Tag Archives: advice

There’s No Place Like Home…

Believe it or not, there are people who believe that a home and a mortgage are too cumbersome to manage, and there are some financial experts who recommend that renting real estate is more beneficial than buying.

The advice is based on the assumption that real estate will not be the great investment over the next 40 years as it has over the last 40 years.

Regardless, look at the facts.  Make some reasonable assumptions:

  • First, assume that home prices only rise as fast as inflation,
  • Next, assume that your rent would be approximately equal to your mortgage payment
  • Then, assume that, instead of making a down payment, you take your down payment and invest in “the markets.”

If this was how you approached this decision, you would need an after-tax and after fees rate of return of 12.4% on your investment portfolio in order to have the same amount of equity in your portfolio as you have in your home!

Now, to be fair, you have taxes and upkeep on your home. If you assume that taxes are 1% of home value, and assume that upkeep is another 0.5% of home value, then you would still need an after-tax and after fees rate of return of 10.8%.

These rates of return, over the long term, are unachievable.  You would have to have an all equity portfolio for the entire period, and find a way to pay no tax, and still, historical rates of return show broad market equity indexes return about 10% – not enough to get you there!

Finally, one more important issue to note.  Your home is generally considered your principal residence for tax purposes.  This means that, when you sell it, there will be no tax.  So the equity in the home is yours.  If you have found a way to pay no tax on the growth of your “invested” down payment, and if you have found a way to get 10.8% to 12.4%, you will still have to pay tax on the growth eventually.

So – if the aggressive growth rates don’t turn you off, then the tax treatment might just.  Home ownership will likely remain a worthy and profitable goal.

Management Fees – Are you paying for Bondage or Advice?

Each year, Canadians decide how and where they will invest.  Other than asset allocation, the fees that are paid will likely have the largest impact on their account.  For some, fees will be paid to an advisor involved at some point in the process.  That advisor might be a planner or a broker who takes commissions or trailer fees as a result of managing a clients’ account.  Or, fees may be paid to an investment manager, either indirectly through ownership in mutual fund, or directly as a result of a discretionary or segregated account with that manager.

Outside of fees, you may also want to explore whether or not your advisor has a fiduciary duty to you, and if there are any conflicts of interest in your relationship.  Conflicts can arise as a result of the business structure (i.e. only recommending products from that company), but can also also arise out of compensation structures.

Essentially, the amount and type of fees you pay are what determines the kind of practice your investment advisor runs.  Instead of just asking “how much” the fees are, perhaps examine the types of fees you are paying, why you are paying those fees, and what incentive it gives to the recipient of those fees.

Trading Commissions

By far, the most common method of compensating advisors is still commissions.  However, all commissions are not created equal.  There are basically three types of commissions:

  • Brokerage commissions: when trading securities, a fee is charged based on the size and type of trade.  Some brokers will pre-arrange a fee schedule for their clients that provide a certain number of transactions for a fixed cost.
  • “Spreads” on Bonds:  Many investors are unaware that there is a commission paid on a bond.  That commission is called the spread, and it is the difference between the actual rate being paid on a bond, and the rate at which it is sold to you.  For most bonds the spread is between 10 and 25 basis points (0.10% and 0.25%).
  • Mutual Fund “Front End” commissions: when an advisor recommends a fund, the client is charged a percentage of their investment in order to purchase units in the fund recommended.

In all cases, the commission here is a fee paid as a result of a transaction.  Make sure that, when you are working with an advisor, you are comfortable with what those commissions mean.  The commission regimes mean that the advisor gets paid when you act on their advice.  Thus, it is reasonable to say that their bias will be to implement a portfolio solution that prefers action.  If you are an active investor, then this will compensate an advisor who continues to bring quality investment ideas to you.  However, if you are an inactive or conservative investor, you may feel that you are pressured to take action that you do not feel is in line with the objectives of your portfolio.

