December 24, 2011


the joy of a childIt's Christmas Eve. Whether you celebrate or not, snow makes today special and there isn't any.

As a child, Christmas was the most special time of year. It wasn't our festivity but we celebrated just the same. There was joy in the air. People were happier. Everything was delicious and nothing had calories. The decorations looked wonderful. The snowmen, the lights, the sounds, the stockings, the cards, the music. Pa, rum, pa, pum, pum. Me and my drum. 

The joy and wonder. Santa Claus is coming to town! The magic even changed Scrooge and The Grinch.


We had an artificial tree with shiny silver branches. Like any good child, I believed in Santa and was rewarded. How did he get in when we had no fireplace and the chimney led down to the furnace?

Since the real Santa was busy at the North Pole preparing for his annual visit, he sent mall Santas to get our wishes. This was more convenient than writing a letter in those pre-email days. Plus we got a sweet treat. Joy to the candy canes! The lineup was worth the rewards.

We had a black & white TV with one over-the-air channel. This was in London, Ontario. That was fine. We watched uplifting old black & white classics. Year after year.

Boxing Day

When I became a teen, Boxing Day mattered more than Christmas. On December 26th, I'd head downtown to Sam The Record Man where everything was on sale. This was the time to buy imports or expensive back catalog records (yes, the vinyl ones). The popular titles were discounted at other stores.

Future Shop: "Boxing Day" starts on Christmas Eve?!?In those days before websites and home computers, you couldn't do your “Boxing Day” shopping on December 24th or 25th. Now we can. What "progress"! Can’t we get any break from shopping? We have to rely on our self-control, which can be weak.

Fujifilm FinePix 6800Z: click for review at dpreview.comIf you still like shopping in person, Best Buy and Future Shop now open at 6 AM on Boxing Day. Even 7 AM was too early.

I remember lining up in 2001 to get our first digital camera: a Fuji FinePix 6800Z with a body designed by Porsche. Having photos felt important since 9/11 ended innocence a mere three months earlier. The normal price of $1,000 was now reduced to $700. That was for 3.3 megapixels, shutter lag and a noticeable pause between shots. A 64 MB memory card was pricey but necessary accessory. The “good old days" weren't for gadget lovers. The store only had four but I got one and still have it.

Hot Chocolate

As a child, we never needed to travel for Christmas because we were already together. When I started working, travel added stress because the weather was unpredictable whether driving or flying. Sacrifices.
We didn't have global warming concerns in those days. Since we were in a snow belt, we could count on lots of the white stuff. That's a wonderful excuse for hot chocolate.

We didn't have treats regularly. That made the shortbread cookies and boxes of chocolate so much more delectable. This year we have Costco sized boxes that last months.

Why Not?

We live in such a complicated world. On this day in 2008, we were at the hospital emergency ward. We deserve to remember lighter times at least once a year. This is the best time because so many others are looking back and enjoying too. We also have time to think and try new things. Since the New Year is about to begin, this is also a great time to act on new resolutions.

Toronto weather on Dec 24, 2011 at 4 PMWill it snow tonight?

More than once, we've gone to bed with green grass and awakened to snow. There's such a lull when you open the door. Snow dampens the sounds and makes the day even more special. Even the shoveling is fine when you return to a nice warm house with delicious aromas wafting from the kitchen.

This is the final post of 2011.

The best to you and yours during the holidays.
May your 2012 be swell, swell, swell!


Podcast 149 (6:05)

direct download | Internet Archive page | iTunes

PS If this post is just nostalgia talking, I'm still listening. How about you?

December 17, 2011


boardroom ghost 500x515Corporate governance is a measure of how well companies are run and keep their promises. The Globe and Mail has done an annual study for the last 10 years. Here are some of the biggest scandals: Enron (2001), Worldcom (2002), Nortel (2003), Parmalat (2003), Tyco (2005), HP (2006), RIM (2006-2007)  and Olympus (2011). Do you remember why? For highlights, check out this slideshow.

We last looked at the 2007 rankings. It's time for an update.

Lots has changed since 2007. That's when the iPhone was introduced. That novelty is gone and the devices are commonplace. Not all changes have such happy evolutions.

We have endured financial turmoil. Major companies have had difficulty keeping promises. Countries too. Financial services are especially important since they are intangible. You can't touch the return on an investment or feel the quality of an insurance policy by holding the contract.

