

If your advisor and you have not predetermined the benchmark that will be used to evaluate your returns (material that should be in your Investment Policy Statement), visit www.showmethebenchmark.ca set up by my hero, Warren MacKenzie, and other fee-based financial advisors. Calculate your relative benchmark using the Benchmark Calculator and compare them to your returns. It is an excellent way of judging your financial advisor's (or, for that matter, your own) performance.

It's safe to say if you underperform your relative benchmark once over the last five years, it isn't grounds alone to conclude unsatisfactory financial advice. However, if year after year, you're underperforming your relative benchmark, you should take more than a moment to evaluate your current situation.

Do you know the answer to this question? Got to be.

The Politics Between Brokerages and their Full-Service Financial Advisors

2008-09-06T06:04:00.008-04:00

The following is an excerpt from the recent edition of our firm's Investor Awareness Kit:

When a full-service financial advisor starts off at a full-service brokerage, they are given a starting salary for the first year only. Then, exclusively, they earn only on commissions. An advisor has a great deal of discretion to charge however they like. Whether they've been in the business for 26 months or 26 years...whether they've barely passed their licensing exams or hold a series of professional designations...It is up to them to decide how much they will charge their clients. What they don't have control over, however, is what percentage of the commission charged they will keep. That goes to the grid. Basically, the more commissions an advisor earns off his 'book' (the term used for all an advisor's clients), the higher percentage of their commissions the advisor gets to keep. For example, an advisor in his first few years of business will have fewer clients and therefore will be lower on the grid (take a lower percentage of commissions charged) then say somebody who has been in the business for years.

The grid, which varies from brokerage to brokerage, indicates the proportion of the commission that goes to the advisor versus the brokerage. The dynamics of the relationship between broker and brokerage is more like a partnership. The brokerage's responsibility is to provide the office, the assistant, the research, additional support and overhead, while the broker's responsibility is to provide the clients.

Keeping this partnership concept in mind, it must be noted that an investment advisor is more accurately running their own business. They are given a great deal of flexibility of what they can do with their clients, and they are fairly independent. The point is there can be great investment advisors at a specific brokerage firm, and there can be some not so great investment advisors. What's more important is that their value to the firm is assessed not by the success of their advice, but by the amount in commission being charged to their clients and going to the grid. An advisor on their brokerage's Presidents Club or Executive Club, being dubbed a Senior, Director or Vice President; are given these distinctions on account of this.

The difference between an Investment Policy Statement and a Know - Your - Client Form

2008-08-29T23:21:00.004-04:00

All this jabbering about the importance of having an Investment Policy Statement, and I forgot to mention an important dynamic already in place in the industry. An IPS is not to be confused with a Know Your Client form, which are designed to protect and limit liability of the brokerages. While the IPS is an extensive document outlining the vital dynamics of the client-broker relationship, the know-your-client form represents the industry's minimum standard of what is expected for an advisor to know about their client. For example, the Mutual Fund Dealers Association requires the following:

- Investment Knowledge: extensive, moderate, none
- Risk tolerance: low, medium, high
- Time Horizon: 1 to 3, 4 to 5, 6 to 9, 10 plus
- Investment Objective: income, growth (short/long term), balanced
- Individual income
- Household net worth

Note how general a profile this is. If you are ever a victim of advisor malfeasance, it is the first thing that is looked at by the Branch Manager or perhaps the Compliance Department. Furthermore, John Lawrence Reynolds wrote in his book, The Naked Investor, that financial advisors will have their clients sign the bottom and fill the rest in later. Be wary of this because, if there is problem, it will be the place you'll have to turn to in order to make your case.

The Importance of having an Investment Policy Statement

2008-08-21T21:02:00.006-04:00

If there's one thing that we hammer home with our clients, it's the necessity of an Investment Policy Statement prior to beginning your relationship with your financial advisor. If you don't have one, have your advisor set one up for you. If you do have one, verify that it's complete. In his book The Professional Financial Advisor, John DeGoey put forth the statistic that 15% of retail investors with financial advisors have investment policy statements. Although it has been six years since the book came out and, surely, the percentage has increased significantly since then, it is quite an issue.

An Investment Policy Statement (IPS) is a document that details the dynamics of a client's relationship with their financial advisor, such as the most vital elements of a portfolio's elements and design. It is the ultimate guide to transparency between an advisor and the client. Having an Investment Policy Statement, quite frankly, makes the client's expectations clear, and the advisor will understand fully the standard he or she is being held to. The more a client knows entering a relationship with a financial advisor, the healthier that relationship will be.

The best breakdown that could be found of what should be in the Investment Policy Statement (this includes the industry textbooks) was in Warren Mackenzie's The Unbiased Investor. Great book pick it up, if you have a chance!

An IPS should have:
i) the target average rate of return for this investment portfolio over different time periods.
ii) The expected range of returns for the portfolio as a whole over different time periods.
iii) The percentage of each asset class in the recommended portfolio and the permissible ranges for each asset class.
iv) The benchmark that will be used to evaluate actual performance (see next page).
v) Possible investment constraints
vi) Rebalancing strategy
vii) All fees that will be charged
viii) Frequency of contact
ix) Topics to be covered in the quarterly review meetings.
x) Assumptions being made

Eenie.... Meenie..... Mynie.... Moe (How does an advisor pick their mutual fund firms).

2008-07-30T03:06:00.007-04:00

The mutual fund industry is quite saturated with there being an array of different types of mutual funds, which might specialize in a specific sector, geographic location and/or asset class. Financial advisors, who choose to invest their clients in mutual funds, have a huge selection to choose from. As most mutual fund firms carry a wide selection of mutual funds, a financial advisor will typically only use the investment products of a few firms that he or she is comfortable with.

How do they choose which mutual fund firms to put their clients in? In order to get financial advisors to carry their investment products, mutual fund firms employ "wholesalers," whose job it is to persuade advisors to understand why their funds are better than the rest of the industry. Historically, "wholesalers" used what was called "soft dollars" to entice advisors to carry their products. These incentives could have been tickets to shows, games or even all-expense paid trips. As of late, these widespread "bribes" have gotten under control and have declined significantly over the years. However, they do still exist, but in a much toned down manner. Furthermore, a mutual fund firm can also offer higher trailer fees as an incentive to get advisors to carry their funds.

Looking at past performance does show a track record but do keep in mind that it is common place for mutual fund firms to merge bad funds with decent ones to make their history look better...Yes, this is permitted...and, yes, the next thing to wonder is how do we know how legitimate their posted returns are.

Deciphering Churning

2008-07-23T19:53:00.006-04:00

Young and dashing...the young man looked every bit the Bay Street executive. A beautiful wife and home...he exuded a Canadian success story. Little did many know at that time that they were dealing with Bay Street's most notorious con man later made infamous in John Lawrence Reynolds' Free Rider: How a Bay Street Whiz Kid Stole and Spent $20 million. In just a few years, he manhandled his clients' accounts under the noses of his brokerages, who gave him plump titles and credibility. Smooth talking and charismatic, Michael Holoday was considered the ideal investment advisor by his clients until it all came crashing down. Holoday's favorite vehicle for his malfeasance was churning.

Churning, in the retail investment industry, is excessive trading in a client's account done with the intention of generating as much commissions for the advisor, while not focussing on the client's needs.

First and foremost, I'm grateful to say that the retail investment industry has improved to a point where instances of churning are becoming significantly less prevalent. Historically, the retail investment industry was filled with entirely commission (transaction)-based advisors where a commission was charged every time an investment product was bought or sold by a client. These commissions were the advisor's sole medium of receiving compensation, and they depended on it for their livelihood. Hmmm...I just realized I was talking in the past tense. Commission-based advisors still exist today and, most of them are honest and hard-working people. It is the industry, which they've adopted as their own.

Churning is rarely the reason for a clients' complaint. Usually, they complain about another aspect of their portfolio, such as losses, when churning is discovered. The problem was more common with commission-based advisors, whose drive for revenue may have interrupted their focus to give their clients the best.

A general way to assess churning: Add up the value of all purchases and sales (excluding Treasury Bills) in a year and divide the total by the value of your account in the beginning of the year. This is called turnover. If your turnover is less than 2, you are fine. If your answer is between 2 and 6, you should be conscious and start asking questions regarding the frequency of the buying and selling. Do be aware that the older you are, the closer to 2 you should be.
A more conservative method measurement of churning includes only the cost of purchases and not the cost of sales. If the answer is over 6 in this method, give your branch manager a call.

The Power of the People

2008-07-10T14:14:00.015-04:00

Can consumer advocacy become a powerful special interest group? I certainly hope so. One of my favorite consumer advocates, Ellen Roseman, is one of the country's few unwavering constants. With a blog and a column in the Toronto Star, she cunningly points out injustices being committed toward the consumer. While for the most part it is teaspoons out of an ocean, she builds awareness on whatever issue, and we're all better for it, including the companies she outs.

Now, Canadians have long been the victim of higher prices. With a relatively small population and oligopolies galore, we only have a few wireless companies to choose from, a few phone companies, a few Internet providers....and wait, it's provided by all the same companies. Of course, such variables do put us in the position for higher prices compared to other consumers worldwide, and we, for the most part, have accepted it. Sure, we complain. But, more so as a conversation piece, not so different from talk of the weather or celebrity gossip. Rarely, has such a statement been proven wrong until recently.

When Rogers won the license to carry the Apple's IPhone, die-hard fans held their collective breaths. If a Canadian wanted an iPhone, they'd have little choice but to accept the fees charged. The fee schedules did finally come out and provoked wide-scale uproar. All of a sudden, Canadians, who had been the victim of higher prices for years, were furious. Passive Canadians, who had accepted their fate of higher cell phone plans, higher gas prices in an oil rich country and a number of other things, were all of a sudden in a fury. Why? Why now? Of course there can be several answers to this, but when people want what they cannot afford....

Most famously, a site (http://www.ruinediphone.com/) was set up with the intention of showing Rogers the frustration felt by Canadians. With over 60,000 people signing the petition, the fervour fuelled countless newspaper articles and negative publicity for Rogers and, by extension, Apple. Reading this commentary myself, I thought Rogers would simply yawn at the headlines, ignore the petition and life would continue. They did have exclusive control over the Apple iPhone.

Shockingly, they yielded. They adjusted the price points, and Canadians can now get an Apple iPhone at a value short of a rip-off.

