RISCARIO INSIDER

March 8, 2014

THE CBC’S HIDDEN CAMERA INVESTIGATION OF INVESTMENT ADVISORS

Can you trust your investment advisor? That’s a very important question for your financial success. CBC Marketplace investigated advisors at 10 major firms and found some ‘atrocious’. Watch this short video using hidden cameras for examples. For the full version, watch Show Me The Money.

The examples may be extreme and unrepresentative but they did happen. Buyer beware. Buyer prepare.

Clarity And Competence?

Dollars are easier to understand than percentages, but …

“The financial industry doesn’t have to tell you how much investing can cost you in dollars and cents.” — Erica Johnson, Show Me The Money

Where there’s complexity, you benefit from advisors who simplify without distortion. Let’s look at an example: mutual funds.

Fees on mutual funds are charged on the total amount you have invested (your capital and the growth/loss on that capital). The math gets complicated because you’re shown an annual charge (e.g., 2%) but that’s converted to a daily equivalent and deducted daily. You’d expect an advisor to know the mechanics well.

“If can’t explain the fees on a mutual fund, which is such a popular investment in Canada — almost a trillion dollars is invested in them — you should not call yourself a financial advisor.” — Preet Banerjee

The hidden camera showed examples of poor explanations. For instance

“That fee is … umm … it’s on the percentage of returns of the fund. So … it’s … like … sorry just want to make sure I’m thinking about this properly. Like it’s not on … just seeing if I can find, like, an easy definition.” — bank advisor

The lesson? You can’t assume advisors have solid financial education. Yet they are employed. What does that tell you about the accreditation process and the standards of their employers? An advisor who doesn’t know can ask for help … or do a Google search.

What’s Worse?

Life and health products are much more complex than investments because you’re now dealing with the actuarial elements of risk (e.g., mortality or morbidity) and have the additional worry of how to get your claim paid. That makes them harder to understand, explain and compare. Getting suitable help is even more important and difficult.

Some advisors sell both insurance and investments, but how well?

The Big Surprise

The big surprise is if you’re surprised by the CBC’s findings. There’s enough information online to raise concerns about advisors. Ask around. You’re bound to hear horror stories if you ask others what they think they bought and what they think they pay.

You may not have a hidden camera but can take notes or record the audio with your smartphone (seems legal). Protect yourself. Protect your money.

Links

PS "Financial advisor" is among the five job titles in most demand by employers, according to Workopolis.

March 2, 2014

BUYING A CAR VS BUYING LIFE INSURANCE

You’re probably more familiar (and interested in) getting a car than getting life insurance. Let’s compare key elements of both decisions.

The Research

You’ll find lots of information when shopping for a vehicle. There are lots of reviews and comparisons online. You’ve seen the vehicles on the road. You can take test drives. You can visit more than one Toyota dealership and also try other brands.

Life insurance is very different. You’ll find very little information online. Where is the Build Your Own option to configure your insurance, estimate costs and compare companies? You won’t see what other people have and the products are complex. These factors nudge you towards advisors but do advisors help with your financial literacy?

Related: How would Mike Holmes fix the financial sector?

The Price

The price you pay for a vehicle depends on factors such as demand and your negotiation skills. There are often specials which expire at the end of the month. Repeat customers might get loyalty bonuses.

With life insurance, your premiums depend on you (age, health) and your advisor (skills, companies represented). You’re usually required to buy at list price, which means you don’t need to worry about negotiating. Choosing a different advisor won’t cut the price.

Depreciation

No matter how shiny or well-maintained, a vehicle drops in value. Resell the day after you buy and you’ll take a loss.

Life insurance becomes more valuable each passing day because the probability of a claim keeps increasing. Permanent insurance will pay a benefit one day. Temporary insurance may not for two reasons. We’ll use Term 10 as an example:

Premium increase sharply every 10 years when you renew coverage.
Coverage ends at an age like 75 before claims are most likely.

Maintenance

Vehicles have maintenance schedules you’re encouraged or forced to follow. You might get a gentle reminder each time you start your engine.

Don’t count on a prompt to update your life insurance, regardless of how long since your last inspection or how your life has changed. Advisors earn more from selling than servicing.

Surprises

The cost of repairing and maintaining a vehicle increases every year. You never know what surprise is lurking. The biggest risks lie outside the warranty period when you’re liable for the full cost and suffer the full inconvenience.

Life insurance requires some maintenance too. As long as you keep paying the premiums, you don’t need to worry about breakdowns. Your coverage may not remain suitable for your evolving needs. You’ll probably need help from a suitable advisor to explore your options.

Related: What happens if my life insurance company goes out of business?

The Nudge To Buy

There are lots of incentives to get another vehicle. The repair bills on the old one might start stacking up. Perhaps you visited an autoshow or saw an intriguing ad. Your lease might be ending. Maybe a friend or neighbor got new wheels.

There isn’t much pressure or motivation to buy insurance. These days, life changing events no longer trigger insurance purchases (e.g., marriage or the birth of a child). We have “tax season” and “RRSP season” but no “insurance season” (though the US has Life Insurance Awareness Month each September with celebrities like Boomer Esiason, the Cake Boss, Lamar Odom and Leslie Bibb). It’s easy to delay buying insurance.

Preowned

You might save money by getting a used vehicle. You save on depreciation but face higher maintenance costs and don’t know how long your ride will last.

You can’t buy used life insurance because the coverage is personalized to you. You can save money by getting coverage that’s temporary rather than permanent — like leasing instead of buying.

Reselling

You can sell your vehicle for cash. The value keeps going down with age and condition.

Permanent life insurance grows in value after purchase. You might be able to cancel your coverage and get some money back. If legal, you could sell your coverage to an investor (a “life settlement”), though it’s creepy to know the buyer gets a higher return the sooner you die.

Finding The Money

A vehicle is expensive. Where do you find the money? We’re good at getting what we want by distorting our spending. Perhaps more money for a car means less dining out or road trips instead of flights.

Life insurance gives you peace of mind but you can’t touch that. We don’t think anything will happen to us, which makes insurance premiums look like a waste.

Changing Your Mind

“Unlike most other contracts, vehicle purchases are binding once signed, and can only be cancelled under certain conditions.”
— Office of Consumer Affairs

Buying a vehicle gets emotional and the advisors have ways to add to the pressure. Once you sign the contract, try changing your mind. It doesn’t look like you can unless you got a lemon (which you won’t know until later).

Life insurance is different. You have a 10-day free look from the time you take delivery of the insurance contract. You can change your mind for any reason without penalty.

The Biggest Difference

For many, getting a new vehicle is exciting and even the search is enjoyable. New wheels might be a necessity. Heated seats, navigation and great sound aren’t but make driving more pleasurable.

Getting life insurance isn’t like that at all. The first challenge is finding an advisor who will help you and nudge you to take action.

Links

PS Do you have better insurance on your tires and rims than on your life?