Where clients are Investing - Toronto edition

Two years into starting my own practice, it still takes me an absurd amount of time to write a well thought out blog post (which is why I rarely) do it, but since I’m supposed to have at least some content on my website, I’m going to try the exact opposite of well thought-out.

How does 3am ramblings sound?

If my wife and I forget to put our sound machine on, 3am is the time we’ll wake up after someone with a tuned exhaust races down our street (unclear why they don’t take Dufferin instead), or more recently, it’s the time our newborn decides to feast, poop, or some loud combination of the two.

It’s about the time I’m unable to fall back asleep and will occasionally think about exciting things like, who has the best takeout sandwich in the Parkdale/Roncy/Brockton/Junction area, and the American love affair with Drake.

The mind also drifts back to the Investment Plans I do for clients, what they’re investing in and the conversations I have with them.  After 2 years, my analyst training has me looking for trends, trying to eliminate outliers and just trying to come up with a picture that is not 100% right, but hopefully, a bit less wrong.

So, what ARE they investing in?  Here are some not well thought-out observations which are probably going to sound like 3am ramblings. They are.

1.) There are still plenty of shitty mutual funds out there.  Shitty shit shit. And It’s the usual suspects overcharging people without them knowing, but at least they’re pretending to actively manage their pot, bravo!  

2.) In a weird twist, one of the alternatives showing up are overpriced portfolios of index funds. I think the sales pitch is “hey, we’re looking out for you, we can save you money on fees by investing in index funds”.  Except that a passive portfolio for almost 0.70% isn’t that great either. I’ve also seen some “independent” advisors tack on a 1% fee on top of that, I guess as comp for their twice per year calls? Their pitch is the same - going from an actively managed fund at 2.4% to  a passively managed portfolio for 1.7% is a win for YOU the consumer. **eye-roll emojii**

3.) I’m not thrilled with Robos.  They fall into the above criticism of index funds, which many times, ends up being an expensive indexed portfolio.  There are excellent Canadian investment managers out there who charge not much more, for true active management. Those are more attractive options, in my opinion, OR if you want to go true passive, Vanguard and Blackrock both offer diversified ETF options and at this rate, those investment products will be free if they keep up their price war.

4.) The Non-bank Discount brokerages got game.  I was wrong in thinking I’d see DIY Investors go to their bank’s own online broker (like TD Waterhouse).  Instead, clients seem to be ditching the bank altogether. Maybe the bank didn’t tell them there was an online broker option?  In the meantime, it’s been over a decade since the E-trade baby told us that investing was simple, not to be outdone by Questrade’s anger-inducing campaign

5.) Re-focusing a person’s individual investment objectives and really figuring out the goal of their investments gets totally overlooked by the sales machines out there.  A lot of clients in are stressed because they’re comparing their investments to unrealistic expectations or expectations that aren’t relevant TO THEM.

6.) Back to Robos for a second.  They do generate the most inquiries from people.  By they, I mean WealthSimple and that’s not to put down the other Robos out there, but it certainly feels like WealthSimple and the 7 dwarfs in Canada.  Mostly because they throw an insane amount of money on advertising, which btw, is probably the best financial services branding/marketing in the country. That said, you the client, is paying for those slick spots during the Jays game.   

7.) ETF’s scare people.  Partly because we’ve at least heard about mutual funds for forever, whereas ETF’s seem like something new and exotic by comparison.  Yes, many clients feel like ETF’s are exotic. But I think the bigger issue is mental responsibility for one’s own investment performance. No one wants it. Even with the simplicity of all-in-one ETF’s,

8.) Since this post is clearly coming across as if I dislike everything, some good news! Financial literacy IS getting better!!!  People are becoming more engaged and asking more questions compared to when I first started. But….financial literacy in Canada, generally, is total shit.

But it’s getting better….

… my totally self-selecting client world.

On to some petty things

9.) The retirement I think most people are looking for comes by way of a workplace pension (in addition to CPP) and zero-mortgage combo.  I still see these. They make me happy. I’m worried I’ll see less. I’ve stopped worrying about young people. Many will need to find their own way. At least they have time and technology.

9b.) Just a reminder that CPP will be around. At some point you may have to work longer to get it. You’ll most definitely have to pay more into it. But it will be around.