Why do I care? Why am I writing about this? It's sort of this successful change from the grassroots...the bottom-up approach....that exemplifies probably the most untapped way to get change in this society. Why we haven't more efficiently harnessed it remains beyond me. The Leafs are horrible? We question management's commitment? Why...Why, instead of just fan clubs, do we not just have fan unions, which can boycott entire strips of games. For those sports enthusiasts, remember, when MLSE hired Mike Babcock as GM of the Raptors. A novice GM with no prior experience, we watched Vince Carter get traded away for nothing and a decent team reduced to subpar. It wasn't until the fans stopped attending...that people stopped watching...that Babcock was fired, and they decided to get a former Executive of the Year (now, a two-time Executive of the Year), Bryan Colangelo. The Raptors are a good team again.

I do realize it seems like I'm harping and perhaps I am. However, if this approach can be applied to the Apple iPhone, then why can it not be applied to lobbying for lower MERs (Management Expense Ratio) or boycotting Principal Protected Notes and other investment products that sound sexy but provide little value to Canadians. Lobbies that, if done successfully, will save a Canadian family thousands of dollars and make Bay Street conscious of our educated collective.

It cannot go past us that change from the bottom-up is possible in this country, and we have a responsibiliy to ourselves and future generations to adequately harness a power so far neglected.

Dow Jones officially in a bear market

2008-07-03T06:59:00.006-04:00

Now, I try to avoid play-by-plays of the markets just because there are so many people who do it much so better than me. However, this is an occasion. The Dow Jones is officially in a bear market, which is characterized by a 20% decline. With the S&P500 and the Nasdaq flirting with a similar classification, there is a great deal of uncertainty in the market right now. Understatement of the century, right?

As the economy goes through an incredibly volatile period and is flirting with stagflation (high inflation, limited growth, high unemployment), it kind of makes me feel...that really...it's about time. It's about time this uncertainty reached the mainstream and played its toll on the markets. With high inflation, central banks have no choice but raise rates to keep it in check. However, a recessionary environment is best fought with lowering interest rates. Not since the 1970s have so many brilliant men and women been so doubtful of what the central bank should do. It appears there's no clear answer. With these issues with liquidity (our "credit crisis"), we're learning as we go along.

Remember, although a recession has been declared by many pundits, it has not yet reached a consensus yet. With the second quarter over, companies are beginning to come out with their second quarter earning's numbers. Perhaps with this, we'll be able to assess our two consecutive quarters of declining GDP (and, hence, declare a recession).

Remember, folks, be brave. For every recession, there is a recovery. As retail investors, we have to be concerned with the long-term and not selling on weakness. Hang tight. If you guys have an Investment Policy Statement and a full financial plan, you have all the insight you need going forward. The more transparency in your relationship with your advisor, the more confidence you have in your portfolio during uncertain times.

An alphabet soup of designations!

2008-06-29T17:16:00.006-04:00

When assessing a financial advisor's qualifications, most Canadians just don't know where to begin. Besides academic degrees, the plethora of professional designations in the industry tend to make people a little confused. Here is a mini-glossary of some of the more popular ones out there:

CIM: Certified Canadian Investment Manager -- a discretionary portfolio management designation of Canadian Securities Institute.
o Completion of 3 levels (courses), including the Canadian Securities Course.
o Experience Requirement: None

FMA: Financial Management Advisor -- A financial planning designation of the Canadian Securities Institute.
o Completion of 3 levels (courses), including the Canadian Securities Course.
o Experience Requirement: None

DMS: a professional designation of the Canadian Securities Institute specializing in the advanced concepts of derivatives and risk management.
o Completion of 5 levels (courses)
o Experience Requirement: None

FCSI: Fellow of the Canadian Securities Institute -- senior financial services designation *
o One of the above designations is needed (CIM or FMA), a licensing course, an additional course and dedication to continuing education (42 hours per year)
o Experience Requirement: at least 5 years of financial services experience in 8 years.
o Required to complete the Ethics Module and Case Study or the Ethics Seminar

CIMA: Certified Investment Management Analyst -- senior financial services designation *
o Pass 2 levels of exams, as well as maintain an average of 20 hours of Continuing Education per year
o Experience Requirement: 3 or more years of financial management experience

CFA: Chartered Financial Analyst -- the senior designation for investment analysis *
o Pass 3 levels of exams
o Experience Requirement: 4 years of acceptable professional work experience

CFP: Certified Financial Planner -- senior financial planning designation *
o Pass one exam after completing a FPSC approved education program, as well as maintain 30 hours of Continuing Education every year
o Experience Requirement: at least 2 years of personal financial planning related work experience

* Acceptance of these designations requires their holders to abide by certain ethical standards and guidelines set forth by the institution they are accepting it from.

Supreme Court of Canada works their magic...

2008-06-20T18:41:00.010-04:00

"It reaffirms what has been the basis of company law in Western Europe and North American for the last 250 years since share-owning corporations came into being: the duty of the directors of the company is only to the shareholders, because they are the owners of the company."
--Gavin Graham, Chief Investment Officer, Guardian Group of Funds.

Now, I wouldn't put this quote forward as an unbiased view, as the Guardian Group of Funds is a mutal fund company owned by the Bank of Montreal. For Mr. Graham to favour the shareholders isn't exactly groundbreaking, but this statement reveals an accurate sentiment of those who favoured the deal.

The Supreme Court of Canada ruled in favour of the $52 billion leveraged takeover of BCE. A ruling against would have killed Canada's largest corporate buyout in its history. The case pitted shareholders against bondholders in the most unprecendented of fashion, and pundits had no idea which way the Supreme Court judges were going to rule. Considering the years that have transpired since such a significant ruling dictating corporate law, their preparation and decisiveness is absolute remarkable. I'd love to go on and on about this, but as the seven justices who ruled have given themselves 6 months to elaborate on the reasons for their decision, the commentary is quite limited in scope. This has left the articles and segments profiling the story basically sticking to the facts. Even pundits strayed from making a prediction on the possible outcome....even when asked to....Pundits? Who would have thought?

After everything is said and done, though, it must not be forgotten that the bondholders had a legitimate argument. The fact that the takeover was leveraged (meaning that the entity buying BCE was taking on debt to complete the buyout) resulted in the value of the bonds being lowered by 18%. BCE will go from an investment grade credit to a private company with junk bond status. Meaning that the people that lent BCE money thinking it was a fairly safe loan, have now totally been sandbagged over a variable they couldn't possibly have foreseen. Their frustration is, as well as should continue to be, understood.

With this in mind, this case isn't only about bondholders versus shareholders, but the legitamacy of the rating agencies passing judgement on these bonds. They blew the call on asset-backed commercial paper, duping investors, and now here we are....again. This wasn't as safe a debt issue as they graded it to be. But then again, there's really no way they could have known. A future blog post really needs to take into consideration the flaws of ratings agencies.

A later musing, perhaps. For now, congrats to the shareholders of BCE and the Ontario Teachers' Pension Plan.....and congrats to the Supreme Court of Canada. All in a day's work, eh.

Tim Russert (1950-2008)

2008-06-14T17:59:00.002-04:00

While I was on the phone today, I was hit by shocking news run across my blog feed: Tim Russert had passed away. One of my favorite newsmen, Tim Russert, long-time host of Meet the Press, struck fear across the hearts of even the most seasoned politicians. As much as politicians must have loathed going on his show, they were compelled to because an appearance brought a credibility that no other journalist could match. Now, that's power...something he never abused, as he was tough on each equally. They had to explain themselves. Any contradictions in their views? You bet his viewers would know about it. Republican? Democrat? It didn't matter.

I wrote an obituary (or rather, tried), but as I see the outpouring of support and love for this man...I realize I'm a little out of my league. But I want to say he was a true success: a successful career and a successful family man, which is particularly exemplified with the pride and love he felt toward his son, Luke.

I do want to bring attention to an incredible blog entry I read paying respect to the man. Written by a doctor in Buffalo (Tim Russert's hometown), I feel a need to post the link. I hope you find it as a profound as I did.

http://alirizvisblog.blogspot.com/2008/06/tim-russert-1950-2008.html

Mr. Russert, you will be missed.

Escaping the Deferred Sales Charge

2008-06-12T14:57:00.005-04:00

Are you invested in DSC mutual funds? Remember, with DSC funds, commissions aren't charged up-front, but rather redemption fees are inflicted when the client leaves anywhere from o to 6 years after investing in the fund. The earlier you leave, the higher percentage in fees. Is it possible to get out without paying such redemption fees? Yes...

10% rule: Most mutual fund companies allow clients to redeem 10% of their holdings each year in a DSC fund or transfer amount into front-end load funds in the same family. This is a viable option, and it serves as beneficial to the advisor as their trailer fee (a fee they receive from the fund company for keeping their client invested with them) doubles for this portion of the portfolio.
Another means of getting out of a fund is to switch into another fund in the same family. As the DSC clock goes on for 6 or 7 years (the period of which you'll be charged for leaving), make sure they don't reset the clock to zero. This is usually not a problem.

For both these approaches, there is no uniform method that mutual fund firms use. Please read their simplified prospectus for how they approach these rules.

Some clients, who are unaware of the downsides of the DSC, show a great deal of frustration with their advisor for subjecting them unnecessarily to such a compensation method. They....maybe, led to believe....that they are stuck, not just in the fund family, but with the advisor that entered them into such a model. This isn't the case, as the client can switch advisors.

This won't be as beneficial to the advisor accepting the portfolio, assuming there's no attempt to sell you out of DSC funds. With significantly lower trailer fees, they'll be taking a client with little compensation in the beginning. I think that speaks volumes for the advisor, who, by accepting the account, are counting on a long-term relationship. Respect, in my books. However, a client should be careful if a new advisor's suggestion is to sell everything and pay these redemption fees, especially if you haven't been invested in the DSC fund for long. This will more likely benefit the advisor than the client. Be skeptical of such a suggestion.

David Vs. the Deferred Sales Charge....

2008-06-08T23:42:00.006-04:00

A deferred sales charge, or rear-end load fund, is a manner of investing in a mutual fund with a transaction-based (or commission-based) advisor in which there is no upfront fees charged but rather fees are charged when leaving the fund. The earlier you leave, the higher percentage that must be paid in redemption fees. "All your money goes to work for you," a financial advisor will say to make this compensation method more appealing.

