Do-it-yourself investing

Some months ago I saw the following which is a re-hash of many similar articles that I’ve seen in the business sections of the newspapers. Unfortunately, I put it aside as a basis for a new article and I’ve forgotten where I’ve first seen it!

" ...folks who buy mutual funds through brokers (and, therefore, pay a fee to buy the fund) lose 1% per year on average versus those who buy mutual funds directly (and, therefore, don’t pay a fee to buy the fund). How significant is 1% a year? Over a 30 year time span, this annual 1% erosion will eat more than 25% of an investor’s total return."

The 1% referenced above is the cost of an adviser. What the above paragraph is trying to suggest is that if you don’t want professional management of your life savings and you want to do it entirely yourself without any help, you could indeed, save the 1%.

Are we being penny wise and pound foolish? What if the 1% saved (as stated above) is offset by a 3%, 4% or more annual loss because maybe you are not really equipped to be a great portfolio manager? Should saving money on the management of your life savings be your single ultimate goal?

The answer is clearly – no.

Obviously the author of this article does not like financial advisors and has intentionally used the word “losing” in what I think, is an example of irresponsible reporting.

Are costs the same as losses?

I don’t believe they are.

My doctor provides a valuable service. His or her fee is embedded in the price of the service. I (thankfully) do not get a bill when I need medical attention. Medical costs are not open, transparent or disclosed and I do not need to take medical courses to become medically literate so I can qualify to be a patient. I do not perceive my doctor as losing me so many percent per year but I do recognize there is a cost element in seeing a doctor.

Problem is the average investor does indeed “lose” say, 3% per year(or more) due to shooting oneself (predictably irrationally, speaking) in the foot. Buying when they should have sold. Selling when they should have bought or just too much buying and selling in general or trying to catch up with the latest investment fads of the day. People after all are people. We are just not genetically hardwired to be great portfolio managers.

What if the investor hired an adviser for one reason only - to dissuade the investor from bad investment behaviors and to intercede at crucial inflection points? Perhaps talking an investor from not selling at the depths of despair in 2009 and losing 57% of your life savings forever? Or not buying into the tech euphoria and avoiding the resultant tech crash.

Have we all forgotten the lessons of the Great Financial Panic of 2008 - 2009 already? If an adviser (by sheer force of Will) managed to protect an investor from himself or protect investors from the ravages of the media during the Crisis, would the investor still perceive his adviser to be a guaranteed annual loss of 1%?

Certainly not.

Managing your life savings is not a do-it-yourself project. Knowing one’s own limitations and turning things over to a professional when it is appropriate to do so, may be one of the smartest things you’ll ever do.


Related articles:

  1. The Great No-help Lie
  2. Value of Advice


Aspire to be average!

Averages are of course, just averages. Naturally, no one admits to being just average.

Given the following scenario:

1. Due to the U.S. Financial Crisis, the benchmark S&P 500 stock market index dropped about -57% from its peak in 2007 to the depths of despair on March 9, 2009 when the stock market finally bottomed out. Yes, that’s a minus sign in front of the 57. That’s a big drop. Millions of investors capitulated in a fugue of loathing and despair as headlines everywhere predicted the imminent breakup and certain financial collapse of the U.S.A. As usual, the press was completely wrong. The press made the same prediction for the European Union. Wrong again.

2. Fast forward to August 2014 and currently the same S&P 500 benchmark index is up almost 200% from the low on March 9, 2009 (Source:

Given the above numbers, what is your rate of return over that time frame?

The question is actually far more difficult than it seems.

If you panicked during the “Great Panic of 2008 – 2009” you could have sold your index or ETF and crystallized your paper loss of -57% with a real loss. In dollar terms, a $10,000 investment would only be worth $4,300. If you were a do-it-yourself investor, you were waiting of course, for the “all clear” message in order to get back in. Unfortunately, there were no “all clear” messages on the evening news or in the morning papers.

Many investors remain in a fog of uncertainty more than five years after the low point in 2009, and are still in cash. This is changing (has the Great Rotation begun?) as I am seeing some reports of investors piling record amounts of money into stock index funds much to the delight of the Canadian do-it-yourself money magazines. That message sounds suspiciously like the “all clear” message; unfortunately it is almost six years too late!

In the real world though, things are very different. The media believes that buying the cheapest investment products will do the best. Based on real world experiences, I suspect the exact opposite is true – the cheapest investments do the worst. The cheapest investments ( the no-help type) consists of investments that exclude the labour component ( adviser not included!).

