Tuesday, December 23, 2008


OK, having enjoyed my rant on what to stop doing, now I will share my thoughts on what you should do!

Let me preface this by saying my beliefs carry into the work I choose to do but do not require an investor to engage my services or, anybody's, to take charge of your investments. Consider it a free consult!


You both "earn" your money and "own" your money. It seems that many people spend more time cleaning their golf clubs than they do managing their money. Sorry, I do not believe the common drivel that “I am so busy I have no time”. You spend 8-10 hours each working day to earn money and then you hand it to an advisor you met an hour ago because they are your friend’s cousin’s brother and thus can be trusted.

Understand that Advisors and Financial Planners are simply sales people. Would you hand your chequing account to a car salesman and say hold my money until you find me a good car? Not likely yet it is almost a certainty the car dealer cares more about your follow up business than your advisor. If your car breaks down you are immediately inconvenienced; if your portfolio breaks down you pay a price at a future date. Trust your advisor like you would any 100% commission sales person.


The investment industry fills the airwaves and newspapers with financial pornography designed to excite you and thus lower your defenses as they pick your wallet. The blogosphere cannot be trusted, after all who is behind the blog and how do they make money? Ya, that includes me if you have not done your homework.

Go to unbiased or low biased sources. An unbiased source would be “investopedia.com” which provides definitions and articles to help explain investing(ignore the ads). A "near unbiased" source would be the Canadian Securities Institute, which is supposed to be unbiased but seems to think mutual funds are heaven sent. Take the Canadian Securities Course, it will cost you a few hundred bucks and a few hours work but it will provide some good definitions and explanations. You do not need to do the exam to learn.

Point: You need to explore your personal needs before you go hunting for a sales person to sell you securities.

You can’t explain what you need if you do not know what you need. The sales person knows what they need; your money and a securities company that will pay them to deliver your money. What do you need?


Go and get a “real” financial plan.
DO NOT accept a two page plan that says you need to put $235mo into our mutual funds. Get a plan with at least two scenarios so you can compare options, and by the way you should choose the options not the planner. If you are good with a spreadsheet then do your own forecasts but you will need to get the tax piece right so be careful. The plan should link to your investment strategy by pointing out what rate of return will meet your future needs.

Point: You need to direct your advisor on what you need to do.
You can take advice, but never hand the wheel to the advisor. If you have less than $150,000.00 you should probably just do it yourself as you will not likely find a good advisor anyway!

If you want to hire an advisor, interview at least three. You should set the parameters upfront with the advisor to weed out the obvious greedy bastards.
- I will not pay total costs in excess of 2% ever
- I will not buy deferred sales charge funds EVER
- My target rate of returns net of fees is x%, what is the lowest risk portfolio you can structure to achieve that goal over the next 5-10 years
- I will not hold any individual security that represents more than 10% of my portfolio
- I do not want any product where I do not understand how it works or how everybody involved gets paid

You need to get the advisor to sign the above documented objectives for your records.

Point: We are back to the key point “ONLY YOU CARE ABOUT YOU”.
You need to have independent monitoring of the investment accounts. It is best if you do this yourself. You need to have a composite or blended benchmark and you need to know your rate of return (not the rate of the fund you’re in as it will differ)

There are a variety of ways to monitor your accounts. The best way is to use two free websites to determine both your true rate of return and how your benchmark returns performed.


Point: The on-going management of your account is made either hard or easy based upon whether you think you have super powers or whether you think you are normal. If you have super powers and can tell really good B.S. from the truth and can explain why the smart folks with sure fire winning strategies are giving away the information for free, then you should actively manage your money and make lots of really smart trades every day!

Action: Nobody consistently beats the markets. Nobody consistently beats the market. Yes I did repeat that for a reason. It is very expensive to buy into the delusional view that some people know what random market move will happen tomorrow.

It is quite cheap to “participate” in the markets with a good diversified low risk portfolio of index funds and ETF’s. Similarly some well monitored, well diversified “buy and monitor” portfolios will be successful over time. Pick a strategy to participate at low cost. Avoid any strategy that is designed to beat the market.


Every advisor needs to have a secret solution that others seek. I gave my secret away (since I am not a securities advisor).

ONLY YOU CARE ABOUT YOU…..and based upon your actions, EVEN YOU MAY NOT CARE ENOUGH TO DO IT RIGHT! For years I was guilty of this....very busy and very important!

To those who do care and think your money is important for what it can provide your family for years to come; put in the effort or hire somebody to do it for you.
Find somebody who is very tightly bound to your goals (by contract in writing preferably) and monitor their performance and more importantly also their strategy ,to ensure they always put your family first.
When their need comes first you will see a change in strategy. That change should be viewed as the canary in the coal mine. Look for the signs: more calls and recommendations for purchases, a shift to "managed", "structured" or "guaranteed" products, and the biggest warning sign; when they utter the killer phrase "it's different this time". When that strategy shift happens, get out quickly!
Your skeptically focused blogger,

sois mike

Wednesday, December 10, 2008

Financial Pornography

Most people find pornography offensive! That has been true for the past few thousand years of course. That is why it is so confusing as to how so much of it survives, even though nobody buys it or watches it.

Financial pornography is the same, but with charts instead of pictures! In both cases the reality is not nearly as stimulating as the "doctored" graphics try to portray.

Financial pornography is represented by the distortions, misrepresentations, phony fund commercials, stupid bank claims, and all the other obviously bogus claims being delivered by phony senior citizens claiming to be retiring to France when they are actually working into their late 70's because they bought the stupid mutual funds they are flogging.

Nobody would ever listen to "Mad Money" nor follow the crazy advice, yet I keep hearing people talk about what they heard from a "friend" who watched the show. Stop watching that stuff, its morally and financially corrupt.

The financial markets have always had a way with words and graphs. In the past, it was all rather innocent since "good" people were not exposed to the financial smut. Then along came the Internet, cable T.V., thousands of financial planners and ,yes , blogs! Now the financial world has gone nuts and products that were once in the restricted world of professionals are now discussed by Joe Trader as if he actually understood them!

Since when did:

- retirees read 80 page legalese on a split-share issue and understand the leveraging (hint: the answer is never),

-when did your local lawn care guy start trading in options because a "covered call" is free money.

-I heard a caller on Business News Network today who claimed he never lost money on a single option trade and could not understand why everyone was not writing puts and calls.

Well enough of this smut! Here is the truth you need to listen to and learn from!

Day traders live in their mothers basement and are really just degenerate gamblers.

Active trading by an investor works only when the average investor is Warren Buffett and has billions to cover his mistakes....and yes, he does make mistakes. Active trading without a billion dollar corporate team behind you is just stupid....yes, I mean you!

Managed or structured products are a fee looking for someone to pay it. The only way to win is to be the salesperson skimming the investments! Yes, mutual funds are a managed product so figure it out.

