It's Your Money  

How honest is your adviser?

Does your investment adviser really have your best interest at heart?

You might think so but there are far too many advisers out there who are still pushing whatever investment products onto their clients that pay them the most fees.

Just last week, the Ontario Securities Commission (OSC) approved a settlement agreement with the mutual fund arm of RBC bank for offering higher commission fees to its reps for selling proprietary funds.

This settlement agreement confirmed that between 2011 and 2016, they paid their reps an extra 10 basis points in commissions for selling RBC portfolio series funds over other options that could and likely should have been offered to their clients. (The report also said OSC staff did not allege any harm to clients as a result of investments in the RBC PS funds.)

An extra 10 basis points (0.1 per cent) may not sound like much, but these added fees totalled up to $24.5 million paid to their reps, which sounds like a big motivator to me.

Before you think that RBC is alone in creating these conflicts of interest, I have seen many other examples of similar proprietary product incentives from numerous investment and insurance companies.

The total penalty for this very intentional decision? A measly $1.1 million fine dubbed an “administrative penalty”.

I decided to look at the numbers behind this particular case to see just how much money they had likely earned by pushing in-house investments onto their unsuspecting clientele.

Their portfolio series funds have a built-in management fee of around two per cent per year, so an extra 10 basis points each year would suggest a couple of hundred million dollars was put into these products.

As stated above, RBC charges an annual management fee of two per cent per year. So, for each $100 million of client money that sat in these accounts, RBC sales reps, portfolio managers and shareholders would have brought in roughly $2 million of fees each year.

You start to see why they would be willing to pay up a one-time $1-million settlement penalty.  

Since coming to the attention of the regulators, RBC has stopped this conflicting interest sales policy. You can be assured, however, that many more such conflicts still exist across our industry and enormous amounts of client’s hard-earned money is being subjected to such practices.

At what cost you might ask? I took a peek at the five-year average return for the RBC Select Balanced Portfolio Series fund the other day and it averaged 7.93 per cent.

I then looked at some of the biggest third-party funds in the same asset category with similar objectives and risk and found five-year averages between 8.6 and 14 per cent per year – noting that these were the first few funds that came to mind that we use, and I didn’t go looking for the highest returns out there in the asset category.

Again, using simple math, I found that a one per cent lower return over a five-year period would equate to clients losing out on $5 million for every $100 million invested.

This is not to say that the in-house investment offerings will always be the worst option, but you would certainly want an adviser who is recommending what they think makes the most sense, not what will pay them a higher commission fee. 

Most professionals will have some types of conflicts of interest in their practice field, but it's how you handle them and disclose them to your clients that will define what type of job you do. 

I continue to advocate for regulatory reform that would see a simple and easy to understand fee-based structure as the only fee option for all advisers in addition to a fiduciary duty standard to get rid of these types of conflicts. In the meantime though, it is left up to you to decide if you are getting good quality and unbiased advice.

One simple way to check for a conflict is to check on the quantity of “in house” investment products that your current portfolio contains.

If you are invested with a major financial institution and the bulk of your portfolio is made up of funds sold by that same institution, it may be time for a second opinion.  


Working past 80

Are you worried you’ll run out of money before you die?

Are you scared that you may not able to pay for your long-term care needs?

Afraid that you will need to rely on your children for financial support during your final years?

According to the Seniors and Money Report released last week, you are not alone.

June is Seniors’ Month and the jointly commissioned report was released a few days before the start of the month to highlight some real risks and fears many Canadian seniors are facing.

Key findings from the report that looked at debt, income and financial planning work for Canadians aged 60 and over include:

  • One in four seniors fear that they will run out of money before they die.
  • A little under 75 per cent of respondents were likely to rely mostly on government income (CPP, OAS and GIS) over other savings and retirement income they built up on their own. 
  • 30 per cent stated that they can’t afford to retire.
  • More than half of those polled said they still carry debt past age 60 and 35 per cent were still carrying a debt load past age 80.
  • 25 per cent feared that they would not be able to pay for long-term care costs.
  • 30 per cent of those over age 60 and 22 per cent of those over age 80 are still financially supporting their children.
  • Nearly a quarter of homeowners over age 60 still have a mortgage.
  • Financial planning used to be a much less complex task.

If you worked for the same company for your whole career, you had a steady paycheque to pay down the mortgage and put a little away, plus a solid pension plan to fully fund your retirement needs.

As long as you put in the years with your company and didn’t spend more money than you could afford, your retirement more or less took care of itself. 

Times seem to be changing though and the days when most of our population retires with a good pension, a mortgage free house and a good-sized retirement savings account are gone.

This makes the financial planning and retirement planning process significantly more important.

Some seniors may feel embarrassed about their financial position. While never easy to do, asking for help at a time when you feel vulnerable or ashamed is critically important as this is when you need the help the most.    

Many also feel that it’s too late to ask for assistance when it comes to their finances. Again, this couldn’t be farther from the truth.

While solid financial planning advice would have no doubt helped them even more 20, 30 or even 40 years ago, getting that advice today is still better than waiting another five or ten years to see what your options are.

