Weekend Reading: A Few Bad Apples Edition
This stuff makes me sick. A Toronto advisor got a slap on the wrist – a $65,000 fine and 30 day suspension – for making unsuitable recommendations for two retired clients. The advisor implemented extensive “double” leverage through the use of a margin account and borrowed funds from home equity lines of credit to invest in mutual funds with deferred sales charges.
“She referred to a leveraged strategy as a “no brainer” and minimized any risks associated with it.”
Furthermore, the advisor convinced her clients to transfer the commuted value of their pensions and invest in DSC mutual funds.
Perhaps most egregious, the advisor used her personal email address to communicate with the two clients, stating that she had difficulty remotely accessing her work email. In reality this protected her unsuitable recommendations from any employer oversight. In fact, she conveniently deleted several emails including the one in which she recommended her client borrow to invest.
These disgusting and shameful acts are all too common in an industry clinging to a commission-based model that’s clearly lacking in regulatory controls and oversight. We’ve heard the arguments not to paint the entire industry with the same brush, or that misconduct only happens with “a few bad apples”, while the rest of the industry is full of good guys and gals looking out for their clients’ best interests.
Bullshit. This doesn’t happen by accident. It’s the preferred playbook of unscrupulous advisors.
- Invest in deferred sales charge mutual funds
- Churn those mutual funds annually to generate commissions and trigger a new seven-year DSC schedule
- Encourage leverage through a margin account and/or home equity line of credit
- Encourage clients to take the lump sum commuted value of their pension and invest in a LIRA
- Encourage taking early CPP and invest the monthly benefits
- Discourage any other financial planning strategy (i.e. mortgage pay down) that doesn’t involve investing
Victims are not limited to seniors and immigrants who don’t know any better. It’s not surprising to find ordinary investors trapped in costly financial relationships with their “trusted advisor”.
That’s the problem with conflicted advice. Your advisor’s interests (his or her compensation) is not aligned with your interests (improving your financial situation). The end result is you get sold funds that may be “suitable” for you but might not be the best or most optimal for you and your wallet. You’re also told to invest above all else, which may or may not be the right advice for your personal situation.
This Week(s) Recap:
I’ve been busier than usual with financial planning and freelance work so I only managed one post here last week. I wrote about mental accounting and how we spend money.
Over on Rewards Cards Canada I revealed that I applied for 13 credit cards last year. Here’s what happened to my credit score.
Finally, many thanks to Rob Carrick for including my article on why I don’t pay off my mortgage in his Carrick on Money newsletter.
Promo of the Week:
Last year we partnered with Canada’s leading robo-advisor Wealthsimple to offer a free portfolio review and check-up with one of their portfolio managers. It proved to be overwhelmingly popular, and based on the feedback of my post earlier this year on how to transfer your RRSP to Wealthsimple, you guys are craving more info how to work with a robo-advisor.
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Book a 15 minute call with a Wealthsimple Portfolio Manager.
Weekend Reading:
An honest and refreshing look from an advisor on why financial advisors should leave portfolio management to the experts and focus instead on financial planning. <— YESSSS!!!
In one of the more ridiculous surveys I’ve come across, this USA Today feature says we spend $18,000 per year on “non-essentials”. It goes on to list these items, which include three types of ‘dining out’ on restaurant meals, take-out, and buying lunch, along with personal grooming and ride sharing. In my world we don’t call these items “non-essentials” – we call them ‘miscellaneous’ spending, as in if you have your savings and fixed expenses covered then who the hell cares how you spend the rest of your money?
Frugal Trader explains what happens to your RRSP and TFSA after you die.
The maximum OAS a couple can get is $19,600. Here’s how to get all of it.
Recently retired Michael James on Money explains his bucket strategy for retirement spending.
We’re a long way from maxing out two RRSPs and TFSAs, but once we do we’ll want to start investing in taxable accounts. My Own Advisor Mark Seed has you covered with this post.
Jason Heath explains the tax implications of transferring between registered accounts – such as from a LIRA to an RRSP.
You can’t compare rent to a mortgage payment. Ben Felix explains why this way of thinking about the rent versus buy decision is extremely flawed in his latest Common Sense Investing video:
Don’t blame the government. Here’s what the Bank of Canada says is the real reason for the housing slowdown.
Respectfully interacting with people you disagree with, and other useful and overlooked skills from Collaborative Fund’s Morgan Housel.
Here’s Nick Magguilli on the necessary conditions for successful market timing:
“How do you know when a market decline will be 20% (or greater) before it happens? You don’t. You have to go off some feeling that this decline is “the big one” and not one of the smaller declines that happen more periodically.”