Deferred Sales Charges

Mutual Fund “Back-end” commissions are a contentious topic among investment professionals and the investment public.  These “deferred sales charge” occur when a client purchases a new fund within a mutual fund company.  The advisor is paid a commission by the fund company, but the client is required to remain with that fund family for a certain period of time to account for those fees being paid, usually 3 of 6 years.  After the first year, those funds pay a trailing commission to the advisor of roughly 25 to 50 basis points.

The upside is that there is no immediate cost to the client.  In addition, the commissions paid are usually either 2.5% or 5.0%, and this allows advisors to receive compensation from smaller accounts, and enables them to spend the appropriate time with those smaller clients to deliver proper advice.

The downside, however, is that the bias for a practice run with this compensation scheme means that the advisor is paid to meet and satisfy new clients rather than existing clients.  If an advisor is being paid 5% on a new client and 0.50% on their existing clients, the attention of their practice is likely biased towards the initial portfolio set-up, and not necessarily the ongoing management of your account.  If your advisor recommends the use of these charges, ensure that you are comfortable that you will continue to receive the same quality of advice into the future.  In addition, your advisor should not be asking you to re-invest in deferred sales charges again once the deferred sales charge period is over.

No Load

No load compensation schedules are generally by advisors working with mutual funds, and are intended to mimic the type of compensation schedule that investment managers receive (see below).  The no load schedule means that the advisor receives their compensation as a percentage of the assets they have under management.  This means that their bias is towards maintaining the assets they already have, as there is no extra incentive for them to attract new clients, and there is nothing stopping them from leaving if they are unhappy with their service.  These are a form of servicing commissions, as above, but are the only form of fees these advisors receive for clients invested in these funds.  Thus, their bias will be towards more inactive clients.

Servicing Commissions

Servicing commissions are fees that are paid by fund companies (generally) to advisors for maintaining the accounts that they have.  Servicing commissions vary depending on whether the advisor has recommended a front end load, no-load, or deferred sales charge fee options for their clients.  Reasonably, these are the fees that the advisor receives for maintaining your account over the long term.

Investment Counsel Fees

A direct relationship to a discretionary portfolio manager usually means a fee schedule much like the “no-load” schedule described above.  These fees are usually lower, as a result of the size and structure of accounts being managed.  In addition, it is generally accepted that these fees are tax deductible for non-registered accounts (although taxpayers are advised to consult their tax professional to ensure this is the case for them).  The fees paid to these managers can also be mixed with an incentive fee of some sort, such as a share in a percentage of profits.  This is more commonly found in managers with higher risk or specialty mandates.  There are a variety of “retail” solutions like this that are available to clients through advisors that mimic this relationship.  Two of note are offered by SEI and Franklin Templeton.

Your Objectives

Perhaps the best advice ever spoken on this topic was delivered by Upton Sinclair when he uttered the following: “It is difficult to get a man to understand something when his job depends on not understanding it.”  More specifically, if your objectives do not fall in line with the method in which your advisor receives fees, it will be difficult for you both to see eye to eye on an investment strategy.  While the fee discussion tends to raise the blood pressure of both clients and advisors alike (for different reasons), it is a discussion that should be had.

Regardless of the fee schedule, good quality advisors are likely going to give good quality advice to their clients, regardless of the fee schedule.   However, even good quality advisors are running a business, and the business decisions that they have made about their practice are going to impact how they deliver their advice in the future.

As far as I can tell, there has already been much written about fees, and a recent report suggests that Canada’s mutual fund industry may have the highest fees in the world, on average.  So what is an investor to do when faced with the costs of investing?

The Child Care Expense Derby

find out who should really claim child care expenses on their tax returns

Can't decide who should claim the child care expenses at tax time?

My wife and I earn similar (but variable) incomes, and so each year we engage in what we call the “Child Care Expense Derby.”  We have the government to thank for that.  Every year I am a bit suprised by who it goes to (“and the winner is…”), but I am glad for the opportunity to get some tax back for the money we put into child care.  I always like to go to some handy tax calculators to figure out where I stand before tax time to see if I can predict the winner.  Here are two: my website (not very complicated), and TaxTips.Ca (more complicated).