Here’s a true story that was very candidly told to me by a doctor (not my client) which I would describe to be as a VHNW (Very High Net Worth) individual. He admitted that he had capitulated during the Panic in 2008 -2009, cashed out and has been in cash for the last five years. No mutual funds, not even a GIC. He couldn’t make the decision to get back in, he said.

The big lesson here of course is not to sell during a big downturn (or even worse, refusing to buy during the big recovery) and it is very true that if you sold or stood aside and watched the big "V" on the chart (the big downturn followed by the big recovery), you might be forced to admit that your returns would be nonexistent, horrendously negative or at best - mediocre.

If the good doctor had even an average mutual fund performing in a very average way, he could be bragging to his colleagues at the next medical convention about his wonderful returns over the past 5 years.

Incredibly, we still see journalists criticizing mutual funds for their professional portfolio management fees not realizing that for many if not all investors, the costs of bad investment decisions at times of emotional distress far outweigh a lifetime of fees. The true drag on investment performance is not the open and transparent fees that one must pay for professional money management but likely the media that abandoned their readers when readers needed them the most. Journalists are at best, fair weather investors.

Millions of do-it-yourself investors panicked and sold out during the Great Panic of 2008 – 2009 likely due to the headlines or the evening news. Today, the Financial Crisis is old news and is largely forgotten. Very few investors admit to making disastrous investment decisions during that perilous time. It is perhaps our human nature that fools us into thinking that it was someone else who was panicking and doing all that selling – certainly not me (probably it was that average investor on the chart!)

That one mistake alone (selling at or close to the bottom) may take a decade or more just to break even.

In my view – one of the most important things that financial advisers do best is expressed by noted behavioral economist Dan Ariely:

"Whatever you do, I think it's clear that the freedom to do whatever we want and change our minds at any point is the shortest path to bad decisions. While limits on our freedom go against our ideology, they are sometimes the best way to guarantee that we will stay on the long-term path we intend." -- Dan Ariely, Professor of Psychology & Behavioral Economics at Duke University


Related articles:

  1. The Great No-help Lie
  2. Value of Advice


Fund Facts - The risk and reward of fluctuation, volatility and standard deviation

 "Democracy is the worst form of government, except for all those other forms that have been tried from time to time." Winston Churchill

I have had some recent discussions with a major Canadian investor advocacy group (FAIR Canada) that had contacted me. Apparently, they saw this humble blog of mine and invited comment on their submissions to the various regulatory authorities.

The group thought that “risk” as pertaining to mutual fund investing is poorly defined. They are appealing to the regulators to augment the information on the new Fund Facts document that must be given to mutual fund investors when they buy a new fund.

I do agree with the investor advocate’s view that the various ways of describing risk are complex and had addressed that very same topic several years ago in my article “Risky Business”.

Not much has changed since I wrote that article but at this moment in time, the security regulators appear to have made a radical U-turn and appear be leaning towards the use of standard deviation as a measure of risk. When I wrote the somewhat contentious (at the time) article in 2009, the regulator would not allow advisers to use risk rulers, standard deviation (or any variant) as a measure of risk. Their view was that the fund company’s prospectus description of risk was to be used.

Unfortunately the industry, advocacy groups, regulators or advisers still cannot all agree on what measure or measures can or should be used to evaluate the riskiness of a mutual fund.

Fund Facts are replacing the prospectus as this important new information document must be given to investors anytime they buy a new mutual fund. This change came into effect June 13, 2014.

The new Fund Facts document contains a graphical risk “ruler” that indicates the volatility of the fund in terms of low risk, low to medium, medium risk, medium to high and high risk. The simple ruler – with a pointer to indicate where you are on the scale, indicates the degree of fluctuation (volatility) of the fund in the past. It does not predict how volatile the fund could be in the future.

    fund facts risk ruler        

        Example (above) of Fund Facts “Risk ruler”. Note pointer indicating “medium” risk.

The advocacy group suggested that more sophisticated measurement tools should be used and additional mathematical concepts or statistical models be employed.

Although I have a background in Mathematics and Economics, I did not agree. The whole point of the Fund Facts document is to simplify. Explanations of skewed binomial distributions and probability theory would hinder, not help in the decision to buy (or not to buy) a particular mutual fund.

Sometimes we can’t see the forest for the trees. Investors need to know one very important thing. Many mutual funds fluctuate a lot in price. Anything that fluctuates in value can potentially make or lose money. The industry including the advocacy groups can’t seem to agree how to tell potential investors that they have a chance of losing money. Bell curves however, aren’t going to do it.

