This month's issue of "Protegez-Vous", Quebec's highly reputable consumer advocacy magazine, reports that 50% of financial advisors (conseillers financiers) that were questioned as part of a "mystery shopper" survey, failed to interview the "client" and provide advice per the norms of Quebec's Financial Planning designation. This number does not surprise me, nor do I think it is unique to Quebec. I believe the problem is Canada-wide at all levels of the financial services industry because most advisors are far more motivated by how they are paid, rather than by the ethics of their professional designation.
Think about it. At one time, most Canadians had very little surplus funds (and were granted very little credit) and they did whatever business they had at the same local bank whose staff was paid the same salary day in day out, regardless of whether you were there to buy a Canada Savings Bond or request a personal loan. The only Canadians who even needed a financial advisor were those who had ample wealth to invest in the stock market, and they were happy enough to pay a broker commissions to buy and sell stock because it would be the unwise broker who would risk losing a wealthy client by recommending poor stocks or multiple transactions just to fatten his payout. In fact, the wealthy often had accountants and lawyers on their payroll as well, in order to provide alternate viewpoints in financial affairs.
With the advent of many smaller investors entering the marketplace in the last 25 years, the level of competition for this larger volume business became more intense, with providers understanding very quickly that small investors were more "sticker-price" adverse: they would not pay a fee for "advice" up front but could be influenced to buy an investment if it was provided as part of an "advice" model, such as "financial planning" and as long as the costs were hidden for obvious view.
Hence the phenomenal growth of the mutual fund industry, from a few hundred funds in the early nineties to more than five thousand today in Canada alone. Because mutual funds are baskets of securities with unit values changing daily and requiring a complex accounting and reporting system, it was relatively easy for a mutual fund company to include a myriad of expenses and fees (Management Expense Ratio, or MER)that must be deducted from the return of the fund before calculating the net return to the client. Added to the MER is the dizzying array of sales commission charges "Front-load", Deferred Sales Charge" or "Back-load",all of which ensure that the customer pays for the privilege of having a mutual fund sold to him/her- and in fact will be still required to pay the sales charges even if he/she wants out of the investment sooner rather than later.
Many people still have enormous trust in financial institutions, not realizing that the "girl at the bank" who used to admit candidly if rates were actually better across the street, was now a "financial advisor" and paid in part by commissions on any and all bank investments she sells. As the mystery shoppers in the the Protegez-Vous survey found out, many so-called financial planners, advisors or counsellors, did not bother to find out what course of action was in the client's best financial interest: they only succeeded in offering the type of advice that was in their best interest. So, my friends, when it comes to seeking financial advice, " Caveat Emptor" or "Let the Buyer Beware"
Monday, October 8, 2007
Wednesday, September 26, 2007
So you have a little money to invest....
A few weeks ago, I got a great question from a young man who has a little money saved from his summer job and he was wondering what were his best options in investing this tidy sum (about $1500).
Now typically we see this kind of question posed to a mutual funds salesperson, broker or the "girl at the bank" and they immediately launch into what the "best" investment product is at that moment. By sheer co-incidence, the best investment is usually the one the "advisor" happens to be selling, either an exotically named global fund, a hot stock or a dressed up fancy but still plain old guaranteed investment certificate (GIC). ALL OF THIS ADVICE IS WRONG,WRONG, WRONG.
Why? Because none of them of asked what the money is to be used for. That is the first question you must ask yourself before proceeding with any investment plan. For example, if the money is to be used in the next 12-24 months, but you are not sure when, put the funds in a "no-load" (i.e. your bank's house brand which should not have a sales fee attached) T-bill mutual fund for safety of principal, market interest rates and ease of withdrawal. You can guarantee your rate of return by buying a GIC, but I would only suggest this if you knew exactly when you needed the money and could time the maturity of the GIC accordingly, otherwise it is cumbersome and can be costly to cash in a GIC before expiry.
But if you think you will only need the money in 3-5 years, say to help pay for university tuition, then you have a sufficient time horizon to invest in a "no-load" (again no sales fee) Canadian equity index mutual fund and be able to earn a greater rate of return (Ask about the Management Expense Ratio, MER, it should be less than 1% on an index fund). Your investment will go up and down over the next 60 months but resist the urge to buy and sell in response to the market. Establish a reasonable target return (say that the $1500 grows to $2000) and if you reach this target within the 6 months before you need the funds, sell your units and transfer the cash to a T-bill fund. Sure, maybe the Canadian index fund you sold will go up further, but you have made over 30% on the capital already and are you willing to risk losing on the $2000?
