Rob Carrick’s [Bad] Advice to Young People: RRSPs? Nah.

Rob Carrick’s receent article is a beauty. His headline is “Under 25? Live it up! Financial advisers can wait.” The article gives very confusing advice, and is by no means “financial and investing wisdom” as he claims. It’s the opposite of wisdom, whatever that is. He main goal point seems to be that young adults should wait before starting to invest (“RRSPs? Nah.” he says) and that they should stay away from the financial industry.

His logic goes like this. The “the financial industry is always trawling for new clients” so don’t invest until you are older. “There’s no need to let the financial industry get its hooks into you just yet.” If you do some investing, “get aggressive, sure, when you’re young, but hold off on the adviser.” “Be wary of the financial industry at any age.” Did the financial industry abuse Rob Carrick as a child? When you’re a bit older, sure go ahead, get an advisor, he says. “My advice to people in their early 20s is to live a little, and then visit an adviser when you really need to.” “Expert help can be indispensable if financial matters baffle you.” He uses an example of a TD poll that concluded that people aged 18-24 are least likely to have consulted a financial planner. Rob, TD is not in the same business as the fast food industry. Advertising targeted at children/young adults is OK.

Rob makes a feeble argument as to why you should until you are 28 to invest rather than, say, 22. Here goes:

There’s a good, strong argument for contributing to RRSPs as young as possible, of course. The earlier you put money in a plan, the longer it has to compound tax-free. If you put $1,000 in an RRSP at age 22, you’ll have $18,344 at age 65 if you assume an annual return of 7 per cent. If you wait until 28 (the TD poll found this is the average age for starting an RRSP), you’ll have $12,223, and if you wait until you’re 32, you’ll have $9,325.

By these numbers, the right age to start contributing to an RRSP is 28. You just lose too much in tax-free compounding if you wait until 32. And what about the $6,121 in gains you miss out on by delaying until age 28? Call it a fair price for enjoying your youth and not rushing into financial adulthood.

I’m not sure how he concludes that the magic age is 28 from those numbers. May I remind you Rob that one is only allowed to contribute up to 18% of one’s gross income into an RRSP every year. In the worst case that would lead to an 18% reduction in enjoyment, in the best case, it would lead to less spending on unnecessary things and minimal impact on enjoyment. You said it yourself Rob, “There’s a good, strong argument for contributing to RRSPs as young as possible, of course. The earlier you put money in a plan, the longer it has to compound tax-free.”

Off to E*Trade I Go

I just mailed my E*Trade application this morning. I applied for their cash optimizer account, a CDN and US trading account and an self-directed RSP account. There is a $100 transfer free from Clearsight but E*Trade will pay that. E*Trade hypes their “Conceirge Transfer Server” but it’s nothing special. In fact besides paying for the transfer fee (for accounts of $25,000 or greater) it really does nothing above and beyond what any other firm would do (like what Clearsight did when I transfered from TD).

As much as I hate to say this, I am looking forward to making some trades. The reason is that I have been pilling away cash into my RRSP for the last while and haven’t bought anything. Time to start reorganizing my portfolio. I won’t be selling and ETFs, that’s for sure (I only have one, XIC) but I’m not afraid to get rid of mutual funds at no expense and switch to some ETFs.

Should I Go It Alone?

Over the past year I have been an advocate for using an advisor as a source of some good advice and as a way to keep a small barrier between you and your money, to prevent over-active trading. Frustrated by the fact that Clearsight Wellington West, after getting rid of my former investment advisor, has not bothered to call me, and unimpressed by what I see on the web pages of investment management companies, I have been contemplating going it alone. The main reason I got a financial advisor was to stop me from doing stupid things and that worked. It was also done to save myself time. But if I don’t do stupid things and stop trying to be too active with my money, then it should not take too much time. Having an advisor for the past year was a great experience. Over the year we never sold a single investment. I don’t think I ever went a year before without at selling a mutual fund at some point. Am I ready to go it alone? I don’t know, anyways, it is just an idea at this point.

After my unsuccessful search for an investment management company, I briefly looked at options for self-directed RRSP accounts. I first looked at TD Waterhouse (I used to be at TD Waterhouse and TD EasyWeb) because I really like their web services. I also looked at E-Trade. Their trades are a bit cheaper at $20. My portfolio as it stands right now mostly consists of a bond mutual fund, a Canadian ETF, a Canadian small-cap mutual fund, a US mutual fund, and an international mutual fund. I might switch the US component to an ETF and leave the CDN small-cap and international where they are for the time being. If after the transfer is all done from Clearsight to E-Trade and I buy 1 ETF, if all I have to pay is $20 then that is pretty good. It looks like their have some conceirge account transfer thing so the transfer fee is waived if you have more than $25,000. I have that much but my wife doesn’t so I’ll have to think about what to do there.