It is my belief that there are very rare circumstances where it is the optimum fee choice for clients. In fact, I'll go even further and say that it is one of the most commonly abused tools in the retail investment industry. When qualifying advisors for Onus, their manner of approaching this compensation structure is a factor used to judge their practice. Forget recommending it, if they are presenting it as a viable alternative to the front-end load, when, many times, it is clearly not.... It simply is not good financial advice. With the exception of some extenuating circumstances (such as a problem with compulsive gambling or spending), it is not necessary for you to commit your money into an investment for as long as 7 years.

Due to its high upfront fee paid to the advisor from the fund company (as high as 5% for an equity fund), the advisor is being compensated far in advance for a service that hasn't been fully completed yet [funnily enough, the investment industry acknowledges this with trailer fees being cut by half]. It can create an atmosphere for negligence as they have been paid a strong chunk of their fees and penalties inflicted for leaving a fund family is more than enough incentive to get the client to stay. Thus allowing trailer fees to collect for the broker.

As our society gets increasingly more knowledgeable, the Deferred Sales Charge on mutual funds is being used less frequently. Ten years ago, it was a mainstream option used by a great many advisors. Today, to use it extensively does not exactly garner widespread respect.

Is education really education?

2008-06-04T19:38:00.010-04:00

When a tree falls in the forest, does it make a sound? With the sensibilities of that question in mind, I ask you: When an individual receives an education, but does not apply it, is it still an education? While the answers to both those questions are a seemingly obvious 'yes,' a credible point can still be made from them.

I discovered an advisor the other day, who had earned the majestic CFA. The Chartered Financial Analyst designation exemplifies a mastery of investment analysis. It brings instant credibility and respect to the holders' ability to analyze stocks and bonds competently. It is a staple for every analyst...or aspiring analyst....as well as hedge and mutual fund managers.

The CFA requires three exams and several years of experience. You don't simply wake up one morning and decide to write a CFA exam. Anyway, I was a little puzzled when this advisor invested his clients exclusively in wrap accounts, a means of empowering a third party to manage an investor's portfolio for a flat quarterly or annual fee. Essentially, it puts the entire portfolio on auto pilot, so the advisor can focus on other dynamics of their clients portfolio (like their clients' financial plan or tax savings, for example).....Well, this is the justified rationale. However, the truth of the matter is that it could just open up time for them to go recruiting other clients or, for that matter, just relax and enjoy life.

The point is that this method of investing removes portfolio management, asset allocation and, more significantly, investment analysis from the advisor's responsibilities, which are very possibly attributes a prospective client looks for in a financial advisor. This CFA he worked so hard to earn is simply there to more adequately sell himself to the client....it seems. A client will obviously be dazzled by an advisor, who holds the same qualifications as a hedge fund manager or investment analyst. After being left wide-eyed at the possibility of some one-on-one analysis of their investments, the client is being put into investment products that are available to a great many advisors. The advisor's CFA education is not being applied.

A pity, in my opinion. What is the point of an education? To apply what you learn, hopefully. To able society to somehow benefit from it. As it should, the CFA does aid this advisor in attracting clients. Unfortunately, in this case, it's not aiding his clients.

The finer things in life

2008-06-02T00:23:00.002-04:00

An exhausting weekend!

Saturday marked the 30th wedding anniversary of my Uncle and Aunt, and their kids put together one of the most incredible surprise parties that I think I will ever witness. Not that this has anything to do with this blog or Onus, but it really reinforces the importance of family and friends. When you see such displays of affection, it makes you realize that, among other things, the existence of an Investment Policy Statement or a full financial plan in your relationship with your financial advisor isn't everything.

It sure does help, though.

Blog Entries of Fame (Week of May 12-19)

2008-05-20T13:33:00.005-04:00

Some of the more captivating blog entries to hit my blogosphere radar last week are:

1) 'Thicken My Wallet' writes of how, with oil prices skyrocketing, wind energy is the next big thing.

http://www.thickenmywallet.com/

2) Our man on the 'Million Dollar Journey' tells of his experience with the Nortel's litigation settlement on the class action lawsuit put forth by some of its shareholders.

http://www.milliondollarjourney.com/

3) Freakonomics author and New York Times blogger, Steven D. Levitt, presents the argument of two University of Chicago economists, Christian Broda and John Romalis, that, contrary to popular belief, inequality has not grown very much over the last decade. Explaining globalization has lowered costs of goods consumed by the poor and middle class, while bought by the rich have gone higher.

http://freakonomics.blogs.nytimes.com/

Hope everyone had a great Victoria Day!

Steadyhand coming to Toronto

2008-05-14T09:06:00.024-04:00

When Phillips, Hager & North was bought out by RBC in late February, their diehard supporters and some industry pundits were speculating the death of an era. Forgoing marketing expenses and requiring a higher than usual minimum investment requirement, they practically invented the no-load industry in Canada. When mutual fund fees were deregulated in the early 1980s, PH&N didn't touch their mutual fund fees, while most mutual fund firms raised theirs. Considered mavericks by some, they commanded a fierce loyalty.

In the same month as the RBC/PH&N deal (February), Steadyhand Investment Funds was celebrating its first year anniversary of filing their prospectus. President and CEO, Tom Bradley, spent 14 years at PH&N eventually taking the top job. Steadyhand is his very own project, and I'm eager to see the results. As a new entrant to an incredibly saturated industry, I am keenly following their progress. Their size is small, which makes their possibilities endless. However, it also means the jury is still out on them. Furthermore, they are (I believe, anyway....correct me somebody) the only mutual fund firm with a blog!

There are a slew of differences between PH&N and Steadyhand, which I'll get into in another blog entry. The question, though, isn't in the differences.... but the potential of a key similarity: Can they win a loyal following close to that of PH&N?

Tom Bradley will be hosting a lunch next Tuesday, May 21 at the Intercontinental for his small cap manager, Wil Wutherich. Check back for a review of the event and my thoughts on Steadyhand.

To RSVP:
Email: info@steadyhand.com
Phone: 1-888-888-3147

Blog Entries of Fame (Week of May 5-11)

2008-05-12T10:05:00.008-04:00

Some of the more captivating blog entries to hit my blogosphere radar last week are:

1) Juggling Dynamite author, Danielle Park, delivers Fitzgerald-like prose in a feature entitled "All in this together." A money manager, who can write, will definitely be one to remember. Best opening line for a blog that I can remember: "Reality is always evolving but we humans are reactionary, backward looking creatures. Perhaps to cope with the stress of change, we commonly exert mental gymnastics to justify and bootstrap the status quo." Keep reading.... http://www.jugglingdynamite.com/blog/_archives/2008/5/7/3679755.html

2) The Globe and Mail came out with their "Best of the Blogs." A top-5 ranking of the top investment blogs ranked by our favorite writers at the Globe and Mail. In case our fans are wondering, we didn't get a mention. One day, Horatio. One day.
www.reportonbusiness.com/

3) Steadyhand's Tom Bradley answers a common question which will soon be asked by baby boomers: What advice do you have for retired people who do not have a 20-year time horizon?
http://tom.steadyhand.com/default.asp?item=2200561

Why aren't returns posted on your financial statements?

2008-05-08T19:20:00.003-04:00

In his Thursday blog entry, Dan Richards spoke of clients wanting to get a "...an easily comprehensible reading on how they've done over the past year and since they began working with their advisor." The President of Strategic Imperatives, a consulting firm that works on marketing strategies for financial advisors, was describing the public's increasing consciousness of needing to be accurately updated of their returns every year as a means to assess their portfolio's performance. I, genuinely, hope this is the case. Intuitively, people that don't have relationships with a full-service brokerage might believe this would just go without saying. Why wouldn't a client's returns be posted on their financial statements?

Contrary to Richards, my personal experiences have shown that the public generally is quite ignorant that their returns aren't published, generally accepting approximate numbers given to them by their advisors. Even if the lack of information is regarded with healthy disdain, it is accepted with a strained reservation that we have no choice but to follow the status quo.

By Mr. Richards so eloquently pointing this out as a concern for clients, it will help advisors begin to take heed. Well...the ones that follow him anyway, which are some of the better ones....or aspire to be better (you get the point). Therefore, I appreciate his insight and the blog post.

How much an issue this is to clients is tough to say. Posting returns and other performance measurement statistics on clients' statements was a suggestion put forth in the Fair Dealing Model, a report put out by a committtee of the OSC a few years ago. The conclusion of the report were suggestions and never really gained much traction. Warren MacKenzie, President of Second Opinion Investor Services, and other fee-only advisors founded a petition at http://www.showmethereturn.com/ in order to illustrate to the good people at the OSC the importance the general public places in having this sort of transparency. When I talked to Warren a couple months ago, this petition had only collected a couple thousand signatures. I, myself, rose at the Investors' Forum this past October and asked David Wilson (President of the OSC) and Susan Wolburgh Jenah (President of the Investment Dealers' Association) why it wasn't mandatory for firms to publish their clients' returns on their statements, while at the same time drawing attention to this particular petition. Their respons was that it was too cumbersome a process to actually implement, and they had bigger things on their mind. It's hard to argue they don't have bigger problems. However, the only logical response is for us, at the grassroots level, to hold financial advisors accountable for displaying such a level of transparency. If it's a mainstream expectatation, financial advisors will have no choice but to yield to the demands of their client base.....Or risk losing a great client. As Richards described it, doing this will allow a financial advisor to be "competitive." Obviously, he, too, is aware of how saturated this industry is.

Read the blog (http://www.strategicimperatives.ca/blog/?p=56). Put in a request to your advisor to implement some sort of portfolio tracking template. It'll help immensely with reaching your personal finance goals. You deserve it.

It's okay that Certified Financial Planners don't always give full financial plans?

2008-05-05T19:30:00.014-04:00

The Investment Executive, Canada's newspaper for financial advisors, published interesting results completed recently for the Financial Planners Standards Council. The Financial Planners Standards Council administer and enforce the ethical standards of the Certified Financial Planner designation. I thought I'd share some of the results (my commentary is in italics below):

Of those surveyed:

70% have used a financial planner
Less than 10% used the services beyond investments that a planner can provide (ie estate planning, insurance, tax advice, etc.), although a majority of them are aware that these services exist.
In 2006, 59% of CFPs provide financial planning to over half of their clients, which was a drop from 71% in 2004.
97% of CFPs do full financial plans for at least some of their clients, while only 40% do so for "most"(that number was 13% higher four years ago).

The conclusions presented today by Cary List, president and CEO of the FPSC, at the annual conference for the Canadian Institute of Financial Planners (CIFPs):

Financial planners are still in the sales profession, as far as people are concerned. Furthermore, comprehensive financial planning is not so much a priority of the Canadian public, and it's the perceived lack of need [not lack of trust] that is the reason for this. Therefore, there has been a significant downward trend in CFPs administering financial plans to their client base.

