StatsCan reports that the country’s gross domestic product by industry grew by only 0.2% from September, dragged down by the flagging manufacturing sector and weak construction industry numbers.

In this environment, raising interest rates in order to reign in excessive borrowing—as recently hinted at by Bank of Canada Governor Mark Carney—might serve only to nudge the economy back into recession. For this reason, analysts expect rates to remain where they are until the second quarter of 2011.
]]> http://www.moneysense.ca/2010/12/23/slow-growth-cools-talk-of-rate-hikes/feed/ 95 http://www.moneysense.ca/2010/12/23/embrace-your-adviser/ http://www.moneysense.ca/2010/12/23/embrace-your-adviser/#comments Thu, 23 Dec 2010 16:35:02 +0000 MoneySense staff http://www.moneysense.ca/?p=9522 Getting to know a new planner can be an intimidating process. But remember that you’re there to achieve some life-changing goals—so don’t just hand your finances over to your adviser and forget about them. Like many things in life, the more you put in to the relationship, the more you’ll get out. Here’s how to make sure you get out as much as possible.

Get involved
“The people with the greatest success are those who get engaged with the process—who come prepared to meetings and are able to define their concerns,” explains Karen Diamond, partner at Diamond Retirement Planning in Winnipeg.

Getting engaged doesn’t mean you have to show up with all the answers—it just means taking the time to write down your concerns, list your goals, and stay up to date on any pertinent paperwork. “You want full disclosure right from the get-go,” says Lenore Davis, partner with Dixon, Davis & Company in Victoria. “You’ve decided to pay someone for advice, so holding back only means you’re handcuffing your own adviser and denying yourself honest, accurate advice.”

Set clear goals
If you don’t tell your planner where you want to go, you’ll never get there. But it’s amazing how many people forget this step. The goals you set should not only be clear and achievable, but inspiring too. Paying off your mortgage is great, but it’s goals like retiring at age 55 to travel the world that will get you excited enough to stick to your plan.

Once you’ve set your goals, write them down, including both the “destination” goals, like building an estate to leave to charity, and the “along the way” goals, like paying down your debt. It’s a big task, but Davis suggests breaking your plan up into manageable chunks. “It’s like planning a drive from Vancouver to Toronto,” she says. “Deciding on where to eat, sleep and stop each day on the trip can be daunting, but if you break it down into segments, it’s much easier.”

Setting clear goals allows you and your planner to develop an accurate and realistic financial plan that can be stress-tested. “Goal-setting and stress testing taught me to be realistic,” says Ron Caterine, an electrical engineer in Edmonton, Alta., who recently put together his own financial plan with the help of his adviser. “It helped me to avoid chasing returns—and planners who sell their services based on returns.”

Stay in touch
“At an absolute minimum you should expect once-per-year annual reviews,” says Davis, but don’t stop there. One of the benefits of hiring an adviser is that you can get access to his or her experience and advice throughout the year. Feel free to call or email whenever you have questions or concerns.

At your very first meeting, you should ask your adviser for a Letter of Engagement. This letter should not only outline what services the adviser will provide, it should also spell out the type and frequency of communication you should expect on an ongoing basis.

Express your values
Don’t assume that your planner has the same priorities as you. If leaving money to charity is more important than paying for your kids’ education, make sure to make that clear. Similarly, if you’re extremely risk averse—to the point where you want to stay out of the stock market altogether—let your adviser know. Regardless of how nice your planner is, he or she isn’t helping by pushing you towards goals you don’t feel comfortable with. “The only result is that you feel unheard and out of control,” says Lance Howard, founder of Lance Howard Group in London, Ont.

Measure your progress
After selecting a planner and constructing a plan, the next step is to measure your progress. The best way to do this is to compare your personal rate of return with an appropriate benchmark. The selection of the benchmark should be part of your initial discussion with your adviser, so that at least once a year you can track and monitor the progress of your own account. For more information on how to measure your progress, see the “Power of Advice” feature in the next issue of MoneySense.