If you do not intend to use this money for many years, consider putting it in the same CDN equity index fund but in a registered retirement savings plan (RRSP). You may not need an RRSP deduction yet to get back income tax but you can save the deduction for a future year (when you have a lot more income) and your earnings will be tax sheltered until you are ready to withdraw the funds).
Lastly, if you want to learn more about investing and have some fun, you could try your hand at buying individual stocks. Start reading the business pages, read a few books (anything by Warren Buffet or his mentor, Benjamin Graham) and look up investment advice websites, (i.e. www.investorED.ca by the Ontario Securities Commission) in order to familiarize yourself with the basics of buying securities. Open your own discount brokerage account (shop around for the cheapest transaction fees you can find), buy a few stocks and see what they do. You may hit on a great buy or two but I promise you, you will lose money at some point. That's ok, because you will gain a wealth of hands-on knowledge about how the market really works and what your own risk tolerance really is. If you are truly interested in investing, there is nothing like experiencing this for yourself with a little money at a young age in order to save yourself a lot of grief later on with a lot of money at an older age.
So now that you know that the "best investment" is the one that best meets your need for safety of principal, liquidity and growth, not someone else's need for a commission. Don't fall for the latest "hot stock", make the right choice for you.
Now typically we see this kind of question posed to a mutual funds salesperson, broker or the "girl at the bank" and they immediately launch into what the "best" investment product is at that moment. By sheer co-incidence, the best investment is usually the one the "advisor" happens to be selling, either an exotically named global fund, a hot stock or a dressed up fancy but still plain old guaranteed investment certificate (GIC). ALL OF THIS ADVICE IS WRONG,WRONG, WRONG.
Why? Because none of them of asked what the money is to be used for. That is the first question you must ask yourself before proceeding with any investment plan. For example, if the money is to be used in the next 12-24 months, but you are not sure when, put the funds in a "no-load" (i.e. your bank's house brand which should not have a sales fee attached) T-bill mutual fund for safety of principal, market interest rates and ease of withdrawal. You can guarantee your rate of return by buying a GIC, but I would only suggest this if you knew exactly when you needed the money and could time the maturity of the GIC accordingly, otherwise it is cumbersome and can be costly to cash in a GIC before expiry.
But if you think you will only need the money in 3-5 years, say to help pay for university tuition, then you have a sufficient time horizon to invest in a "no-load" (again no sales fee) Canadian equity index mutual fund and be able to earn a greater rate of return (Ask about the Management Expense Ratio, MER, it should be less than 1% on an index fund). Your investment will go up and down over the next 60 months but resist the urge to buy and sell in response to the market. Establish a reasonable target return (say that the $1500 grows to $2000) and if you reach this target within the 6 months before you need the funds, sell your units and transfer the cash to a T-bill fund. Sure, maybe the Canadian index fund you sold will go up further, but you have made over 30% on the capital already and are you willing to risk losing on the $2000?
If you do not intend to use this money for many years, consider putting it in the same CDN equity index fund but in a registered retirement savings plan (RRSP). You may not need an RRSP deduction yet to get back income tax but you can save the deduction for a future year (when you have a lot more income) and your earnings will be tax sheltered until you are ready to withdraw the funds).
Lastly, if you want to learn more about investing and have some fun, you could try your hand at buying individual stocks. Start reading the business pages, read a few books (anything by Warren Buffet or his mentor, Benjamin Graham) and look up investment advice websites, (i.e. www.investorED.ca by the Ontario Securities Commission) in order to familiarize yourself with the basics of buying securities. Open your own discount brokerage account (shop around for the cheapest transaction fees you can find), buy a few stocks and see what they do. You may hit on a great buy or two but I promise you, you will lose money at some point. That's ok, because you will gain a wealth of hands-on knowledge about how the market really works and what your own risk tolerance really is. If you are truly interested in investing, there is nothing like experiencing this for yourself with a little money at a young age in order to save yourself a lot of grief later on with a lot of money at an older age.
So now that you know that the "best investment" is the one that best meets your need for safety of principal, liquidity and growth, not someone else's need for a commission. Don't fall for the latest "hot stock", make the right choice for you.
Sunday, September 9, 2007
Will joining the army solve your credit problems?
Author's Note: This blog touches on the 'drowning in debt' situation of many young people today, but I also wrote this piece as a tribute to our guys and gals in camouflage. For those of you who oppose Canada's role in Afghanistan, I respect your opinion, but in the short time I have been working with the military, I have nothing but respect for what they stand for, and that is to serve their fellow Canadians in whatever task they are asked to do.