Wraps are the way small time investors get exposure to fully diversified fees. You pay everybody in good times and bad. You make benchmark returns almost never. Duh!

Financial Planners do not often do financial planning. They get the qualification because the title "Mutual Fund Fee Skimmer" was too difficult to fit on their cards. They are paid to collect your money and deliver it to big corporations. They do not manage your money, they collect "vig" on the deposits.

Bankers are like a stealthy thief sneaking into your house and stealing the silverware one piece at a time. Before you know it your eating with your fingers and the bank is offering you a cutlery loan at 18% interest. Service charges on proprietary funds are obnoxiously high and the people selling the funds are proof that the bottom of the class can still find work somewhere.
Stop feeding the beast and thinking the teller is your friend. friends don't refer friends to bank planners.

There, now I feel better.

I hope that I have offended a few bankers, advisors, and planners because that way I feel like there is a purpose to life. If you are ready to handle the ugly truth, wait for 2009 when the real stuff starts to fly and markets test 7,000 and lower!

Then the real smut will come to the fore!

See you in 2009!

Tired of 2008.....sois mike

Tuesday, November 18, 2008


A friend was lamenting the other day, about why all politicians lie. I had to clarify that they do not lie, they obfuscate! She responded, what the heck is that supposed to mean? I said, “ah ha, it works!

OBFUSCATION: to make something obscure, to confuse

Politicians obviously are the masters of obfuscatory practices, however those in the investment business can take their place of pride alongside, some might even say “under”, politicians. The business of advising investors has long been a very fertile ground for the obfuscators.

At first, in honing their practice, advisors sought confusion via simply creating a “lingo” that excluded those investors not on the inside, or in the know as it were.
Terms were designed to make investors feel small. Who knew whether a 60% margin meant you had to put in 60% or your loan was 60%?, who knows a “put” from a "call", what's an option or a warrant? Yup, this is tough stuff, I better pay a small fortune to hire a translator who we will call a “broker”.

The broker quickly left investors broker so a new obfuscation was required; let’s call them advisors! But, you cry, aren’t they just sales people? Most don’t go within a mile of a prospectus, they just read the “hot sheets” from head office and sell whatever crap is on the sheet. How can they be called advisors…..ah, obfuscation!

The next stage was more devious, as you would expect from an industry with no oversight to speak of. Instead of picking off investors one at a time, they needed an obtuse process that could channel investor lemmings to the advisory cliffs! But they couldn’t just say, hey suckers come see what we are selling now. The old “pump and dump” was well known and not nearly as lucrative as it had been. Thus we entered the new age of the “mutual fund”! This gathered lemmings by the thousands and told them all about sharing risk. What wasn’t explained, was a thousand people taking too much risk is a thousand people losing too much money!

Obfuscation (I like the word obviously) was not limited to explaining the underlying risk. With mutual funds came:

  • hidden fees to obfuscate the costs,

  • misleading fund descriptions ,( think “balanced fund, Canadian Focused funds, Opportunity funds”),

  • false reporting ( a mutual fund is not an asset class folks)

Having learned that you can make more money by suckering the masses on a large scale, the industry started to look at how they could pry cautious GIC investors from their money. Low and behold, along comes the Principal Protected Note (PPN)! If ever a name was going to obfuscate, this was it. Investors thought they were the “protected “ party.

If markets took a big dip, they were protected and when it skyrocketed they got to “share” in the gains. Note the obfuscation around the word “share”. The advisor got paid BIG commissions up front, the manager got fat annual management fees and a totally unwarranted share of profits through capping market gains. And if the markets had a bad spell in the middle of the 5-7 year terms, hell management cashes out and moves on to the next sucker game. The investor, well your locked in with all "market participation" cancelled for years to come!

Don’t worry, we will be back in a few years to hand you your inflation ravaged principal! What, you didn’t read the 89 page small font section on “protection events”, oh, you thought you were the protected party? Sorry, I thought you knew what obfuscation was? Look, don’t worry. When you get that piddly principal back we have a great new product for you….guaranteed to make up for any losses! What, details…..don’t you worry about the details, you have an advisor! He can clearly spread the obfuscatory fertilizer well enough to separate you from your money…..and we have some great news for you!
You will (snicker, snicker) be fully informed (giggle, giggle) according to the “principle based” (how can I keep a straight face) "Point of Sale" documents coming into effect!

Oh, you’re skeptical? Who designed the POS document? Why it was designed by a committee of the same folks who oversaw the PPN’s. Wait, come back,.... I’m warning you... those GIC’s are bad. They're too simple, they have no hidden fees….you’ll be sorry!

I trust the above was not too clear....after all, I am a professional!
sois mike

Sunday, November 2, 2008

P.O.S. = Profits Over Service


To quote U.S. politics; You can put lipstick on a pig, but it is still a pig!

I recently reviewed the POS document from the Joint Forum of Financial Market Regulators. Given the makeup of the group I will admit I was worried they would gloss over the key points and produce a lame document. I could NOT have been more wrong!

They did not gloss over the key points when they produced the LAME document. They flaunted the fact they knew what should have been in the document, and told you why they don’t really care! It was a bold and clear statement that investor’s rights are well back of industry rights!

It looks like Joe Killoran, the over-energized investor advocate, is proved correct. His POS alternative may provide way too much information, but at least he starts from the viewpoint that investors often can read above a grade 6 level! (I can’t make this crap up; it is a requirement of the Joint Forum that the POS be written for no higher than a grade 6 level of reading. Thanks for protecting us dumb investors from all those big words like “capital loss” and “hidden-commission ”.

I began to copy sections that concerned me but quickly realized I was copying most of the document. I was reminded of a statement by Warren Mackenzie, of Second Opinion who stated “the industry is always pleased to move the investor slightly forward so long as it does not impact commissions”. But you get the point; investors get a story instead of facts and any concrete practical requirement gets so watered down it becomes irrelevant by the time you read it.

But a poor blogger like I can’t do this justice, so let’s let the Joint Forum speak for themselves. (to those who are sarcasm challenged, no such interview took place, but the quotes do belong to the Joint Forum. The witty dialogue is all mine).

Fundsellor: What's the secret to remaining so vague that this document does not give any real information to those masses of mutual fund investors?

J.F.: “It does not outline specific requirements for the new regime. Rather it sets out concepts and principles agreed upon by members of the CSA and CCIR. The framework will form the basis for implementation.”

Fundsellor: Huh?.... anything I can actually understand?

J.F. “In response to comments, we have also revised the framework to include less frequent updating and filing of the Fund Facts…. Other aspects, including the specific content under some items, will be left to fund managers and insurers to determine.”

Fundsellor: Is there any way we could make it easier to just pretend investors have the incriminating….er, necessary information to evaluate the fund?