Canadian companies have proved resilient. That’s a sign of being well-run. The regulators deserve credit for setting high standards and ensuring they are enforced.


The best 15% of boards did well before Enron and would have done well without any reforms. The 70% in the middle have benefitted most from the governance revolution, and the 15% at the bottom are unchanged.
— TD Bank chairman Brian Levitt (Corporate Canada sees a quiet revolution in governance)
Corporate governance has improved. We’ll focus on financial services. In 2007, only 12 companies scores 80% of more. Now there are 16, despite the tough times and higher standards.


2011 corporate governance for financial services (click to enlarge)Here are the five highest ranked companies in financial services:
  1. Manulife (#2 overall, down from #1 in 2007)
  2. Scotiabank (#4 overall, up from #18)
  3. Sun Life (#7 overall, up from #8)
  4. tie: BMO (#10 overall, down from #5) and TD Bank (#10 overall, down from #3)
  5. tie: CIBC (#12 overall, up from #18) and Industrial Alliance Insurance (#12 overall, up from #21)
The Bottom
As in 2007, Power Corporation of Canada is at the bottom at #237 (a drop from #178). This group owns companies like Canada Life, Great-West Life, Investors Group, Investment Planning Counsel, Mackenzie Financial and London Life.

For more details, click on the table. You’ll find much more about corporate governance on the Board Games 2011 microsite. The University of Toronto prepared the data at the Clarkson Centre for Business Ethics and Board Effectiveness. How do you fit that on a business card? You can download the full results in a spreadsheet to do your own analysis.

No Guarantees

We can't predict the future until tomorrow becomes yesterday. That doesn't make us helpless. We can take steps to put the probabilities on our side. You might want to support larger companies which rank high in corporate governance — especially leaders in 2007 and now. Thanks to competition, you rarely pay more but get extra peace of mind. What’s the downside?

Even well-run companies may have products with poor promises. For instance, you’ll find pitfalls in mortgage life insurance and investments with high expense loads. You might do better as a shareholder than a customer.

Corporate governance is also a way to gauge whether your advisor is putting your interests first. If you were sold or shown products from companies with low scores, did you get tires with less tread? On a warm sunny day, you won't notice the difference but freak storms strike. When the roads get treacherous, it's too late to change your tires.

Nothing stops companies from scoring high on corporate governance. Do they? Nothing stops advisors from recommending those companies. Does yours?


Podcast 148 (6:39)

direct download | Internet Archive page | iTunes

PS How good are you at keeping your promises?

December 10, 2011


What high MERs?We're not ostriches and in winter there's no soft sand to hide our heads. We might cover our ears with hats or wear headphones but we can't pretend we don't know what's going on around us.

Still, we love fooling ourselves and doing nothing while we’re being harmed slowly. Like lobsters in a pot.

In honesty, can you claim you don't know that Canada has extremely high investment expenses? Especially after this week’s extensive media attention?

Compound interest is the secret ingredient in investment growth. The Management Expense Ratio (MER) is the enemy. Yes, we need to pay something but the more we pay, the worse our returns. Since the MER is often deducted on a daily basis, the effect of the cost is compounded too. The damage builds over time. Plus, in absolute dollars, you pay more as your investments grow.

The Facts

Let’s start with research and reports from credible sources.
Morningstar Global Fund Investor Experience (Mar 2011)
“Canada is the only country [out of 22] in the survey with TERs [Total Expense Ratios] in the highest grouping for each of the three broad categories [equity funds, fixed-income funds and money market funds] … These Morningstar rates Canadacosts cannot be explained by pointing to unique features of the Canadian fund market.” (page 22)

“Positively for fund investors, sales and media practices are excellent and disclosure is very good. Unfortunately, these benefits are counterbalanced by steep taxes and the highest fund costs found in this survey …  Nor does it [Canada] offer fund investors the protection of a board of directors.” (page 24)

“ … the Canadian funds community is the only funds groups to claim last year’s Global Fund Investor Experience report was methodologically flawed in its treatment of fund expenses … A final claim is made that Canadian mutual fund costs should not be compared to those of the United States, because the U.S. marketplace is much larger and therefore enjoys greater economies of scale. This argument has some merit, but it does not explain why Canadian fund expenses are significantly higher than those in other countries with modest population bases, such as Belgium, Australia, Sweden, Norway, and Hong Kong, to name a few.” (page 58)