I hear them again. "Don't worry, I haven't got my full pay yet, but as soon as I do I'll send you the money so you can pay them", "Tell them I'm in the military now. Don't say I'll call them, I can't, I've only got ten minutes break." "Look, I'm getting paid before month end, please don't return the cheque, please can I talk to somebody else?" Outside my tiny, unmarked office on the 2nd floor of the megaplex at the St. Jean military base are two public telephones and, I am guessing, because the telephones look like they are in a private area, they are often used by recruits on break to make phone calls of a more personal nature. I don't mean to eavesdrop, but the quiet earnest largely English-speaking voices seem to rise about the steady francophone hum of the mega, and given the nature of the conversations are almost always about money owed and money to be paid, a particular interest of mine because I have been hired to teach personal financial management here at the base, I hear what I should not hear.
The base is teeming with new recruits, over 6200 are expected to undergo their Basic Military Training or BMQ over the next 12 months. They are mostly anglophones and mostly young men in their twenties although there are many more francophones, thirtysomethings plus and women recruits than I would have thought prior to being hired by SISIP, the agency providing financial services to the members of the Canadian Forces, in July 2007.
Myself, I am a 20-year veteran of the financial services industry. We used to joke that working for one of Canada's big six banks was like being in the army. I survived training in the trenches of branch banking back in the late 80's and was promoted to various loan officer and field management positions, all of which I thoroughly enjoyed, until my resistance to the "new sales culture" of modern banking in Canada sidelined my wonderful financial career. I became a "fee-only" certified financial planner (in other words no sales commissions, client pays for advice on hourly basis) and, over the next five years, developed a passion for delivery of objective financial counselling as well as financial education.
I was fascinated by how personal behaviour and interpersonal dynamics would confound the best-laid financial plans of the people I was working with, and further explored this avenue by completing a Bachelor's in Social Work at McGill. It was at this time that I resolved to do something to help ordinary people better manage their own affairs, mostly by promoting basic financial education, as a defence against what I saw as an increasingly predatory financial services industry.
So fast forward, I thought I would find a job as a social worker and use my financial skills to work with clients, but by fluke (those internet job applications do work) found myself being hired full time as a Personal Financial Educator whose main duties would be to deliver lectures on budgeting and use of credit to platoons of up to 70 recruits on an almost daily basis.
But why a financial management lecture to guys and gals who are running drills and learning to use weapons? Because the CF recognizes that money problems are prevalent amongst its members. By supporting the SISIP program at the recruit stage, a program consisting of easy to digest financial tips and interactive activities, hopefully future financial stress will be avoided. One of the student recruits' favourite activities is when we ask them to write down their "dreams" and then use the paper to make airplanes which they all gleefully throw at a target. Later, I read the paper airplane dreams privately. "My own house", "To give my daughter everything she needs", " A fully loaded 4X4 pickup truck and to marry my girlfriend".
All in all an excellent plan to bulk up the psychological morale of our defensive forces. But we have been attacked from the rear. As I have painfully learned from the recruits who ply me during class break to please tell them what should they do because they are already "a little late" with some payments and they thought they would be getting more on their paycheques, the financial well being of our recruits has already been compromised. From what I have seen, the average amount of debt of a young male recruit is at least $15,000, not counting car or student loans. The monthly payments scratched out to the penny are the minimum amounts due on credit cards and lines of credit already maxed out, consolidation loans for old consumer debts and new "Buy now-pay later" consumer debt loans now due. (What was consumed? They don't remember.) Add the car loan "which I gotta have" and the student loan "which doesn't count because I got interest relief for 6 months", and the tally is some $45,000 in debt by someone whose last job was as a cashier at Tim Horton's. It used to be said that a banker was someone who begrudgingly gave you an umbrella even when the sun was shining, but now it appears a banker is someone who happily hands you the rope ample for your hanging.
At this time, I can only tell them to try and see the SISIP staff counsellor for a budget review, which is difficult to do because they must ask their platoon sergeants to make the appointments for them. SISIP, through a non-profit charitable foundation, does offer special loans at beneficial rates to help consolidate debts and relieve financial distress to CF members who have served at least one year, but no direct financial assistance is available to recruits for understandable reasons. More than half the recruits will drop out before completing their BMQ. They will not longer be the military's problem. They will rejoin the ranks of the civilians, still carrying their $45,000 of crappy credit.
