Fee-Only Financial Planning: How do Most Canadians Pay Their Financial Advisors?

Today’s Globe and Mail sheds light on the industry of fee-only financial planning. Most Canadians are completely unfamiliar with the concept of hourly-rate financial planners, but as the Globe and Mail notes, a small shift is beginning developing within the financial consumer’s mindset.

How do Most Canadians Currently Pay for Financial Advice?

Most Canadians pay for financial advice in one of two ways: 

1. A commission on the dollar amount of investments being managed. Most often this is reflected as a percentage of a particular financial transaction. For instance, if John and Jane Smith invest $100,000, they would pay a commission of anywhere from about $1500 to $2500 for the service. Some investment companies may charge as high as 5%, or $5000, but that is getting increasingly rare. 
2. A percentage fee charged annually on the amount of money invested. Most often, this charge is hidden within a wide range of investment and/or mutual funds fees and charges that is simply deducted from the investment returns of the customer. For instance, if John and Jane Smith invest that $100,000 in a balanced mutual fund at the bank, they would most often pay about $2,000 to $2,500 per year in mutual fund fees. Now, if the bank actually showed those charges to the customer, there would be an outrage… so they simply hide them in the prospectus and reports. How do they do this? Let us imagine that John and Jane earn 5% on their investments valued at $100,000, or $5000. In order to pay their fees of 2% per year, the bank or financial institution would simply show them a net return of $3,000 or 3% (Their $5,000 actual investment return, minus 2%, or $2,000 in fees).

There is, however, a third, and much more transparent way that Canadians can pay for financial advice: 

3.  Hiring a fee-only financial consultant or planner. This method generally involves the individual financial consultant billing the customer an hourly rate for the advice that they give. For instance, if the advisor charges $75 per hour, and the customer seeks an hour of advice, the bill would be $75. Plain and simple, with no hidden charges or secret fees buried inside the prospectus or report. Obviously, this method would not earn as much for the planner or financial institution, so it is less common and little advertised.

Why don’t more Canadians use fee-only financial planners / consultants? It is easy for the population to be manipulated by the financial industry into thinking that they are not “paying” their advisors or planners when they do not get an obvious bill for services rendered. Of course, the truth is that they are often paying more than necessary. Perhaps it is time for a change!

Cheers, and Happy Planning and Investing!

Matthew. 

Leon's Takeover of The Brick Almost Complete: Competition Hurdle is Cleared.

The takeover of The Brick Ltd (TSE: BRK) is almost complete as the Leon's Furniture corporation (TSE: LNF) received a "no-action" letter from the Competition Commissioner in Canada. This means that the retail operations of both companies will be able to consolidate, and profit from any associated synergies, without have to sell any stores or significantly alter their businesses. 

The Brick's shareholders are going to receive $5.40 per common share from Leon's, and the deal is expected to be completed by the 28th of March, 2013. 

Currently, Leon's has 73 stores, and The Brick has 230. Combined, they should be able to share warehousing and distribution, and head office and administrative employees, which should reduce costs, as well as increase their overall buying power with their suppliers. Increased buying power can result in lower per unit costs for retailers, and either lower prices for customers or higher profit margins for the stores.

Are other Canadian retailers ripe for more activity down the road?

Sears Canada has long been struggling to survive under the rule of its American parent (Sears Holdings (Nasdaq: SHLD), but their days seem to be numbered as profits and sales continue to fall. Also, the newly re-listed Hudson's Bay Company (TSE: HBC), despite recent re-branding efforts and an apparent reversal of fortune, will continue to be pressured to release even more of its valuable real estate holdings into the marketplace. 

Continue to keep an eye on both going forward.

Cheers, and Happy Investing!

Matthew. 

Here We Go Again! Student Loans Being Packaged as Investment Vehicles.

The Wall Street Journal has reported that billions  of dollars in student loans are now being packaged together as investments for investment banking clients around the world. 

Reminiscent of the recent mortgage loan crisis that occurred only 5 years ago, and that we are still feeling the pain from today, thousands of student loans are being bundled together so that they can be sold as "safe and secure" interest bearing securities. 