J.F. “Electronic delivery could include, for example, sending directly to the investor an e-mail with an electronic copy of, or link to, the Fund Facts, or directing the investor to the relevant Fund Facts on the fund manager’s or insurer’s website.”

Fundsellor: So they do not actually have to give and explain the document to the investor…..slick! How did you come up with this neat dodge…er, option?

J.F.: “Many commenters were opposed to the requirement to deliver the Fund Facts before or at the point of sale for subsequent purchases because of the potential disruption to the purchase process. “

Fundsellor: Obviously we can’t have lack of vital information slowing down the sales commissions or the industry will really have a crisis to deal with!

Fundsellor: With all this asset backed paper making people nervous how are you going to deal with short-term investments?

J.F. “We have therefore excluded money market funds from the point of sale delivery requirement because they are generally of low risk..... In these circumstances, the adviser may go back to the client after the initial recommendation of a money market fund and resume the e discussion of what fund or funds may be more suitable as a longer-term investment. “

Fundsellor: I get it; no big commission equals no disclosure. That will teach investors to buy low fee products! But seriously, if I really want to sell a juicy commission product is there any way I can set it up to avoid all this?

J. F. “. If the investor initiates the purchase” (bolding by the writer not the J.Fer’s)

Fundsellor: That’s easy enough to arrange. It’s not like anybody else was in the room with us. How do we sell this gigantic loophole?

J.F. “We agree that investors who initiate the initial purchase of a fund through an adviser should be able to decide whether they want to receive the Fund Facts before or after the point of sale. “

Fundsellor: How about the prospectus. A few clients read that and then give me some flack when I maybe glossed over a few fees or risk factors. Can I escape that problem too?

J.F. “ Dealers will have to deliver the simplified prospectus to investors only on request. “

Fundsellor: Have we been able to hide any other fees?

J.F.: “A few commenters suggested adding the trading expense ratio (TER). We considered these comments, but for simplicity, we have kept the reference to the MER only.”

Fundsellor: How about the real basic stuff? I assume there is no way to get around providing meaningful benchmarks now?

J.F. “A few commenters wanted to see benchmarks added to the performance information. We considered these comments, but based on our principle of simplicity, we have not included benchmarks. “

Fundsellor: You can do that?.....I mean, well done! I don’t suppose you got rid of the risk disclosure as well?

J.F. “The framework contemplates use of the IFIC risk scale at least until an acceptable alternative is developed. “

Fundsellor: Wow, we get to use the risk ranking designed by the companies selling the funds. You guys are amazing! Next you will tell me we can still hide my fees from the investors! Sorry, that might be expecting a little too much. You folks can’t work miracles…..can you?

J.F.: We have removed the adviser compensation section and changed references from “adviser” to “firm”.

Fundsellor: so you mean I can hide behind the firm and not disclose my skim on the fees, great! Hang on. Are you sure the investors won’t figure out that they are paying all the costs for everybody? How did you word that section?


Fundsellor: Wow, you guys couldn’t do better if you had all worked directly for the fund companies and advisors. Just kidding!
I noticed that the asset allocation does not show the split between fixed income, cash, and equities. How can that even be considered asset allocation?

J.F.: “Flexibility will be permitted in certain areas to allow fund managers and insurers to describe their funds accurately. These include:
-the description of the fund’s investments
-providing up to two pie charts for investment mix
-the type of allocation used for pie charts "

Fundseller: Well, thank you to the J.F.er’s on the committee for the great job. I haven’t seen so thorough a review since the Warren Commission looked into the grassy knoll! I only wish I could have smoked the “joint” your committee was named after!

Soismike: Well folks you heard it straight from at least one end of the horse! No full fee disclosure by advisors, no benchmarking, no clear asset allocation, and no proper risk ranking! Thank goodness the industry has regulatory oversight to protect us……Say it ain’t so Joe, say it ain’t so!


Saturday, October 18, 2008


While Advisors hide under their desks (OK not all, just most) a huge number of investors will make the panicked decisions necessary to complete the most common of investor strategies “The Buy & Fold”.
The B&F strategy is what I call a “naked cover strategy”! By the time the investor has lost their shirt (the naked part), their Advisor is taking cover ...hiding under a desk mumbling some insane non-sense about waiting out the storm, ( or yo-yo’s walking up a hill, or fund managers are on top of this, or my personal favourite – stocks are on sale)….basically covering their Advisor butts (the cover part) and hoping that you do not call the compliance area to report their idiotic investment strategy . That strategy of course is driven by the Modern Commission Theory (MCT ) and explains how we find a senior citizen with 80% of assets in equities at the top of the bubble!

How Do You Recognize If You Are In A Buy & Fold Investor Strategy ?
First, let me explain clearly, there are no B&F investors, only B&F strategies. Anybody with a bad portfolio can be involved in a B&F strategy. The key is to understand how it starts and how you can recognize the symptoms.

STEP 1: You choose an advisor based upon a recommendation from your buddy/bank/relative who actually know as little as, or less, about investing than you do.

STEP 2: The advisor uses a useless “risk questionnaire” to determine how much high risk equities they can legally push on you without you throwing up in a good market. This is also part of the cover strategy for the advisor and the related brokerage or fund house they are shilling for. You will note the advisor directing you to go up at least one level of risk from your initial thought so you do not get hampered by compliance issues later.

STEP 3: Utilize the MCT to sell you expensive and high risk options that include deferred sales charges (DSC) to ensure a change of strategy does not put future commissions at risk for the advisor. This is important later as you begin to get skittish about your losses.

STEP 4: The next step takes some time. It is the moderate drift in asset weightings to even more equities. In a good market it can be done by being too lazy to rebalance the portfolio. In a slow market it may be by directing new deposits to equities only. This step is vital to moving for example, a 55% equity balanced allocation to a 70%+ equity weighting. The longer you stay with the advisor the more the equity weighting increases and the less the investor asks questions.

STEP 5: The markets begin to drop and become erratic. You see fluctuations that start to erode your gains and come close to threatening your principal. You contact your advisor to see about reducing risk. Your advisor, with a big warm smile assures you now is the time to get aggressive! Yes, equities are on sale!
Chagrined that you had shown weakness, you jump in further and climb on the equity express. Each “dead cat bounce” in the market is another buying opportunity. Now we can often get our equity position up to 80% +.

STEP 6: You’re done. Your money is disappearing daily, you are afraid to open your investment statement, and you have not heard from your advisor in 2 months or more. The “fold” stage unfortunately is where you un-cover the mess you’re in. Your savings are nearly gone, firing your advisor is moot since you can’t find him/her and they do not return calls or emails. The advisor covers their butt, you cover your losses and hope you still have a roof to cover your head!

