Tuesday, 21 June 2016

Canadian Bank stock dividends - are they really that good?

At a recent family function.  Someone came up to me and asked me if I liked to talk about investing and  personal finance.  I said of course. Well I got cornered and he has been investing for years now and how you can never go wrong with bank stocks.

"They pay a healthy quarterly dividend come rain or shine and they keep hiking their dividends year in year out".  Combine that what a decent capital appreciation, and you can't do any better.

This is just a quick summary of our conversation that must have taken place in thousands of living rooms, bars, and anywhere else people meet to talk about how things are going in their lives.  Bank stocks sometimes come up, after all banks are in our everyday lives.

The above statements are somewhat true, Canadian bank stocks are in my opinion, almost the perfect dividend stock to own for the long term.  But think deeper.

Like a herd of sheep, we simply refuse to see the banking industry for what it really is, its an industry that is working harder every day to take your hard earned money.  Almost in a silent way.  They make money on your mortgage, your bank accounts, your investments like mutual funds, commission fees for trading, even your payroll deposit, yes that right, they make money on your payroll deposit  Let's face it, everyone uses something at the bank and you can't escape that part of everyday life.

Yet, we give the banks our hard earned money and they pay it back to us in dividends?  And we think because we get this dividend, its good?  It's almost like the money the bank makes, its paying it back to you in dividends.  That's if you own the stock and not just invest in mutual funds.  It's almost like the ultimate ponzi scheme.  Some might go as far to say the banks are trying to suck and blow and the same time.  If this offends you because you are a banker or are friends with a banker, I apologize.  The thing is, every investment comes with a  strings attached.  It just so happens, the banks have a long string into our lives.

A quick look at the 2015 Royal Bank of Canada annual report shows in their income statement that fees totalled $7.8 Billion.  How much did Royal bank pay out in dividends in 2015?  $4.6 Billion.

If you own Royal Bank stock and you bank with Royal, it's important that your mindful of the the fact that your relationship with the bank and the fees paid to maintain that relationship more than covered the dividends you back from your investment in their stock.  I am not just picking on Royal Bank, if you go through all the Big Six bank's annual statements, you will see something similar.

Now recent articles about banks hiking their fees, just seem wrong.  Most consumers will be complacent about the increase, they will continue to bank with their bank.  Now not all Canadians own a bank stock, so if you do not own any bank stocks, you are behind at this point, as investors who own bank stocks have at least gain somewhat of a foothold with their financial establishment.

Now I hear what you are saying, its like a cash back or a discount on my fees I pay because of the dividends they get, if thats the case then so be it.  But remember that when you receive a dividend from the bank, it may not be exactly what you think it is.

Tuesday, 14 June 2016

CRM2 - Client Relationship Model 2 and other ways to reduce fees

The long awaited amendment to the way investment dealers and financial advisors deal with clients is coming in July 2016, are firms worried?

The Client Relationship Model Phase 2 is meant to show clients how much money in fees they are actually paying on their investments.  The actual annual cost and compensation of all operating, transaction, and related charges paid to the dealer.  As well, trailer fees and other type of payments will all be shown in dollars.

Now why would an investment firm be worried.  In today's investment environment, where low returns are the norm.  There will be clients who discover that their dealer or financial advisor or mutual fund manager is actually making more money (in fees) then they are on their investments.  Not just this year but year after year after year.

There are literally millions of mutual fund clients who do not even think they are paying fees for years now.  These individuals might be in for a big shock when new quarterly statements start showing up in their mailbox showing the fees that are paid out (in dollars).

But smart investors already pay low fees, either by buying their own stocks or purchasing ETFs.  These type of investors will not panic when CRM2 takes into effect.  If you want to pay lower fees and be in the know, then here are a few ways to reduce those crazy investment fees that you have been paying.

Don't Trade

Investment brokers love traders.  Buy low, sell high, does that sound familiar?  Broker fees are really low in today's environment but companies still make millions on your trading fees.  If you have seen the move "Wolf on Wall Street", that is exactly how they made their money, when you buy or sell something, they make a commission regardless of if the stock goes up or down.

When you trade to make a profit and especially if it is in a non-registered account, you trigger tax implications.  You have to pay capital gains tax on your trade.  More money leaving your pocket.

Only trade when it makes sense for your portfolio.

Stay away from IPOs

Investment companies make more profit on Initial Public Offerings (IPOs) than any other type of transaction.  Investors are told to get excited about the new issue and not to miss out on the next greatest thing.

No one needs to buy the latest IPO but brokers need to sell them.

Don't buy mutual funds

Most mutual fund clients will be in for a huge shock in July 2016 when they get their new statements showing all their fees, including trailer fees paid to their investment advisors, previously buried so no one can humanly find it, will now be on view for all to see.