No matter what stage of life and retirement planning you are at, a solid financial plan can go a long way to help ensure a work-free and worry-free retirement.  

It is never too late to get started.

Learn dollar cost averaging

After a couple of years of low market volatility, the bigger swings started up again earlier this year.

The thing is though; market volatility is normal and need not be feared. You should however plan for this movement and make sure that your portfolio is built to accommodate it. 

One simple technique for adapting to volatility is the use of dollar cost averaging (DCA).

In the simplest form, a DCA strategy is one that has you buying into the markets on a regular basis for a fixed amount, regardless of market conditions.

The “cost averaging” part of the equation is a consequence of buying less of a stock or fund when prices rise and more units when prices fall, averaging out the cost per share or unit over time.

Nobody wants to invest a hefty sum of money right before the market goes down and see their value drop in the first few months. Ideally, you’d like to put the money in right before the market has some strong gains.

By using a DCA strategy, you don’t need to try to predict what the market will do in the short term, a prediction that nobody can make with absolute certainty. Instead you will gradually and continually add to your portfolio.

Many investors unknowingly "dollar cost average" by default if they put a regular monthly amount away into their RRSP or TFSA.

There is no question that this is the preferred way to put money away and save for retirement since you can take advantage of the longer-term time horizon without worrying about picking the right time to invest.

But what should you do if you suddenly have a larger sum all at once? 

The lump sum might come from the sale of a home, an inheritance or even an employment buyout.

While the desire to put all the money to work right away might sound good, you need to equally consider the current market conditions and risks involved. It may be far safer and less stressful to implement a shorter term DCA strategy and put say 20 per cent of the money into your chosen investments each month for the next five months.

In some market conditions, it might make more sense to put all the money in at once, particularly if the investment time horizon is longer. Each situation should be independently evaluated to see what makes the most sense.   

On the withdrawal or retirement income side of the equation, a reverse DCA strategy might also be a good idea.

Let’s assume you pull $50,000 out of your RRIF each year.

If you pull the money as a lump sum every July 1, the timing might help or hurt you. If the markets go up in the first two quarters of the year and then drop back down for the rest of the year, your July 1 timing couldn’t be better.

But if the markets have a rough first half of the year before recovering and growing into year end, your timed withdrawal could eat away at a fair bit of capital. 

The same retiree could instead elect to pull $4,167 each month which would spread the market timing risk out and create an average cost of sales prices for the given year. 

Statistically speaking, putting in or taking out a lump sum all at once will outperform a DCA strategy over time – roughly to the tune of two out of three cases.

But that doesn’t necessarily mean it is right for you.

You need to also consider the “sleep soundly at night” factor, which often is worth far more than a little bit of extra returns.     


You can be a millionaire

How hard is it to save $1 million for retirement?

To answer that question, we must look at a number of variables such as interest rates, number of years to retirement, etc.

But the net result is that it may be easier than you think.

No matter what rate of return you earn on your investments, the real key to reaching your goals is starting to save as early as possible.

Let’s assume that your goal is to have $1 million in your portfolio when you reach age 65; you increase the amount you put in each year based on inflation (we’ll call it two per cent per year) and that your investments grow at six per cent per year.

The amount you will need to put away will depend entirely on your age:

  • An 18-year-old would need to invest $56 per week or $2,919 per year
  • A 25-year-old would need to invest $90 per week or $4,672 per year
  • A 35-year-old would need to invest $185 per week or $9,597 per year
  • A 40-year-old would need to invest $274 per week or $14,233 per year
  • A 50-year-old would need to invest $691 per week or $35,915 per year

Younger Canadians certainly find putting money aside for retirement hard with entry-level wages, student loans and the high cost of living but the numbers don’t lie.

It is substantially easier to reach your retirement goals when you start saving at an earlier age. Even when money is tight, if you stick to a budget and setup an automatic weekly or monthly withdrawal, you likely won’t even miss the money being set aside.

Although you may feel like your budget is tight, the majority of 25-year-olds can put away $90 each week if they make that goal a priority.

Ideally, those with moderate incomes will put this money away in their TFSA account so that the $1-million nest egg they amass will be completely tax free. For some, a mixture of TFSA and RRSP contributions might be best.

There is no doubt that there are lots of people out there not earning six per cent per year on their investments, but it’s really not that hard to do.

If you put the money into a well-diversified (i.e. not predominantly Canadian bank and oil stocks) portfolio with a moderate risk profile and don’t touch it or make any changes, you should very easily reach or beat your six per cent annual goal. 

In fact, a portfolio like the one mentioned above will quite likely earn a higher average rate of return over the long term. If you were to take the above example of a 25-year-old who needs to put $4,672 away per year to reach $1 million and had them earning eight per cent per year instead of six, they could have a nest egg of $1.6 million by the time they are ready to retire. 

So yes, in addition to starting early the quality of investment management you select is also very important.

There you have it, saving $1 million is not that hard to do if you invest it properly and start early.

Even if you can’t put away the full amount required each week to hit your goal right now, starting with any amount today will get you closer to being on track for the stress-free retirement you deserve.

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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