Is it bias, or are some financial advisors just inocmpetent? | General financial discussion | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Is it bias, or are some financial advisors just inocmpetent?
March 11, 2016
9:06 am
Loonie
Member
Members
Forum Posts: 9308
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

There was an item in the Financial Post's advice column a few weeks ago that I meant to post but I have used up my free credits for now and can't post a direct link.

You may be able to access it by googling "Widow has impressive pile of cash in savings, but inflation threatens to wipe out her meagre returns".

The gist of it concerns a 47-yr-old widow with no kids or apparent family obligations who owns her condo outright, has a good job, savings, no car, walks to work, and spends little.

She currently has 650K in savings, AND saves at the rate of nearly 50K annually. The professional advisor allows that her savings will accumulate to 1.66million by age 65 even if her return is only .5% overall, after inflation and income tax.

At age 65, she will receive a company pension of over 35K plus she could apply for CPP. OAS will likely be clawed back BECAUSE OF HER HIGH INCOME, we are told. Her considerable savings could be annuitized, pushing her total income well over 100K.

Her current annual spending is very low, somewhere around 18K.

Now, to my way of thinking, that's plenty of money.

But, oh, no. Enter financial advisor. (Look it up to find out who.)
Financial advisor says, good heavens, this is nowhere near enough. She must invest in the stock market! (She has already told us she is opposed to this as she lost money once before.)

Financial advisor has somehow concluded that, after taxes, she will "only" have about 80K / yr to spend!

A few problems with this analysis:
*He does not tell us whether her company pension is indexed or not. Certainly this should have been an important question to ask. CPP is indexed. OAS is indexed, although subject to clawback at above-average incomes.
*She could buy an indexed annuity, if her assets are to be turned into an annuity. This would reduce the annual income from the annuity (I don't know by how much exactly, and he did not even bother to explore this), but it would be indexed. Since he estimates it non-indexed at 59K, "mostly in return of capital" (i.e. not taxed at all), the amount she would retain from the annuity would still be substantial - and indexed. Despite this, he thinks that her overall tax will be 25% of income. However, if over 50% of her income is from an annuity which is "mostly return of capital", she would have to be paying approx 50% tax on the remaining approx. 50K, not allowing for any tax credits. I don't know any jurisdiction in Canada that charges 50% average tax on 50K income.
*She could delay CPP to age 70 without risk. She clearly has enough money to get from age 65 to age 70. After that, the 42% bump in CPP (which will remain indexed) would be an extra bonus in coping with inflation.
*Nowhere does he mention what her real financial need would be, extrapolating from her current expenditures of about 18K and adding in something for longterm or critical care insurance etc. If you're only spending 18K, you don't need over 100K, especially when you know how to ensure that a substantial portion of that will be indexed to inflation and/or protected from taxation through non-registered annuity or TFSA. In fact, ALL of her current expenses plus extra insurance policies could be easily covered through the portions of her income that could be indexed, with lots left over, even with inflation.
*He says she is getting average 1% to 2% on her GICs before tax, and is very dismissive of this because of its after-tax after-inflation results. Yet, here is one place where he could potentially have been useful. He might have whispered that she actually could get better returns elsewhere. He might have talked about laddering her GICs. He might have talked about making sure they were spread out enough to be properly insured to the extent possible. Why not introduce the poor woman to financial institutions that offer more than 2%?!!

And yet, this financial planner, who has his own company and gets paid for his advice, seems to want to pathologize her perspective. It is as if she has a disease, called "loss aversion". E-e-w-w!!, not that, the financial advisor's evil adversary, which must not be allowed to invade the pure waters of the markets!
He claims she must invest in the stock market in order to be secure in her old age and not be "forced into assisted living". Indeed, he says that for only 1% annually taken from her assets, and with the help of "someone she trusts" (now, who might that be, who doesn't honour her goal of not investing in the markets?), she could move 50 to 60% of her money into... the stock market! - just where she told us she does not want to go. If you believe all this, then I have a swamp in Florida for you... sf-wink
The only thing we can say for sure about that is that somebody would be getting over $8000 /yr from her, minimum, when she hits 65 - if her money is all still there by then.

Have they no shame?

(Sorry about the spelling mistake in the title. Someone can correct it - or consider it funny perhaps.)

March 11, 2016
12:29 pm
Bill
Member
Members
Forum Posts: 3970
Member Since:
September 11, 2013
sp_UserOfflineSmall Offline

The problem is people use the industry-proffered term "financial advisor". I don't acknowledge that phrase, I use the term "mutual fund salesman". It's not perfect, maybe others have their own term - ?

