Canadian Financial Institutions: Buyer Beware

Aggressive sales targets for both advisers and tellers at large Canadian banks may be promoting unethical, anti-consumer behaviour.

Neilson Spencer - Creative Banking

TD Bank has been in the news a couple of times over the last week for somewhat unscrupulous tactics where customers are involved. The issue is staff has a conflict of interest, with sales targets driving customer interactions and product recommendations. Think about that for a second – when suggesting financial products and services, including products you haven’t asked for, they’re juggling sales targets they must reach against your financial well being. This isn’t limited to financial advisors at banks, who I’ve referred to as salespeople before, but includes tellers.

Banks are managing staff performance based on sales. The behaviour they’re reinforcing is one where sales trump all. If you want to remain employed, you have to hit a sales target. We aren’t talking about supersizing your fries at Wendy’s, when they suggest an additional product. We’re talking about investments and line of credits they push, among other products, which may not be ideal for your situation. Aggressive sales targets will lead to aggressive sales behaviour. It sounds like an oversimplification, but that which you reward is that which you reinforce.

The two articles in question have the following headlines and are both fairly interesting, fairly indicative reads:

‘We do it because our jobs are at stake’: TD bank employees admit to breaking the law for fear of being fired

‘I will do anything I can to make my goal’: TD teller says customers pay price for ‘unrealistic’ sales targets

My caution around large financial institutions isn’t new and I’ve been fairly wary for years. For investment advisors to have a ‘suitability standard’ instead of a ‘fiduciary standard’, for instance, bakes in all sorts of issues. They don’t have to suggest the best product for you, merely one that is suitable. So if the product they’re suggesting is higher cost, with no additional benefit over an alternative? No problem! The product is suitable.

Both interesting reads, and while TD has been singled out, this practice occurs in banks across the country, both north and south of our lovely Canadian border. It is highly unlikely that they are the only offender. People who work in banks aren’t intentionally harmful, but the context in which they work promotes consumer adverse behaviour. Listen to suggested product pitches with a healthy dose of scepticism. Educate yourself before you get taken for a ride.

Additional Information:

Forbes on the difference between the fiduciary standard and the suitability standard.

An additional article from CBC’s Go Public on RBC promoting products that, after returns, barely kept up with inflation. You can’t control market returns, but you can keep your fees down so you get as much of the pie as possible. More evidence of salespeople at banks pushing products without fiduciary duty.

Header image by Neilson Spencer – Creative Banking // CC by 2.0

Choosing the Right Financial Professional for your Investments

Some tips to help you choose the right financial professional to sort out your investments.

John Liu - Financial Gain

I’ve written a bit about my distrust for the personal finance industry in Canada, given there’s room for plenty of conflict of interest and product recommendations that aren’t in your best interests. Self-educate or be taken advantage of. Over in the U.S., a retirement account fiduciary rule which protects consumers from financial firm conflicts of interest is in the midst of being attacked. When corporate interests are put before consumer interests, you have to look out for yourself. Buyers beware. So, that begs the question: how do you find a financial professional that’s right for you?

What Type of Professional do you need?

Financial Planners

In Canada, financial planners will create a plan, assessing cash flow, retirement, risk management and asset allocation. It’s invaluable to have a plan before you start putting your money to work for you. It may be extremely cheesy, but, if you fail to plan, you plan to fail. What financial planners generally won’t do is suggest specific products or make trades for you. That gets into the realm of financial advisors.

Financial Advisors

Professionals with this title will look at your asset allocation, willingness to accept risk and suggest actual financial products (stocks, bonds, mutual funds, ETFs, etc.). They may also make trades for you, depending on the service levels they provide.

Note: There are absolutely firms that offer both services. It’s just important to be aware that there is a distinction between the two types of professionals and the services they can provide.

Tips on Choosing a Financial Professional

So you’ve figured out what you need, be it a financial planner, an advisor, or both, so what’s next?

