It'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.
Wonder
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.
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.
If 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.
Will 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!
Corporate 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.
Trends
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.
Rankings
Here are the five highest ranked companies in financial services:
Manulife (#2 overall, down from #1 in 2007)
Scotiabank (#4 overall, up from #18)
Sun Life (#7 overall, up from #8)
tie: BMO (#10 overall, down from #5) and TD Bank (#10 overall, down from #3)
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?
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?
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 costs 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)
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)
An 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.
Disagreement
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.
Unbundle
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.
"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." — advisor.ca (Nov 30, 2011)
Following that article, this exchange took place on LinkedIn.
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:
insurers
intermediaries, or
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
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.
Intermediaries
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.
Independents
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?
In this week’s Globe and Mail, Preet Banerjee investigates the financial aid available to the disabled. I’m quoted. The interview took place via Bluetooth while I was driving to the sold-out Toastmasters conference. (There, Jonathan Holowka and I showed ways to turbocharge clubs with social media.)
Disability is a dreary subject and you avoid buying insurance, but the topic is popular this week. Advisor.ca, has articles to help salespeople clear the sales hurdle and pitch disability coverage. There is even a script for them to use on you. If you start getting contacted in the near future, maybe that’s why.
This post gives you more insider thoughts about disability insurance, which is sometimes given the glitzier name of income replacement insurance.
Statistics
There are many eye-popping statistics about the high risk of disability and how long income can be lost. You can watch a no-longer-embeddable video from PPI Solutions.
You probably know people who are disabled at least partially.
Differences
Death is something an actuary can calculate fairly easily and accurately. Predicting who will become disabled is not so easy. It is a calculation based on chance. — New York Times, April 2011
Life insurance pays a fixed amount upon death. Critical illness insurance pays a fixed amount upon diagnosis of a covered illness. Within reason, you decide how much coverage you want.
Disability insurance is different. It only replaces a portion of your lost income. If you were able to replace your full income and get indexed benefits, where is the financial incentive to return to work? If the economy is bad and layoffs are pending, getting disabled may look like an exit strategy.
To counter abuse, insurers have ongoing checks to make sure you still qualify. With life and critical illness insurance, you're only checked at the time of the claim.
Nortel is a sad example. Instead of getting real insurance, the company decided to insure employees themselves. Since Nortel is bankrupt, their promises mean nothing. The disabled lost their benefits. If real insurance were used, then benefits would have continued. If the insurer failed, Assuris protection would step in.
If you can't rely on an employer or government, can you rely on yourself? If you don't have your own DI coverage, you are your own insurer. Since you cannot tell if you're going to become disabled or for how long, self-insuring can prove very costly unless you're independently wealthy.
Problem
Statistics Canada reports that 1 in 7 Canadians are disabled. The rates increase with age. Not only is disability common during your working years, the benefits could be paid until age 65 and might even be indexed. While the protection is worthwhile, it's pricey. It has to be. That’s why some people buy critical illness insurance instead. That's valuable coverage but hardly a substitute.
The perceived problem is that you can spend lots of hard-earned money on insurance and never get a long term disability. Isn't that better than having a claim? You had peace of mind and your health.
PS Relying on your employer for your pension is also risky. Defined benefit plans are becoming rare in the private sector and we're living longer than ever.
The answer depends on where you're getting the advice and the business model of the advisor. When a billionaire sells advice via a seminar, I'm skeptical. Why not show generosity by giving the information away for free? The Khan Academy does and is changing lives.
For-Free or For-Fee?
There are many places you can go to get a free financial plan. If they sell mutual funds, count on the proposal including mutual funds (instead of cheaper ETFs). If they sell insurance, count on a recommendation to buy some (and probably not cheap term).
Even if you pay, there may still be biases. If they sell investments, you may be encouraged to move your portfolio to them. Do that and they may even waive their fees for the plan. The result is the same as if you got a free plan. Their real model might be asset accumulation.
However, the criticism may be unwarranted. Time and expertise cost money. A monkey will work for peanuts but maybe you don't want a hire a monkey.
For-Fee
What about for-fee planners? We're reluctant to hire them when we can get free plans elsewhere. They may also get compensated for the investment or insurance sales that arise from their recommendations.
The optics vary.
To appear independent, they may send you to someone else in their firm. In the bank-owned world, the investment advisors make referrals to the insurance specialists and share in the compensation. Management may get incentives to ensure both groups to work together.