SLM Corporation (NYSE: SLM), the largest student loan company in the United States, sold $1.1 billion of the loans recently, and demand was high enough to make it glaringly obvious that few lessons were learned from the mortgage crisis, and investors are willing to "reach for yield," or take a lot more risk if it means earning some extra percentage points in return. 

Interest rates in the current investment environment are at historically low levels, and SLM Corporation is taking advantage of the climate by offering investors the chance to make a little extra money, while at the same time ridding their balance sheet of billions of dollars in loans to students with limited job prospects in a dismal market for young graduates.

Interestingly, student loan levels are rising, delinquencies and defaults are rising, and yet many banks are now choosing this time to package the loans and sell them to investors... if only these banks had some sort of responsibility to actually care for their clients or customers.

Cheers, and responsible investing : )

Matthew. 

Death of ING Direct Almost Complete. Scotiabank and Capital One Implementing Takeover. It was a Good Idea While it Lasted.

The slow death of ING Direct in North America is almost complete. After Capital One's $9 Billion purchase of the American unit of ING, and ScotiaBanks's $3.1 Billion purchase of the Canadian unit, both banks have been shuttering a number of ING's once thriving business units.

In Canada, Scotia announced that they will be closing ING Direct's Mortgage Broker unit, which offered discount mortgage loans to Canadians via mortgage brokerage offices. Clearly, this is an attempt to consolidate and direct business to the traditional ScotiaBank unit, and hopefully raise costs and rates for Canadians through reduced competition. This is happening after ScotiaBank just recently promised everything would stay as-is at the ING unit, and that they would not attempt to reduce competition through their acquisition. Did Scotia lie?... I am sure everyone is very surprised : )

In the United States, Capital One is renaming ING Direct "Capital One 360," and eliminating the firm's iconic orange branding. The new colour for ING? Dark blue and maroon. Capital One, however, promises ING clients no change in services, which sounds familiar to what Scotia said in Canada. 

Undoubtedly, both Capital One and Scotiabank will start enacting "cost saving measures" to increase "efficiency" at their new banking units, and this will mean job losses for many of ING's North American employees. This will be good news for Scotiabank and Capital One shareholders, but undoubtedly bad news for those employees, their families, and probably ING Direct's North American customers as well.

Less competition is good for corporate profits, but bad for banking customers. Continued consolidation in the banking sector leads to reduced options and higher prices. This means higher interest rates on loans, lower interest rates on savings, and higher banking fees. For investors in Scotia and Capital One, it means higher profits.

Cheers, and Happy Investing! 

Canadian House Prices. Sales Down, but Prices Hold Firm. Toronto and Vancouver Real Estate Weigh Heavily.

The average resale housing price has risen to $352,800, up 1.6 percent over last December. That is the good news. Overall, sales of existing homes in Canada declined by 17 percent from the level last year.

In addition, the supply of new homes onto the market has been steadily declining for three months. This reduced level of supply has helped to ensure that prices have remained relatively steady, as has a reluctance from home-owners to accept prices lower than they have become accustomed to in hot markets.

According to the CREA's chief economist, Gregory Klump, sellers are simply taking their homes off the market and holding firm if the prices they desire are not materializing. This has made for a slower market, but at the same time, there is a strong semblance of stability. 

The national average is being particularly weighed down by Toronto and Vancouver, which if removed from the sales data, results in a 3.3 percent price increase. 

Bad news for home owners and real estate investors? Not necessarily. Stability and consolidation in the marketplace is a good thing. A long slow period of price consolidation can help to familiarize buyers and sellers with more realistic and current price levels, and help mitigate a price collapse in the future. Also, as indicated above, Toronto and Vancouver are seriously weighing down data, so for those buying in many smaller urban centres across the country, the current situation is actually better. 

Cheers, and Happy Investing. 

A Business Plan for Entrepreneurs, Investors, and Business Owners. Stay on Target.

A recently published CX Blog article highlighted some strategic questions that have to be asked when preparing your sales plan. Though written primarily for the eyes of entrepreneurs, the information and message is very useful for independent business owners and shareholders alike. 