Still no Word from Clearsight Wellington West

Since Clearsight was bought by Wellington West about 1 month ago as I described I have not heard from my new financial advisor (as my original advisor “will no longer be with Clearsight” as a consequence of the acquisition). I decided to wait for them to call, to see how bad they wanted me. Well it appears that I am not that important to them. I did receive an email and a letter in the mail, which was appreciated, but no phone call. I thought they would have made phone calls to everyone ASAP. Anyways, I am just saying that I am disapointed and that this will influence my decision on whether or not I stay with them, follow my former investor wherever he sets up shop, or start searching for a new place altogether.

Clearsight Acquired by Wellington West

The company that my investment advisor works for, Clearsight, has been acquired by Wellington West. As a result of this, my advisor will no longer be with the newly formed company,

One outcome of our new partnership is that your current advisor, X, will not remain with Wellington West Clearsight. As a result, Y will now be responsible for your accounts. Be assured that you will receive the same sound investment advice that you have come to expect from Clearsight.

It looks like the new company will be called “Wellington West Clearsight.” Wellington West was the worser name of the two so I think they should just change the name to Clearsight. After browsing their website for a bit, a couple negatives jumped out at me

  • One of their core principles is “At Wellington West, our commitment to independent growth is an asset that we will always preserve.” If you click on the growth link you see some graphs that shows the growth in the number of client accounts they have and the number of assets under their management? Huh? Am I supposed to want to take my money there because they can grow their client base? I says: “At Wellington West, the loyalty of our clients and our dedication to independent growth are assets that we will always strive to preserve. As our history shows, we are capable, confident, and committed to our core value of moving our clients forward.” What does growing their assets and growing their number of clients have to do with “moving clients forward.” What does “independent growth” mean anyways? Does it mean growth done independently without acquisitions? In their email to me they were also very proud to tell me about their growth as a company for some reason: “Wellington West is Canada’s fastest-growing independent wealth management firm, managing more than $7.6 billion in assets with 28 branches across the country and 425 employees. It has more than 30,000 client accounts.”
  • On their home page there is graphic that says “move clients forward and keep them eternally.” Um… Great sales pitch. Come to us and we will do everything in our power to keep you here eternally. I think keeping clients eternally should be a positive side-effect for the business if they do everything else right but keeping clients shouldn’t be a goal in itself. That’s the sort of thing that Microsoft does.
  • Another principle is “at Wellington West, we are the best at whatever we undertake.” Understatement of the year.
  • They mention their “clear, uncompromising focus: we serve our clients first” and their “clients’ interests and needs always come first” although I was a bit dismayed at how, after the takeover, I was neither a) consulted on what I thought of my advisor (maybe if he received enough praise from clients they would have kept him?), b) contacted me personally about my advisor’s leaving/dismissal, instead I received a form letter. They say in their email that I’ll be contacted in the next few weeks. To me that doesn’t sound like “serving clients first” or “clients interests always come first.” Maybe I’m being a bit harsh, I don’t know.

It’s easier for me to find some negatives. The positives are a bit harder to figure out because I just don’t know enough yet. There are some things I would like to know more about, for example:

  • “The fruits of our strategic collaborations include access to quality independent research, deal-flow and, one of the most advanced fixed income offerings in Canada, our Rapid Electronic Bond Access (REBA) system”
  • They have several “solutions” and I haven’t heard of any of them and would have to look in to it some more.
  • The advisor who is taking over my account sounds much more senior than my advisor was, although that may just mean that I will have less access to him while he spends more time with his big clients.

By the way, my ex-advisor did not contact me. I can only assume that they locked up his computer and Internet access yesterday morning and so he was unable to get a list of home numbers to contact his now former clientele and thus recruit them to wherever he goes next. I will be searching for his number and I will eventually make a decision of whether to stay at Wellington West Clearsight or move with my ex-advisor. Whether or not Clearsight stays with Ross Healy might be a factor, considering it was the reason I went to Clearsight in the first place. I am not aware of the alternatives to Ross Healy’s services out there, although I am sure they exist.

Mutual Fund Loads

When is a Front-End Load NOT a Front-End Load? Answer: when the front-end load is zero.

On a previous blog post of mine about my new portfolio allocation as proposed by my advisor, I received a comment from Average Joe in regards to the MERs and the loads on these funds (CI Value Trust fund, Templeton International Stock fund, and E&P Growth Opportunities fund):

These are all loaded funds as well (ie. they are not no-load funds). You will more than likely be locked in or have to pay a penalty to get out.