  • In general, what you’re going to be looking for is a “fee only” professional. They will generally charge an hourly rate. If you’re looking for an advisor that actually manages your portfolio, you may be getting into “percentage of assets under management” territory.
  • Ideally, the person you work with should not receive a direct commission from the specific investment funds they suggest. This is important, because it removes a substantial conflict of interest. If they’re pushing their own products, and receiving a commission for it, whenever you buy or sell, they’re less likely to suggest lower fee, better suited options. Directly ask them how they’re paid.
  • Don’t be tricked by an impressive sounding combination of letters, following a person’s job title. Ask what the designation following a professional’s title indicates. Is the designation managed by the financial industry, or administered by an independent organization? The CFP (Certified Financial Planner) designation in Canada is one of the more recognized designations, despite it not touching on index investing.
  • You’re going to want to avoid banks and large financial institutions. Unfortunately, while you may have a longstanding relationship with them, they make money by selling overpriced financial products. Their advisors lean more towards salespeople, which I’m uncomfortable with.
  • If you want index mutual funds or index ETFs, it’s important to ask upfront whether this is something they advise on. Not all financial designations provide education on these products.
  • You’re also going to want to assess how responsive the professional is, and how easily you can have a conversation with them. If you can’t get in touch with or understand them, they’re not someone you’re going to want to work with over the long-term.
  • Oh yes, finally, avoid insurance companies when looking at investments. This may sound obvious, but they’re extremely likely to try and sell you an array of insurance products instead of actual investments. It’s true that you can tax shelter money within the investment portion of a life insurance plan, but why wouldn’t you just buy an actual investment?

Resources

  • For Canadians, Holy Potato offers a list of fee only financial planners and coaches.
  • MoneySense also provides a list of approved financial advisors. I’d go with the Holy Potato list first. The MoneySense article is a pay for listing service.
  • Preet Banerjee has a good, far more detailed write-up on choosing a financial planner.
  • MyMoneyCoach has an article on how to find a financial advisor
  • Despite everything I’ve said above, Steadyhand is a solid option, if you’re comfortable with actively managed mutual funds and associated fees. I’ve suggested them a couple of times before, despite the fact that I would not use them myself. They’re probably the best pro-consumer actively managed mutual fund firm in Canada.

Header image by John Liu – Financial Gain // CC by 2.0

Thoughts on Millionaire Teacher: Second Edition

The second edition of Andrew Hallam’s Millionaire Teacher may very well be the only personal finance book you need to read this year.

Millionaire Teacher - 2nd Edition

ISBN: 9781119356295, Author: Andrew Hallam

Let’s get this out of the way: Millionaire Teacher is my favourite intro to personal finance book. I first read Andrew Hallam’s Millionaire Teacher a little under two years ago, after which point I gifted two copies to people I thought could benefit from the information. This is the first book I’ve felt compelled to do that for, and also the first book I’ve thought I needed to re-read, with the January 2017 release of the second edition.

For people who want to understand how to better manage their money for the long-term, increasing your chances of a comfortable retirement, this should be your go to book. The writing is clear and low on jargon. It covers a ton of information I wish I’d had coming out of high school.

With that said, I trotted over to my local library and picked up a copy, with the hopes of reading new information on ETF investing and robo-advisors, which were absent in the first edition.

What the Book Covers

  • Intelligent spending
  • Investment growth over time (the power of compounding)
  • The importance of investment fees (why index funds work and why actively managed funds on average underperform market return)
  • Controlling for poor investor / investing behaviour
  • Asset allocation (the importance of investing in both stocks and bonds)
  • Index investing in different countries (including Canada, the U.S. and Great Britain with sample portfolios)
  • Alternatives to do-it-yourself investing
  • Dealing with investment advisors/brokers (effectively, having a BS detector and knowing which questions to ask)
  • Avoiding common mistakes (why buying gold may not be wise, avoiding investment newsletter advice, etc.)

New Personal Takeaways

  • Consider a guaranteed pension plan within the context of the fixed portion of your holdings. This implies that you can hold more equity and less fixed assets in your RRSP/TFSA/Taxable accounts. Ah to actually have a pension.
  • Do-it-yourself investing, which is my preferred strategy, may not be ideal for everyone. Simplicity is sometimes worth the price premium where people may not want to spend an hour a year managing their portfolio. In those cases, the additional investing cost can be worth it.
  • The new segment involving asking banks about putting together an index fund portfolio matched my experience with TD bank directly. It is not a strategy they actively support. They will throw information at you to try and dissuade you from this course, despite research backed findings indicating that it provides a greater probability of success.

Summary

If you’re going to read one personal finance book this year, try to make it this one. Personal finance books tend to be dry, though this one tends to avoid that pitfall entirely. This book can help you gain a better understanding of how to get your money working for you. In comparison to other, similarly targeted titles like the Wealthy Barber Returns, I found this title less anecdotal with a far better flow.