The first meeting

5 ways to begin on the right foot

Confirm the service and fees
At the beginning of your first meeting, clarify exactly what services your adviser will be offering and how she will get paid. This should have been made clear before hiring your planner, but getting a confirmation is a good idea. “No one works for free, but it’s important you know what you are getting for what you are paying,” says Lance Howard, founder of Lance Howard Group.

Be clear about your goals
“Determining your goals is a process of deciding what you’re looking for and what is important to you,” says Karen Diamond, partner at Diamond Retirement Planning. Whether your goal is to retire at 55, buy the house of your dreams, or start your own business, write it down and bring it to the meeting.

Don’t hold back
You’ll need to reveal a lot of personal information about your finances to get the most out of your adviser’s services. The starting point is information: bring your last three years of tax records, a year of pay stubs, your investment statements, and legal documents such as your will and power of attorney. “You will need to be willing to disclose everything at this point,” says Diamond.

Communicate your values
Right from the start, express your personal values and how they affect your finances. If you want 10% of your income to go to charities, then make that clear.

If you don’t want to invest in alcohol or tobacco companies, or if you don’t think it’s a good idea to leave an estate for your children, let your planner know that too. And if you don’t feel your values are being respected, ask your adviser to explain. If you’re not satisfied, tell him. It could be a matter of miscommunication, or a signal that you need to find another planner.

Take notes
Bring a notebook, says Lenore Davis, founder of Dixon, Davis & Company. Write down any action steps from your meetings and don’t stop making notes after you leave. Keep a financial diary throughout the year to track your progress, and note any concerns that arise. That way you’ll be sure to address everything that’s important to you at your next meeting.

One of my favourite tales of investment stupidity is the story of the Beardstown Ladies. This group of grannies from a tiny Illinois town became famous in the 1990s when their investment club reported annualized returns of more than 23% for a decade. These Buffetts in bonnets wrote five books about their stock-picking acumen, which sold hundreds of thousands of copies, and they toured the US, celebrated as folksy, common-sense geniuses. Then someone checked their numbers.

It turned out that when the ladies calculated their returns, they included new money they had added during the year. Their actual investment returns over the decade were 9.1% annually, compared with almost 15% for the S&P 500. If you happen to find a Beardstown Ladies guide in a used bookstore one day, grab it: they’re collectors’ items now.

As the year-end approaches, you’ll likely want to know how well your own portfolio has done during the last 12 months. If you didn’t add or withdraw any money during the year, calculating your return is easy. Let’s say your portfolio’s value was $50,000 last December 31, and at the end of this year it has grown to $60,000. You can figure out the rate of the return with this simple formula: ($60,000 – $50,000) / $50,000 × 100 = 20%.

But as the Beardstown Ladies discovered — unfortunately, it was only after they appeared on Donahue — this formula doesn’t work if your account has experienced cash flows, either in or out. What if the above portfolio started the year at $50,000 and you contributed another $500 on the 15th of each month? Your balance has increased by $10,000, but $6,000 was new money and only $4,000 came from investment growth. Now what is your rate of return for the year? Not so simple anymore.

You don’t have to do the math

Most annual statements from brokerages, mutual fund companies, and financial advisors do not include your personal rate of return, also called the internal rate of return, or the dollar-weighted return. So you’re probably on your own when it comes to figuring it out.

There are several formulas for calculating a portfolio’s return when money has moved in and out during the year. Most use that squiggly line that looks like a sideways W, and I’m pretty sure one of them includes the emblem of the Green Lantern. You are welcome to use these.

Fortunately for people like me, Weigh House Investor Services in Toronto created this handy online calculator that will do the math for you. All you need to do is enter the value of your portfolio at the start of the year, the value at the end of the year, and the dates and amounts of any contributions or withdrawals.

I used the calculator to figure out the rate of return in my own RRSP, taking into account three lump-sum contributions I made during the year. (My ETF retirement portfolio is 30% bonds and 70% equities, spread across Canada, the US, and international developed and emerging markets.) How did I do? Just over 10% for the year. That means I accomplished my investment goal: beating the 10-year performance of the Beardstown Ladies. In your face, Grandma. (Just kidding.)