But right now, at the 3rd week of their 15 week BMQ, all is possible: a steady paycheque to satisfy hungry creditors for now, and the promise of a rewarding CF career to enable them to attain their dreams with dignity and pride. But who are these guys, and gals, really? For the corporate suits on Bay street, hungry for market share and quarter-end profits, these young men and women are prime targets when launching marketing campaigns aimed at snaring long-term steady credit consumers. For those of us who watch from the sidelines, who support our troops in carrying out their many duties, dangerous and controversial as they may be, these young people represent the best of who we are as Canadians. They are all brothers, sisters, sons, daughters, fathers and mothers and they work very hard to be at their best in order to be ready to do the jobs we ask them to do.
I finish writing this and I hear one last phone conversation before I close my door: " Don't worry about the money, it will be ok, I love you and I love the baby too".
I hear them again. "Don't worry, I haven't got my full pay yet, but as soon as I do I'll send you the money so you can pay them", "Tell them I'm in the military now. Don't say I'll call them, I can't, I've only got ten minutes break." "Look, I'm getting paid before month end, please don't return the cheque, please can I talk to somebody else?" Outside my tiny, unmarked office on the 2nd floor of the megaplex at the St. Jean military base are two public telephones and, I am guessing, because the telephones look like they are in a private area, they are often used by recruits on break to make phone calls of a more personal nature. I don't mean to eavesdrop, but the quiet earnest largely English-speaking voices seem to rise about the steady francophone hum of the mega, and given the nature of the conversations are almost always about money owed and money to be paid, a particular interest of mine because I have been hired to teach personal financial management here at the base, I hear what I should not hear.
The base is teeming with new recruits, over 6200 are expected to undergo their Basic Military Training or BMQ over the next 12 months. They are mostly anglophones and mostly young men in their twenties although there are many more francophones, thirtysomethings plus and women recruits than I would have thought prior to being hired by SISIP, the agency providing financial services to the members of the Canadian Forces, in July 2007.
Myself, I am a 20-year veteran of the financial services industry. We used to joke that working for one of Canada's big six banks was like being in the army. I survived training in the trenches of branch banking back in the late 80's and was promoted to various loan officer and field management positions, all of which I thoroughly enjoyed, until my resistance to the "new sales culture" of modern banking in Canada sidelined my wonderful financial career. I became a "fee-only" certified financial planner (in other words no sales commissions, client pays for advice on hourly basis) and, over the next five years, developed a passion for delivery of objective financial counselling as well as financial education.
I was fascinated by how personal behaviour and interpersonal dynamics would confound the best-laid financial plans of the people I was working with, and further explored this avenue by completing a Bachelor's in Social Work at McGill. It was at this time that I resolved to do something to help ordinary people better manage their own affairs, mostly by promoting basic financial education, as a defence against what I saw as an increasingly predatory financial services industry.
So fast forward, I thought I would find a job as a social worker and use my financial skills to work with clients, but by fluke (those internet job applications do work) found myself being hired full time as a Personal Financial Educator whose main duties would be to deliver lectures on budgeting and use of credit to platoons of up to 70 recruits on an almost daily basis.
But why a financial management lecture to guys and gals who are running drills and learning to use weapons? Because the CF recognizes that money problems are prevalent amongst its members. By supporting the SISIP program at the recruit stage, a program consisting of easy to digest financial tips and interactive activities, hopefully future financial stress will be avoided. One of the student recruits' favourite activities is when we ask them to write down their "dreams" and then use the paper to make airplanes which they all gleefully throw at a target. Later, I read the paper airplane dreams privately. "My own house", "To give my daughter everything she needs", " A fully loaded 4X4 pickup truck and to marry my girlfriend".
All in all an excellent plan to bulk up the psychological morale of our defensive forces. But we have been attacked from the rear. As I have painfully learned from the recruits who ply me during class break to please tell them what should they do because they are already "a little late" with some payments and they thought they would be getting more on their paycheques, the financial well being of our recruits has already been compromised. From what I have seen, the average amount of debt of a young male recruit is at least $15,000, not counting car or student loans. The monthly payments scratched out to the penny are the minimum amounts due on credit cards and lines of credit already maxed out, consolidation loans for old consumer debts and new "Buy now-pay later" consumer debt loans now due. (What was consumed? They don't remember.) Add the car loan "which I gotta have" and the student loan "which doesn't count because I got interest relief for 6 months", and the tally is some $45,000 in debt by someone whose last job was as a cashier at Tim Horton's. It used to be said that a banker was someone who begrudgingly gave you an umbrella even when the sun was shining, but now it appears a banker is someone who happily hands you the rope ample for your hanging.