Additional Resources

Mutual Funds: Hidden Costs Matter

Why understanding hidden mutual fund fees is important. Should you consider moving to Exchange Traded Funds? What’s the impact?

OTA Photos - Analyzing Stock Market

For a while now, I’ve been considering switching from TD Bank’s E-Series index mutual funds in Canada, to lower cost index ETFs. When you’re starting out, TD E-Series funds are great and admittedly, less daunting than dealing with ETFs. They provide a painless way to get your money working for you. As your portfolio grows in value though, it may be worth considering what you’re paying.

I definitely suggest considering the e-series funds for early Canadian investors, for the following reasons:

1) No fee to buy or sell in a TD Mutual Fund / TD Direct Investing account

2) You can set-up an automatic monthly purchase plan, automating adding money to your investments, at no additional cost.

3) They’re some of the lowest cost bank provided index mutual funds in Canada. Tangerine, for instance, has an average MER of about 1.07%. My TD E-Series portfolio was averaging somewhere between 0.42% and 0.45% in fees, based on my allocation.

4) Buying and selling through TD’s platforms (be it TD EasyWeb or TD WebBroker) is extremely simple. You tell it how much of a fund you want it to buy, and off you go.

5) You don’t have to worry about market trading hours. It’s much easier than directly using the stock market to make a purchase. You place a dollar value order and away you go. The order is taken care of after market hours (time to post the transaction and the like is another matter).

ETFs on the other hand, are more complex to buy and sell, and unless you’re on Questrade, will likely have a transaction cost of about $10 each time you buy or sell. ETFs are traded during stock market hours. You’ll generally want to buy them when the stock market is actually open to avoid unexpected price surprises. Mutual fund transactions, by contrast, are processed at the end of the business day, which makes buying and selling a little easier. Further, with ETFs you have to consider the current bid-ask spread, and figure out how to price your order. Not complicated, really, however with mutual funds, you can just enter a total dollar amount you want to buy, and you’re off to the races.

With that said, as your portfolio grows in value, ETFs can provide a notable fee savings, through their lower Management Expense Ratios (MER). Factor in advisor fees, and the cost difference grows even larger.

A Cost Comparison between TD E-Series Funds and Vanguard ETFs

Let’s do a quick Comparison, comparting TD’s fund expenses to Vanguard Canada’s, to give you a better idea of what a regular investor might be paying.

TD E-Series Fund MER

TDB900 (Canada) TDB902 (U.S.) TDB911 (International) TDB909 (Canadian Bond)
0.33% 0.35% 0.51% 0.50%

Vanguard Canada Fund MER

VCN(Canada) VXC (International including U.S.) VAB (Canadian Bond)
0.06% 0.27% 0.13%

Note: Vanguard’s VXC covers U.S. and international markets all in one fund, which accounts for the difference in number of funds.

Given these percentages will look small to most, being a fraction of a percent, let’s do some math. Assume Bob has $100,000 dollars invested in each of these portfolios. For TD, we’ll go with a simple 25/25/25/25 asset allocation split equally across their four funds. In Vanguard’s case, we’ll go with a 33/33/33 split for their funds. Let’s see what the annual cost difference looks like.

Bob’s TD E-Series Annual Cost Breakdown:

Fund Value MER Cost
TDB900 $25,000 0.33% $82.50
TDB902 $25,000 0.35% $87.50
TDB911 $25,000 0.51% $127.50
TDB909 $25,000 0.50% $125.00

Bob’s Total Annual Cost with TD: 82.5+87.5+127.5+125= $422.50

Bob’s Vanguard Canada Annual Cost Breakdown:

Fund Value MER Cost
VCN $33,000 0.06% $19.80
VXC $33,000 0.27% $89.10
VAB $33,000 0.13% $42.90

Bob’s Total Annual Cost with Vanguard: 15+40+67.5+32.5 = $151.80

Bob will pay an additional $270.70 yearly, on a portfolio of $100,000 with TD’s E-series when compared to Vanguard. If you consider the power of compounding amounts in your investments, you should also be aware of the power that compounding costs can have to eat away at your retirement money.