But it recently occurred to us that we could be wasting our time. After all, if your habits are set in stone—if we are all born spendthrifts or tightwads and there’s absolutely nothing we can do to change that—then why read a personal finance magazine? It may be interesting to consider that if you doubled your savings you could retire 10 years earlier, but if you have no control over how much you save, it’s purely a theoretical consideration.

You could say the same for financial planning. Many times we’ve pointed out the benefits of having a financial plan—but they’re no good unless you actually follow them. And we have a sneaking suspicion that a lot of people don’t. Once a year they may sit down with their planners and pledge to spend less, sort out their investments, and set up that RESP, but how many actually do it?

To find out, just over two years ago we set up a little experiment. We invited Canadians from across the country to take part in a week-long financial boot camp we called the Seven-Day Financial Makeover. From more than 200 entries, we selected four participants—three couples and one single woman. We flew them to Toronto, put them up at the Fairmont Royal York hotel for a week, and told them to brace themselves for the most intense personal finance workshop of their lives.

Nine of the country’s top financial experts put our participants through a grueling series of sessions covering everything from budgeting and bank fees to insurance and investing. When they were done, we asked top financial planner Norbert Schlenker— chartered financial analyst and founder of Libra Investment Management—to draw up a comprehensive and personalized long-term financial plan for each participant. Then we sent them home and waited.

We learned a lot about how financial planning works from the experience, and we think you can learn a lot from reading about it. But we also knew that the real value of the exercise wouldn’t be revealed for a while. As they left, all of our participants told us that our boot camp would change their lives. But would it really? It has now been more than two years since the Seven-Day Makeover and it’s time to find out. Can an impulse shopper really become a bargain hunter? Can a couple who always argue about money live happily together? Can a woman with almost no investment knowledge stick to a sound investment plan? Read on to find out the five key pieces of advice that succeeded—and three approaches that don’t work at all.

Under his proposal, small and medium-sized businesses and self-employed people will have access to private pension plans, which are very similar to RRSPs or Defined Contribution RPPs. The difference, however, is that they relieve employers of the administrative burden and shift it to a third-party administrator.

Most provincial governments had been pushing for an expanded CPP as the solution to Canada’s pension coverage woes. However, Alberta’s finance minister withheld the unanimity required to execute such reforms, arguing that they would threaten job creation and destabilize the economy.

Flaherty told reporters in Kananaskis Country that now is not the time to place additional burdens on employers while the economy is recovering from recession.
]]> http://www.moneysense.ca/2010/12/21/feds-provinces-agree-on-private-pension-solution/feed/ 35 http://www.moneysense.ca/2010/12/21/five-reasons-to-love-tech-funds-again/ http://www.moneysense.ca/2010/12/21/five-reasons-to-love-tech-funds-again/#comments Tue, 21 Dec 2010 17:36:26 +0000 Suzane Abboud http://www.moneysense.ca/?p=9474 Looking for growth? If you’re feeling brave, I know where you can find it: technology stocks. I know, you swore off the sector after losing your shirt on Nortel back in 2001. That turned out to be a wise move. If you invested in a technology fund 10 years ago, you would now be looking at an average loss of nearly 10% per year.

But it’s different now. Really. Technology stocks are no longer grossly over-valued, for starters. The whole sector has come crashing down to earth. Not only is the sector more attractive by historical standards, but arguably, compared to most other market sectors as well.

Today, the average price-to-earnings (P/E) ratio of a typical U.S. technology mutual fund is 21 times. That’s approximately half of what it was 10 years ago. In March of 2000, at the crest of the dot-com bubble, the NASDAQ Index average P/E ratio peaked at an absurd 47 times earnings. It’s true that a P/E ratio of 21 is still high compared to the overall S&P 500 average of 16. However, technology stocks have always commanded a sizeable valuation premium over other sectors, and there are some good reasons for that. You might not want to jump in with both feet, but here are five good reasons why it’s time to give tech stocks another chance:

Tech is growing fast
Forrester Research estimates IT spending will grow by 9% this year and 7% next year. Compare that to the expected GDP growth of 2% or 3% for the overall economy. As well, technology companies are projecting an average earnings growth of 15% to 20% next year, versus 7% or so for the broad market. Investors expect the faster growing earnings to catch up with higher stock prices, which justifies the higher P/E multiple.