And here’s Nick again on cumulative advantage and how to think about luck – or why winners keep winning.
How about a double shot from A Wealth of Common Sense blogger Ben Carlson? First up he explains why you’ll never invest in the next Big Short.
Ben goes on to list some financial superpowers, including the ability to witness your neighbour getting rich or buying stuff without getting FOMO.
Finally, if you’re not following Sam Cooper’s stellar investigation into B.C. casino money laundering then you’re missing out. His latest expose reveals how organized crime first made its way into B.C.’s casinos.
Have a great weekend, everyone!
What I found a little ironic is that the very day her fines came down, the same advisor posted this article (https://www.bloomberg.com/news/articles/2019-05-09/young-real-estate-flippers-get-their-first-taste-of-losing) on her twitter, talking about the dangers of investing in real estate with the tweet “Hard lesson learned” – meanwhile, she was grooming her clients to commit dangerous leverage practices with their real estate investments. She’s since deleted her twitter, but YIKES!
Unbelievable, but not surprising. Every dollar invested in real estate is a dollar that she can’t get her greedy hands on to invest.
Hi! Wondering what your take is on the new RBC Core Plus Fixed Income Fund that my advisor wants me to invest in from my G.I.C. that has come to term?
Hi Sandy, if it’s this RBC Core Plus Bond Pool (RBF2691) that comes with a MER of 1.08% I think you could probably do better from a cost perspective. Its benchmark is the FTSE Canada Universe Bond Index – and there are several ETFs that track that index directly for lower fees.
Ask your advisor about the RBC Canadian Bond Index Fund (RBF700) – it tracks the same index and comes with a lower fee (0.72%).
You also might want to look into RBC’s robo-advisor arm called RBC InvestEase where you can invest in a portfolio of index funds for around 0.70% all-in.
Hi! No it is a new fund only offered through their full fee advisors. I am with Dominion Securities. RBC Core.Plus Fixed Income. It has a MER of .0.40% It is one of three new funds.
Thanks! I will have to look into that as I was told the total M.E.R. would be 0.58.
Really,
I used my margin account to buy the dip in December and couldn’t be happier, paying a tax deductible 6% interest to generate almost 20% returns in 5 months is a no brainer( 70% is the amount of margin I am allowed to use) so I am up $14,000 in my margin account for a tax deductible cost of $1750.
As for early CPP you bet I will be taking it early since my “privilege” is going to lead me to have a lower lifespan I will be taking my CPP at 60 and investing it in my TFSA where it can grow tax free and double every 8-9 years. The growth for 15 years at 7% would give me at 75 around $260,000, also by taking CPP early if you have not much taxable income you qualify for the GIS(which the TFSA will have no bearing on). I will also be able to pass this on to my heirs unlike CPP which ends at my passing.
No wonder so many Canadians are poor and broke in retirement.
Hi Mike, the difference is you’ve entered into your choices with eyes wide open and have a clear goal and vision in what you hope to accomplish for your personal situation. I very much doubt these clients had a hot clue what they were getting into – and your comments don’t address the clear conflict of interest from the advisor.
What I do realize is that a house is a depreciating asset and for an advisor to not recommend using that asset to generate income that is tax deductible is wrong in my opinion.
Yes the using of personal email is wrong and I do believe you are right on items 1,2,6. but to I worked for a company in your neck of the woods and contributed to a company pension. When I left I took my cash out of the pension and am very glad I did as the plan is insolvent from mismanagement and the people who have contributed for years will get nothing. Was up there last weekend for a visit with family and friends, my old co workers I went for lunch with will get nothing ,nada.If I had not taken my advisors advice and moved my cash out into a LIRA I would be in the same boat as them with sweet frick all. Ask Nortel, Sears employees if they should have taken out a LIRA instead of the safe company pension that no longer exists.
As a side note I work for a company whose only benefit is a discount on employee stock, you got a 10% discount on company share price, my advisor discuss the ramifications of all my eggs in one basket, I did not join plan. The company price has dropped substantially and still going down, I know many workers looking at 5+ figure losses and growing and most people I talked to said their advisors told them to go for it, the more the better and they have an inside edge working for our company.
But I digress, YMMV with the advisors you seem to be so against, mine has taken me from nothing to close to a seven figure portfolio and could not have been this successful without their guidance, knowledge and professionalism in financial, estate and tax matters.
Mike
Gosh Mike,
your adviser seems to have saved you from every calamity possible. It almost reads directly out of the sales training handbook.
Good article Robb. More of us need to call a spade a spade on conflicted advice.
And yes, CPP/OAS at 70, pretty all the way every time. Unless you don’t like math or are planning on dying young.