The article actually presented 8% as the percentage of those surveyed that don't pursue comprehensive financial planning due to a lack of trust. Instead, it has been concluded that it is the "perceived" lack of need that clients don't get this service done for them. The question I feel that should have been broached at the conference is what can be done to change this.

Obviously, comprehensive financial planning is far better than hiring somebody to just sell investments. Are CFPs doing enough to present the full package? Intuitively, you go to a doctor, and they set the dynamics of the check-up. You go to a lawyer, and they give you their take of how your case should be pursued. It just seems natural to me that you go to a CERTIFIED Financial Planner, and you'll just be provided with a full financial plan. If for no other reason, then because it's the service. It's the profession and the professional that should dictate the standards, not an 'out-of-the-loop' public. Is it wrong to believe that it's up to the Certified Financial Planner to set the pace for their service? Who is it to correct this perceived "lack of need?"

"Maybe that's not such an awful thing," List concludes, as people have come to respect the CFP for other reasons.

The article, itself, ends with "...so List suggests perhaps it's 'okay' that CFPs are not planning as much." Now, this wasn't a direct quote of Cary List, but the author's interpretation of his remarks. That being said, quite frankly, I am a little concerned that Mr. List didn't present this as a problem, commenting instead "Can we do something to reverse this trend or do we want to? Do we care?" and "...is this a trend that we just have to live with? Perhaps, maybe to some extent." I would, intuitively, think that he should believe that 100% of CFPs should be providing "full financial planning" and not be relegated to a role of just selling investments.

It is the standard that I've held the CFP to. As Onus Consulting Group has been indexing the advisor community and filtering out ones according to our stringent standards, it does disconcert me as we have held advisors with a CFP designation with a higher regard. This has a great deal to do with the great work of the Financial Planners Standards Council. To hear Mr. List speak in such a manner, I am a little concerned.

I always felt if I heard such statistics being concluded in a survey, I'd be hearing this remark from the President of the FPSC, but here it is coming out of my fingertips:

A downward trend in financial plans for the clients of CFPs? I think we can fix that.

Source: Ray, Regan. "Financial Planners caught in a Catch-22." Investment Executive 5 May 2008: http://www.investmentexecutive.com/

An example of advisor malfeasance (The importance of OBSI)

2008-04-30T14:01:00.004-04:00

As far as coming to my attention, this story broke on http://www.wheredoesallmymoneygo.com/. The story was originally broadcast on CTV W-5.

http://watch.ctv.ca/news/w-five/going-for-broke/#clip48969

It's heart-wrenching, and you must watch it. Stories like this inspired Onus Consulting Group. It tells the story of a hard-working dairy farmer and his wife, who had their account churned by an investment advisor at a reputable firm from $217,000 to $1800. Besides covering the grave injustice that occurred, the story goes on to cover the farmer's inability to receive restitution from the Investment Dealers' Association, the self-regulatory organization that oversees full-service financial advisors. The segment's lambasting of an adequate means to seek restitution without mentioning the Ombudsman for Banking Services and Investments is where I take issue. The journalist claims at the end of her segment that the best way to seek restitution is to take it to court, which I disagree with....at least initially. Please read.

For a straight-forward tutorial on how to assess churning, see page 14 of our Investor Awareness Kit available on the top left of the page.

A part of my comment, which had its debut on wheredoesallmymoneygo.com:

The one thing I didn't like about the segment is the lack of respect toward OBSI (Ombudsman for Banking Services and Investments) in resolving the matter. OBSI is a private organization, so unlike the IDA and MFDA, they're are not financed by its members. IDA and MFDA are more concerned with policing (and yes, the jury is out on how effective they are) brokers. Restitution, simply, is not their concern.

OBSI, on the other hand, is totally independant. The services are free, and the clients can take legal action if they don't find the judgment satisfactory. While it is true that their judgements aren't binding, their decisions are agreed to by both parties almost all the time. Furthermore, while they cannot order restitution over $350,000, many clients, including the exploited dairy farmer, can really get some justice.

If a client feels that their advisor has commited some sort of malfeasance on their account, file a complaint with OBSI. The news segment really should have stressed this! Unfortunately, it was only briefly mentioned by the anchor after the segment. The journalist covering the story didn't even mention them.

File a complaint with the IDA (or MFDA, if you're dealing with a mutal fund dealer), as well....however, just so the advisor can be disciplined. Don't count on them for restitution.

Rebutting the downsides of fee-based advice

2008-04-28T20:11:00.007-04:00

There were a couple articles last week by Canada's two power personal finance columnists, the National Post's Jonathan Chevreau and the Globe and Mail's Rob Carrick, pointing out the drawbacks of fee-based accounts. Quite simply, a fee-based account is a method in which full-service financial advisors compensate themselves by charging their fees as a percentage of their client's portfolio size.

If you've been a regular reader of my blogs [and I know there are just millions of you out there], you would know that I have been a fan of advisors who use fee-based in their practice. The transparency it brings to the client-broker relationship is unrivalled. John DeGoey, in his book The Professional Financial Advisor II, believes financial advisors embracing this compensation method illustrates one of the most important steps to bringing a sense of professionalism to the industry. It's hard to deny such a move would remove the conflict of interest that a revenue-driven, transaction-based approach employs, as the advisor is no longer being compensated by each trade or mutual fund switch.

The Drawbacks (the following information is also provided in my Investor Awareness Kit, which can be downloaded by clicking on the link on the top-left corner):

1) A buy-and-hold method with a few trades doesn't justify having to pay a fee based on the percentage of your assets.

Thoughts: A fair point. Detractors of this method do point out that the incentive for the advisor to pursue future investment opportunities is severely undermined if they're already paid upfront. However, I believe that the client will be in touch with this anomaly, if there is one. They'll know exactly what they're paying each year, and they'll know what they're getting in return. An observant comment to Carrick's column written by a financial advisor spoke of the great lengths that they go through. It's not just putting trades through, but also working on the insurance, tax and estate planning. It's the time spent servicing the Investment Policy Statement or updating the financial plan.

Regardless, if there is value or not, the client will know how much they are paying, and it will be far easier to make a qualified decision whether or not the advisor is worth their compensation, as they can put an actual dollar value to their financial advice.

2) For advisors to bias toward securities with embedded fees (most notoriously, new issues) once their clients are placed in fee-based accounts.

Thoughts: Okay, this observation has a great deal of merit, and it's something that should be kept in mind. When a brokerage firm acts as the principal in a transaction (they own the investment product being sold and are not acting as the agent between their client and another party), there are always embedded fees involved paid out to the brokerage. New issues, for example, carry a 3%-5% commission to the broker. Limited partnerships and flow-through shares make up some of the 'sexier' products out there and advisors know how to pitch these in a manner to make their clients salivate. By recommending these products, they are giving themselves quite the raise from the fee they are already collecting from the client.

This is a problem, but it shouldn't be a factor to completely do away with fee-based advice. I've been excited to see brokerage firms broach this issue dead on with them not passing the 'embedded fee' comission to the advisor. While this isn't mainstream yet, several brokerages firm have initiatives in place, and it definitely is a start. We can do our part by educating the client and holding advisors that do commit such reckless behaviour accountable for their actions.

With 10.7% of the full-service financial advisor community using this method, I still feel there is a long way to go in making this the more mainsteam compensation method. It is not to say that transaction-based (being when an investment is bought or sold) should be completely done away with, especially for large portfolios with few trades, but I do disagree with Carrick when he entitles his article, "Fee-based accounts sounds good, but they're just as open to abuse." There simply is many more methods an advisor can employ to take advantage of a transaction-based portfolio.

I agree with DeGoey that fee-based will make financial advisors stronger professionals. The public doesn't need salesmen when it comes to their investments.

The take of SqueezePlay's Kevin O'Leary on the fate of retail investors of ABCP

2008-04-22T19:55:00.007-04:00

"Maybe Granny will actually ask her broker next time (the person puts her into a piece of paper) what it is she's buying. Maybe you need these lessons occasionally to cleanse the markets....to scrape the plaque off the veins that make the financial system run."

So says Kevin O'Leary on April 22, 2008, as he makes the case for retail investors not getting back the par value of their asset-backed commercial paper (ABCP) suggesting instead that the value should be what the market dictates. I was complete shocked at the opinion put forth by the SqueezePlay anchor. The man, who shot to mainstream fame in Canada on CBC's the Dragons' Den, has the idea that retail investors should hold themselves responsible for not doing enough due diligence. I'd like to present is a Canaccord advisor's e-mail to his or her client suggesting ABCP:

We have been able to secure a block of AAA 1 year money market paper yielding 4.80 to our clients. This paper offers the following:
- Liquidity: You can sell the Planet Trust at anytime before maturity. GICs are non-redeemable.
- Protection of the capital: The rating of the Planet Trust is AAA credit. GICs are only ensured [yes, the broker misspelled it...it's "insured"] up to $100000.

This e-mail was taken from none other than SqueezePlay. Tell me, Kevin...Is it really possible for retail investors to do further due diligence being pitched of the merits of an investment in such a manner? Especially, when Canadians rely on their financial advisors as being their source to the happenings in the investment industry. Here they are being pitched an investment product as a substitute to a GIC. Until the offer to match par by Canaccord, which was recently matched by Credential Securities (the other party in this debacle), these investors were risking losing everything with no liquidity. Market pundits were putting the value of this paper at twenty cents to the dollar no more than a few months ago (now, it's looking more like sixty apparently). Imagine....close your eyes, Kevin....losing 80% or 40% or whatever '%' of your investment on something that was recommended to you as liquid (which it currently isn't) and as a substitute to a GIC? Uncanny.

It is absolutely shocking that the man seeing what he has seen would have such an opinion. You can't argue that he made this argument out of ignorance. You can't argue that he made this argument out of a lack of competence. What are we left with? This attitude will destroy the profession of finacial advice. Advisors should be trusted to make suggestions given their clients' needs. This is the reason full-service financial advisors are recruited in the first place. Having to second-guess constantly and to take out of this "don't trust anything that's being recommended to you," will seriously undermine the profession. This paper had a high credit rating and was exempt from prospectus disclosure, so even due diligence wouldn't have saved them. Wouldn't it be more powerful to give the players involved a sense of accountability over what has been done? Penalties? Fines? Lawsuits? Wait, lawsuits are looking very unlikely, as it is a condition for the retail clients to get their money back.