In my initial presentation to a new mutual fund investor contemplating the purchase of a stock-based mutual fund, I always point out that stock markets go up and they go down – sometimes a little - sometimes a lot. How much is a lot? Well during the U.S. Financial Crisis in 2008 and 2009 the benchmark S&P 500 stock market index dropped a staggering 57% (peak to trough). That’s a lot.

The advocacy group described my explanation of risk as “glib”.

[Editor’s note: To be fair to FAIR Canada (pun intended), at least they are reaching out to the adviser community and are asking for comment and discussion. No regulatory authority has ever asked me for input on how to improve our industry and to this adviser - that’s a terrible oversight.]

If I suppose, one’s man’s interpretation of simplifying arcane mathematical concepts is being glib – then I plead guilty to all charges. But I offer no apologies.

In non-jargonized parlance, I’ve described what the buyer of the mutual fund is buying, and what can be expected in the way of fluctuation. In one sentence only. No fancy charts and no crash courses on statistical theory required!

Is the new “risk ruler” effective?

When I showed my 85 year old client the risk ruler of a particular fund, he responded immediately before I had time to discuss what it was or how to use it.

He grasped the concept immediately. Peering intently at the ruler he said to me. “Glenn, the higher the risk of this fund (pointing to the ruler), the higher the chance there is to lose money, right?”


The Fund Facts document overall will do a very good job of replacing the telephone book sized prospectus and it will be the major talking point of discussion during the point of sale process.

Investing after all, is a process - not a product.

Sure, the Fund Facts document could be improved but it does highlight all of the most important information that an investor should know before buying a mutual fund.

This is a good thing.

ERRATA:  I thought I was contacted by FAIR Canada but was in fact, contacted by SIPA who is a different investor advocacy group. My thanks to SIPA for their clarification. Their web site can be found here:


Consumer watch - Tangerine Bank hits sour note with RRSP and TFSA transfers

Tangerine accepts money readily enough but what if you want it back?

ING Direct pioneered the no-fee savings account in Canada. Unfortunately, the U.S. Financial Crisis morphed into a World Financial Crisis in 2008 -2009 and many European banks found themselves (along with their American counterparts) in deep financial trouble. According to Wikipedia:

In 2008 as part of the late-2000s financial crisis ING Group, together with all other major banks in the Netherlands, took a capital injection from the Dutch Government. This support increased ING's capital ratio above 8%, however as a condition of Dutch state aid, the EU demanded a number of changes to the company structure. This resulted in divestiture of a number of businesses around the world, which included insurance businesses in Latin America, Asia, Canada, Australia and New Zealand and the ING Direct unit in the US, Canada and the UK .”

 On August 29, 2012,The Bank of Nova Scotia bought out ING Direct Canada and renamed it in April 2014 as Tangerine Bank.

Despite the promises of outstanding customer service on their new TV commercials; my client’s recent experiences with the new bank have not been good ones. The issues have been with transfers out. Specifically, registered plans transfers such as RRSPs and TFSAs.

Under the Income Tax Act, financial institutions are obliged to transfer a RRSP to another financial institution upon the bank’s customer written request to do so.

There are voluntary guidelines as to how long this transfer process should take. According to the CBA (Canadian Bankers Act) Guidelines, a registered plan transfer should be done within 7 business days and up to 12 business days during the busy RRSP season. Unfortunately, the guidelines are voluntary and non-binding so in reality a financial institution can exceed any of these limits without fear of regulatory penalty.

A number of very late transfers from Tangerine has resulted in a curious turn of events that appears to show that the bank may be inappropriately applying “privacy concerns” to institution–to–institution transfers resulting in considerable delays and frustration with a transfer process that has ground to a halt. Two clients have already sworn that they will never deal with Tangerine Bank again. Two others have moved their funds out of the new Tangerine Bank to Manulife Bank which offers a premium savings account very similar to Tangerine’s ISA account. One other client has lost money due to Tangerine Bank’s glacially slow transfer process.

Now why would Tangerine’s privacy policy cause delays and frustration with respect to registered plan transfers?

Great question.

My office has processed many thousands of these types of transfers. We have transferred RRSPs, RRIFs, TFSAs, LIRAs, LIFs, pension plans and all manner of registered plans and over the years have dealt with dozens of banks, trust companies and credit unions.

Therefore, we find Tangerine Bank’s refusal to speak with the institution requesting the transfer as exceedingly odd as Tangerine Bank’s very existence depends on the free flow of money coming in from these very same financial institutions.

Concerned calls to front-line staff about the whereabouts of the transfer-out cheque are met with polite refusals to divulge any information citing “privacy concerns” about releasing any information to the institution (or their authorized representative).