10.) There’s no need to bash bonds.  Everyone said they rates were headed higher in 2010. And 2011. And 2013. And 2015. And 2018. They serve a purpose and no one can predict the future

11.) My vibe is that Downsizing is a myth.  Getting any significant amount of home equity to fund retirement will mean (for most people) leaving the area they’re in, moving into a place far smaller than their expectations or, hopping on the reverse mortgage train, which is one of my least favourite products, but admittedly, I think will be an incredible source of growth for financial institutions over the next few decades.

12.) Comparing investment options exclusively based on fees is not a productive exercise. I probably should have said this way up top when I started talking about fees.  

There’s a lot of shelf space on the internet and a place for active management, robos and passive. Part of the fun with this job is figuring out which of those options provides the most value to an individual or family.

And having the flexibility to say so.

Good morning.

Money IN

Planning your income as you approach retirement is quickly becoming one of the most important and overlooked aspect of financial advice.

The entire financial system is setup for clients to make contributions to their investments (which in turn generate commissions for financial institutions) and there really isn’t a huge incentive for them to sit down with you and develop a playbook for how you might eventually start to draw down on those assets.

So let’s do that.

For most people approaching retirement, they’ve become used to relatively steady and predictable employment income for years. I’ll just say from the get-go, transitioning away from that income stream to one that relies on a mix of investment income and government benefits is a huge challenge and again, something that is often overlooked.

For most people, their income after retirement will include at least a few of the following:

  • Canada Pension Plan (CPP) withdrawals

  • Old Age Security (OAS) payments

  • RRSP/RRIF withdrawals

  • Tax-Free Savings Account (TFSA) withdrawals

  • Company sponsored retirement plans (DC plan)

  • Life Income Fund (LIF)

  • Defined benefit pensions plans

Figuring out how much to draw and from which accounts and in which order and how that changes over time, is specific to every household but as an example, lets look at an example with a two income household with partners currently 61 years of age.  Both partners plan to retire at age 65 and have the following investments:

RRSP: $696,000

TFSA: $65,000

LIF: $95,000

Collectively, their expenses are $65,000 per year and they have a $50,000 mortgage they expect to pay down before entering retirement.

Here’s a visualization of how and when they might receive income now, through retirement and assuming they live to age 95.

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Ages 61-64: The orange bars represent their employment income, which is the sole source of income for the household as they approach retirement

Age 65-69: CPP (light blue) and OAS (black) kick in, along with withdrawals from their LIF.

Age 69: RRSP withdrawals begin

Age 71+: TFSA withdrawals stop and RRIF withdrawals become mandatory

It’s worth pointing out that even small changes to your account balances, household spending, or even life expectancy can have big changes on determining the optimal solution for your retirement income needs.  

Additionally, government benefits from the Guaranteed Income Supplement (GIS), Federal GST/HST credit, or Registered Disability Savings Plan (RDSP) may be applicable to your situation and also included in your income mix

Having this income available to you as you approach retirement needs to be part of the service your financial advisors provides.  If it isn’t, or your unsure about your financial situation, speaking with an advice-only financial planner that provides this level of detail can save you thousands of dollars and confusion when it comes time to juggle your various retirement income sources.

GIC and Chill

2019 is the year you fall in love with GIC’s.

Maybe that’s a throwback feeling, but for most people, considering GIC’s as a legit investment option is a first.

So, where did they even go?  

They’ve been around.

But beginning in the early-90’s and despite two market corrections which wiped out a lot of retirement savings, GIC’s have been been shunned from portfolios.  Equity markets are all you hear about in the media and the prevailing message from the investment world is you’re throwing away money by investing in GIC’s.

“I bought a 5-year GIC and slept well” ~ said no one in the last 25 years.

A historical look at GIC rates (courtesy of helps frame some of the context around what happened to the perception around GIC’s.

In the decades leading up to the early 90’s, both equity market returns and interest rates (upon which GIC rates are based) were solidly positive and into the double-digits.  The path for someone saving for retirement usually had them save and invest ‘till they turned 55 (retirement age once upon a time) and then buy an annuity or GIC to fund 10-15 years of retirement expenses.