Here's a link to the full report (PDF)
Financial Post
Jonathan Chevreau wrote: “I doubt any objective advisor would counsel against buying the iShares ETF through a discount brokerage though my bet is quite a few would counsel against buying Investors [Group] Dividend Fund for the simple reason it’s overpriced … when a far cheaper alternative exists. It’s beyond me how the firm can countenance this stance while also trying to wrap themselves in the rhetoric of their alleged efforts to improve financial literacy.OK, Investors Group, now the gloves are off on your financial literacy stance (Dec 1, 2011)

“Has there been a sea change in consumer attitudes to fees and the dramatic contrast revealed by the surging ETF industry? Or are we so helpless as investors that we willingly turn over 2.7% in management fees to companies like Investors Group to make our decisions for us?”The MER Debate (Dec 6, 2011)
Investment Executive
“Outside of deposit accounts (held by 90%), affluent Canadians are most likely to invest in mutual funds (held by 56%). This is one of the highest levels of mutual fund ownership of all countries surveyed.”Affluent investors in Canada rely on professional advisors: survey (Dec 8, 2011)
The Globe and Mail
“The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) complained that under the current regulatory environment, there’s limited price competition and demanded that Ottawa look into the high cost of investing. Federal Finance Minister Jim Flaherty said he would ask the Senate national finance committee to investigate.”Canadian Investors ‘gouged’ by fees (Dec 5, 2011)

“Given that Canada has some of the highest mutual fund fees in the world, we are used to seeing fees of 2.4 per cent and higher. Investors Group, however, stands out among fund companies in Canada because their fees often hit around 2.7 per cent. This is but one of the red flags.”Investors Group mutual fund fees among the highest in Canada (Dec 6, 2011)

“It is beyond pathetic that no mutual fund company in this country wants to make low fees a key part of its marketing pitch to investors. Our fund industry abides. It’s insular, complacent and arrogant. It too often charges high fees for lame funds that investors buy through advisers who provide no advice.”The no-gouge way to better investing (Dec 7, 2011)
Canadian Labour Congress (CLC)
MERs: you vs your advisorAn online calculator shows what happens when you invest a lump sum of $10,000 and earn a compound return of 5%. With a mutual fund charging 2.5% guess what happens after 30 years? You have under $21,000 and your advisor has over $22,000. This is a win/lose and you’re on the wrong side.

After 45 years, the results continue to compound against you. You have less than $30,000 and your advisor gets over $60,000.

With low fees of 0.5%, you win. After 45 years, you have over $72,000 and your advisor gets less than $18,000. Don’t cry for your advisor. You aren’t their only client and the investment was entirely yours.


The Canadian investment industry doesn’t see a problem. Surprised?

They argue that we lack economies of scale. That makes for sense for physical things like installing fiber optic cable or paving roads. An investment is an electronic transaction, and computations keep getting cheaper.

Another argument is that you're paying for advice. Perhaps but there are questions too
  • how good is the advice? what are the objective measures of quality? what are the penalties for bad advice?
  • how much are you paying?
  • how much does the advice cost? Is this cost dropping?
Has your advisor ever told you how much you pay for their advice? In the world of for-fee advice, you would. Since that model is rare, you probably don't know.

How meaningful is advice without guarantees or penalties?

If you've been burned by bad investment advice before, do you still believe your advisor has a magic crystal ball? Do you believe you get the same quality of advice as the big investors like pension funds, insurance companies and banks?

If you're not getting amazing advice, maybe your best option is to lower your costs.

Why Hide?

Why is the cost of advice hidden from you? Maybe that's because you wouldn't pay for the advice if you saw the bill. Maybe you would demand more for your money or demand to pay less for what you are getting. Maybe you’d look for better advice even if that cost more. After all, most advisors are close to average, which impairs the advice they are capable of offering.

The Real Purpose Of MERs

I've been to nonpublic seminars where investments are introduced to advisors. There's a standard pattern. The presenter shows how the new investment team beats the gang that just got turfed. We see carefully-constructed examples of amazing past returns that no one actually achieved. Advisors are shown the point-of-sale material. Who needs skill when you’ve got nice coloured charts? The best is last: slides on how high the compensation is. Now go out and sell sell sell!!!

I've never seen a slide that shows the portion of the MER intended for advice. As an investor, have you?