We filed a concern of our own to Tangerine supervisory staff who indicated to us that inquiries should not be made by phone but by fax. We tried to use Tangerine’s suggestion but faxes were not responded to. Even when we indicated (via fax) that the matter was urgent and there was clear evidence of a serious service issue, Tangerine still refused to talk to us directly. Despite our instructions to contact us, Tangerine instead would call a rather confused client who would of course not know anything about the technical details of a registered plan transfer.

We escalated the issue further to the bank’s internal ombudsman; however my email correspondence to the ombudsman was intercepted by another Tangerine department.

Despite my argument that Tangerine clients were being hurt and losing money due to Tangerine’s intransigence, Tangerine would not be swayed. Their policy was their policy and it was not going to change. Future queries from our office would still have to be directed to their fax system and we should get a reply within 48 hours.

As one last ditch effort to appeal for some sort of resolution with regards to their privacy policy, I asked Tangerine if they would honour a letter of direction signed by their customer allowing us to make a service account inquiry on their behalf.

To my complete amazement, horror and dismay, Tangerine Bank’s answer was no!

[Editor’s note: My immediate reaction was shock. Is this even legal?]

Our office is considering escalating the issue. My preference is to contact Tangerine’s CEO directly and ask him to review the Bank’s current policy. Other than that, we are literally at wit’s end with respect to Tangerine Bank.

We find the bank’s privacy view to be contradictory. Institution-to-institution registered plan transfers under the Income Tax Act (ITA) consists of a cheque made payable to the receiving institution. When the receiving institution does not receive their cheque in a timely manner, the receiving institution will always call the transferring institution (in this case, Tangerine Bank) with a service inquiry or follow-up. Perhaps the documentation was not in good order, perhaps the client missed a signature, or maybe the cheque got lost in the mail. It could be any number of things. For the sake of our clients, we have to know.

We believe that Tangerine is inappropriately using “privacy concerns” for institution-to-institution transfers that do not involve client privacy issues at all. As the receiving financial institution already has the client’s personal and confidential information, we find Tangerine’s privacy policy to not release any information about the transfer as decidedly odd. More odd is that Tangerine’s customers are being hurt due to the Bank’s reliance on internal policies that is not in the best interest of their customers.

Tangerine may be Canada’s newest bank but already, my clients are saying it is not delivering the award winning service they claim to have.


GICs are a dangerous game

Who would have thought that a simple Guaranteed Investment Certificate (GIC) would be in the middle of a controversy that involves the federal government, Parliament, the banking industry, powerful government agencies, privacy law and ethics?

One of the most powerful but least known Canadian government agencies is FINTRAC. Who are they and what do they do?

According to their web site, FINTRAC’s mission is to: “To contribute to the public safety of Canadians and help protect the integrity of Canada's financial system through the detection and deterrence of money laundering and terrorist financing.”

Part of their mandate is to ensure the compliance of reporting entities with legislation and regulations (“Reporting entities” for the sake of this discussion refer to banks, trust companies and credit unions.)

FINTRAC reports directly to the Minister of Finance and their mandate is to enforce the Proceeds of Crime Money Laundering and Terrorist Financing Act.

In the great pecking order of financial things, which government body, agency or regulatory organization, regulates the banks, trust companies and credit unions?

A simple question – but the answer is far more complex.

Some financial institutions say that no, the Proceeds of Crime Money Laundering and Terrorist Financing Act does not apply to them as the bank regulators overrule the Act. In other instances, some credit unions might say they operate under provincial government statutes and federal rules do not apply.

Others have hired risk management lawyers in order to ensure that on-going client data collection can be justified despite the exemptions in the Proceeds of Crime Money Laundering and Terrorist Financing Act.

Although one of FINTRAC’s primary and most important roles is to enforce the Proceeds of Crime Money Laundering and Terrorist Financing Act, they are not enforcing the exemptions regarding registered plans. The Office of the Privacy Commissioner (OPC) has criticized FINTRAC for allowing the over-collection of confidential client data, but FINTRAC’s stance regarding individual Canadian’s privacy rights is that privacy questions are outside their mandate. And the OPC lacks the enforcement powers other than perhaps, moral suasion and fear of audit to force a financial institution to comply. On the public OPC web site, it appears that no financial institution has been brought to task concerning the use of confidential and private information with respect to registered plans.

A minimum of zero?

FINTRAC’s own view of The Proceeds of Crime Money Laundering and Terrorist Financing Act is curious if not contradictory. Although FINTRAC’s mandate is to enforce the Act, they are interpreting the Act by saying that the exemptions regarding registered plans do exist, were passed by Parliament, have force of law, must absolutely be followed but privately, the exemptions in their view are merely minimum requirements.