THE GOOD NEWS: You can bail out at any step. Just because you are in the B&F game does not mean you need to stay with the program until the bitter end. The fastest and least painful way out is as follows:

- Get an independent review of your investment process by a consultant that does not sell securities or work on commission.
- Use a professional service to find a proper advisor
- Get an independent professional to help draw up or review your Investment Policy Statement
- Either you or another independent body need to monitor the performance of your advisor.

One last piece of advice......Tell your advisor that equities are not on sale….new advisors are!
sois mike.....no need to buy and fold now that you've been told!

Friday, October 3, 2008

The Pension Problem: Retiring on Kraft Dinner


As manufacturing jobs go slowly down the bowl, a large number of factory workers are being dumped into the investment world with zero support and a larger amount of money to invest than they have ever imagined possible. For most it is the rolling over of the pension plans and for a lucky few it includes a severance package. On the surface this is a positive as in days of old workers were left with little to invest or live on. So what’s the problem you ask?

Many of these workers are doing the equivalent of walking out with a pork chop around their neck to feed the starving jackals. The pork chop is their pension money and the jackals are of course the many advisors chasing the employment ambulance! Let’s back this up a bit though.

EMPLOYERS DUMP THE MARKET RISK ON EMPLOYEES: The workers first began to lose their retirement nest egg when employers switched the onus onto uninformed employees to manage their own Defined Contribution pension plans. Knowing the difficulty the top pension managers have in keeping pensions fully funded, one can assume everybody knew that the workers had little or no chance of having their pension fully funded on retirement. However, not leaving failure to chance, the insurance companies managing the funds ensured employees had a miserable selection of high cost mutual funds or low return money market funds to invest in. In fact I could not imagine a respectable pension fund manager EVER choosing from the selection offered to the employees. To further show the care and concern for employees, millions of dollars in DC pensions sit in money market funds for years with no effort to contact employees and discuss better options.

EMPLOYEES LEFT HOLDING THE MONEY BAG: While a few employees might think they can handle the job of investing their pension over a 30-50 year period, very few actually can. The vast majority are left to wander the streets hoping to stumble onto an honest advisor to help them out. Sadly, many advisors adhere to the Modern Commission Theory and, unlike a true pension manager, they quickly ascertain maximum risk they can get away with and the employee ends up in an equity dominant, high fee managed product. While you might say, why not go heavy on equities when they have a long term investment horizon(?) that would ignore the fact they are nearing retirement, unemployed, and often have debt and cashflow challenges. For many capital preservation and emergency funds are the immediate need. Regardless, the fact is that all of these employees need a good financial plan before anything gets done.

SOLUTION: The solution is obvious and easy to implement. The challenge is that the people who need to help make it work are not focused on the people who are leaving the job.
The employers need to provide training to EVERY employee who is in a capital accumulation plan (CAP Plan) to ensure they have the ability to assess the plan and understand the role they now play in managing money for retirement.
The insurance companies running the plan should offer education in how the plans work, the options available, and most of all the fees. Every pension plan should have an index fund solution with diversified asset classes and auto re- balancing. Insurance companies should be providing options for successful investing, not herding the uninformed employees into fee heavy lucrative fund options.

Last of all, and the most perplexing to me, is the role of the big unions. First you allow the Defined Benefit pension to be bargained away, then you ignore the basic safeguards that YOUR membership needs to protect there interests. Wake up fellows, your membership needs help.

Overriding this whole issue is a regulatory system that truly seems to worry more about the advisors and insurance companies and a lot less about the employee being asked to become an investment manager. So who is going to step up? Self Regulatory Bodies….. OSC, IDA, IIROC, advocis,CSA? I suspect that will happen when pork is airborne.

Okay, this article will no doubt end my hopes for the Leacock award for humour, but remember even funny guys can get peeved when an injustice is in front of you. The economy is squeezing the worker and this is a forewarning that retirees in the next two decades are going to be impoverished if politicians (good luck) do not bring the key parties to the table to balance the risk that is now borne by those who can least afford the impact of that risk.
Retiring on kraft dinner.....SOISMIKE

Monday, September 22, 2008

History Rewritten!

Watching Wall Street Re Write History
We are fortunate to have a front row seat at one of the greatest historical re-writes in ….. well history I guess! In reality (because reality is so rare when reading about financial issues today) we are an integral part of the re write because without a complacent sheep like investing public it could never happen! Puff out that chest folks, you are a part of smoothing over the biggest fraud in history!

First lets review the key players in the fraud; then we can look at the cameo role we all will play!

The fraud of course starts with the three key ingredients of all good cons: a large dose of greed, a little street smarts, and a whole whack of arrogance!
The initial level of greed is a shared role involving real estate agents, appraisers, and bankers on the street level. Their greed combined with a little street smarts allowed then to con a massive number of homeowners into thinking they could have free money on run down shacks. They however, can only be complicit in the scheme if somebody can get them real cheap money to prime the pump on the scam.

That of course required a higher level of greed and arrogance than we generally find on the street. For that we needed a team approach. Thus we have the lobbyists and politicians to manipulate rates to set up the free flow of mortgage money. The politicians, being of a lower intelligence level, are influenced for minor amounts of campaign donations. In fact the key role they will play is as a fallback position for when the scheme eventually and inevitably must explode.

The arrogance that was so key to the overall success was supplied, for the most part, by the international bankers and investment experts who refused to admit they had no clue what they were buying for their clients. Thus the scheme takes on an unprecedented scope and size because arrogance is an international trait and thus common to all high paid, lazy analysts and rating agencies. In fact, one can hardly assume the scam was ever meant to get so large because it is ridiculous to think anybody could have predicted how arrogant and lazy the world’s investment experts were to become.

Thus a national scam gained speed and became a large scale fraud that now threatens the free world as we know it! (sorry, I have been listening to politicians too much lately). Anyhow now comes our part!
With the crap having been flung from the blades of the fan, the politicians swing into the distraction mode blaming everybody in site but themselves. While they do this the smart guys bail out and cash in their profits and start shorting the companies they financially raped and pillaged to make even more money.
Then when hysteria hits its highest point the cover-up swings into the whitewash mode. Does this sound familiar, “Let’s not worry about who caused this mess, let’s start focusing on what we need to do to fix it!” That is soon followed by the “Big Lie” approach of “this is all caused by a market correction and will soon be OK”. Note this lie must be repeated ever five minutes on BNN and CNN to ensure the sheep (that’s us) understand that the guys who stole all the profits are not responsible.

And finally the finishing touch on the cover up. Let's try this one on for size ;"In fact this whole thing was caused by a social experiment as the government tried to increase social housing to the lower income folks." In fact some hedge fund folks will tell you this whole thing is really a failed government program and all we really need is “less regulations”. So tell you what, since this is all a government problem, really, the tax payer needs to rightfully make sure all the shareholders are protected from the bad investments their companies made. In fact lets let the government buy up all the poison crap we sold and put it in the treasury.
Surely it’s the least the little people (that’s us again) can do to make it up to the wealthy investment bankers who have been so severely impacted by our actions.