If you had to reflect on the sales plan for any of your investments, do they make sense? Are they clear? Or are they convoluted and lacking focus and attention? 

Below I have highlighted 7 strategic business questions for you to consider as owners, entrepreneurs, and investors: 

1. Why should people want what you're selling?

What does the product or service help people do? What need does it satisfy? 

2. Who are you selling to?

Are there target markets for the product or service that you want to sell? Do they have specific demographic characteristics? Are you focusing on a specific region really well? Or are your efforts scatter-shot all across the map?

3. Who is your competition?

Who are the top competitors in this industry? How are you different? What do you do better? What can you learn from your competitors, and what are they not doing well? Is there a hole in the market that they are not satisfying?

4. What is your price point?

You need to consider what the current price range is for the product or service that is being offered? Where do you fit into the mix? Is there something you are offering, or that you can offer that can put you into a higher price point? Or do you want to be at the bottom? If you want to be at the bottom, make sure your costs are less than those of your competitor. 

5. How many customers do you need to reach your profit goals?

Or, how much volume do you need to do? Have you established your break-even point, above which you start to make a profit, and below which you are operating at a loss. Not knowing key information such as this leads to a lot of business failure early on. 

6. How will you reach your market?

How will you gain new customers? Will you utilize referrals, advertising, sales promotions, et cetera? Try to track what works and what does not. For instance, have you had any success with old media like newspaper ads, or do you need to shift your focus on-line? 

7. Is there a clear sales pitch?

Often referred to as the 30 second elevator speech, a business needs to have a directive clear and transparent enough to be explained in 30 seconds or less. You need to be able to state what need you are satisfying in the market, and either differentiate yourself from the crowd or place yourself in a target niche. Will anyone remember or be able to explain to someone else what exactly it is you or the business does?  

Try to read the above noted points a few times, and think about them in relation to your own business interests, or even perhaps your own personal brand. 

Cheers, and Happy Investing. 

Matthew.

What Makes the Perfect Stock? Five Key Components.

There are a lot of different factors that combine to make the perfect stock, and even then, there is no guarantee of success. Nonetheless, this article will try to identify some key components every investor should consider when hunting for the next money-making opportunity.

 

What to look for in your next stock investment?

 

1. Growth: Healthy growth in revenue is a good start for any quality investment. Preferably, a rate of 15% over the last five years would be ideal, but sometimes there may be glitches along the way due to recessions and business restructuring.

 

2. Profit Margins: How much money the company actually earns in profit for each dollar the company generates in revenue. Somewhere in the range of 15% or more would be healthy, and provide some cushion for pricing pressure and new competition in the market. Some businesses, like grocery stores, however, have chronically low profit margins, which is evidence of stiff market competition.  

 

3. Balance Sheet: Essentially, the more money the company has borrowed, the less of a stake in the company its shareholders have should things turn south. Try to find a company that has a lot of assets compared to its liabilities. If a company has no long-term debt, that would be ideal, but of course this is rare. A debt-to-equity ratio is often utilized in this area, and if so, try and keep it below 50% debt.

 

4. Valuation: This is generally a comparison of the price of the stock in relation to its earnings. Anything over 20 times a 3-5 year earnings average is too expensive for most businesses, and under 15 times would be best as long as the company displays other signs of health, like those mentioned above.

 

5. Dividends: A dividend is how much money the company returns in cash to its shareholders. Dividends vary widely, and it is important to remain principled in this area. It is easy to go chasing stocks that do not pay a dividend, but it can become dangerous as dividends can be used as a good indicator of overall financial health. Ideally, a dividend of over 2% would be considered healthy.

 

Cheers,

 

Happy Investing Intelligent Investors, and please remember to share this blog with others!

 

Matthew.

Why Gold? Inflation and the Dollar.

During economic uncertainty it has become essentially economics canon to purchase and stockpile gold as an investment or hedge. Why is this the case? Clearly, gold has little or no practical uses. Of course, it used as jewellery, and has a number of uses in the field of electronics manufacturing, but not nearly enough to support present-day production and supply. 