I would wager many investors don’t quite consider the impact these costs can have on your ability to retire comfortably. Over a lifetime, these annual costs can account for tens of thousands of dollars that you might otherwise have available in your accounts. The cost gulf between quality index ETFs and mutual funds grows when you look at actively managed mutual funds, with MERs between 1.6% and 2.6% on average in Canada. Are you getting value for you you’re paying for, or are you ensuring bank advisors/brokers have a great vacation, fueled by your retirement savings?

Summary

TD E-Series funds, or even ETFs, are not for everyone. There are other options available like Tangerine or Robo-advisors, where you transfer money, and they handle portfolio asset allocation in low cost funds. The key take away from all this, is ultimately that costs matter. There’s no requirement for firms to show you what exactly you’re paying holistically, even with the new CRM2 regulations in force in Canada. The regulations will show what you’re paying for investment advice, but not so much what you’re paying for your actual investments. Costs matter, and if you don’t take charge of what you’re paying, nobody will.

Resources

  • Canadian Couch Potato on whether moving to ETFs makes sense.
  • Morningstar has a two part series on what Canadians pay for mutual funds, if you want to learn about different types of costs. Part one and part two are linked.
  • Steadyhand has a relevant article explaining investment costs, including a useful infographic.
  • Vanguard has a great write-up on the differences between mutual funds and ETFs.
  • Bonus image, by Sacha Schua (CC by 2.0) which spoke to me, when learning about ETFs (I found my first experience buying ETFs more stressful than I anticipated):

Sacha Schua - Thinking about my ETF hangups -- index card

Header image by OTA Photos – Analyzing Stock Market // CC by 2.0

Canadian Personal Finance Blogs, Books, Videos and Podcasts

Great resources to start learning about Canadian Personal Finance. Blogs, books, podcasts and videos.

Sean MacEntee - Education

There are a ton of resources available to help you learn about investing in Canada. It can be tricky to separate the good from the bad with limited time, so I’ve put together a list that should be a great starting point.

Blogs

Canadian Couch Potato: a site authored by Dan Bortolotti, a financial planner and writer for MoneySense magazine. He’s an outspoken proponent of index investing in Canada. The idea behind the couch potato portfolio is, set-up index investments, adjust periodically, sit back and watch your investments appreciate over time. Dan also has a great podcast which I highly recommend.

CanadianCapitalist: this site isn’t quite updated as much as it once was, but is still a great resource for Canadian investors interested in personal finance and index investing.

Books

I could suggest books that are hundreds of pages long and densely packed with material and personal finance philosophy. There are some really good, really deep reads. However, I’m not going to do that. Most people have neither the attention nor the interest. Instead, just read these two short books on finance:

Bogle - Common Sense InvestingJohn Bogle – The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns 

John Bogle, founder of Vanguard, created the world’s first index fund. If you want to understand index investing, and why it can work, in simple language that you don’t need a business degree to decode, make this your first stop. It’s 240 pages with fairly large print.

Hallam - Millionaire TeacherAndrew Hallam – Millionaire Teacher

Andrew Hallam set out with the goal of writing a personal finance book targeted towards teachers. The book is written in extremely understandable language, structured rather well and provides a ton of useful, straightforward personal finance information. The book ranges from constructing an index portfolio, to behavioural pitfalls in investing. He also has specific information for Canadians, which is a nice touch. The second edition is 256 pages, with graphs.

Podcasts

CanadianCouchPotato: this is by far, the most informative Canadian personal finance podcast to date. Yeah, I’m a bit of a fan. I’ve been following the blog for years, and the podcast hits all the points. If you have time to check out just one podcast, make it this. The podcast is split into a few sections: general Canadian personal finance issues, reader questions and bad investment advice. This last segment, in specific, is amusing and informative in equal parts. They just released their third episode, so it shouldn’t take all that long to catch up.

Mostly Money Mostly Canadian with Preet Banerjee: Preet is a Canadian personal finance consultant and writes for publications including The Globe and Mail as well as MoneySense. His podcast is less succinct than CanadianCouchPotato, and less focused on index investing. However, he has interesting expert interviews and segments which are worth a listen, if you have the time.

YouTube/Videos

Lars Kroijer – Investing Demystified: Lars Kroijer, a former hedge fund manager, put out a series of five short videos discussing how to invest, if you can’t hope to beat the market. They’re well produced, well written and easy to understand. Lars talks about a two fund solution, a world index fund and a bond fund, which simplifies index investing.