March 11, 2016
12:57 pm
kanaka
Member
Members
Forum Posts: 1232
Member Since:
December 23, 2011
sp_UserOfflineSmall Offline

Bill said

The problem is people use the industry-proffered term "financial advisor". I don't acknowledge that phrase, I use the term "mutual fund salesman". It's not perfect, maybe others have their own term - ?

lol....my daughter works for one and she wanted us to meet him. No doubt he wanted us to become his customer but i find that a bit award with my daughter working for him. My daughter has worked for 2 more advisers since. During the discussion with him I said something like......."you are just a mutual fund sales man".....interesting response....none and seeming to catch him off guard.....he stuttered a bit and carried on with his conversation...I am good at doing that. sf-surprised

In talks with others we have come to the conclusion that Investment Advisers are in the same category as:
Lawyers
Realtors
Vehicle Sales.
So what is the appropriate category name?

Unfortunately, these are my personal feelings about the majority in this category, while no doubt in my mind there are some good ones.

March 11, 2016
1:17 pm
xxxx
Member
Banned
Forum Posts: 338
Member Since:
June 29, 2013
sp_UserOfflineSmall Offline

Kanaka - surprised you did not include "politicians" in your listing category above?

March 11, 2016
4:57 pm
Koogie
Member
Members
Forum Posts: 334
Member Since:
November 19, 2014
sp_UserOfflineSmall Offline

"""Is it bias, or are some financial advisors just inocmpetent?"""

Freudian slip or just solidarity with them ?

sf-smile

March 11, 2016
5:04 pm
kanaka
Member
Members
Forum Posts: 1232
Member Since:
December 23, 2011
sp_UserOfflineSmall Offline

Koogie said

"""Is it bias, or are some financial advisors just inocmpetent?"""

Freudian slip or just solidarity with them ?

sf-smile

I don't think incompetent.......it is "just another commission based" industry......making us think we are getting the best investment and returns.

March 11, 2016
5:05 pm
kanaka
Member
Members
Forum Posts: 1232
Member Since:
December 23, 2011
sp_UserOfflineSmall Offline

Brian said

Kanaka - surprised you did not include "politicians" in your listing category above?

ha ha......but they are not on commission. I guess they are more like Saturn sales people.

March 11, 2016
9:04 pm
Norman1
Member
Members
Forum Posts: 6910
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said

There was an item in the Financial Post's advice column a few weeks ago that I meant to post but I have used up my free credits for now and can't post a direct link.

You may be able to access it by googling "Widow has impressive pile of cash in savings, but inflation threatens to wipe out her meagre returns".
...

I think this is the February 5, 2016 Financial Post article: Family Finance: Widow has impressive pile of cash in savings, but inflation threatens to wipe out her meagre returns

March 11, 2016
10:51 pm
Loonie
Member
Members
Forum Posts: 9308
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Brian said

Kanaka - surprised you did not include "politicians" in your listing category above?

Perhaps he should have included editors at the National Psst, who allowed this to go through, apparently with straight and sober faces - like they think this is helpful?!

March 12, 2016
7:25 am
SavingIsGood
Member
Banned
Forum Posts: 215
Member Since:
February 18, 2016
sp_UserOfflineSmall Offline

kanaka said
In talks with others we have come to the conclusion that Investment Advisers are in the same category as:
Lawyers
Realtors
Vehicle Sales.
So what is the appropriate category name?

Unfortunately, these are my personal feelings about the majority in this category, while no doubt in my mind there are some good ones.

I agree with you 1000%. We could easily live without them but they have persuaded useless politician (who are hiding behind armed police and useless heavily armed Can military) that their services are essential.
But I have really nasty way to deal with car dealers: I do not want to pay more than $x for this car - today. No? Good bye...

To comment OP, if person at 65 years of age has 1.65M in saving, assuming she manages to live next 40 years, she can spend little bit more than 40K per year not counting if she keeps money at the bank at 1.75% which will add even more.
NO need to invest; NO need to pay taxes if that is pure saving.

March 12, 2016
7:30 pm
Norman1
Member
Members
Forum Posts: 6910
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

I read the article and found the advice to be okay.

If Esther's company pension were indexed to inflation, that would mean $46,808 of her $106,308 annual pre-tax retirement income, or 44%, would be indexed to inflation.

Her after-tax retirement income is to be $80,400 a year or $6,700 a month.