I had not looked into the loads of these funds before. In my reply to the comment above, I looked up the load options for 3 three mutual funds in question in their respective prospectuses:

I had assumed these funds were all no-load but they are not, as you have pointed out. I went and looked at the prospectuses (sp?) and here’s what I found:

-CI Value Trust can be purchased and sold after 3 years for free with the low-load option. If you sell before the 3 years are up, the sales charge is 3%.
-Templeton International Stock fund can be sold after 2 years for free with the low-load option. If you sell before the 2 years are up, the sales charge is 2%.
-E&P Growth Opportunities fund can be sold after 2 years for free with the low-load option. If you sell before the 2 years are up, the sales charge is 3%.

This does not concern me too much. I would much rather be locked in to something as it will force me to stay invested, at least on the 2-3 year time scale.

In the above, I am only quoting the “low-load deferred sales charge” option. There are actually three options for these 3 funds:

  • Front-end load (or initial sales charge) option: you pay a sales commission when you buy your shares. The commission is a percentage of the amount you invest and is paid to your financial advisor.
  • Deferred sales charge:
    • Standard deferred sales charge: varies depending on the fund, but usually higher initial penalty percentage than the low-load deferred sales charge option and a longer waiting period until the load disappears, and for some funds you may switch or sell some of your units every year. The penalty charge decreases every year you stay invested in the fund.
    • Low-load deferred sales charge: lower loads compared to the standard deferred sales charge option and shorter time until the load wears off. Usually the penalty is constant rather than decreasing, then after a short period of time, becomes 0%.

I had incorrectly assumed that the low-load deferred sales charge was the cheapest option for the investor. When I asked my advisor about this, he told me how Clearsight handles mutual funds. He said that all funds are available from Clearsight on a no-load basis. They do this by doing front-end loaded funds but with a load of zero. They do have a penalty of 2% if you want to switch or sell within the first 90 days to discourage silly trading. So essentially they have access to all funds on a no-load basis. Also, he told me they get paid a 1% trailer fee from the mutual fund company.

Anyways, that’s just a long-winded way of saying front-end load does not always mean front-end load. If your advisor or his company chooses not to charge the front-end sales charge then it is essentially no-load. After years of investing by myself in TD Mutual Funds through TD’s website, I have a lot to learn about mutual fees!

How is Your Spouse’s Portfolio Managed?

I had assumed my financial advisor was going to manage my RRSP portfolio and my spouse’s separately. ie. I thought he was going to have an asset allocation model for her and an asset allocation model for me and each was going to be totally independent. I was going to suggest to him a long time ago that we use a spousal RRSP for one of us and put all our monthly contributions into one account. One of us would contribute to our RRSP directly, the other would contribute to the spousal RRSP of their spouse. It would be as if we had one portfolio. Except our RRSPs would get really lop-sided after doing that for a while and we would have to switch to the other RRSP and start contributing into it as well. That doesn’t seem like the optimal way to do things.

I just found out today that he is planning on manage my RRSP and my wife’s together, treating the two RRSP accounts as one massive portfolio. So I could have the international and US stuff, for example, and my wife could have the Canadian and the fixed income. This would be much more efficient from a cost perspective. If we bought all ETFs all at once for example (one ETF for each market: US, Cdn, Int., Bonds) our commissions would be cut in half. Instead of buying 8 ETFs (4 each) we would just buy 4 ETFs (2 each). I didn’t think advisors ever did this because it would be harder to manage because underneath they are separate accounts. But I’m glad that mine does! What about your spouse? Is his or her portfolio managed together with yours as one large portofolio?

Too Many Choices (or why I am ready to give up)

If you have read my last post you will know by now that I am set to start my new portfolio at Clearsight. I have been debating what to choose for my US equity component, and whether or not to go with my advisor’s recommendation of CI Value Trust (satellite fund of Legg Mason Value Trust). I said in my last post that am not interested in investing in Bill Miller‘s Value Trust fund but that I said I would rather go with the Rydex S&P 500 Equal Weight Index ETF (RSP) instead. I have now come to the realization that RSP is very similar to the S&P 400 Midcap Index which is also available as an ETF (MDY). It is very highly correlated and comparing the performance of these two ETFs makes this obvious. There is also a small advantage to getting MDY over RSP in that “the higher volume on MDY is an advantage for that fund, as is the typically tighter bid/ask spread” but this is probably splitting hairs. Comparing either of these two funds to Bill Miller’s Value Trust is probably not a fair comparison, just as comparing S&P 500 (huge-cap) to S&P 500 Equal Weight (semi-large to large-cap) is not exactly a fair comparison as they are in different classes and will of course perform differently. I found yet another index choice today, the S&P 500 Value Index (IVE). It has beaten the S&P 500 index but it has not been able to catch Bill Miller’s Value Trust. Sounds like a great alternative to the S&P 500 index though as it screens out some stocks which aren’t a good value.