In private firms, revenue can be shared too. Let's say an accountant sets up a company with a planner, investment advisor and insurance advisor. All revenue could go to this one-stop shop and get shared through the ownership structure.
For-fee planners often establish informal affiliations. They could get paid for the referrals they give by getting referrals in return. That's reciprocity. Buyer beware again.
Other Sources For Free Advice
If you're getting advice from someone who doesn't sell financial products, you may be getting good advice. Bloggers, journalists and authors can be excellent sources. They make their money in other ways.
Retirees may have valuable advice if they've kept their knowledge current and can connect with younger generations. Former insiders are another source but find out why they left. If you sense they were booted out for poor performance, they have biases.
If they're giving free advice, how much are they putting online? If none, they may have difficulty learning new skills. Perhaps they don't have much to say that would withstand public scrutiny.
The Sellers
You could get good advice from someone who's selling but you might not. If the advisor only sells mutual funds, will you get any recommendations to buy low-cost ETFs?
When Paid Advice Doesn't Pay
I've met advisors who wanted to give unbiased paid advice but they couldn't create a viable business model. So they added commission-paying elements like investments or insurance.
You're not keen to pay when you can get free advice elsewhere. This says the for-fee advisors haven't been able to show value for your money. To compensate, some will give you lengthy financial plans that are mainly fill-in-the-blank templates. There's more value to you if that content is online, hyperlinked and kept up-to-date. You could then get a much shorter plan — maybe one that fits on a single page and has clear action steps.
The Dilemma
Even if you're paying for advice from someone who's really good, they probably sell something related and get rewarded for referrals. Without those subsidies, the advice would likely cost you more.
The Biggest Problem
The biggest problem with free advice is compliance. Or rather, your lack of compliance. We place less value on what's free even when we agree. Here's the paradox. If you pay, you're more likely to value the advice, act and get the benefits. You then get more than your money's worth.
How is your Internet access these days? We “upgraded” to Rogers’ priciest Ultimate plan 1.5 months ago and have periodic problems. The speed is inconsistent and access has been intermittent the last three days. I can’t even run SpeedTest.net. The usual steps of unplugging/replugging the equipment hasn’t helped.
Our Hi-Speed Extreme Plus plan had downloads of 25 Mbps, maximum 125 GB. In August, we got upgraded to 32 Mbps and 150 GB for a few days. The faster speed made a noticeable difference and seemed "just right". In September, that became our normal plan ... except now everything seemed sluggish.
What happened?
We had a rental wireless modem for $7 per month. The range was lousy compared to our previous wireless N router. As a compromise, we turned the Rogers gear into a wired modem and connected to our own wireless router. We’ve done this for years. It works well but we were paying Rogers for wireless services we were not using and did not need.
Costco To The Rescue
While vacationing in the US in late August, we bought a Motorola Docsis 3 modem, the fastest available. The price was $75 at Costco. After returning home, we tested it for several days. The results were excellent ... until I returned our rental modem to Rogers. Service slowed down. I thought this was due to the back to school crowd or technical problems. We waited patiently for weeks.
Consequences
I called Rogers and found that we'd been put on an ancient plan with 18 Mbps and 95 GB/month. We're still paying the same $70/month but losing 14 Mbps and 55 GB per month! That's crazy. By upgrading, we ended with less. Using convoluted logic, the rep explained we weren’t paying more because of price hadn’t gone up.
This was the consequence of returning the Rogers equipment. We were not told at the time. We could only get the previous service if we were willing to pay an extra $7/month to rent Rogers equipment we clearly didn't need.
Fastest
I asked if I could upgrade to Ultimate which is 50 Mbps and 250 GB per month. This costs $100/month plus $7/month wireless modem rental plus tax. In the past, this plan required digital cable. That's a nonstarter since we don't even have a TV: we use Netflix, mobile devices and a projector.
This time, I was told that I could upgrade and did. We couldn’t get the published plan, though. We’re on a faster backbone that isn’t available everywhere. The rep put us on an unadvertised plan: 75 Mbps and 200 GB/month. Faster is better but why chop usage by 50 GB? Google is piloting 1000 Mbps and unlimited usage via fiber optics. That’s forward-thinking.
Rogers Ultimate is inconsistent as others have reported. Sometimes great. Other times sluggish. Maybe it’s time to call tech support again.
It's Christmas Eve. Whether you celebrate or not, snow makes today special and there isn't any. 
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.
If 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. 
Will it snow tonight? 