The reason for the derby is this – we are never exactly sure which income will be the lowest until we get our employers’ T4’s, and then the spouse with the lowest income is the one who receives the benefit of the child care tax deduction.  Also, thew winner of the Child Care Expense Derby will be the spouse who contributes less to their RRSP.  The child care expenses can cause a big swing: tax rules allow expenses to be deducted in the following amounts:

  • a maximum of $7,000 per year for each other eligible child who is under 7 years of age at the end of the year; and
  • a maximum of $4,000 per year for each other eligible child (between the ages of 7 and 16).

This means that a family of three children under the age of 7 has deductions of up to $21,000 – nice work.  You could notice significant savings on your taxes, approximately a $7,000 tax savings for the average Canadian, who earns income at approximately a 30% tax rate.  The eligible child care is defined by CRA as on their website follows:

  • an eligible child care provider;
  • a day nursery school or day-care centre;
  • a day camp or day sports school;
  • a boarding school or camp (including a sports school where lodging is involved); and
  • an educational institution for the purpose of providing child care services.

Note that this is not an exhaustive list expenses, and other expenses, such as advertising for a care worker, or agency fees to find a care worker are also included.

The downside here is for a family that only has one income, or when the incomes are far apart (i.e. one high income and one low income), the deduction may not be as great that two mid- or high-income earners.  But it is still powerful.  Imagine a family with one income of $75,000 and one income of $45,000.  (Let’s say there are two children under 7, so $14,000 of eligible expenses).  The lower income spouse at $45,000 would reduce their taxable income by $14,000, using the childcare expenses as a deduction against income.  This would be a tax savings of approximately $3,300 for the year.

You should also note that this deduction gives you the exact same tax relief  as an RRSP deduction, so if you have to make the choice between who does what, don’t let the lower income spouse do any RRSP deduction until the higher income spouse has maximized their RRSP contribution.  This will ensure that the higher income spouse gets more deductions against their income, and that the lower income spouse does not put RRSP contributions in at an exceedingly low rate.  Some planning should help you avoid this.

This should help when it comes to deciding what to do about care for your kids, to help and reconcile the finances at the end of the year, and to generate some other tax benefits while you are at it.

Three Easy Steps to Put Your Fitness Routine in Gear!

Spring has sprung!
and with it, come the shorts, t-shirts and the bulges that have taken over since last summer…

Do you want to get fit and in better shape but are not sure where to start?
I’m not only an experienced, professional trainer, I am also a sister and a friend to a few good men, and I have to say that I am increasingly aware of what a busy dad contends with on a daily basis. With all of the demands that you guys juggle each day, its no wonder all aspects of your well being feel depleted. It takes a lot of energy to be the modern professional, a husband, dad, coach, disciplinarian, appeaser and your average household handyman. I’m sure plenty of you dads out there want to get in better shape just to be able to handle it all!

Lucky you—it’s my pleasure to help you get back in the game of fitness!

Let’s face it, without a strong, healthy body and a confident and happy mind, you won’t be able to put your best foot forward. It’s very important that you do what it takes to be your best at work, at home and with the kids! The key to our longevity is due much less to our genetics and more about how we take care of ourselves right?
So, my best advice to get you up and moving and feeling better involve a few easy “starter tips.”
These tips will help sway your scale in the right direction and help build a stronger you:

First; try a carbohydrate-cycled diet.

Alternate between days of low carb (intake is below 50g/day) and moderate carb intake (times 1.5 with your bodyweight to get your approximate daily grams) to maintain your muscle and lessen your level of fat. Cycle the starchy carbohydrates only, and include as many fruits and vegetables as possible.

Second; Plan to weight train three times a week and “superset” your weight exercises.