For those that faithfully read this blog, you should know that this is a combination of the Modern Commission Theory and the “One is Born Every Day” theory with a hefty dose of steroids thrown in for good measure!
Your wise historian,

Saturday, September 13, 2008


All theories have a shelf life in the quickly evolving world of investing. The constant dialectic process ensures new theories challenge the old and the better theory survives until a new challenger comes along. Our analysis shows that the Modern Portfolio Theory may well have been trumped by a new challenger!

The Modern Portfolio Theory (MPT) has been a mainstay of the investment management business for some time. It provides a theoretical underpinning for how an investment portfolio should be constructed. It has been considered a “core” investment principle and is part of the curriculum for investment courses taught in our business schools, the CFA program and also in the Canadian Securities Course. While not everybody agrees wholeheartedly with all aspects of the theory, most acknowledge the relevance of the thought process. In short it is mainstream.

Investopedia offers a nice short definition of MPT.
"According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper "Portfolio Selection," published in 1952 by the Journal of Finance.

In an analysis of the investment portfolios of individual or “retail” investors, you would expect to find significant evidence of MPT in a review of the portfolio construction. However, inexplicably many portfolio show little evidence of the application of MPT, with portfolios lying well off the efficient frontier.

No theory is “static” in the fast changing world of investing. I believe that a new theory needs to be develop that can adequately explain this phenomenon in portfolio construction at the retail level. Hence, I unveil the “Modern Commission Theory” or MCT.

MCT, while not taught in the CSC courses or found in any investment textbooks, appears to be the chief operating theory guiding many of the financial advisors in the retail investment industry. It is a concept learned strictly through mentorship and on the job experience, with no text books available. The fact that the theory has been adopted by so many sales advisors is due to the enlightened self interest that is so inherent in the theory and rampant in the industry.
The definition of MCT is as follows:
“According to the theory it is possible as an advisor, for each client , to construct an optimized portfolio of securities such that commissions can be maximized for any given set of investment objectives, account size and investment knowledge”

While it requires a strict discipline and a great deal of research and knowledge, a maximum commission opportunity is available for every security type and asset class. Portfolios utilizing the MCT strive to attain the efficient commission frontier; where no further fees can be derived without increasing the time spent with a client!
In its highest and purest form of application the fees and commissions are opaque and can only be determined and measured with the highest level of investigation and analysis. Fees and commissions at the top level should be buried in complex terminology and where possible inserted deeply into the most complex prospectus.
Under the broad theory of MCT, there appear to be a number of principles uncovered that are used with great effectiveness by advisors as they strive for the optimal MCT portfolios.

1.The most complex products with the most confusing and opaque fee and commission structures should be sold by advisors to the least knowledgeable investors. As such investors with limited knowledge should be sold Principal Protected Notes (PPN), Guaranteed Minimum Withdrawal Benefits (GMWB) variable annuities, and other financially engineered products, wherever possible. Let’s face it stocks, bonds, and preferred shares are getting to be too well understood.

2 Wherever possible the wealth should be shared through the use of managed products. Rather than manage a portfolio directly as old world stock brokers and advisors did, you should sub-contract the portfolio wherever possible. Managed solutions such as funds of funds and wrap accounts do a nice job of layering fees. We call it the “team approach”.

3.Intergenerational investing is important. Where possible DSC accounts should have 10% a year removed from the initial fund and reinvested in another DSC fund (the son). The following year you repeat the process and create the third layer or grandson of the original DSC. Who says diversification can’t be profitable for all.

4. Structured products should be the mainstay of an optimized MCT strategy. By their very nature they are sexy, confusing, and best of all they provide great opportunity to increase fees and hide costs and risks.

A word of caution however is worth noting. As with all new theories, some of the dinosaurs are not on side (did I say’ buy and hold’, value, GAARP) and more seriously a few rogue advisors are promoting a counter theory.

Beware the “indexers”! Clearly unaware of the personal satisfaction built into the MCT, they preach low fees and greater diversification. I caution you because opening the door even slightly to index funds will knock you off the maximum commission frontier line. In fact a whole portfolio of index funds may actually cause the portfolio to spontaneously combust and burn up all the fee gains driven through diligent application of the MCT.

Similarly beware the fee based and fee only advisors for they can also erode the key principals of MCT unless corrective commission tactics are embedded in the processes.

Fortunately the indexers are few and the commissions are many. I am convinced the MCT will prevail,after all, haven’t we been able to maintain the worlds highest MER’s inspite of all those annoying investor advocates! Stay the course and MCT shall emerge as the accepted theory by all self aware advisors!

As with all new theories, the idea has not been fully explored to date. But we are just at the start of a great new world of structured commissions…er products that promise to take advisors and their companies to a new revenue high.

Like the original works of MPT by Markowitz,was expanded on by William Sharpe and Merton Miller who all eventually shared a Nobel Prize: I believe that the theory of MCT will be expanded on in years to come and if nominated for the Nobel Prize, I would honorably accept it. I would also be remiss if I did not acknowledge the efforts of my predecessors for their pioneer work on the theory. Special acknowledgement to P.T. Barnum and his work on the “One is born every day” theory!

Note* The above article may contain traces of sarcasm and a heavy dose of reality.


Friday, August 8, 2008



In reviewing portfolios I have noticed that client issues are most often concerned with the performance of an individual security….or several individual securities. It obviously makes sense that a security that you own will catch your eye when it is dropping in value! The main challenge with this approach to portfolio management is that the damage is most often done long before the security caught your eye!

You are not an insider and neither am I. If we were we would be filthy rich and not overly concerned with our daily or quarterly portfolio movements. The investment professionals are the first ones in on a good thing and the first ones out when things go wrong. That’s where the expression “buy on rumour and sell on news” comes from. In fact, unless you are a full time and well networked analyst, you are unlikely to ever get a truly worthy stock tip. The way we small investors can make money in the market, is through two key rules: never chase last year’s winners and always look at the big picture.

The first is obvious. If you never listen to the "Mad Money" or read the business section of the paper and if you ensure that on pain of death you never attend an investment seminar, you should be well on your way to success. Money is made by working hard, saving your spare cash, and investing over long periods of time in quality investments. The secret is to understand that the quality investments are only the building blocks in the big scheme of investing.

Your portfolio needs a good architect if it is to survive in tough times as well as thriving in good times.
Building on the architect theme, your house is designed to look great and meet all of your functional needs with windows, a furnace, plumbing and all the services and rooms you require. But the builder did not just drop by the hardware store and see what was on sale or what paint is the latest hottest colour (hopefully). They filed a plan of subdivision and the building design had to be approved to ensure the house was safe. Then they hired skilled trades to ensure the plans were followed and everything was within the building codes. Your portfolio is built exactly the same way, or at least it should be.
Unfortunately, many portfolios are built from a series of security purchases based upon what is hot today. If kitchens are not big winners with buyers lets not put a kitchen in the house, ditto for bathrooms that just need to be cleaned regularly. Sounds crazy but look in some portfolios and you see huge gaps in the basic asset classes because they were not in favour, were not sexy enough, or simply did not pay the advisor enough commission.