Even better, that valuation premium isn’t as high as it appears to be. These days many technology companies have tons of cash on their balance sheets, averaging between 10% and 20% of their market capitalization. Microsoft, for example, has cash assets representing some $4 per share. That means if you bought the company’s stock today at $25, you’re really only paying $21. After adjusting the price of the shares for the value of the cash on hand, Microsoft’s P/E ratio drops from 12 times to 10 times. Several technology stocks have become so cheap that they are now considered true value picks. Because of all that cash, the average technology P/E ratio is actually more like 18 or 19 times, not 21.

Tech is transparent
Tech companies got a bad rap during the dot-com bubble for promising the moon before they even had a penny in earnings. Internet darlings that actually lost money on most of their sales still saw their stock prices shoot up (remember Pets.com?). But today it’s easier to understand a tech company’s earnings reports and balance sheets than those from companies in other sectors. Some five years ago, new accounting rules paved the way for cleaning up the stock options fiasco. Since then, earnings reports have become more transparent, with less room for accounting shenanigans. Unlike banks, which have a zillion ways to hide bad loans, or commodity-based companies, which use complex models to estimate the value of their reserves, technology companies’ earnings are largely made up of simple, pure cash flow.

Tech is (almost) recession-proof
Technology products have increasingly become part of our daily life. These are no longer discretionary spending items: in many businesses, if you don’t have a BlackBerry or an iPhone you can’t compete. Our unwillingness to give up such technology once we’ve grown accustomed to it has made the sector more defensive in nature, and more resistant to economic down cycles.

Yes, companies may put off upgrading their computers, software, routers and servers during times of hardship, but they won’t give them up altogether. Besides, corporate balance sheets are flush with cash right now—unlike debt-laden consumers and governments. Right now corporations are capable of spending big bucks on technology to improve productivity, making tech one of the few sectors that could see above-average growth despite the current hard times.

Tech is global
Technology has innovation on its side, and that boosts both productivity and demand. (How many people do you see lining up for a new detergent or soft drink formula the way they do for the latest iPhone or iPad?) That excitement is spreading around the world. In fact, the sector is now considered a second-tier play on emerging markets growth. As consumers in India and China become wealthier, they’re quick to upgrade the technology they use. Those markets present a phenomenal opportunity for many sub-sectors, particularly telecommunications equipment. Despite cut-throat competition between Apple, Research in Motion and Google, all three of them are enjoying strong growth in global smart phones sales.

Tech pays dividends
Believe it or not, some tech stocks are becoming dividend cash cows. Distributing surplus cash—as opposed to retaining it for growth—is becoming increasingly engrained in the corporate culture of the larger, more mature technology players. Microsoft’s dividend yield is currently 2%, similar to the overall market yield. Intel is yielding a juicy 3%. Other high-tech companies that used to pour all of their surplus cash into research and product development are likely to follow suit.

Of course there are risks too. You probably don’t want to invest too heavily in tech if diversification is important to you. Just a few large players make up the bulk of the sector’s market capitalization. Apple, for instance, currently represents a full 20% of the NASDAQ Index. The Dow Jones U.S. Technology Sector Index is also top-heavy, with the five largest member companies representing nearly half of the portfolio. Similarly, in Canada pretty much all of the S&P/TSX Capped Information Technology Index is made up of just five companies, no more.

So while the long-term prospects of the big technology indexes are good, short-term, investors could be in for some serious volatility. If you don’t have the stomach for wild roller coaster rides, a more diversified, actively managed mutual fund might serve you better than a passive index fund, as the fund manager can help to smooth things out.

In the “Tempting Technology,” chart below, I list some actively managed technology funds that have managed to report positive returns over the past five years—despite the massive losses incurred in 2008. If you look at their top holdings you will see the same index heavyweights: Apple, Google, Microsoft and Cisco. I recommend them as a good way to get some technology exposure, as they are more diversified than the index funds. Keep in mind, though, that higher growth always comes at a cost—so even the best technology mutual funds will have a tumble or two along the way.

