Tuesday, May 26th13.1°C
David Allard

Do or do not

“The optimist sees the rose and not its thorns; the pessimist stares at the thorns, oblivious of the rose.” 

- Kahlil Gibran


Good planning is all about managing change. If we could depend upon our expectations of the future 100% of the time, there would be little need for ongoing planning. We could simply write down our expectations, create a budget and then let it unfold exactly as planned.

Unfortunately, life isn’t like that. The true reason we plan is to make sure we’re in a position to react when change happens. Effective planning means looking ahead at the potential curves we could be thrown and deciding how best we can prepare for them. There are two kinds of people in this world (of course there is), first there’s those who are the eternal optimists, they always positively skew their expectations of the way things will play. You know the type, if it takes twenty minutes to drive from point A to point B, they will leave 15 minutes before they need to be at their destination, fully expecting the traffic to be light and the potential exist for them to go a little faster so they can make up time. The second group of people are the ones who, when faced with the same twenty minute drive, leave thirty five minutes early giving themselves a buffer in case the traffic is slow or there is an accident ahead.

This same attitude is pervasive in all things in life. Whether it’s money, speed, working out or cooking, expecting things to work out all the time is a recipe for disaster. In the financial planning world we always say the devil is in the details, the clearer you are about the challenges and risks you might be faced with, the better prepared you will be if they do. Take health as an example. If you ask a person how long they expect to live, their response will have more to do with their fear or comfort with death than it will have to do with a reasonable assessment of their family history, lifestyle and activity level.

On a different subject, if you ask people if they will have enough money to retire on, quite often the expectations of those with little in the way of pensions and assets is unrealistically high, while those with abundant resources will often be more conservative, and less optimistic about their ability to finance the rest of their lives.

The truth is both approaches may result in challenges. Our optimist may have to scramble when unexpected events occur, or be forced to make drastic changes to their lifestyle if their plan doesn’t work out. The pessimist may be better prepared for future events, but the constant dwelling on the negative isn’t without its costs: health, peace of mind and life expectancy are all affected by stress.

The key then, is to make retirement plans from a balanced perspective.

The first requirement: use reasonable expectations for your situation. Regardless if it’s your health, finances or the amount of time it’s going to take to drive to Calgary: know your strengths and weaknesses. Once you have a handle on those, consider the potential challenges you might face along the way. Whether it’s your healthcare plan, the amount of gas in your tank or your cash flow expectations, always assume you’ll have a little less than you expected, and that things will usually cost a little more than you’d hoped.


This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.


Death of a sales commission

In New York City in 1792, twenty-four brokers met under a buttonwood tree on Wall Street. They agreed to buy and sell public stock with each other using a basic commission rate of 0.25%. This was the birth of the Buttonwood Agreement and ultimately the New York Stock Exchange.

Since then the fees investors pay for access to financial markets have been in a state of constant evolution. In the early years, commissions were fixed; if you wanted access you paid a standard rate that was non-negotiable. In 1975, the Securities & Exchange Commission (SEC) abolished fixed commissions in the US amidst investigations of price fixing, unreasonably high fees and exclusivity amongst brokers.

Tiered commissions were next and most investment firms still use this model for their transactional portfolios. The basic premise is the higher the price of the stock you are trading and the greater number of shares, the lower the percentage you pay.

As mutual funds grew in popularity and found their way to investors’ portfolios, the costs associated with them evolved as well. In the beginning, advisors and salespeople would charge a flat front-load fee that ran as high as 10-12% at the time of purchase. As competition increased and the sales cycle for mutual funds matured, the pricing structures changed.

Fund companies began to offer what were known as DSCs, or deferred sales charges. This meant if you purchased a mutual fund you now had the choice to either pay a commission up front, or pay no commission at all, as long as you remained invested in the fund for a specific period of time (usually between 4-7 years). If you chose to sell before that date, you would be charged an early trading fee. In addition, brokers were often paid quarterly trailing fees as an incentive to continue to hold a fund companies’ products. Trailing commissions were actually higher on the front load versions. In later years, a low load option was created that was less lucrative for investment firms and less punitive on clients if they chose to sell their investments early.

With the introduction of discount brokerages, no load mutual funds and increased competition, the industry has continued to re-invent itself. Today the prevailing winds are firmly in the direction of fee-based commissions. These are the structures where clients pay a fixed percentage annually of their assets under management, usually between 1-2%. In my mind this is a superior choice for many investors, as it puts the advisor on the same side of the table as the client, and the fees are completely transparent. There are no surprises, and in fact, fees charged on non-registered accounts are currently tax deductible.

The exercise here wasn’t to point fingers. In any business, prices will ultimately fall: processes evolve, technology lowers costs and industries respond to the demands of their customers and clients. It wasn’t many years ago that people were willing to pay $7500 or more for a laptop computer—today most of us are unwilling to go beyond $1000.

The writing does appear to be on the wall. As regulation increases and the demand for full disclosure and transparency grows, the industry will continue to move towards fee based models. In the UK and Australia, commission-based accounts have been banned, and in the US this is the predominant fee structure available. In Canada, fee-based accounts have existed for many years but only a fraction of investors have taken advantage of them. Today this is changing.