To get specific:
-think of cash as being the furnace and electrical components of the house. Flexible in that they are not always needed, but important because when you do need them you need them at the flip of a switch.
- lets look at fixed income as the foundation and basement of the house; a solid foundation that assures no matter how bad the weather, the house is not going to blow away or float away!
- equities are the siding, the landscaping, the paved drive, the Jacuzzi tub, the chandelier. They are the portion that gives the place curb appeal and provide pride of ownership. Quality equities are often the difference between successful portfolios and drab portfolios. They give your portfolio the lift that allows you to hold inflation in check and build that new addition on the house.
- alternative investments are the four car garage with a Porsche and a BMW. You do not really need them but if you can afford the cost then live a little and spend your mad money! Who know they may become classics and go up in value!

Okay, that’s a bit of a stretch, but you definitely need to have a portfolio that is built with sound planning and that includes the five basic asset classes: cash, fixed income, Canadian equities, U.S. equities and Global equities. You need them in the correct proportion and you need to understand the purpose they serve.

When you are buying a new investment you need to ask yourself, which asset class should I be looking at and what purpose is the investment going to fulfill. There is no sense buying a door when you need a window! Similarly there is no sense buying an equity when you need a bond! Do not get carried away worrying about what security to buy until you know what asset class you should be shopping for!


Thursday, July 24, 2008



I had an interesting discussion with my broker today about a stock that was underperforming the expectations we had when we bought it. Coincidentaly at the same time I was reading an analyst review of the same security in the newspaper. It got me to thinking about how the industry handles analysis and recommendations on securities.

Let’s say you work with a portfolio manager who has every initial after his name. Your portfolio is a diversified mix of 30 securities. Your portfolio manager/advisor has 120 clients; all unique just like you! Allowing for overlap, your advisor needs to track and analyze say about 125 securities. If each security is given 5 hours of review quarterly that means approximately 2500 hours of work! Of course, you want your advisor looking at new securities and opportunities too, as well as meeting with you quarterly and of course she needs to prospect for new clients to stay in business. It becomes clear that analysis is truly a full time job for the research team not the advisor!

That is why they have specialists who utilize their CFA degrees and statistical skills to probe deeply into each security in a given sector. Far from your advisor being a one person show, they have the benefit of the brilliant minds and skills of all the top analysts. That obviously explains why we never lose money on a recommended stock selection! Just kidding folks.
With all the geniuses burning through the data and a skilled advisor reviewing the data it’s just like having a guarantee of performance! So why doesn’t it work that way? Well we all can make a mistake so maybe it’s not so much a guarantee as an extremely likely outcome that we will not lose money! Okay, that’s not really how it seems to work either…..what gives?

Well to get back to my discussion with the advisor; after a lot of discussion over several months we finally decided to unload a phone stock that was not adding value. The advisor had done their homework and provided the research results from the in-house sector expert who after following the stock for years had finally put up the sell sign. We were getting out with a small loss and a couple of years wasted.

What was interesting is that the newspaper I was reading was quoting a telecom analyst of some renown who had just reviewed the stock in depth and switched from a “hold” (industry code for a sell recommendation) to a vigorous “buy”. Hang on folks; they reviewed the same material, used the same math, and likely have the same accreditation. So how does it end up that they both come to the decision they had previously been wrong and it was time for a change in recommendation? And then, they both come to the exact opposite decision from the same data!

Just think; one of them will be considered brilliant and one will be considered a moron! Which one am I listening to? Well the obvious answer to those who know the industry is that they are both wrong! The data is obviously not clear and both are making bets on how things will end up. The thing is they are betting with my money and your money! The investor is the pawn in the game; the sucker with the money in many cases.

So who wins? Well the security industry wins of course. I sold and thus generated a commission and somebody bought my security based upon the opposite analysis and paid a commission. So are the analysts and brokers in cahoots to get our money? Not really. They all think they are right and they all think they are helping us get rich!

In six months I will let you know how it comes out! Until then I will keep reminding myself that my advisor has guessed right more often than not. How do I know that? Look up composite benchmark and then start tracking the performance of your advisor. Hopefully my advisor is doing the same with her researcher! As my friend John Home says, “You get what you inspect; not what you expect”!
Tracking results, SOIS MIKE

Friday, July 4, 2008


Today we are going to talk about how the challenges of today will inspire the financial wizkids of tomorrow! Most recently we have felt the impact of the "skill" or perhaps more appropriately, the "cunning" of financial engineering. The increase in "structured" solutions has come at a tremendous cost as we have all seen with the Sub Prime situation and ABCP fiasco.

While rationale minds might think that would lead to the sale of more "vanilla" securities like stocks and bonds and Index funds, that is not likely to happen any time soon. Financial engineering is "industry speak" for hiding the fees behind the concept. So whats coming next.....

What will actually happen is that the financial "engineers" will construct more of the same structured stuff that got us into trouble today! If real engineers and construction firms worked the same way as financial engineers, houses would be falling down all around us as I write. But one needs to assume we are not crazy enough to buy the same risky securities as the ABCP and bad mortgage products we bought; so this time around the engineers will have a whole new approach to the products. Look for the word "GUARANTEED" to become prevalent in the sale of the "new" structured products! Having just been burned they know we are all looking for a "sure thing" before we dip our investing toe back into the shark tank.

How will they manage this engineering feat? Think of a rundown dilapidated house, but with a new coat of paint and new vinyl siding! The risks and future repairs are hidden by the cheap covering to provide a sense of quality that is not there.

Securities are actually quite basic. They are investments upon which you earn a rate of return determined by rent and risk.
Rent is the return you could get from a zero risk investment such as a short term government guaranteed treasury bill. That is known as the "risk free rate of return".
The "risk" portion is the additional return you get for accepting volatility and some amount of uncertainty in your return. As an example with bonds that risk portion would be the credit risk of the issuer and the impact of interest rate changes on the bond value.

So, if somebody is offering you returns above the risk free rate, and suggesting you have a guarantee, then where did the risk end up? The return over and above the T-Bill rate means there is risk, but the guarantee means somebody else is taking the risk for you! Sounds great! So, just one question(?) what are they getting in return?

Well, for the most part they are getting a significant chunk of the return you might think you will be getting! The neat thing, for the engineers, is you are the only one putting money into the proposition! They are taking a per cent of your positive returns and none of the negative returns because the guarantee is paid for from your deposit. Perhaps now you can see where the cunning comes into the equation!Perhaps these products need to come with a warning on the label:

CAUTION: Guarantees may significantly reduce the value of your investment while drastically increasing your costs!