A big portion of the MER is a sales commission. Advice is the cost of making the sale, an attempt to show the expertise of the advisor.

The MERs are high because we continue to buy. Would lower MERs increase the investment manufacturer’s market share? Probably not because of buyer inertia and since competitors can quickly copy. It's like gas prices. There are different chains but the prices match. You get a sense of the margins when you see how much less Costco charges for gas.


Bundles often have compromises that boost profits. Who really eats the ketchup chips in the variety pack? How good is the headset that came with your smartphone?

When you invest, you pay for advice and administration (including transactions and record keeping). You won't know how much unless the components are separated. You might then be surprised and decide to do something. Not now, but later. Until then your inertia costs you a bundle.


Podcast 147 (12:37)

direct download | Internet Archive page | iTunes
PS Remember that tax hurts too …

December 3, 2011


hockey commotion"The Canadian life and health insurance industry is witnessing some dramatic developments. Barely a day after Standard Life’s announcement that it would discontinue its individual life insurance and critical illness products, there is word that Sun Life Financial has dismantled its long term care insurance (LTCI) specialist model." (Nov 30, 2011)

Following that article, this exchange took place on LinkedIn.
The challenge from Byren Innes (click to enlarge)Promod Sharma: For years, I've seen insurance advisors struggle to understand the different types of products: life insurance vs living benefits (disability, critical illness, long term care) vs investments. Clients lose when they aren't offered products which are suitable and well-configured. Having experts certainly helps but has a cost ... 
Byren Innes (LinkedIn profile): Agreed. Unfortunately we live in a very complex product world today even though the 'product' shelves are much narrower than the past. As many advisors broaden their own offerings it becomes increasingly difficult to understand - not just the basics but the specific and sometimes complex and subtle details. I'm waiting for a smart entrepreneurial firm to step up and fill this gap. Who will it be?
To date, Byren’s challenge has gone unanswered. This post proposes solution.

The Past

When your condition exceeds your doctor's expertise, you get referred to a specialist. You get better care and doctor avoids malpractice issues. Insurance works differently. Advisors need no real training. Once they pass a simple multiple-choice exam they are free to work on cases beyond their capabilities.

Since insurance advisors are commissioned salespeople, their primary goal is finding prospects. That tough role gets well-rewarded. When advisors elect to get technical help they have three choices:
  1. insurers
  2. intermediaries, or
  3. independents
Each source has pros and cons. As Bob Dylan said, you gotta serve somebody. That's true even when you think they are serving you.


Insurers provide free support. The price is right but the advisor then has an obligation to sell that company's product. Say bye to independent advice.

Since insurers are cost-conscious, they hire average specialists. Despite the impressive credentials, you get average advice. These experts often have "field experience". That means they failed at selling and are happy to get a salary and employee benefits instead.


Managing General Agents (MGAs) are the intermediaries between the insurers and the advisors. The larger organizations provide internal support. This can be better than what's available from the insurers. Recommendations can now be independent but there's an indirect cost: the advisor usually gets lower compensation.

This model looks good. There's no upfront cost to the advisor, which is ideal since not every case closes. However, advisors often begrudge the cost. For reasons I've never understood, they'd rather get 100% of nothing or compromise with the free support from insurers.


Some technicians realize they can't sell and some salespeople realize they can't do the technical work. They form formal alliances or work together on selected cases.

These technicians can be very good but they aren't cheap. They typically get a split of the revenue (e.g., 25%-50%). No sale means no money, which may tint their advice.

To show their value, technicians tend to make matters look more complicated than they really are. If they simplify, the advisor might soon realize they can use free or cheaper resources.

The Ideal

Can an advisor who tries to do everything be great at anything?

The ideal is to have a team of independent specialists. Each masters their niche and gives referrals outside their expertise.

In practice, few advisors specialize because that means leaving "money on the table". For some reason, that's a problem. The other challenge is trust. Advisors want you to trust them but they have immense difficulty trusting other advisors.

An Extra Step

Commission-based sales create conflicts of interest. The solution is for you to pay for each service even if you decide against proceeding.

Is this radical?

You already pay your lawyer and accountant for their services. You pay a home inspector even if you don't buy the house. What do you think?


Podcast 146 (6:15)

direct download | Internet Archive page | iTunes

PS Just because advisors can get help to sell you a policy doesn't mean they have help to provide ongoing service.