FINTRAC’s argument that exemptions are minimums makes no sense. What is clear is that Parliament intended RRSPs and other registered plans to be exempt from record-keeping and client identification requirements.

FINTRAC’s role is to enforce that law and to ensure compliance of reporting entities (deposit taking institutions) with the legislation and regulations.

The law specifically states that all registered plans (RRSPs, RRIFs, TFSAs, etc.) are exempted from record-keeping and client identification requirements.

The problem is that most of the banking industry doesn’t like this law and many have largely ignored it as too lenient, too expensive to implement and creates a perceived risk for the banking industry.

These are all valid objections but the law is clearly stated and is the law – no record-keeping and client identification requirement for registered plans like RRSPs.

For almost all deposit taking institutions in Canada, the above Act exemptions are mostly ignored and the banks continue to use and collect record-keeping and client identification information for the opening of registered plans. I only know of one chartered bank in Canada that has a clearly defined policy regarding their RRSP products and they make it absolutely clear that record keeping and client identification requirements are exempted. However, almost all other institutions have redesigned their RRSP applications so that the client or bank customer has to give the extra client information including identification and then the client has to sign the application. Because the client has signed “voluntarily” to give up his personal information, this neatly side-steps the Act’s registered plan exemptions.

FINTRAC, Canada’s financial watchdog, according to the OPC Audit, appears to happily accept whatever unfiltered confidential information financial institutions send them.

Who stands up for the little guy?

Alas, we have a problem or set of unique problems here. We have deposit-taking institutions collecting information they are not supposed to collect. We have FINTRAC that is supposed to be strictly enforcing the Act but may not be. We have the OPC doing a lot of finger wagging at FINTRAC and the banking industry, but not much else.

While the above controversies have been argued about for some time, my view is simplistic. In case of doubt, it is always best to take the moral high road. I do not give client’s personal and confidential information to anyone where it is not required. Bottom line for all registered plans – if is not required, then the information should not be given.

For bank customers who are asked for identification to open up a RRSP or TFSA, I would certainly question the bank as to why they need this information. If the bank or credit union insists or demands that you give up your information and you do not wish to divulge this information, your options are limited. If you refuse, the bank will merely refuse to give you the investment.

As far as I know, no one has filed a complaint with respect to possible FINTRAC violations and/or privacy act violations with respect to registered plans.

Privacy laws are often touted by financial institutions to be very important but in practice, privacy concerns appear to be way down on the priority list. In the view of the OPC, the majority of financial institutions are over-collecting massive amounts of personal and confidential information that is not required.

While the OPC is being critical of FINTRAC and Canada’s financial institutions for the over-collection of Canadian’s personal and private information, the OPC is not totally blameless either. The OPC makes allowances for “know your client” information without defining what “know your client” means. This small hole has, in effect, become big enough to drive a truck through. Financial institutions have interpreted this as carte blanche permission to gather additional information to create their own “know your client” requirements. These internal policies vary greatly from institution to institution resulting in “Babel-esque” confusion about how much or what is required for internal compliance reasons.

Inadvertently, the OPC manages to shoot itself in the foot as financial institutions can use “know your client” rules to over-collect client information as per the OPC’s very own guidelines. From a legal perspective, you have to admire the financial institutions neat end-run around the federal government privacy rules by using the privacy rules themselves as an argument for increased data collection.

One of the basic tenets of Canadian privacy law is that information should not be collected if it is not required. Every day it seems, we hear about or read about millions of customer records being lost or stolen. Information can’t be lost, stolen or misused (even accidentally) if it is not collected. Why bear the risks and enormous costs of acquiring and safeguarding information that does not have to be collected in the first place?

As we all know from the headlines, privacy is becoming an increasingly scarce resource. Information is the new currency and institutions are astonishingly desperate to get their hands on your personal data even if it is not required. It is up to us to safeguard our personal and confidential information as best we can.

Note: The above discourse refers to client name deposits that are held directly by a bank, trust company or credit union. The above mentioned FINTRAC Guideline 6G does not apply to securities dealers (brokerage firms, mutual fund dealers, etc.) as they are exempt.


Proceeds of Crime (Money Laundering) Terrorist Financing Regulations (PCMLTFR)


Paragraph 62.2 (i):

FINTRAC Guideline 6G (exemptions for registered plans):

Office of the Privacy Commissioner (OPC) 2013 audit of FINTRAC:

Privacy concerns with FINTRAC remain:



Joomla Templates: from JoomlaShack