While that is never likely to happen, the real disgrace is that these products will be sold to those seeking the least risk and who can often least afford the costs.

So what should you be watching for:

Guarantees: Unless you are buying a bank GIC with CDIC coverage or a short term Government Bond, do NOT ever trust a guarantee.

GaffleGab: If you do not understand a product, do NOT think it is because you are stupid. There is a great chance the confusion is intentional and a pretty good chance your advisor does not really understand it either.

Fees: Structured products are often designed to hide fees. Ask for a clear description of all fees in writing from your advisor along with comparable fees without the guarantee. In fact ask your advisor why they can not create the same product for you from standard easy to understand securities.

The attached leads to a great Ken Hawkins article on structured products for those wanting to learn more!

sois mike


If the article does not open when you click the address, paste the address in your browser

Saturday, June 28, 2008

Its Not A Lie If My Fingers Are Crossed

I can remember playing around as kids with my brother and sisters. Our general rule was "it's not a lie if your fingers were crossed when you said it". Of course, as kids our little white lies did not have the power to destroy wealth or mislead strangers. It was more likely to involve who took the last cookie or who left the milk out.

As we read through the tangle of information and dis-information from those selling securities, the little errors of ommission or implied information becomes a much bigger risk to investors.

A great example was exposed in the recent article by Rudy Luuko in the Toronto Star this week. For those that follow Mutual Funds, Mawer has been a great company that delivers on its promise of quality investing at a reasonable price. While many firms have partnership agreements, one of the Mawer partners sells what is basically the same fund as Mawer sells, but at a much higher MER. That higher management expense ratio funds a bigger trail of commissions back to the advisor. So once more the advisor has a choice: I can sell you the Mawer funds directly from Mawer at a low investor cost, or I can make a big commission by having my client buy the same fund through a partner firm. Hmmmm, I wonder how the disclosure works on this sale.

My guess is that the advisor crosses her fingers and says this is a great company with a great track record and maybe just forgets to mention the investor can buy the fund a lot cheaper if the agent looked past self interest and focused on wealth building for clients. For those who think maybe this is an isolated situation, please refer back to the sale of DSC style funds. The concept is the same. WHAT THE INVESTOR DOESN"T KNOW DOES HURT THEM!

Sois Mike

Tuesday, June 17, 2008

Bad Advice Has Consequences

One of the most common questions I receive is "what clues are there that I might have a bad advisor?". That is inevitably followed by the question "what is it costing me?". The answer is that bad advise may cost you a few dollars in fees and a few dollars in lost performance during a strong market, or it may cost you a substantial portion of your portfolio and a lot in fees in a soft market, or it may cost you your retirement lifestyle, your savings and your hard earned retirement in a tough market. The above is not a scare tactic. A bad advisor becomes readily apparent in rough markets when earlier decisions made in a strong market are exposed to the negative market forces. When investors take the "flight to safety" you will quickly know if you are holding "safety" or excessive risk. Warren Buffet expresses this concept by stating "only when the tide goes out can we tell who was swimming without a swimsuit". In investor language that is what is known as "naked risk exposure". Lessons are very expensive for investors who discover that their advisor is a great talker but not much of a portfolio architect
The below link to another Ken Hawkin article may help you self diagnose some challenges in your own situation.

The Cost And Consequences Of Bad Investment Advice
by Ken Hawkins

Many investors still rely on their investment advisors to provide guidance and to help them manage their portfolios. The advice they receive is as varied as the background, knowledge and experience of their advisors. Some of it is good, some of it is bad, and some is just plain ugly.


Wednesday, June 11, 2008



One of the big challenges for an advisor is how to answer the question, what are your fees?

The question is a key one for investors because the way the question is answered tells a lot about how you will be treated as a client!
We have talked in the past about the variety of ways in which fees are charged. I want to state first thing, fees are necessary and you will pay them one way or another. The best of money managers and the worst will all charge fees. The best of course earn the fees they charge and it becomes a win-win situation. But lets get past the fact that fees are a given. Lets talk about how advisors respond to the question.

First Example: In a recent industry magazine I read a letter from an advisor who stated with conviction that his clients did not care for the details on the fees as they were netted from performance which is the bottom line measure for an advisor.

I would challenge that viewpoint by extending the logic to everyday transactions. Assume you were buying a car and wanted to know what you were paying above list price. That tells you how much the dealer is earning on the sale and allows you to decide if it is reasonable. It may not change the price offered, but it provides the buyer with disclosure and an ability to compare dealers. Similarly, if you hired somebody to paint a house you would want to know the cost of the supplies and the cost of labour so you could adjust costs as needed (faster painter or cheaper paint).

Another challenge to the “big picture” defence is the fact that performance numbers are excluded from most statements. If you can’t get pure rates of return or benchmark comparisons then the ability to measure the advisor’s net value is lost. Of course that may be the real intent.

Second Example: Advisor’s often are paid via a combination of up front sales commissions and trailers. Again, let me say that that is not necessarily a bad thing. The commissions are generated from the fund company for the most part and are not disclosed on an individual investor basis. Advisor’s often state that the client is made fully aware of the Management Expense Ratio (MER) on funds purchased, which discloses the fee the client is paying. That is indeed true. It does not however enlighten the client as to how much of the MER is given back to the advisor. That presents a challenge for clients who might explore different options that pay less to the advisor and have lower MER fees if they in fact could make a straight comparison with all facts disclosed. It might be bye bye DSC fees.

Third Example: Many advisors are telling clients that they are charging a flat fee as a percentage of the accounts assets, say for example 1.5%. That is an all cost absorbed fee and is transparent and easy to understand. Finally success you say. Well, not so fast. If these advisors purchase funds or wraps for the client there is often a double payment of the MER and the flat fee. That may not be a real problem when it is clearly explained up front on the fund purchase and an allowance is made to the total fees charged. The problem is when the added MER is quickly shuffled aside in the conversation before the client gets a chance to ask a key question.
If I am paying you 1.5% to manage my account, why am I also paying the fund manager to manage my money as well? If the fund manager is managing the fund, what are you being paid for? Again, disclosure and transparency are the key. A good advisor should be able to justify the fund purchase and should purchase low cost funds and or exclude the asset from the 1.5% flat fee.