The challenge is that partially-indexed $6,700 a month is not much more than the $200 a day or $6,000 a month in-home help or institutional care is expected to cost. Esther would have to move into a nursing home as soon as she needs assisted living. No way she would be able to pay $6,000 a month for in-home help and live on the $700 a month left, particularly if what's left, and then some, is not keeping up with inflation.

The advice given is one of two choices:

  1. Increase equity component to 50% to 60% so that she ends up with around $2.3 million instead of $1.6 million at retirement. That would result in $9,600 a month after taxes. A much more comfortable margin over the $6,000 a month in-home help cost.
  2. Reduce current savings and put the difference into a long-term-care insurance policy to pay $200 a day, until end of life. That would cost her $290 a month or $3,480 a year.

The advisor is correct: Preserving principal is not the same a preserving purchasing power. Decades ago, I had a Canada Savings Bond that paid 10½% per annum. Sounds like I was growing my money until one realizes that inflation was around 7% at that time.

Was I not 3½% ahead still? Yes, if I wasn't paying any taxes on the interest. If I was paying 25% taxes, then I was ahead just 0.875% a year. If I was paying 40% taxes, then I was actually losing 0.7% a year in purchasing power.

Inflation is important. Prices inflating by 2% per year may not sound much. But, that ends up being 21.9% per decade. Falling ½% behind per year after taxes means falling behind 4.9% per decade.

March 12, 2016
11:13 pm
Loonie
Member
Members
Forum Posts: 9308
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

At least half of this woman's income can be inflation-protected, so she will not be looking at high inflation - perhaps 1% overall instead of 2%. In addition, her assets will be higher than this advisor suggests because she will have been getting significantly higher interest for the previous 18 years. As you say, Norman, even small percentages add up over time, and this applies to interest too.

I think the advisor should have referred her to an annuity specialist. It's a complicated field and, from what I have read, one really needs to speak to a specialist in this area. I learned recently about term annuities. You buy them for a specific term, at the end of which you get your remaining money back and can make a new decision which reflects current circumstances. I think she could buy those and re-adjust them every so many years according to her situation as it develops. When and if she gets to the point of needing assisted living, she will have insurance (according to his plan) and she can either stop renewing the annuity and use up her capital at that point based on life expectancy or buy an annuity that suits her new circumstances when the time comes.

She also will not be losing nearly as much in taxes as it may first appear, due to the annuity, which will be almost tax-free. If, in today's dollars, her income is 100K, of which 40K is "return of capital" in an indexed annuity (he estimates 59K for non-indexed, and I don't know what the return would be on indexed, so this is what I think is a fair guess), she might pay something like 14K on the 60K in income tax, which is an average tax rate of 14%, far less than anything cited here. In cases like this, it is the average tax rate that matters, not the marginal tax rate which gives a more alarming result but is not relevant because she will not be adding any more income at the top end bracket. In addition, if indeed she requires expensive assisted living, this will involve tax-creditable costs.
Add that to the 1% inflation, and we have 15% lost. Big deal. 85K gives over 7K/month to play with, which is plenty, even in assisted care.

But she will not need assisted care from the moment she turns 65 until she dies 30 years later, as projected by this advisor.

Also, I didn't mention before that he does not appear to include the value of her condo in his calculation of her assets - which, since she lives in BC, might be very high indeed. When and if she needs assisted care or nursing home, or before, this property will be sold. Even at a modest valuation of 300K, this would provide over 4 years of care at 6000/mo, and she would still have all the rest of her income, which she wouldn't even need. She would also be cashing in on those insurance policies he wants her to buy. On average, most people who require this level of care will not live longer than that, but, if she does, then she can draw on her assets and the income which will have been piling up since she turned 65, as she clearly will not be needing it until she is physically or cognitively impaired. After 4 years of assisted living, her days will be surely numbered.

If the advisor had taken these and the other considerations I mentioned into account, then he might have had some cred with me, but I also think he would be forced to different conclusions.

The telltale sign of an advisor who uses cookie cutter approaches like this one, is that he advocates the predictable breakdown of 50/50 or even the riskier 60/40 between equities and cash, without any reference to the risk this would entail, her risk tolerance (except to complain about it) or the extent to which it might be "necessary" (in his terms) to meet her needs.

He also ought to be initiating a rational discussion about how much is really "enough", and whether she feels the trade-off is worth it between investing in equities and the cost of potential future care. At some point, everyone must make that decision for themselves. We all have to live within our means and within our risk tolerance, and it is the job of a financial advisor to honour that.