Super setting means performing two exercises back-to back without rest in-between. A good way to do this technique is by super setting opposite muscle groups like chest and back, and your arm muscles like biceps and triceps. I assure you, you’ll burn more calories in less time!

And lastly; just MOVE!

Get outside, walk or jog whatever you want at least 3 times a week at a moderate intensity for over 30 minutes. Include the dog, kids and/or your significant other. Exercising together is a great way to increase fitness and family fun!

So what are you waiting for?

Building a healthy, strong body doesn’t just happen over night! You need to empower yourself by setting realistic goals and begin with the good old fashioned basics. Clean up your diet, move some iron and get your heart pumping. I’ll be here with you along the way, and I’ll check in often to see how you are doing.

Stay tuned because next time, I will share the 3 most common fitness myths with you!

I’m simply determined to get you started off on the right foot!

Got questions? Comments? Specific requests?

Post a comment here and I’ll do my best to help you out!

Shawna L. Marshall B.A.,BKin.,H.D

Power Corrupts, Entitlement Corrupts Absolutely

  • “Power tends to corrupt, and absolute power  corrupts absolutely.” – Lord Acton, 1887
  • “Unlimited power is apt to corrupt the minds of those who posses it.” – Earl of Chatham, 1770 

In light of recent events (Tiger Woods, anyone?), many would believe the above statements to hold true.  It seems, in our society, that increasing power inevitably leads to a complete erosion of moral and ethical boundaries.  Consider former US Attorney General Elliot Spitzer, or Senator John Edwards preaching family values as a campaign slogan while committing adultery.

However, power may not be the entire story.  I recently read an article in The Economist (Jan 23-29, pp. 75-76) that looked at a study by two professors (one in Europe and one in North America), who conducted a series of experiments to see if this was indeed true.  In the tests that they organized, they arranged so that one half of the group felt entitled to their power, whereas the other half did not.

What they found was interesting.  The research suggests that the individuals who were made to feel entitled to their power were far more likely to commit immoral or unethical acts than the group that was led to believe that they did not deserve their power.  In addition, the research went on to consider the actions of those in power who did NOT feel entitled to the power they were given.  Not only were they more likely to be much more harsh in the judgement of immoral acts, but as a group, they were also more harsh on themselves when judging their own acts than on others.

Huh.

So why did I bring this up in the money column?  I think that this is a very strong analogy about how people, and specifically children, act when confronted with money (note: this is my opinion now, but go with me here).  I have seen many clients come and go, and come to know their families relatively well over the years.  I have also listened to many people speak about the plans they have for their retirement and estate plans, and most feel that leaving “too much” money would have a negative effect on their families, or more specifically, their kids.

So how do we teach kids about money and responsibility?  There are loads of fantastic resources around the web.

However, we are often so preoccupied with saving and spending wisely ( heck, that is what this column is designed to discuss! ), that we fail to consider whether or not our culture (I must have this video game/car/home/toy/etc.) is making our children to feel entitled to the money that their families earn.  Parents may work their fingers to the bone to earn this stuff, but there is likely no activity, strategy or website that will teach them the importance and impact of money unless they learn they will have to earn it, not that they deserve it.

When in Doubt: Seek Support

One of the very best ways to cope with a stressful environment is to reach out to others and nurture connections you have. Narrowed vision, as if we had blinkers on, is a natural response to stress. Blinkers are good when we need to focus but bad when we need to be creative. Working with others in a creative and supportive environment is an effective antidote to modern day stresses.
Develop a group of supporters who can help you when you need it. Do this in advance, as part of your professional networking. It’s not the kind of thing you can do at the last minute. Many people form support networks in groups they join, like a Goal Setting Club or a professional association.
A goal setting kind of club which meets regularly is a good idea for people who work alone and even for people with jobs who need a professional outlet away from work. The key thing is to have handy access to people who know you, your situation and what your strengths and weaknesses. Their input and ideas will job your own creativity.

What about you?

Who do you reach out to when you need some help through challenging times?