With the vote on the proposed plan of investors being bought out at 100 cents to the dollar being held this week, it is widely expected (indicated by proxies coming in) that retail investors will accept the offer. Of course, they should, but, as stated, they will give up their right to pursue legal action. Not exactly a great thing, as it won't help the players develop a sense of accountability. This is where the problem lies.

I do want to give credit to Mr. O'Leary...His imagery of paralleling "plaque" to retail investors being sandbagged is incredibly poetic. Rudyard Kipling couldn't have done a better job.

Sources: SqueezePlay [BNN], Globe and Mail "ABCP ruling to come Thursday"

A child's reason for becoming a financial advisor

2008-04-18T20:01:00.009-04:00

An ad campaign I saw today on the TTC features young kids with epilepsy revealing their aspirations.

Child #1
Aspiration: Construction worker
"Because I like to build."

Child #2
Aspiration: Chef
"Because food makes people happy."

Child #3
Aspiration: Dentist
"Because smiles are important."

Child #4
Aspiration: Stockbroker
"Because fast cars are cool."

It's funny how the child who wants to be a stockbroker wants to be one due to the expectation of a posh lifestyle. Not to make the world a better place, unfortunately. On the other hand, the other children's ambitions are rooted for constructive reasons...the betterment of society. The young man's stereotype of the profession is common, and I genuinely hope he will drive that fast car.

Dare I believe that a similar child even a decade from now will want to be a financial advisor [yes, he won't use the term stockbroker] to "help people reach their financial goals in life." We could simplify it, but you get the drift.

It'll happen. Of course, I think so.

Onus Consulting Group's inaugural mention on the blogosphere

2008-04-16T16:25:00.002-04:00

Check out our first mention on the great blogosphere on the "Relative Benchmarks and Absolute Benchmarks" entry at http://www.wheredoesallmymoneygo.com/. The blog is an informative Canadian personal finance blog run by Scotia McLeod Investment Executive, Preet Banerjee, dubbed a member of a "new breed of finacial advisor" by the National Post's Jonathan Chevreau and the author of "RRSPs: The Definitive Book on Registered Retirement Savings Plans."

Asset-backed commercial paper tutorial

2008-04-10T18:41:00.000-04:00

Diagrams and everything...David Harper and the great people at Bionic Turtle do a good job of explaining asset-backed commerical paper. Take 5 minutes.

Note: Keep in mind, these trade receivables, which he speaks of, extends to credit card and mortage debt (David speaks in a more broader manner of companies, in general, being owed money by its customers).

Purpose: The whole point of them is to convert money owed to an entity into cash more quickly.

Canaccord finally comes through...Will their clients forgive them?

2008-04-09T10:22:00.000-04:00

Today, it was announced that Canaccord will be buying back asset based commercial paper (ABCP) from their retail investors at par. Groundbreaking....Some are saying it's about time they made a move, but quite frankly, I'm surprised they didn't wait until they were closer to the Purdy Crawford Committee restructuring proposal. It is the retail investors that are going to control the vote on restructuring that will be happening, as they make up the vast majority of those holding the ABCP. Of the 2000 retail clients, most of them are from Canaccord (1430 of them).

More on the Canaccord Relief Program and ABCPs, which have been a crux in the Canadian capital markets, later.

Bringing trailer fees to ETFs

2008-04-06T21:06:00.000-04:00

Not to long ago, I was watching an interview of Som Seif, CEO of Claymore Investments, on Jonathan Chevrau's http://www.wealthyboomer.ca/. Myself...I have a great respect for the passive management approach (taking advantage of ETFs and index funds), and Claymore is one of the very few players in the industry (the other being Barclays iShares and Horizon Beta Pro). Claymore has blossomed in an arena where both TD and StateStreet have entered and dropped out.

The argument of passive vs. active management isn't one to be made for this blog entry, and it, unfortunately, hasn't really reached a fevered pitch within the broader retail investment industry. Regardless of this, the emergence of ETFs, in the last few years, has been an incredible feat. It has been remarkable to witness the amount of advisors themselves approaching their clients with the notion to access these funds, although it means having to visit the fee-based model with no trailer fees. It served as a reminder that there are a good many advisors out there that want the best for their clients (STANDUP advisors as my virtual mentor, John De Goey, calls them).

However, recently, Claymore added an Advisor-Class ETF where trailer fees(embedded compensation) will be paid out to financial advisors. This is something that hasn't been done in the past and, as Seif conceded, the SEC doesn't allow Claymore to do such a thing in the United States. Is this useful? It will definitely get more advisors aboard getting their clients to recommend ETFs. Since this innovation, the only optimum choice a financial advisor had in getting their clients into ETFs was adopting a fee-based compensation structure. This method of charging their clients upfront as a percentage of their portfolio greatly enhanced the transparency between the client and his or her broker. Intuitively, I believed that the rise of ETFs and index funds would have proved an excellent vehicle to making fee-based compensation more mainstream.

This changed with Claymore's recent move. "The benefit of the dot A is it allows advisors to now use them across their books, but, more importantly, it allows them to have the conversation about the ETFs to move their clients to a fee-based platform," Seif told Chevreau. Honestly, does he really believe that? If the advisor has an embedded fee option, it sort of avoids having to have that conversation about the benefits of fee-based compensation. Clients have been programmed for so long to not having to look at certain fees that it really is a challenge for advisors getting them to see the benefits.

Will the other ETF firms follow suit? I hope not. Barclays iShares has done something more in line with the Onus ideology and that's simply to educate. Their recent ad campaign points out problems in the client-broker relationship and the broader retail investment industry, including my favorite: "Canada has the highest MERs in the developed world. Should your clients care?"

All this being said, Seif's reasoning is that ETFs are great products, and if clients are being steered away from them because of a lack of trailer fees, then something should be done about it. It must be mentioned that I, admittedly, have a genuine respect for Som Seif. A respect that extends outside the retail investment industry. Seif accomplished the feat of setting up Claymore Investments all the while coaching the U of T water polo team to a championship season (his third one in fours years). He admitted doing it at the expense of having to cut some of the team's more promising players because he didn't want to jeopardize the team chemistry. A risk-taker. A great coach. A genuine leader in my books.

However, in this case, I feel he's leading the wrong way.

It's time to have that talk

2008-03-29T10:43:00.000-04:00

"You have the same deterioration of credit standards, the same securitization of debt, the same leveraging, the same inability of people to pay. People are using credit cards as their cushion. We're set up for a consumer credit-card debt crisis if we do nothing."
-- Austan Goolsbee, Obama Chief Economic Advisor

The man, who shot to fame as the Obama insider who described his campaign's NAFTA stance as politicking rhetoric, is really on to something. With all this talk of sub-prime mortgages, debt of all kinds is finally emerging as a relevant economic issue. As much as it has always been present in discourse, there really has been no sense of urgency as it truly has become a part of our culture. As analysts, journalists and pundits alike, stress about the mistake made by granting such high risk loans to homeowners, I wonder why the issue of the credit card debt hasn't become a more prevalent concern. Considering, a credit card is granted far more indiscriminantly than a mortgage and the interest rate charged is significantly higher.

The Federal Reserve says Americans have built almost $1 trillion in "revolving credit." A customer known as a "revolver" is an individual that holds debt and doesn't pay it off each month. Edward Yingling, President of the American Bankers' Association, has referred to this as the "sweet spot" of the industry.

The habit of recklessly spending without being in touch if it can be afforded has quickly become a part of our culture in our ever-so materialistic society. Perhaps holding a postive correlation to the credit card companys' voracious marketing campaigns. Every individuals seemingly is inundated with material enticing them to get a new credit card. Zero percent for the first 6 months? Sound familiar? It goes on and on. The key is seeing what comes after these low introductory rates. Andrew Kahr, a credit card industry consultant, credited with introducing the 0% introductory rate and a lower minimum monthly payment, acknowledges that his reasoning for suggesting both these ideas to his client was to allow the customers to be able to take on more debt. Before his idea, credit card companies expected 5% of the principal owed to them paid back to them each year. He recommended that be cut to 2%. If the client just pays their minimum monthly payment each month, it'll take them years upon years to pay off.

What has been made clear by experts is that the true success of credit card companies comes in their ability to maintain their debt, which inflicts heavy interest charges. Shockingly (or rather, not so shockingly), twenty-eight percent of Canadians don't even know what interest rate they are paying on their credit cards. Folks, make sure you know.

Shaky Ground

2008-03-17T20:03:00.000-04:00

Shaky Ground
Cartoon by Sage Stossel of The Atlantic Monthly (www.theatlantic.com)

Death of a Legacy...

2008-03-14T00:52:00.001-04:00

Jim Cramer, Eliot Spitzer and Slate.com's Cliff Sloan [Classmates at Harvard Law School]
From one of my oldest friends....this picture, and the line, "Simpler Times."

The e-mail that was there to greet me when I opened my inbox this afternoon didn't exactly get me thinking of the Spitzer scandal. The scandal had been dominating my free thoughts for the last few days.

As news of Eliot Spitzer's penchant for prostitutes broke, my response was absolute disbelief. The man, whose political career was based on ethics and morals, was a genuine do-gooder. Genuinely, he wanted to make a difference. I will say that now, as pundits and rivals say otherwise. They say he was arrogant. They say he was reckless. They say he destroyed reputations. Yes, hard to deny, they say he is a hypocrite. Now that they have opportunity, they've been saying a lot of things.

Most significantly as they say his crusade was for political gain, I say his moves against the Wall Street establishment were taken at great risk with no guarantee of anything. This is best exemplified when, in 2002, he made a case to go after the conflict of interest in investment banking research, his press conference regarding Merrill Lynch was unable to find no public officials willing to show their faces. Wall Street held power...most directly in campaign contributions...more indirectly in other ways. Yet, he pressed on.

His two-term role as attorney-general of New York brought much success to cleaning up white-collar crime on Wall Street, dealing with issues that had been ignored for years [I debated going into details, but I realize the typical blog reader doesn't have the patience...do the reading...it's been documented]. Briefly, he took on issues, such at excessive executive compensation, market timing and conflicts of interest in investment banking research, which the New York Attorney General's Office had never touched. These responsibilities were left [or, for that matter, not left] to federal jurisdiction. A single man working in an unproven office hardly guaranteed political gain. As there was no precedent for his actions, the chances of falling were quite likely.