At this point I began to get frustrated with the number of choices out there. RSP, SPY, MDY, IVE, and that is only a few of the ETFs available. Then there are the actively managed mutual funds, LMVTX being only one of many, and of course there are the index mutual funds of which there are probably one for every index just like the ETFs I mentioned above. Sometimes I feel like I know exactly what I want, other times I can not makes heads or tails of it with all the choices and knowing there are even more choices out there that I have not examined is daunting. It is frustrating for some someone like me, skilled in the maths and sciences and now software, that there is not some exact deterministic way of determining the ideal choice.

When I left TD, one of the main reasons was because I did not have a proper selection process for what I would buy for my RRSPs. Usually I would scan the performance (usually the longest term possible, 10-years or since inception if available) and choose funds that looked like they had done well in the past. This was flawed because crappy funds can have a few stellar years and good funds can have a few bad years. Or sometimes I would look for funds that did well in the past, but might have just come off a bad year (hoping to catch the fund on the up-swing). This method was also flawed. The second reason I left TD was that I did not want to be a DIYer anymore. I felt like an amateur/hack trying to do a professional’s job, and I was not succeeding. Not only that but I did not have enough time to spend on this. You may think that writing and researching articles for this blog takes time, and yes is does (and I have learned a lot about investing by writing this blog), but it cannot compare to the amount of time financial advisors and their superiors have spent day in and day out trying to answer these same questions. It is after all their full-time job. My financial advisor says that he does not pick stocks. He leaves that to the professionals, such as Ross Healy or Bill Miller. He does not have time to research stocks for his clients. By the same token, I should leave the management of my portfolio to my advisor because I do not have time to do it myself.

This does not mean that I should leave everything up to my advisor. Much like my advisor will monitor the actions of Ross Healy and Bill Miller I should also vet all actions my advisor recommends for my portfolio. Right now I think I am ready to give up and let him decide what is best. I would like to have a say in the asset allocation and I really want to have 25% bonds and the rest balanced between Canadian, US, and International. But as for what is inside those categories I really do not have the time to examine his choices of holdings for me in microscopic detail. It has already taken far too much of my time. The portfolio that my advisor is recommending is already much better than my old TD portfolio for many reasons, and if going with an advisor helps keep my hands off my portfolio and helps me keep this allocation over the long term, then it will surely achieve much better performance in the long run than I was getting with TD as a DIYer.

No time to read over this rant, it’s too long. Grammar mistakes be damned!

Bad Investment Advice – Part II

This is a continuation of the story I shared with you in “Bad Investment Advice.” If you do not have time to read the entire article, in short, a brother of a friend of mine went into TD looking to start up an RRSP, armed with some great recommendations for a balanced, well-diversififed set of index mutual funds in equities and stocks. Instead, thanks to the “advice” of one of their investment “advisors,” he came out with a 100% equity portfolio in Canadian equities because “it has done so well in the last few years.”

I wrote about that story on January 25th. The story continues. Just yesterday before the RRSP contribution deadline for deductions made for the 2005 tax year, my friend’s brother went in to add to his RRSP. Here’s what happened:

[he] went in to the bank to contribute some last minute money to his RRSP’s, and the tried to get him to transfer his mutual funds to a GIC paying 2.5% per annum! A 23 year old kid with 45+ years of investing on the horizon, and she recommends a GIC paying 2.5%!? I’m going in there with him this Saturday.

Unbelievable.

Bad Investment Advice

Interesting story came my way today. A good friend of mine (the person who bought me the Intelligent Investor last year), and a loyal reader of my blog, got his brother to go out and put some money into RRSPs for the first time. Most likely he has a little bit of cash saved up from working and is saving it up for rainy day. My friend wrote up a suggested portfolio for his brother that went something like this:

  • TD Canadian index fund (40%)
  • TD US index fund (20%)
  • TD international index fund (20%)
  • Some TD bond fund (20%)

I’d say this was an excellent suggestion for a starting portfolio. It has a low overall MER and is diversified in terms of equities and bonds, but also diversified across several markets, By keeping the allocation rebalanced and by supplementing it with monthly contributions, you could expect to hold onto this portfolio for a long time and you might just beat a large fraction of the managed mutual funds out there.

But I am getting ahead of myself here. My friend’s brother may have walked into the bank with this suggested portfolio (typed up and printed I might add), but he didn’t walk out with anything resembling it.

The person at TD Canada Trust suggested instead that he invest in a 100% Canadian equity mutual fund because it has done so well in the last few years. My friend’s brother of course went along with it (I would too if I was in his shoes). After all, from the age of 17 to 20 my paltry savings were all invested in AIC Advantage Fund, a Canadian equity fund. Why? Because it had done so well in the previous years. This is probably one of the most common traps people fall into: chasing good performance.

There are so many reasons why the portfolio the TD person suggested (or lack thereof) is just wrong. The fact that this person at the TD Canada Trust branch would ignore the excellent suggestion the client came in with is not too surprising I guess, but it still makes me puke.