Contents: investment advisers in Canada, long-term care insurance? Investment Policy Statements, U.S. home prices up but hottest markets slowing, Toronto condos: not about housing but profits and rents about to drop, needed/coming 401(k) changes: outcomes vs. contributions, OECD: coming austerity’s impact on pensioners, $1B spent on lawyers/”professionals” from Nortel estate, risk off the table as valuations rise, end-of-life planning, money and fiction.
Personal Finance and Investments
In the Globe and Mail’s “Canada’s trouble with investment advisers” Tim Kiladze discusses how Canada’s advisers continue to be paid by commissions/trailers for selling products. The article notes that while provincial regulators have “proposed sweeping reforms… (and) The groundwork has already been laid for more robust disclosure of the fees that investors pay, and mutual fund companies may have to curtail the amounts they pay to advisers in return for selling their products.” But the industry is very powerful and meaningful reform is not a foregone conclusion. Financial institutions argue that all problems are fixable with fee-based accounts charging 1-2% of assets but these can be gamed by double-dipping (i.e. collecting trailers in addition to fees). (Time will tell if any meaningful reform will actually occur in Canada. Disclosure of fees/conflicts of interests is not enough. 1-2% annual fees are way too high, and where is the requirement for an advisor to be a fiduciary and eliminate conflicts of interest?)
In the WSJ’s “New strategies for long-term care” Kelly Greene reports that LTCI policies continue to get more expensive “for new and longtime policyholders” as there are fewer companies offering them. Greene notes that Medicaid pays $131B or 62% of total U.S. long-term care bill, but the total expenditure excludes family caregivers’ contribution of about $450B in unpaid care and the $8,080 out-of-pocket expenses per caregiver. She mentions: asset protection schemes like Long-Term Care partnership Program in many states (mostly too expensive due to costly inflation protected policy requirements), hybrid policies (whole/universal life insurance policies with LTCI riders which are expensive/opaque). (As I have mentioned before, I continue to be unconvinced about the value of LTCI policies given high load factors, insurance company ability to increase premiums and many other reasons. Some risks are just unsuitable for insurance protection and are more appropriate to be addressed as part of one’s retirement savings program.)
In the NYT’s “Individuals find ideas in the institutional investment world” Paul Sullivan sings the praises of Investment Policy Statements for individuals, but notes the challenges of implementing them for “smaller clients”. The difficulty for smaller clients is the IPS effort/cost to thoroughly identify goals, objectives, return objectives, risk tolerance and assorted constraints, which are then translated to an asset allocation and portfolio implementation followed by periodic rebalancing to the target asset allocation. (I am sold on the IPS being the right tool as the basis for financial planning and investment management. You should ask for one from your advisor.)
Real Estate
The September 2013 S&P Case Shiller Home Price Indices indicate US national home prices are up 3.2% in the quarter and 12.2% in the past year. San Diego, Las Vegas, Los Angeles and San Francisco showed YoY increases >20%; Miami and Tampa were up 14%+, and Phoenix was up 18%. The smallest YoY increase within the 20-City index was New York at 4.3%. Index is still 20% off from 2006 peak and current average prices are now back to only mid-2004 levels.
In the WSJ’s “Hottest housing markets hit headwinds” Nick Timiraos notes that “In a number of cities across California, Arizona and Nevada—where price gains have been especially strong in the past year—sales are slowing and supply is rising…(with the slowdown attributed) to rising prices and a jump in mortgage rates, which have made homes less affordable for prospective buyers and a less compelling deal for the investors…”. Timiraos notes that that in Q3 “home values in Orange County rose just 1%; in San Diego, 2%; and in San Francisco, 3%. Those were the smallest increases in those markets since prices began to rise in early 2012.”
In a CBC report on Toronto condos “The condo game” (which now appears unavailable to me, though an interview with the documentary filmmaker and a trailer are still available) looks at the “forces at play behind the fastest moving condo market in North America – Toronto – and discovers that the glittering glass hides a sea of troubles…(because of) how very much the condo market is focused on investor profit, not affordable housing”. The report notes quality issues (e.g. panes of glass falling from new buildings) and others which later translate to high cost maintenance problems, inadequate city planning, pre-sales which result in having bought a condo totally different than expected, neighborhood businesses impact of condo developments and the problems associated with condo governance. Furthermore Tara Perking in the Globe and Mail’s “Weakening rental picture latest condo market worry” reports that “rents in Toronto condo market are on the verge of decreasing” and quotes a report indicating that “New condo landlords in Toronto today can expect going-in unlevered cap rates around, and often below, the dividend yield on a typical bank stock or residential REIT…Investor owners are accepting returns below available REIT yields despite the illiquidity, lack of diversification, and operational risks of owning a unit directly.”