Tempting Technology

These funds are a great way to increase your tech exposure.

In early 2011 consumers can expect to be faced with new signs at the cash register, asking that they consider paying with cash or debit in an effort to spare merchants high credit card fees.

“Most Canadians are unaware that small businesses pay huge fees to the banks and credit card companies to process credit card transactions,” reads a prototype sign. “Paying with cash or by Interac helps independent firms keep prices down for us all.”

Credit card fees have been in the headlines recently thanks to a recent Competition Bureau decision to appeal to its quasi-judicial body to outlaw certain “anti-competitive” practices used by Visa and MasterCard. It would like retailers to be allowed to add a surcharge to purchases made on “premium” cards, which often charge higher merchant fees.

Visa and MasterCard plan to fight the bureau’s decision, and suggest that retailers offer discounts to consumers who pay with cash.

Again, this is NOT his real name.

Before I turn the page on John I thought it might be a good idea to get some expert commentary on what happened that day. Had I been too hasty? After all, financial advisers are salespeople, and John was doing exactly what he was trained to do.

I spoke with Rob Kelland, director of wealth management and portfolio manager with ScotiaMcLeod in London, Ontario. Rob is a 27-year industry veteran who was gracious enough to provide his perspective on my breakup with John, and he does not mince his words when it comes to his profession.

“This is a relationship business and you’d better treat people properly,” he says. “It’s got to be transparent and people need to know what the fees are and what their options are.
Regarding the bond (that John Doe tried to sell me), I would not personally offer that to someone walking into my office like that. It’s not prudent, not responsible and not in keeping with what you came there for.”

Unlike John Doe, Kelland is able to provide any investment product for his clients, not just the ones his company sells. This is obviously a huge advantage for an adviser, as it raises their credibility. Unfortunately for John, he was limited by his company’s product line and was required to attempt to keep as much of my money as he could.

So how exactly do advisers get paid? And how do you know what type of adviser you have? Kelland breaks down the industry in the following way:

The advisers who work in bank branches typically work on salary, possibly with a small bonus structure (not the Wall Street kind). In general they can only offer their own products. Kelland explains that they offer good advice with little bias, and you can open an investing account with whatever amount you like.

The next step up consists of mutual fund planners such as Investors Group and Dundee Wealth. Their product offerings are limited to mutual funds and possibly GICs, but depending upon licensing some are able to offer additional investments. This group is generally remunerated through commission either on the sale of an investment or as part of the MER of a mutual fund.

Next are the full service shops such as Edward Jones, RBC Dominion Securities, BMO Nesbitt Burns, etc. These shops have a very wide selection of products, including securities, mutual funds, ETFs, and GICs. There are also several fee platforms available to you.

The first is “traditional” in that if you buy a product (from RBC, for example) you pay a commission of some nature which goes to the adviser.

If you buy a mutual fund, some advisers still charge a DSC (deferred sales charge) where they get a fee up front. However, increasing numbers of advisers are charging no fee, but are taking part of the MER (management expense ratio) that is paid to the managers of the mutual fund. In this scenario, you’re paying a fee on a hidden basis to the adviser through the mutual fund.

The final option involves fee based-accounts, which are aimed at clients with at least $100,000 to invest. These advisers usually have access to just about any investment product under the sun, and charge a set annual fee which covers all your trading, advice, planning and services.

“In many cases, that all-inclusive fee is lower than what you’d pay in a mutual fund at the bank,” says Kelland.

The upside of this type of arrangement is that the fee issue is out of the way at the beginning. If your adviser calls and recommends moving out of equities and into bonds, you know the call isn’t a way for him or her to drum up some additional business.

However, regardless of the fee structure, the key issue for any investor should be transparency. “The adviser should be offering information on how they’re being paid and what your choices of payment are,” says Kelland.

And if they’re not, it’s up to you to find out. Don’t just sit there and expect a flood of information. Ask questions. Lots of them. And if you don’t like the answers, keep looking.