I would challenge him, or anyone trying to help this client, to make the effort to look at what can be done with the assets she has and will have. Take her seriously when she says she does not want to invest in the stock market. I have no doubt that a different set of figures would result. He has systematically ignored numerous significant factors in her particular case.

I regret that I can't give a more detailed analysis, taking into account every detail which ought to concern an advisor. It's not my job anyway, but we are not given all the details required to be definitive.

I would not touch this advisor with a ten foot pole. Others might, and no doubt many do. I have said what I can to warn about advisors who think the way this guy does. As Bill said in another post recently, people have to make their own decisions and do their own learning. However, I think a certain amount of regulation, both by the "profession", if it can be called that, and the public (i.e. government) is necessary in the public interest. In this guy's case, I think it is the "profession" that needs to be taking a long hard look at itself.

And, speaking for myself and my own opinions, if 1.66 million plus a condo and pensions aren't enough for one very frugal woman with no debts or dependents to retire on without taking a shot at the stock market with at least 40% of her money (which may or may not achieve the desired result), then we have reached a vey sorry situation in our country. The overwhelming majority of Canadians will never have anywhere near this much money, and I think we all know some of them. No doubt some could do better with what they have, but this is the situation.

March 16, 2016
6:51 pm
Norman1
Member
Members
Forum Posts: 6910
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

Loonie said
....
I think the advisor should have referred her to an annuity specialist. It's a complicated field and, from what I have read, one really needs to speak to a specialist in this area. I learned recently about term annuities. You buy them for a specific term, at the end of which you get your remaining money back and can make a new decision which reflects current circumstances. I think she could buy those and re-adjust them every so many years according to her situation as it develops. When and if she gets to the point of needing assisted living, she will have insurance (according to his plan) and she can either stop renewing the annuity and use up her capital at that point based on life expectancy or buy an annuity that suits her new circumstances when the time comes.

With term-certain annuities, there's no money left at the end. The entire invested capital is paid out over the term of the term-certain annuity. That's why the payments are so high compared to a GIC. However, if one does the calculations, one will find the rate of return on remaining capital to be not very good. If one can live with the interest-only payments of a GIC, one can do better with a GIC.

However, a life annuity is an interesting option. If she were 65 today, living in BC, and retiring now with $1.6 million to invest, she could buy a life annuity from RBC Insurance that would pay her around $92,400 yearly or $7,500 monthly, non-indexed, for the rest of her life. She would end up with a pre-tax retirement income around $139,000 a year or $11,500 a month! She may put $2,000 a month aside to cover the inflation on the $6,000 a month later in life for in-home assisted living.

Loonie said
....
And, speaking for myself and my own opinions, if 1.66 million plus a condo and pensions aren't enough for one very frugal woman with no debts or dependents to retire on without taking a shot at the stock market with at least 40% of her money (which may or may not achieve the desired result), then we have reached a vey sorry situation in our country. The overwhelming majority of Canadians will never have anywhere near this much money, and I think we all know some of them. No doubt some could do better with what they have, but this is the situation.

The advice is intended to give her the option of maintaining her current lifestyle and living indefinitely in her current home. In-home assisted living is not cheap.

If she would be okay with selling her home and moving into a nursing home earlier, then she can just continuing saving as she has and not need to invest for higher returns.

I think the most valuable part of the advice given is the insight that preserving principal is not the same a preserving purchasing power. If she understands that, then she will be making better decisions about her finances.

March 17, 2016
2:21 am
Loonie
Member
Members
Forum Posts: 9308
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I don't think we're talking about the same thing in terms of annuities. What I was reading about was a system where you could sign up for an annuity in a fashion similar to a mortgage. At the end of the term, let's say 10 years, you get to re-set it or pull out entirely. Perhaps I don't have the correct terminology for it.

I think you have demonstrated clearly how this woman could do just fine without ever visiting the stock market.

You're probably right that the "most valuable" part of the advice is that inflation needs to be considered. But, still, this is hardly news to anybody who is paying any attention at all; and the stock market is not the solution in this case.
I think the article boils down to an alarmist analysis which is meant to push someone into something they don't need or want. Really bad journalism. It would be one thing if the journalist used the advisor's analysis to teach the reader how to analyze advice, but he just repeats it, and in my opinion it's very poor advice. I sure hope this woman wasn't vulnerable enough to follow it.

Please write your comments in the forum.