Pensions and Retirement Income
Mark Miller in the WSJ’s “The shape of 401(k) plans to come- and why they are changing” discusses upcoming (needed) changes to 401(k). “The biggest change will be a new emphasis on retirement readiness, rather than simply getting workers to join a plan and contribute. The idea is to focus on actual retirement outcomes, and it reflects apprehension about the large number of Americans who are approaching retirement unprepared. Other trends will include: more professional advisers and more automation (defaults). (Focus on outcomes and advice should help people save more and invest better in preparation for retirement.)
The Financial Times article “Pensioners starting to feel fiscal austerity impact, OECD warns” and Pensions&Investments’ “Despite improvements, retirement adequacy, inequality still need to be addressed” both cover a new OECD report which discusses: (lack of) sustainability of (state) pensions which are now starting to raise “retirement ages and freezing- or even cutting- payouts”, the potential deterioration of previously ameliorated poverty levels, deterioration of worker to retiree ratios. Poverty levels in the >65 aged US population in 2010 are at 19.9% (was 22.2% in 2007) and Canada 7.2% (was 5% in 2007) compared to OECD average of 12.8% (was 15.1% in 2007). But the report also argues that “the wealth of retirees is “very unequally distributed,” which leads to greater inequality in the distribution of retirement income.” and especially “women over 65 particularly affected as they generally live longer, have a lower pension (benefit) and are at greater risk of poverty when long-term care is needed”.
And in the “how nauseating/pathetic is this?” category is CBCNews’ “Nortel bankruptcy fees hit $1B US” “Fees paid to lawyers and other professionals working on the ongoing (approaching 5 years next January) bankruptcy proceedings of Nortel Networks Corp. have passed the $1 billion US mark.” (No doubt that as the assets approach exhaustion the “professionals” will leave just as the parasites leave when the body has been consumed. Where are the legislators? Where is the justice system?)
Things to Ponder
In IndexUniverse’s “Bill Bernstein: Take risk off the table” Olly Ludwig interviews Bill Bernstein who argues that it is time to reduce equity allocations as valuations increase. He is in effect suggesting that (it might not be enough to just rebalance but) as valuations rise (and expected returns decrease) one should also consider reducing equity allocation from say 55% to 50 or 45%. For example he suggests that if the stock market rises 50% he might reduce his stock allocation by 4%. (or 2-5%) And he adds that, of course “when the intelligent investor does some trimming back, he usually feels like a dummy for the next year or two. And when he trims back again, he feels like a little bit more of a dummy. And he feels dumb for awhile each time after he does it. But then there comes a point, three to five years hence, when he feels awfully smart.”
In WSJ’s “Livening up end-of-life planning” Daisy Maxey writes that participating in organized discussions aimed at “breaking down long-standing taboos around a tough subject can bring families and friends closer, help ensure a dying person’s wishes are respected and ease the transition for those left behind.” The discussion can start with “a list of documents and other pieces of information people should make sure are accessible to others, including financial planning and insurance documents, information on employee benefits, the names of people they might want to see them if they are on life support and details of how they want to be buried”. Other topics to consider for such a gathering might be of more philosophical nature such as: mortality, longer life (vs. quality of life), planning for unexpected and/or inevitable death, where one wants to die (home vs. institution), how “The end-of-life experience “is bankrupting us personally, institutionally and governmentally, and we’re not getting what we want…”, writing letters to loved ones.
And finally, in WSJ MarketWatch’s “Want to get rich? Read fiction” Jeremy Olshan discusses financial lessons: in Shakespeare’s Hamlet “neither a borrower nor a lender be”, in Dickens’s David Copperfield “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”, Don Quixote’s “The person who possesses wealth is not made happy by having it but by spending it, and not spending it haphazardly but in knowing how to spend it well.”….and more.
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