At this time, I can only tell them to try and see the SISIP staff counsellor for a budget review, which is difficult to do because they must ask their platoon sergeants to make the appointments for them. SISIP, through a non-profit charitable foundation, does offer special loans at beneficial rates to help consolidate debts and relieve financial distress to CF members who have served at least one year, but no direct financial assistance is available to recruits for understandable reasons. More than half the recruits will drop out before completing their BMQ. They will not longer be the military's problem. They will rejoin the ranks of the civilians, still carrying their $45,000 of crappy credit.
But right now, at the 3rd week of their 15 week BMQ, all is possible: a steady paycheque to satisfy hungry creditors for now, and the promise of a rewarding CF career to enable them to attain their dreams with dignity and pride. But who are these guys, and gals, really? For the corporate suits on Bay street, hungry for market share and quarter-end profits, these young men and women are prime targets when launching marketing campaigns aimed at snaring long-term steady credit consumers. For those of us who watch from the sidelines, who support our troops in carrying out their many duties, dangerous and controversial as they may be, these young people represent the best of who we are as Canadians. They are all brothers, sisters, sons, daughters, fathers and mothers and they work very hard to be at their best in order to be ready to do the jobs we ask them to do.
I finish writing this and I hear one last phone conversation before I close my door: " Don't worry about the money, it will be ok, I love you and I love the baby too".
Monday, September 3, 2007
Welcome to MoneyTalks Cafe
Let me introduce myself: I'm a 40something professional financial planner and educator who has "been around the block" a few times. My proudest accomplishment is being mother to my three children and my career dream is to help others help themselves. I have always had a passion for social justice, education and experiencing life as much as possible. I've made more than a few mistakes along the way, but I believe that every day is ripe with fresh potential, and that it's all about the journey, not the destination.
That being said, I thoroughly enjoy helping people try to figure out where they are going, and what's the best way to get there. Financial planning (the counselling kind, not the "I'm going to sell you a great mutual fund" kind of planning) is to me an ideal blend of nuts and bolts number-crunching and more philosophical "what do I want out of life" kind of thinking.
My purpose in hosting the "MoneyTalks Cafe" is to bring forward my observations about how our consumer driven economy operates and how ordinary Canadians are managing the day to day challenges of meeting competing demands on limited incomes. Are we well served by the financial services industry? Do our governments federal and provincial protect us from misleading sales and credit practices? Do our consumer advocacy agencies have enough teeth to defend our interests? Do we know enough about the basics of financial planning in order to make wise decisions of our own and in turn help our children get a solid start?
In the coming weeks and months, I will share with you my thoughts on these and other financial marketplace issues which ultimately affect our well-being. I am also very interested in the emotional triggers that influence good and bad financial behaviours. I want to hear what you think and I would particularly like to know about your experiences in dealing with difficult financial matters. Whether it concerns sticking to a family budget, struggling with debt, dealing with the taxman or fending off an overeager financial salesperson, do let me know what you are concerned about and how you are coping.
So welcome to the MoneyTalks Cafe and let's get talking!
That being said, I thoroughly enjoy helping people try to figure out where they are going, and what's the best way to get there. Financial planning (the counselling kind, not the "I'm going to sell you a great mutual fund" kind of planning) is to me an ideal blend of nuts and bolts number-crunching and more philosophical "what do I want out of life" kind of thinking.
My purpose in hosting the "MoneyTalks Cafe" is to bring forward my observations about how our consumer driven economy operates and how ordinary Canadians are managing the day to day challenges of meeting competing demands on limited incomes. Are we well served by the financial services industry? Do our governments federal and provincial protect us from misleading sales and credit practices? Do our consumer advocacy agencies have enough teeth to defend our interests? Do we know enough about the basics of financial planning in order to make wise decisions of our own and in turn help our children get a solid start?
In the coming weeks and months, I will share with you my thoughts on these and other financial marketplace issues which ultimately affect our well-being. I am also very interested in the emotional triggers that influence good and bad financial behaviours. I want to hear what you think and I would particularly like to know about your experiences in dealing with difficult financial matters. Whether it concerns sticking to a family budget, struggling with debt, dealing with the taxman or fending off an overeager financial salesperson, do let me know what you are concerned about and how you are coping.
So welcome to the MoneyTalks Cafe and let's get talking!
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