Do-it-Yourself Investing with Justin Bender: If you’re interested in ETF investing in Canada, Justin will show you how to get started, with major discount brokerage platforms in Canada (including: TD Direct Investing, BMO Investorline, CIBC Investor’s Edge, RBC Direct Investing, Scotia iTrade and National Bank Direct Brokerage).

Bonus: Reddit

Reddit also has a great community under the PersonalFinanceCanada subreddit. I follow it pretty regularly and haven’t been disappointed.

Summary

There are a wide variety of ways you can get informed on managing your Canadian personal finances. With the internet, it’s easier than ever before, even if you aren’t a book reader (though I would suggest checking out those two titles – they’re a solid investment in your future).

Header image by Sean MacEntee – Education // CC by 2.0

Managing Your Investments: Self-Surgery?

Can you really manage your own investments, or should you just leave it to the experts?

Andreas Poike - Stock Market Quotes

In a comment to my recent post, one interesting response I got, was that with a larger portfolio, you might not want to take the risk of managing your own money. Leave it to the experts, the argument went, who are better qualified and have your best interests at heart. I would partly agree: there are absolutely qualified people who help (SteadyHand comes to mind), the problem is, how do you distinguish them from salespeople who are just out to make money off your hard earned cash?

This is effectively an argument, at its heart, that you should trust experts, because well, they’re experts. I’ve spent enough time around experts of various sorts to in general say, that they’re just people like you and I who are completely fallible, subject to biases and yes, conflicts of interest.

So what’s a guy (or gal) to do?

Educate Yourself

Even if, in the end, you don’t want to manage your own money, by understanding how things work in the general, you’ll know whether the expert’s advice actually makes sense. I had an investment plan created by our lovely Canadian green bank a couple of years ago, after having managed my own investments for quite a while. The plan looked good on paper, including tons of information which actually made it confusing, but the plan increased my fund holding from four low cost index funds to fifteen high cost mutual funds. It all sounded very impressive, and were I not self-educating on personal finance, I might have gone along with it. The problem? The fees were upwards of two percent. Meaning, to keep up with the market, their fancy portfolio would have to outperform by on average, 2 percent. Highly unlikely. One of the key elements to successful long term investing is keeping costs down.

Find a Fee Based Advisor

If you don’t understand how an advisor is being paid, ask. Some of the best advisors charge a flat fee for their advice. Yes, we are talking hundreds of dollars here. However, by paying them for advice in this way, they aren’t necessarily compensated by commission on the funds they suggest, avoiding that specific conflict of interest.

Don’t Buy the Argument from Fear

Oh you can’t conceivably figure all this out. There are really smart people who spend years learning the market! Why bother? The answer to this is simple: you can get the average market return. The really smart people who manage things like hedge funds? They’re trying to *beat* the market. You absolutely should not be doing that.

About ten years ago, I met with a snazzy sounding insurance/investment firm. They put together client portfolios, bundling investments and insurance. The crux of their argument went as follows:

“Sydney, what part of your body could you not do without?”

At first, I thought, what the hell? What that specific insurance broker was doing, was making an argument to emotion, or fear, in the hopes of selling insurance. Sure, I might one day lose a hand. How high was that probability though, really? Needless to say, following that, as a rule, I tend not to trust insurance brokers where investments are concerned. In making commission on selling insurance, they were driven to sell specific insurance products, which in my early 20’s, I definitely didn’t need.

Summary

By educating yourself, finding an advisor who has your best interests at heart, and not falling to fear based arguments, can you be more likely to be a successful investor. To me, success means retiring comfortably. Avoiding that old age cat food meal is what it’s about. I once thought I wasn’t capable of repairing my own bike. Who knew, that once you spent the time to figure it out, it wasn’t really all that daunting?

You don’t need to manage your own investments to follow a logical investment strategy. Sure the do-it-yourself approach of buying and selling mutual index funds, or index ETFs may not be for everyone. I would argue however, that buying mutual funds, based on a set plan, is pretty simple. ETF’s less so. There are absolutely other options, like robo-advisors (see WealthSimple) that will do it for you, once you create a risk profile. The costs will be higher, when compared with a do-it-yourself approach, but that’s the price you pay for convenience. There’s also Tangerine, although with a market expense ratio of 1.07%, they are definitely not cheap. They’re probably at the higher end of what I’d pay.

Header image by Andreas Poike  // CC by 2.0