Prior to Nixon removing America from the gold standard in 1971, the U.S. dollar was pegged at $35 per ounce of gold. After 1971, the U.S. dollar essentially became a free-floating currency backed by nothing but our imagination. To help hedge against this uncertainty, it became increasingly important for a lot of investors and wealthy individuals to store a certain amount of their savings or reserves in the form of gold to prevent being stung by a collapse in the U.S. dollar. 

Currently at $1721, gold has continued its stratospheric move upward, primarily due to perceived instability and over-supply of the U.S. dollar. So why do people buy gold? They expect inflation, or a general decline in the purchasing power of their currency. One ounce of gold, for instance, could buy a fine suit in 1971 and in 2012, but in dollar terms, the same suit would have increased in cost from less than $100 to $1700... If someone had held their reserves or savings in cash during this period, their buying power would have essentially completely collapsed. If, therefore, you have a reasonable amount of savings, you do not want to hold it in cash or low-interest savings accounts for any extended period of time! It is almost guaranteed to lose its value.

Some other more generalized reasons for why people choose to invest in gold are as follows:

• It is durable - it doesn't corrode.
• It is divisible and homogeneous - you can break it up into smaller amounts.
• It is easily recognisable and hard to counterfeit.
• It has a stable supply because it is hard to get out of the ground.
• It is portable.
• It has a strong history accepted as a medium to facilitate exchanges. 

Keep in mind, however, that gold does experience wild swings in popularity amongst both central governments and investors, and thus can leave even astute and Intelligent Investors in substantial negative territory for some time in dollar terms. So buying gold is not a sure-fire way to curb against inflation, but included in a basket of resources it is a nice start.

Cheers and happy investing!

Matthew. 

HP (NYSE:HPQ): Un-Loved and Under-Appreciated.

Investors have driven shares in HP down over 41% this last year, and down over 71% in a five year period. The turnaround plan under Meg Whitman seems to be going nowhere, and investors are concerned that a trend toward tablets will destroy personal computer sales. We are seeing this same concern drive down shares in both Intel and Microsoft as well recently.

 

There are, however, some things to love about Hewlett Packard:

 

1) The company is expected to earn over $7 Billion in profits next year. With a market capitalization currently of about $28 Billion, that represents a multiple of only 4 times! Paying four times earnings for a company represents an earnings yield on your investment of 25%! Not bad for a brand-name technology titan that definitely has the balance sheet to stay competitive for some time to come.

 

2) The company recognizes that it is facing problems, is not in denial, and is actively engaging in cost-cutting and turnaround efforts.

 

3) The company pays a dividend of 3.65%. In today's low-rate environment a dividend over 3% represents a reasonable return on your savings, and since the company is currently trading at a low multiple to next year's earnings, there is up-side potential in the stock as well.

 

4) The company is #1 or #2 in a wide number of product markets. Though many think of HP as primarily a PC manufacturer, it has leading positions in servers, storage, networking, software, systems management, and printers as well. Essentially, the company began diversification efforts long-ago, and they have paid-off. As PC sales decline, other units of the company should be able to pick up the slack.

 

Of course, no technology investment is without a higher degree of risk, but HP is definitely worth a look for the Intelligent Investor.

 

Cheers, and happy investing!

 

Matthew.  

Tim Horton's Rises in Zagat Survey. Now 5th in the United States. Expansion Continues.

Tim Horton's is now listed as one of the best fast-food restaurants south of the border. Having put itself up against stiff and entrenched competition from global super-powers, such as Starbucks and McDonald's, Tim's has proven itself to be a formidable Canadian competitor.

Last year, Tim Horton's was ranked 22nd in the same survey, so this represents a small victory for the Canadian chain. Brand recognition is still nowhere near as strong as it is north of the border, but it is successfully using its Canadian stronghold to pour resources into the American market.

There are now over 700 Tim's locations in the United States, and another 80 to 100 Tim Horton's stores will be added in 2012.

Intelligent Investors, be sure to keep a pulse on Tim Horton's shares as they further expand in the United States. The American market is huge and has lots of opportunity.

Cheers,

Matthew.

Sent with the BlackBerry Bold 9900.