After everything is said and done, he won't be remembered for successes as Attorney General, nor for his call to reform in the Governor's office, which may or may not have been a success. The sad thing is we will never know. Not to justify his actions for they are unjustifiable. I wonder, though, if it was anybody else.............

Canada needs an Eliot Spitzer.

'Obama' Consulting Group?

2008-03-07T14:46:00.000-05:00

"I'm asking you to believe. Not just in my ability to bring about real change in Washington...I'm asking you to believe in yours." -- Barack Obama

Although this entry isn't to be taken as an endorsement of Senator Barack Obama, I am very much in love with the way he has conducted his campaign. His process-oriented approach has focussed on the way politics is being done in Washington. Yes, he speaks of policy, and he has a solid stance on the issues. However, it's not the issues that have gotten people in the very grass-roots level involved. Potential voters, in the past, that have been apathetic are being made passionate. Amazing, really.

Due in large part to this, I've taken a great deal of inspiration watching this political figure run his campaign. Why? I feel this boutique consulting firm [Onus] is taking baby steps to doing just that by 'campaigning' the way business is done in the retail investment industry. By staying away from the actual investment advice side of the business and focussing directly on the client-broker relationship (at times, for example, a buy-at-all costs approach), it's possible to get people involved and conscious at the grassroots level. Embedded fees? Fee-based vs. commission-based? Advisor accountability? Extra! Extra! Read all about it....This consciousness is improving the quality of financial advice without actually giving any. The more a client knows entering a relationship, the healthier that relationship will be.

The success of Obama reminds me that this attitude can make a difference.

To have a voice to aid bringing transparency to the retail investment industry (leaving the investing to the brokerages) and examing the client-broker relationship....Can we help in being successful? Can we help in bringing about real change in Bay Street's retail investment industry?

Time will only tell. Even Obama has a long way to go.

Momentum everywhere

2008-03-07T00:28:00.000-05:00

Watching the battle for the democratic nomination in the United States unfold, one can't help but be captivated. The 'process-oriented' approach of Barack Obama vs. the 'tested and true' policy approach of Hillary Clinton is incredibly compelling. Watching the shifts in momentum as the campaigns progress, I can't help but be reminded of this market volatility that we're experiencing. In the beginning, it was Clinton as the odds-on favorite. Then, Obama won Iowa, and then the momentum shifted in his favour capped by 11 straight wins. This all changed this past Tuesday when Clinton snapped back with wins in Ohio, Rhode Island and Texas. With a great chance of capturing the superdelegates due to the deep Clintonian roots within the party, it's back to Clinton.

A parallel can be drawn between Clinton and Obama versus the bull and bear markets. Watch the index explode upwards, analysts and economists are speaking of the market's resiliency. A slowdown, sure...but no recession. Watch sharp drops in the index, and we're talking of the disaster of the sub-prime mess and being embroiled in a US recession. Feel free to designate whether you feel Obama or Clinton is the bull, as there will be a loser in this campaign. Regardless, folks, we are in a bear market, which will show resilience and overcome this sub-prime fiasco....and, yes, it is very likely we will see a Clinton-Obama or an Obama-Clinton Democratic ticket (don't ask me which one).

For you to know...

2008-02-23T23:46:00.000-05:00

Next week, Onus Consulting Group's website is undergoing some minor revisions, which hopefully you guys will love as much as the company does.

Probably the most useful will be the ability for visitors to download the firm's very well-received Investor Awareness Kit. As well, a link will be appearing on the Helpful Tools section on our home page to visit showmethebenchmark.com, which is a site set up by Warren MacKenzie of Second Opinions Investor Services to allow people to compare their investment returns to their benchmark.

Stay tuned.

Blogging blogs....

2008-02-19T23:09:00.000-05:00

Before founding Onus Consulting Group, I maintained a passive interest in blogs. Reading them... but always with a grain of salt. My thoughts were that anybody could set up 'shop' and write about pretty much whatever they wanted. Even then, I admired it as an effective means to collect general sentiment to whatever subject I was reading up on. Blogs, like most great ideas, started quite modestly. In 1999, a college student, Brad Fitzpatrick, wanted his high school chums to keep up with how he was doing and founded LiveJournal. Before this, there was no evidence that the general public was comfortable sharing the personal details of their life or attitudes on certain topics online. The success of this sort of transparency was unprecedented in our increasingly privacy-conscious society.

Now, as the writer of one, there has been a stronger drive to find great blogs that aid the personal finance acumen of Canadians. Talking about my experiences as I encounter them and thoughts, only helps so much [if I do acknowledge so myself]. As the founder of Onus Consulting Group, there is a stronger incentive for me to speak of issues that relate to the services of the firm. At times, this can hinder the multi-dimensional perspective the reader seeks.

What do I suggest? Some of the most efficient and powerful blogs in the blogosphere dealing with personal finance are the ones that are written by journalists. Particularly, consumer advocate, Ellen Roseman, of the Toronto Star (http://www.ellenroseman.com/). This individual has virtually created a legacy for herself by fighting for the rights of individuals who have grievances with companies. Her genuine 'do-gooder' attitude is incredibly refreshing and really resonates with her readers. As I, myself, found myself doing this weekend when friends lamented to me about being cut off an all-you-can-eat sushi dinner, I found myself saying: "Write Ellen Roseman." Her manner of asking questions does a terrific job of engaging her audience. This is, especially, exemplified with the consistently strong number of comments she draws.

The National Post's Jonathan Chrevreau is another great example of a well done personal finance blog (www.wealthyboomer.ca). However, it is for different reasons. Rather than the casual aura of the blogosphere, the dynamic of his blog, entitled the Wealthy Boomer, reads more like an extension of his articles. The content of his material is incredibly useful. Not just to the wealthy boomer. Or any boomer, for that matter. But, for any Canadian looking for insight into the retail investment industry. In that regard, his blog is much more focussed than that of Ellen, who will write about a host of topics. Additionally, his video blog features interviews with some of the notable players in financial services. Its presence drew my envy, as he has made a remarkable use of this medium.

In conclusion, it is refreshing to see newspapers give their journalists discretion over what to write about....a quality I find is rare to be commended. This is not to say that the average joe talking of their experiences or the founder of a company talking of issues that relate to the services of his or her firm will not be useful to you. It just must be noted that adding blogs by able journalists, such as the two featured, to your blog reading can represent a very successful upgrade of your personal finance knowledge.

'Z'

What's the damage?... Wait, don't want to know!

2008-02-12T23:12:00.001-05:00

Late last week, I was discussing the state of the retail investment industry with a proud do-it-yourselfer. It was clear from immediately talking to him that he knew more than the average Canadian, and I was quick to commend him for his knowledge and passion. All that being said, he completely devastated me with his next comment:

"It is ridiculous. Some advisors now charge their clients twice: a fee for themselves in addition to the MER."

It must be added this line was said with contempt, although it wasn't particularly relevant to this gentleman, a retiree who very much enjoyed picking stocks for his portfolio. The clients are charged twice but only after significantly reducing the MER to accommodate this charge (these are referred to as F-Class funds). This is done in order to make it clear to the investor how much he or she is paying to their advisor, leaving just the MER, which goes to the fund company, embedded. This method is clearly, I believe, beneficial to the client, which leads me to wonder: How widespread is this belief that this transparent fee serves as an increase in fees to the client?

The term, "unbundling," I first encountered in John DeGoey's book, The Professional Financial Advisor. At full-service brokerage firms, it is referred simply as "fee-based." (*) Basically, it means the financial advisor's embedded compensation is removed and fees are charged to the client in a transparent manner (in brokerage firms, it is as a percentage of clients' total assets). Whether it is recommended or even provided as an option is purely at the discretion of the full-service financial advisor. DeGoey, himself, mused the riskiness of convincing a client to convert to fee-based. I never thought it'd be such a challenge till hearing this comment.

Through the course of Onus's research of Toronto's full-service financial advisors, it is more likely they offer it as an option without recommending it. This conclusion I always found unsatisfactory......unsatisfactory, that is, until I heard this remark.

Investor advocates have been screaming for transparency in the industry. Not because they enjoy screaming mind you, but for the good of Canadians. Finally, on account of such efforts, the industry is moving into such a direction as to allow clients to see how much they are spending on their financial advice as opposed to it remaining hidden. If this is all for naught...

Do clients genuinely feel better not knowing how much in fees they are paying? Is it truly difficult for Canadians to see the value of unbundling? If this is so, do even the most passionate of 'investor advocate' advisors have the guts to recommend this approach?

On the last question...Of course, I believe so.

-------------------------
(*) Fee-only at a full-service brokerage, which is more accurately referred to as 'asset-based,' is not to be confused with authentic fee-based advisors, who charge an hourly or fixed fee. As their pay comes directly from the client, this is where their loyalty is directed. For an example, see http://www.secondopinions.ca/ or http://www.tewealth.com/.

A cumbersome business....

2008-02-08T15:09:00.000-05:00

Still thinking about my thoughts published a couple days ago regarding Ms. Cornell's article, I have to really appreciate her intentions for writing it. Many Canadians don't know where to start when they realize they need financial advice. Knowing whether to use their bank branch, do-it-themselves, or using a fee-based or commission-based advisor has been likened to drawing straws.

While Onus has interviewed a multitude of financial advisors over the course of its existence, we didn't focus on the planners at banks or fee-based advisors. Rather, our energies went into analyzing the different full-service advisors in the brokerage houses. Quite frankly, it was because it was where I personally saw the difference in quality of financial advisors.

At a given brokerage house, there can be great advisors and not-so-great advisors. Every full-service broker has his or her own "book" (the roster of an advisor's clients), which is run pretty much as an independant business. It is important to note that relationship between a broker and brokerage is more of a partnership than an employer-employee relationship. The brokerage provides the analysts, the office, the support staff, and the broker provides the clients. When a commission is charged, the broker get a piece and the brokerage firm get a piece (the percentage of who gets how much is controlled by what's known as the "grid"), which is relative to how much in commissions the advisor charges. The more in revenue brought to the firm, the larger percentage of the commission kept.

What have I found? That, for one, there is a vast range between fees charged. That, this variation in fees doesn't bear a direct relationship to the advisor's competence or attention paid to a client's portfolio. That, all advisors are probably the most likeable, charming people I will ever meet.

And so it continues.....

Test drives sell a car...

2008-02-05T21:45:00.000-05:00

In this past weekend's National Post, Camilla Cornell, in an article entitled Test Driving the Advisors, had the amazing idea of documenting her experiences at 4 different givers of financial advice. Approaching them as an "ignorant" prospective client, she went about exploring the differences in their presentations.

