Early in March, MoneySense did a Q&A with John De Goey, a portfolio manager with iA Securities and author of The Professional Financial Advisor IV—a book that outlines how financial advisors are changing the way they do business. De Goey believes financial advisors are changing the way they do business. Instead of earning commissions for placing products, they are increasingly charging fees for rendering more professional services. In the process, they are putting the interests of their clients ahead of the interests of their employers and product suppliers. MoneySense writer Julie Cazzin asked De Goey several key questions and here’s what he had to say:
MoneySense: What do you see as the major challenges in the financial services industry today?
The industry is being challenged to remain relevant. People are living longer, but careers are less stable and returns are expected to be significantly lower going forward. As a result, most investors will likely work longer before retiring and re-calibrate to a more modest lifestyle than they might have previously expected. Expectations almost certainly need to be lowered…. and advisors and the firms they work for need to manage costs like never before. In the past, people might have been able to retire in comfort if markets returned 10% and products and advice combined to cost 2.5%. In a world where returns might be more like 6% going forward, an all in cost of 1.5% is likely more appropriate (and necessary).
MS: Can you give some specific examples of lowering expectations?
I can think of two off the top of my head. To start, the Canadian stock market had a great year in 2016. Don’t expect a repeat performance. In fact, I have been telling people for over 20 years to reduce their home country bias. Most people still do nothing of the sort and the average Canadian has nearly two-thirds of his money invested in Canada. Similarly, the bond market bull is almost certainly over. Going forward, many people expect the long term return on bonds to be 0% real (i.e. to keep pace with inflation and nothing more). That’s a huge change from what people have gotten used to over the past 40 years or so.
MS: How do these concerns about costs and expectations impact planning projections?
Most advisors are still projecting gross annual returns of about 7% to 8%. In fact, a more reasonable expectation might be for something between 2.5% (conservative) and 4.5% (very aggressive) above inflation. Assuming inflation to be about 2%, then that would bring us to about 4.5% (50/50 portfolio) to 6.5% (all equity). The absolutely critical thing to remember is that those are the expected returns of benchmarks—and benchmarks don’t have any costs.
MS: What do you mean by that?
If those return assumptions are reasonable (and no one will know if they are or not until a generation or more goes by), then it is important that people account for the additional costs. The cost of advice, for instance, is typically 1% or more. Therefore, a financial planning best practice would be to reduce expected returns by expected costs—so 2.5% real to 4.5% real becomes 1.5% real to 3.5% real if a 1% advisory fee is removed from the calculation (as it ought to be).
MS: It sounds like a lot of people (both advisors and investors) are looking through rose-coloured glasses.
They are. It’s pretty difficult to get people to accept that the returns they’ve come to expect over their entire adult lives are not likely to persist into their autumn years. On one hand, cynics might think that advisors are being self-serving and / or alarmist by asking people to save more or work longer. On the other hand, it’s a bit facile to expect to live longer than any generation in history, but to not expect to need more money than ever to fund that longer life.
MS: There’s been some speculation that the federal government might raise the normal retirement age. What’s your take?
I say bring it on. I used to tell people I was retiring at 65. Then (when the normal OAS age was raised to 67) I said 67. Now, I say I’ll work full time until 65 and wind down to a full stop somewhere around age 70. Who knows, the way things are going, maybe I’ll be talking about stopping at 72 or 74 a few years from now. I fully expect to live to age 90 and even if I retire at 70 (the current plan), that’s still 20 years of life as a retiree.
I can only watch so much Jeopardy! and do so many crosswords before I get bored. My advice to people who enjoy their work and are able enough to continue is to keep on going. To be clear, this is not about money for me (although it will be for many of your readers). This is about being fulfilled and making a meaningful contribution by doing something you enjoy.
MS: Thanks for your time John.
You can reach John De Goey at email@example.com.
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