Thursday, March 14, 2013

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!


Tuesday, March 12, 2013

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!


Monday, March 11, 2013

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 : )