Such a concept is a noble one, but it does little in giving us ample insight into the nuances of each service. To the reader, it appears that each outfit, with the exception of the discount brokerage, offered their version of how the portfolio should be taken care of. However, it is interesting that the full-service advisor recommended an 85%-15% equity-fixed income diversification compared to a 60%-40% suggested by the fee-based advisor. Quite a difference, don't you think? Of course, it could be entirely coincidental that equities pay full-service advisors higher commissions than fixed income. On the other hand, fee-based advisors earn the same amount regardless of the make-up of the portfolio they recommend.

While the intentions were noble, there really didn't seem that big a difference from one advisor to the other. All advisors drew up portfolios based on their best abilities, and all advisors met with their clients once a year. Not much for a reader to deduce one section of the retail investment industry from the other.

As well, it must be noted that Ms. Cornell described the planner at Scotiabank's advice as free, which is inaccurate because, in fact, a fee is charged from the client....the MER, an embedded fee deducted from the clients' returns on the respective mutual fund. The bank is paid by the mutual fund firm through an annual trailer fee that is taken from that MER. That being said, planners at banks aren't compensated through commissions but earn salaries, which are complemented with bonuses based on targets being met. Using a planner does minimize a conflict of interest but also a certain level of proactivity, which was exemplfied when full-service advisor, "John Blythe," followed-up days later with a full-blown portfolio analysis. A new client means more to the full-service advisor than to the planner at a bank.

A great article. Perfect for RRSP season. Check out the link below.

'Z'

How to Choose an Advisor: Test Driving the Advisors
http://www.nationalpost.com/todays_paper/story.html?id=280614

Real estate in Costa Rica anyone?

2008-01-29T22:53:00.000-05:00

With a colourful diagram plush with wonderful white squares, they stood ripe for the picking. Hmmm....I've always wanted a plot of land in Costa Rica. The "OwnCostaRica" booth was one of 56 companies exhibiting and promoting themselves to the Toronto public. These companies could be divided into two groups: i ) brokerages, who wanted you to invest your money through them, or ii) companies that wanted you to invest your money with them.

Initially, shocked to be in a room filled with day-trading tutorials and high-risk investment opportunities, was this the place to be to battle the anticipated turbulent markets ahead?

The Financial Forum comes to Toronto

2008-01-22T20:14:00.000-05:00

Get Ready...Get Set...Go!

As the annual Financial Forum comes to Toronto, we are witnessing a great deal of uncertainly in the global markets. In the wake of rate cuts, both, by the Bank of Canada and the Federal Reserve coupled with Bush's $145 billion stimulus package, a lot remains to be seen if the storm can be weathered.

With booths representing some of the most prestigious firms of the industry, the Financial Forum is a trade show of sorts for Canadians looking to gain insight into financial services, specifically the retail investment industry. It is mostly attended by the passionate do-it-yourselfer. The event also is visited by guests who use or are looking for a financial advisor (approximately 32% estimated by the Financial Forum). As a guest, you'll be drawn by the number of people willing to give you advice on what you should be doing. You'll find that this will coincide with doing business with their respective firm. Listen and take notes. Research. Make a qualified decision, if one is warranted.

I, myself, will be all eyes and ears this year monitoring and mingling with the crowd getting their thoughts as to what they make of the state of the economy. The people, not the firms, represent the pulse of our economic livelihood, and the Financial Forum will house the largest crowd of Canadians, who although professionals in their own fields, remain some of the most sophisticated and knowledgable investors in Toronto.

For complimentary tickets, please visit:
https://www.eiseverywhere.com/ereg/index.php?eventid=1390&reference=&PHPSESSID=1d11c175018a9e4c93a6a04a3f7f30bd

Event starts this Thursday and continues until Saturday (9:30 am to 6 pm).

'Z'

To hear or not to hear....Have you heard from your financial advisor?

2008-01-14T11:49:00.002-05:00

With the credit crisis looming large on people's mind, economists and pundits, alike, are on the verge of screaming recession, if they haven't done so already. While a recession hasn't been officially declared yet, it's long time to wonder how prepared you are for the riskiness ahead....Has your financial advisor called to give you insight to the current state of the financial markets? Assuming you feel you should have heard from your advisor by now, there are several possible reasons you have not.

Of course, not that your financial advisor's attention right now is mandatory. You might be a hands-off investor and not wishing to hear from him or her at this moment. But, for a good many, insight and feedback during these turbulent times is a reason they hired an investment advisor in the first place. The education they can pick off by listening to clear and eloquent explanations will only help them in the future.

If your fiinancial advisor hasn't been quick to touch base, there can be several reasons for this. One, as mentioned, is the fact that the client specifically doesn't want to be bothered. The market goes up. The market goes down. This is pretty much the extent of the picture they want to get. They have enough stress in their daily lives to have to worry about how their portfolio is evolving.

Another reason for not hearing from your financial advisor is that you just are not a top client. It is taught frequently in training programs that a broker should pay 80% of his attention with the top 20% of his book (known to many as the 80-20 rule). Assuming this rule, it appears 80% of retail clients aren't prioritized...that is, if they are successful and doing their job right. Are you the top 20% of your broker's book? Are you a valued client?

A final obvious reason for not hearing from your broker is just a lack of proactiveness. A good many advisors spend a significant amount of time recruiting new clients to their practice. The more clients they have, the more money they make. While being a proactive advisor, will establish goodwill in your relationship, there isn't necessarily a clear cut return on his time. Whereas with recruiting new clients, it will mean added commissions to his practice. Seeing how important recruiting new clients is important to one broker over another.

What a financial advisor should do is try to ascertain how much attention you need as the client. Whether you want to meet quarterly, biannually or annually should be determined well in advance and will bring a greater deal of transparency into the relationship.

Lesson: A section called "Frequency of Contact" should be included in your Investment Policy Statement or Financial Plan. It will do a great deal for your relationship with him or her. The section should answer the following questions:

a) How often are the face-to-face reviews of your portfolio?

b) Will you have phone appointments ever so often? Or will you have to solicit them whenever you may have an inquiry?

c) When you call to make an inquiry, how long do you have to wait until you call is returned? Will your call be returned by your advisor for all your inquiries? What circumstances will your call be delegated to the support staff?

So the year begins....

2008-01-07T23:14:00.000-05:00

George Bailey, I presume?

2007-12-31T07:55:00.000-05:00

Every year I savour the build-up to Christmas, which culminates in CBC's playing of "It's a Wonderful Life" on Christmas Eve. With mass consumption and the feeling of everybody thriving, the story of an idealist, who sacrifices his own personal happiness for the sake of the contentment of others, rouses a feeling that gives hope to humanity. Year after year, with all the family festivities going round, I sit across from the television and watch George Bailey's life unfold. Would such a man exist today?

In the world of capitalism, where success becomes determined by an ability to preserve self-interest, such a scenario could easily be thought of as increasingly unlikely. In fact, I have been told as much. This past year at Onus Consulting Group has me believing that such a man as George Bailey, not only does exist, but his compassion exists to an extent in everyone. As Canadians, we come from different backgrounds and roots...different environments...different stories that have molded us into who we are today. I genuinely believe that all of us acknowledge and pay homage to the trials and tribulations that our forefathers from whatever generation have experienced in getting us to this point. Our support for issues like global warming or peace in the Middle East exemplifies our desire to keep future generations equally as grateful.

In the end of It's A Wonderful Life, it was Bailey's sentiment that he couldn't give his family the best that lead to his contemplation of suicide. That innate desire to give our children, our parents, our loved ones the best exist in all of us. For the more guarded that may be where that compassion ends, but it may be for a lack of opportunity in this 'dog-eat-dog' world than anything else.

With the year ending, I'd like to thank everybody who has helped shape the Onus Consulting Group. Your insight and unwavering support has been a source of great inspiration. It will always be remembered. You know who you are. To help, if you're wondering as you read this, "Could he be talking about me?"...indeed, I am. Your faces flash across my mind, as I bid you, as well as every other Canadian a Merry Christmas and a Happy New Year.

'Z'

"I sleep well at night."

2007-12-11T18:36:00.000-05:00

So answers OSC chairman, David Wilson, in response to the question, "What keeps you awake at night?" Asked in the December 3, 2007 interview in the Toronto Star, the question, seemingly intended to draw the Ontario securities regulator's thoughts regarding the problems of securities regulation in Canada, is met with the same "who me?" innocence that currently braces those responsible for investor protection in Canada.

Last week, the Toronto Star published a series of articles on market regulation. The diagnostic wasn't exactly flattering, to say the least. These series of articles made several observations, none the more compelling than a fact, well-known in the financial services community (not so much to the general public), that 30 separate organizations are involved in Canada's securities regulation. At a recent gathering in Toronto, David Wilson conceded, "In Canada securities fraud is especially challenging. There are more than 30 separate agencies involved. This could charitably be called the Canadian enforcement mosaic."

With more than 30 agencies balancing responsibility, it is easier for those involved to "pass the buck," making Wilson's answer all the more appropriate. Are regulatory failings the responsibility of the OSC [Yes!]? While the answer might seem obvious, with so many groups, it could easily be justified otherwise. Did an investment advisor churn your portfolio into oblivion? Yes, the OSC feels terrible, but please file your complaint with the IDA (Investment Dealers Association)? The IDA will feel terrible, but, for restitution, please log your complaint with the Ombudsman for Banking Services and Investment.

What keeps you awake at night? Perhaps the question would be best posed to the retail investor, who is more likely to be kept awake at night.

To read the articles that inspired this blog, click on the following links:
http://www.thestar.com/article/281879 -- OSC chief takes it all in stride
http://www.thestar.com/article/281645 -- Why the OSC so rarely gets its man

A home run for the do-it-yourself investors of mutual funds! Well, actually, more like a base hit.

2007-12-04T03:22:00.000-05:00

Well, I'll start with the good news. Since July 3, 2007, RBC Direct Investing has been offering D-Series funds to its clients. Hmmmm...What does this mean exactly?

Investing in a mutual fund includes a trailer fee (ranging from 0.5% to 1.0%) paid to the brokerage, which is charged annually out of the fund's MER. As the fee is embedded, the client doesn't actually see it being charged (it comes out of the returns which are posted after these fees are deducted). The rationale behind this trailer fee is to pay the advisor for ongoing services rendered to the client. In the case of the client of a discount brokerage (a do-it-yourself investor), this fee has always applied regardless of the fact they don't use a financial advisor to pick their fund or, for that matter, an advisor to provide ongoing support and feedback.