If you work with an advisor, challenge them to a fee-audit of your current portfolio.

The other side of retirement

The golden years - the time we get to leave work life and office politics behind. From Freedom 55 to The Wealthy Barber, much has been said about financial strategies on the road to retirement.

It’s something we’re taught to work towards our entire life: save your money, pay yourself first, contribute to your RRSP, pay down your debt and get a good pension, then you’ll enjoy the good life! All wise strategies; in fact they’re great strategies at any time of your life. But will they guarantee a fulfilling, happy retirement? According to a number of recent studies, not necessarily. More and more research is being done on the psychological impacts of retirement and the well being of people in their retirement years.

For those nearing retirement, many have spent years in a single or related career path with one or two employers. Friends have been made, networks created and an identity built around the person we were at work. It can be difficult to separate our retired selves from the person we were at work. In a 2012 study, In The Journal of Happiness Studies by Elizabeth Mokyr Horner, PhD, of the University of California Berkley, it was found that retirees often experience a “sugar rush” of well being and satisfaction right after they retire, followed soon by a significant decline in those feelings. This occurred regardless of when people retired.

For some, the transition is smooth: they become focused on their hobbies, spend time with their friends and continue to be close to their families and work colleagues. For others though, it can be a time of anxiety, depression and feelings of debilitating loss. According to Robert Delamontagne, PHD, the author of the 2011 book, The Retiring Mind: How to make the Psychological Transition to Retirement, “People can go through hell when they retire and they will never say a word about it, often because they are embarrassed, the cultural norm for retirement is that you are living the good life.”

Research has found that for some, working or volunteering in retirement will prevent depression as well as dementia and hypertension. Psychologist Jacqueline B. James, PhD, of the Sloan Center on Aging and Work at Boston College, has found that only those people who are truly engaged in their post-retirement activities will realize the psychological benefits.

For many of us, the level of engagement we experience is directly related to the amount of control we have over our lives decisions. When we’re forced to compromise and accept things that are different than what we really want, our level of happiness and fulfillment declines significantly.

The solution is to spend more time before retirement getting to know the things that will make us happy, and understanding what we need in life to remain engaged. Too often, retirement planning has been all about financial planning. While the financial details are critical, social and psychological needs are just as important to a good retirement.


The rules are changing

In recent years, a number of countries, including England, Australia and the United States, have changed the regulatory framework that governs their financial institutions. Included have been changes to formalize client communications and create greater transparency in fees.

While industry is constantly striving to improve compliance standards and suitability requirements, there is nothing like a market meltdown combined with a financial crisis, to accelerate the improvement agenda to warp speed. 2008-2009 was no exception. The carelessness and blatant disregard for the rules by some of the World's major investment banks, global ratings agencies, and government regulators were all catalysts in the almost complete meltdown of the global financial system. This had far reaching consequences for stock exchanges, regulators, sovereign treasuries and banks the world over; whether they were complicit or not. Even though Canadian institutions faired relatively well, Industry is implementing similar reforms here at home. Many changes have already been made with the remainder being phased in over the next 18 months.

Building upon the existing requirements that help to ensure fair and honest dealing with clients, the Investment Industry Regulatory Organization of Canada (IIROC) has introduced the Client Relationship Model (CRM). At its core are three key principles designed to enhance investor protection and strengthen the client-advisor relationship:

  • Transparency regarding the relationship between the client, service providers and firms (e.g. information on account types, services provided, transactions and account fees);
  • Transparency surrounding performance of the account;
  • Disclosure of any conflicts of interest.


What will this mean for you?

Because the fundamental principles of CRM are a core part of the way Industry has always tried to serve clients, many of the changes may not be perceived. While in other cases the changes may be apparent, but will not fundamentally change the advisor and client relationship. How this affects you will depend upon your situation, your account types and the securities that you hold.

Significant changes have already occurred in the areas of understanding your risk profile and investment suitability. In some cases, paper work and documentation requirements have increased, but in general the challenges in implementing the new regulations are operational in nature that are borne by the institution.

The two most visible changes are slated between now and July 2016. They will include the reporting of all fees a client pays (trailing commissions, management fees, transactional commissions, and deferred sales charges) on an annual statement and the calculation and reporting of account performances on an annual basis.

While the body and timing of these changes is still considered proposed, the expectation is that they will ultimately be enacted as written.

If you have questions regarding these changes, please feel free to connect with Jeff at [email protected] or link directly to IIROC’s site at www.iiroc.ca

Read more Navigating Retirement articles


About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

After two decades in the financial services industry, Jeff's experience as an advisor and branch manager define his approach to providing customized financial planning, estate planning, and managed income solutions. Key to this approach is a thorough understanding of the unique challenges and goals that exist in every client's life. He is a partner in Navigation Wealth Management.

Jeff holds the Certified Financial Planning and Chartered Investment Manager designations. He lives in Kelowna with his wife Tanya, and their two (almost adult) enterprising children.


You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.

These articles are for information purposes only. It is recommended that individuals consult with a financial advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.

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