Now you may see mutual fund fees at 2% and think, that is not that bad but think of an investment of $10,000 in a mutual fund.  The manager will be getting $200 regardless if it goes up or down.  Now that $200 does not sound like much but think of an investment of $100,000 which could represent either a part of someone's life savings or even all of one's life savings.  Now the 2% fee equals now $2,000.  Bet you didn't know that now.  You pay $2,000 for someone to manage your life savings.  Your fund might not even gain $2,000 in a year or worse, it falls $2,000 and then you have to pay the 2% for it falling?  How does that sound fair?  So your advisor has a good chance to make more than you gain in a year.

It has been documented that high fees over a 25 year investment time frame can eat of up hundreds or thousands of dollars from your nest egg.  That could make the difference between a good retirement and a great retirement.

Final thoughts

The new CRM2 will show investors how much they are actually paying in fee.  Be aware, save, and make your golden years more golden.

Monday, 6 June 2016

5 Investing mistakes to avoid

1. We have no idea of what we are doing…..

Currently as you read this, you might have thought, what is he talking about?  What I am talking about is right now you probably have an RRSP matching plan or Pension matching plan at your place of work.  Now  I am a total advocate of employer matching pension plan or RRSP plans.  If it is a 100% match, that is literally free money.  Now you put in 2% and your employer matches your 2%.  All is great?  Well look between the lines, you most likely only have the Group RRSP plan to contribute to with this matching.  And guess what, it will be mutual funds, yes I know, the mutual fund company will paint a glorious picture of how you need this or you will die a penniless life at the end.  They get ongoing guaranteed fees.  They love that.  There really isn't anyway out of picking mutual funds with this matching going on.  The only way out is to pick the lowest fee fund which is going to be an index fund.

What is wrong with this setup?  It's that most people think the workplace RRSP match is all they need.  They don't know what they are doing?  They don't know how much money they need at retirement.

Worse, is when individuals go on their own and try to invest without a plan.  They see headlines and try to chase a falling knife.  I say if you are reading a headline of the newest and biggest stock then you are already too late.  Talking about the latest sexiest stock gains is great but did you buy before that?  I enjoy my dividend approach of investing, it really is boring and only exciting to me it seems but I know what I am doing with my approach.

Do you?

2. We don't know what we are paying for

Most people still have no idea when they purchase a mutual fund, which happens to be the main type of investment product in Canada currently, that they pay fees.  Canada has some of the world's highest mutual fund fees.  In 2014, the average fee for mutual funds was 2.1%, in 2015, that number jumped to 2.3%.  Doesn't sound that high, we pay higher interest on our store credit cards so a measly 2.3% is peanuts, right?  Wrong!  A recent survey showed that 9 out of 10 Canadians severely underestimated their fees, sometimes to the tune of $150,000 over a life time.

Outside of mutual funds, there are financial advisors, brokers, and fees for just about everything.  To navigate everything properly and understand all the jargon out there for a beginner does seem daunting.

Bottom line, understand your fees and commissions that you are paying for and see if it fits yours needs.

3. We trust anyone to manage our money

Current situations that have arisen from conversations with friends, co-workers, individuals I just meet at the supermarket have a thing in common lately.  They have a financial investor.  Not just a normal financial investor but usually someone whom they have met in their circle or is a friend of a friend or even worse, it is someone's son that you trust and respect.  Now I may start off by saying all financial advisors are crooks or they are all out for themselves.  I am sure there are great ones out there but in the end, no matter their relationship to you, you are responsible of your own savings and investments.

Case in point, unless you track your investments full time, then you won't understand how everything works, all you know is your advisor keeps asking for a cheque for investing.  He says there is a great opportunity and you should not miss out.  Wait a minute, you take all the risks for his guess?  Yes, you may get a gain in the transaction but no one knows what will happen.  We do know one thing, your advisor will get a commission on the transaction.  Depending on the type of security, the percentage will vary wildly.  In the movie, Wolf on Wall Street, brokers were receiving 50% commission on junk stocks or penny stocks.  That's insane, the broker doesn't care about that $8,000 you just pumped into a start up.  He will get 50% commission on that purchase.

4.  We grow older but not wiser in finances

There are older investors in this world.  They have been in mutual funds all their life.  It would be hard to change their habits at this point.  If they were to figure out how much they have paid in their 30 or 40 years of investing then they would raise a stink.  And guess what, after the stink they would go right back and give more money to their investor.

Older investors would no doubt not realize that they could have paid between $150,000 to $250,000 during their life time in fees.  This is not in doubt especially if they have all their monies in mutual funds.

5.  We need to put up a bigger fight

Investing needs to be a battle.  It should be a battle between you and your rate of return.  Not you battling your advisor.  Believe you me, your advisor will fight tooth and nail to get that additional investment from you just to get a percentage commission which could be as little as $100.00 but they will befriend and tell you the pit falls of not investing.

We need to be learn more about our own money.  We need to avoid the route that the investing world has steered us into and fight for our money.