These new D-series funds take into account the injustice of a do-it-yourselfer having to pay the same fees as somebody using a full-service advisor. With the condition of you being able to invest a minimum of $10,000 in the fund, these funds come with significantly lower MERs enabling these funds to outperform the other series of funds with the same money managers and portfolios. The concept of RBC D-Series funds is similar to the arrangement already in place by TD Asset Management, who offer a comparable arrangement to their do-it-yourselfers. Their Investor Series brings a larger selection of mutual funds to choose from with a significantly lower minimum investment requirement than RBC Direct Investing. However, their MERs are only slightly lower, if not the same, than their Advisor Series Funds.

These moves correct an anomaly that has existed in the industry for years. These changes have been slow for many reasons. Namely, the incredibly high profits this brings in for the discount firm coupled with the public's overall lack of knowledge of how fees work. To illustrate, with the D-Series funds available almost 5 months now, there hasn't exactly been an overwhelming stampede to what is clearly the more cost-effective option. There could be all sorts of suggestions put forward on how RBC Direct Investing could better do this, which has no doubt occurred to them. But, for now, as CIBC Investors Edge, BMO InvestorLine and Scotia McLeod Direct Investing are yet to follow, perhaps we should be grateful with the baby steps.

Point: If you are a do-it-yourself investor who invests $10,000 or more in a single fund, moving to RBC Discount is a credible option. Depending on the funds invested in (RBC currently has 45 D-Series funds), you could have dramatically lower fees without affecting the quality of your portfolio. A severe exodus of this sort to RBC Discount on these grounds will prove more than enough incentive for other discount brokerage firms to follow suit.

2007-11-21T21:16:00.000-05:00

"The nice thing about standards is that there are so many of them to choose from."
-- Andrew S. Tanenbaum

2007 Investor Forum Review

2007-10-31T21:15:00.001-04:00

The 2007 Investor Forum was held last Wednesday, October 24, 2007.

It was quite informative.

Ms. Jenah, President of the IDA, seemed very sympathetic. She seemed incredibly benevolent. It's amazing how a warm personality can melt any suspicious sentiment.

Mr. David Wilson, head of the OSC, seemed bored, as the passion of his answers remained quite stagnant from question to question. If he was an "eye-roller," I feel he would have been doing that for most of the questions.

I rose and asked about a suggestion made under the Fair Dealing Model that required brokerage firms to post their returns and other performance measurement statistics on the client's quarterly statements. The response was that they have bigger issues to deal with. So, safe to say, it doesn't seem like its happening. But you can help! Visit http://www.showmethereturn.com/ to sign a petition illustrating your support for such an initiative.

One of the great parts of the night were the seminars they held before the 'Question Period.' Each topic discussed was incredibly informative. They were:

1) Choosing an advisor
2) Getting help with an investment complaint
3) Understanding investment products and risk

The Investor Forum is available in audio and transcript, as well as slides and audio being available for the seminars. Check it out:
http://www.osc.gov.on.ca/Investor/Forum/frm_index.jsp

2007 Investor Forum Tonight!

2007-10-24T15:42:00.000-04:00

Ladies and gentlemen, grab your notepads and prepare.

With its debut in May 2005, the OSC Investor Town Hall (now, the 2007 Investor Forum) was an event instigated by outgoing OSC chief, David Brown, to hear and document questions and concerns of the retail investing public. He invited along his colleagues: the heads of self-regulatory organizations, IDA and MFDA, and the Ombudsman for Banking and Investment Services. This roster coupled with one of our favorite investor advocates, Stan Buell, of Small Investors Protection Association, and we had quite the party. Two years ago, as the first of its kind, the event was a resounding success simply because Ontarian investors had seen nothing like it. Issues were broken and talked about candidly, and the heads of the OSC, as well as the self-regulatory organizations, put themselves out there to be, at times, publicly rebuked. Now, past the inaugural event, there's a great deal more expected of this event. Furthermore, you'd better believe investors are going to want updates on the issues they raised.

We'll see how tonight goes. Please check back in the next week for a more extensive review of the 2007 Investor Forum. It is important to note that evaluating the genuineness of these individuals can only be done subjectively.

A follow-up to the 2005 Town Hall was released last year and is available at:
http://www.osc.gov.on.ca/Investor/Forum/TownHall/th_20060725_final-report.pdf

"We listened to the most marvelous man..."

2007-10-11T17:13:00.000-04:00

It was not too long ago that I received an invitation to a forum. To protect the privacy of the organizers who did a terrific job, we'll call it Y Forum. Being rather ignorant of this fast-growing industry, I was immediately keen to attend.

The forum had very credible guest speakers well touted in their fields, including apparently a man who was introduced as a "multi-million dollar portfolio manager." He was following a respectable roster that included a law professor from the University of Toronto, an editor of a publication on business strategies and the president of a venture capital company.

What followed incredibly informative presentations was this gentleman, who did not speak of the matter he was advertised to bring insight to. Instead, charismatic and an able orator, he spent his time talking about the greatness of life. He threw in remarks about his incredible team and how he graduated top of his class ever so subtly, but the majority of his remarks basically were one large motivational speech. I looked around the room and noted silently that this financial advisor had turned himself into an enigma. When he finished, he was met with a rousing applause from the audience, who seemed to forget, at least temporarily, that he had not shared one piece of information about the subject at hand.

Unfortunately, his lack of any useful information wasn't the most upsetting part of his speech. In order to impress his audience, he hit us with a startling figure that only I seemed to comprehend: He managed $10.75 million dollars for 375 families. Obviously, his intention was to illustrate the hundreds of families that placed faith in his investing acumen, while allowing the word "million" to resonate with his success and the audience's own personal visions of grandeur.

Let us get something straight folks. In this situation with 375 families, one sit-down for an annual portfolio review with a client everyday could not be done in a year. For a full-service advisor to be managing less than $11 million for this many families would suggest an average portfolio size of around $28,500, which is exceptionally low for a full-service advisor to be managing for a client [More on that another day]. Furthermore, a first year investment advisor working at a brokerage firm of one of the five major national banks is expected to gather anywhere from six to eight million dollars of assets depending on the institution. This is their target for the first year! This advisor at $11 million has a great deal further to go until he has climbed to an aura of respectability in the industry, meaning he is still at a place in his career where he has to devote most of his time to recruiting many new clients to his practice....hence, his presence at the seminar.

Dare I conclude the only way he could adequately balance that many clients, recruit more and generate enough fees off accounts of that size would be through inflicting the Deferred Sales Charge on his clients' funds. With the DSC, the client pays nothing going in but is forced to keep the money invested in that mutual fund for usually seven years. During those seven years, the sooner the money is removed out of that investment the more exorbitant the fees inflicted. This gives the client every incentive to remain in those funds and alleviates the advisor from having to worry about paying attention to the client, as their monetary penalties is more than enough reason for them to remain invested. Not a bad strategy at all for the financial advisor, but it will keep the clients' hands tied for years.

In conclusion, commission-based advisors work in an industry that is, in fact, oversaturated. With the vast majority of investments now available to virtually every broker in the industry, obtaining a speciality to recruit and market themselves to clients is becoming more challenging. Our man at the Y Forum, for example, attracted people with his amazing faith in God and in regards to having an ethical, spiritual life. People are able to relate (or aspire to relate) to him, increasing their comfort level. Once an interpersonal foundation is laid, these individuals will not dare question the quality of their financial advice simply because they now trust him.

Keep this scenario and its related concepts in mind. Hope everyone had a great Thanksgiving.

'Z'

What inspired me to do what I do...

2007-09-26T21:39:00.004-04:00

It is funny how I can personify the direction my life has taken into two seemingly mild comments. In retrospect, there's really no way to justify otherwise, which makes these comments rather life-changing epiphanies.

It was high school when I truly fell in love with the stock market. The concept of buying ownership in pieces of a large entity that went up and down in value. The adult version of baseball cards, I thought at the time. Never having a lot of money, I used to passionately research these companies and make mock portfolios. It was only for fun, really.

One day a peer of mine, noting my enthusiasm, approached me and told me that his parents had opened a brokerage account for him in order to "practice" investing for himself. Of course, he didn't know where to start, and he needed some suggestions. I let him know what I was doing and a couple things to keep in mind. As the months followed and the portfolio ballooned, that friend sat across from me in the library one afternoon and said, "Z, thank you." With a look of sheer admiration and respect in his eyes, my initial response to ask, "For what," quickly subsided, and it was that moment I realized what I wanted to do for the rest of my life...become an investment advisor. While doctors saved lives, advisors enabled their clients to enjoy their lives, helping them reach their goals and aspirations. That moment, that feeling at the library some years ago was a moment I wanted to feel for the rest of my life.

My notions of what, in fact, a stockbroker was during high school are frightfully different from what I believe it is today. Years later, working at a Bay Street brokerage, I was given the contact of a hard-working Canadian who had requested information about our firm. Calling him to answer any inquiries he might have, he said, "No, I simply wanted some ideas. You guys are all a bunch of crooks. I was cleaned out a few years ago...a bunch of crooks." There was no venom in his voice. He said it simply. He politely excused himself and that was it. To be hit with an assessment as such a matter of fact, felt like a blow and a direct rebuke of why I joined the business in the first place.

It was later that night that I began my draft of the business plan for the Onus Consulting Group, but it was not to say that I was completely blind sided by this man's revelation. It was just hearing those words so plainly ended any justifying I was doing of my aspiring profession. The fact of the matter was that the typical financial advisor's main ambition wasn't to make their clients money, as I originally had believed; it was to make themselves money. This isn't necessarily the fault of the advisor, who are being cultivated in an industry that stresses the bottom line (and by bottom line, I mean their total commissions) and not the success of their recommended investments.

Thus, began my search for the perfect financial advisor and my quest to educate retail clients as to the true politics of the retail investment industry. More on that later.

'Z'

ZAHID JAFRY, CIM is the founder and an Advisor Analyst at Onus Consulting Group. The company has carved a niche in the Toronto retail investment industry by matching Canadians with highly-proficient financial advisors recruited through the firm's Advisor Indexing Program, a research study examining fiduciary standards of full-service financial advisors. Prior to that, he worked in a marketing capacity at the private client services division of a Bay Street brokerage. He is a CSC graduate and a holder of the discretionary portfolio management designation, Canadian Investment Manager (CIM).