Screen Shot 2019-03-11 at 3.34.51 PM.png

By the early-90’s, interest rates accelerated their long downward trek, which wasn’t a terrible problem if you already owned government or corporate bonds and benefitted from the subsequent price appreciation (interest rates and bond prices move in opposite directions), but the incessant decline in rates to nothingburger levels has resulted in problems for those now nearing retirement.

Firstly, the amount of income you can drive from the fixed income side of your portfolio has collapsed. (In 1990, as a retiree, you could lend $100,000 to the Government of Canada and they’d pay you almost $11,000 per year.  Today, that same investment gets you a whopping $1,750 per year)

Secondly, bond prices would come under pressure IF interest rates rise. The resulting loss in value would offset whatever stable interest income you’re actually generating for yourself.

Here’s the iShares 1-5 laddered corporate bond ETF as an example, where the modest 2% cash yield it generates each year has been almost fully offset by the decline in value of the bonds held in the ETF.

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GIC’s are a bit different from bonds.

There is no price risk with them.  Meaning, if you buy a GIC for a $1000, the amount the GIC is worth is not impacted if interest rates rise. You’ll get $1000 plus your interest payments back, guaranteed. Most (not all) GIC’s have the additional benefit of being insured through the Canadian Deposit Insurance Corporation (CDIC) up to $100,000 per account.

With non-redeemable GIC’s available for in the mid 3% range, I’d happily take those returns and chill as opposed to worrying about price, duration and credit risk with bond holdings.

ETF Autopilot

Earlier this year, Vanguard, the second largest Exchange Traded Fund (ETF) manager in the world, dropped three new products which are legit game changers for investors who would love to ditch their high-fee mutual funds and find a lower cost alternative.

Three new asset-allocation ETF’s were added to Vanguard's already impressive product lineup and provide investors with a simple all-in-one solution for their desired risk profile along with global diversification and importantly, low fees.  

How Vanguard has done this is sounds a little confusing, but basically, they’ve created a single ETF, which in turn owns other Vanguard ETF's.

A Do-it-yourself (DIY) investor otherwise trying to create a diversified portfolio would have to go through the task of properly identifying which ETFs to purchase, what dollar amounts of each to buy, purchase the 6-8 ETF's it generally takes to create a diversified portfolio and then periodically figure out how to rebalance their investments, all of which feels pretty overwhelming (it is) and probably not where your time is best spent.

Vanguard has taken all the hassle out by wrapping together each of those individual ETFs you would need to build your portfolio into a single product which automatically rebalances itself.  

All you need to do is pick one of the three asset allocations:

vanguard asset allocation etf

Conservative ETF Portfolio (VCNS): Provides a combination of income and moderate capital growth by investing in securities with a strategic asset allocation of 40% equity, 60% fixed income.

Balanced ETF Portfolio (VBAL): Provides long-term capital growth by investing in securities with an asset allocation of 60% equity, 40% fixed income

And finally, the Growth ETF Portfolio (VGRO): which pushes for more aggressive long-term growth by investing in 80% equity, 20% fixed income

That’s it.  

Vanguard has given investors an automatic transmission for those who aren’t game for the stick shifting that comes along with DIY investing.

For younger investors who constantly hear about ETFs but are nervous about buying them and managing their holdings, the VGRO ETF certainly would provide them with an appropriate investment portfolio, for those who are a bit older or perhaps a bit more cautious, VBAL replicates the 60/40 asset-allocation of your average balanced mutual fund out there and for those nearing retirement, VCNS raises the fixed income component to 60% in order to soften out exposure to the stock market. 

This is a huge win for the DIY investing crowd as well.  While purchasing individual ETF’s to build out your portfolio is a super interesting and rewarding experience, selecting from the thousands of ETFs already in existence and the new ones that get marketed on a daily basis is head-spinning.  Then trying to figure out when and how to rebalance is another headache to deal with.  Instead, Vanguard's ETFs continuously assesses the portfolio’s asset-allocation and over time, rebalances it back to its intended risk level. (So yes, someone IS watching your money)

Vanguard does all that for a fee of 0.22% which is 90% cheaper than most mutual funds sold in Canada and likely a lot more diversified than them as well.  

While going the ETF route won't be a great fit for everyone, the new products from Vanguard certainly change the game.  These are the Autopilot of the ETF world and provide a far more user-friendly, low-fee experience for investing and growing your money