So, what do great advisor’s do when asked the question about fees. Well, they actually get out the paper and pencil and go through the various fees they may earn, who is paying them, and why they are being paid, and most important of all how they will report the fees to you. They discuss their role in the process, how they add value, what they commit to on your behalf. You see the best of advisors know that if they treat you like you are the one who is the paying client you will understand how they are helping. They also know that you will not likely switch advisors, because the odds are the new advisor won’t answer the fee question to your satisfaction. The truly great advisors will provide you with full fee disclosure, an annual summary of fees paid, and proper performance results for the funds you are paying to own. They provide a variety of cost options with recommendations as to what is most efficient when you are buying a new security. They discuss the new issue commissions they earn on many products to ensure you understand how your purchase decision impacts their earnings.
It’s not rocket science to make informed decisions with all the relevant facts clearly disclosed to an investor. If a client is “not interested” in the fee discussion then the advisor needs to slow down, back-up, and start the conversation again because clearly they are not conveying the message of how large the fees become over time and how much they can siphon from an account if not properly monitored.
The best portfolios have full disclosure by an honest hard working advisor to an informed and involved client. So does that sound like your situation?

Saturday, May 31, 2008

Fox in the Hen House

Retirement is often a battle between you and your advisor. Can you guess who is winning?

The success you have in preparing for retirement will depend on whether you or your advisor wins control over your investment accounts. Recent studies have made it extremely clear that you will need to grow your savings to supplement your government retirement income. For those fortunate enough to have a defined benefit pension, the battle is for maximum happiness versus a tight budget. For those without a defined benefit pension the battle will be for a reasonable standard of living versus dependency on others.

For many investors, they believe they have acted prudently, hired an advisor who will assist them, and worked diligently to save their money. Many will realize far too late that the fox is in the henhouse!

While there are a growing number of advisors who put the client first, the overall trend is still very disappointing. Most advisors put themselves first, their employer second and the client third. What proof do I have for such a bold statement? Recently there have been a number of surveys completed by reliable sources that suggest the industry in Canada charges the highest Mutual Fund expense ratios (MER) in the industrialized world. In fact, Alia McMullen in the Financial Post on Friday May 30th, does a good job of outlining the issues. Her articles is supported by the Rotman International Centre for Pension Management which has raised the alarm that MER’s may rob Canadians of the ability to fund their retirement years.

The issue of excessive MERs have been addressed ad nauseum in Canada but with little tangible results. So advisors work for companies that charge high MERs , what can they do you may ask yourself? Well, for starters they can reduce the damage instead of compounding the matter. However many put themselves first and sell products with the highest fees they can get when cheaper options would benefit the client. The sale of expensive deferred sales charge (DSC) funds makes the problem worse for investors but makes the advisor wealthier. The question I have yet to hear an answer to is “how does the investor benefit from purchasing expensive DSC style funds”. The obvious answer seems to be that they benefit by having a very, very happy advisor and fund company. There appears to be no tangible benefit to the client. I realize the advisor needs to earn a living, but not at the expense of the client.

The product selection between Canada and the U.S. shows how a closed shop in Canada allows for the sale of substantially more DSC funds in Canada versus the comparable U.S. per centage. Instead, Americans purchase a much higher percentage of Index funds. Would it surprise you to know Canadian advisors also have access to the same options but consistently choose higher cost alternatives?

What can you do? Have a strongly worded conversation with your advisor about any funds sold to you via the DSC option. Ask how you benefit by being locked into one specific family of funds by penalties outlined in the DSC schedule? Then ask the advisor how he/she was compensated and if it differs with the DSC versus say a front end loaded fund. The smart investor hires an advisor to work "for you" NOT "with you". You can hire better friends cheaper so do not be fooled into thinking you are part of a team approach. It all starts and ends with your money!
Watching your retirement slip away......
Sois Mike

Sunday, May 25, 2008


Many of you may be familiar with the fable of the frog and the scorpion. It is a story that holds a number of parallels with the investment relationship you may have with your broker or advisor.

The story is poignant as I have recently seen a number of cases where Investors react with disbelief when they are informed that the DSC on their funds was neither necessary nor advisable. Their immediate thought is that there is a misunderstanding because their advisor would never inflate the cost of their investments by selecting the more expensive sales option. In fact, I try to explain that the advisor actually cannot help themselves. Hence the fable.

The fable involves a scorpion asking a frog for a ride on the frog's back so the scorpion can cross the stream. The frog at first declines, fearing the scorpion would sting him and he would die. The scorpion argues, quite logically, that if it stung the frog, the scorpion too would drown. Seeing the logic the frog agrees to swim the scorpion across the stream. But halfway across the scorpion stings the frog! As the frog feels his muscles begin to convulse he asks the all important question,WHY? As the scorpion struggles in the water he says he could not stop himself even if it meant he lost his life. Why, because I am a scorpion!

Advisors are trained that they are "hunters" who live off the results of their sales efforts. They work hard to find customers and get the assets transferred to their firms. As hunters, the expression is that you "eat what you kill". That translates to you earn the income you generate. More is always better and as a great hunter they have earned the income. They begin to believe that you are lucky to have somebody like them advising you. Surely they deserve to make top level income for the hard work and effort they put into investing your money. As the hunter mentality sets in they are praised by their employer for increasing revenue and achieving ever higher revenue goals. But if they fail to make the goals, they are just average hunters, no longer a part of the elite circle of top producers.

The problem is that the advisor lives in the world of the scorpion. They do not charge the highest fees to hurt the client, they charge the highest fees to maintain their position in their organization. The client becomes a means to an end and that end is to maximize revenue. How do they sleep knowing they have charged so high a fee? They sleep like babies! Their can be no guilt or shame in a scorpion acting like a scorpion!

So, the next logical question is why do investors keep letting the scorpions hitch a ride? I guess we wouldn't if we knew they had the stingers. How do you protect yourself from being a frog?

Try telling your advisor straight up that you do not want any DSC commissions charged to your purchases. In fact, tell your advisor you will pay them a flat pre-negotiated fee or move to a new advisor. If you belong to a group that has access to salaried advisors take a good hard look at the benefits of an advisor who is not commission driven. Your advisor will tell you to avoid salaried advisors as they are not up to the calibre he is. Indeed, those salaried advisors are not worthy of being called hunters!

Fighting fees.....soismike
p.s. The he and she are interchangable. Scorpions come in both sexes.

Friday, May 16, 2008


Most portfolios are simply too complex. Unfortunately many investors are guilty of thinking complexity is a good thing! ITS NOT. having a portfolio that has exotic products can almost always ensure the portfolio has excessive fees. Even getting past that fee hurdle, the complexities of investing will generally subtract from performance not add to it.
I find that Ken Hawkins of Second Opinion Investor Services generally is the writer that best puts his fingers on the key issues and does it in a way we can all understand.......so here's Ken from his latest Investopedia article.

Many investors find themselves with a portfolio that is too complicated to understand, hard to manage and difficult to change. In fact, some investors' portfolios contain so many mutual fund and principal protected notes (PPN) that they match the complexity of billion dollar pension plans, but without the expertise and resources required to manage them properly. Individual investors, especially those who invest in mutual funds, should strive for simplicity in portfolio construction. Koichi Kawana, a designer of botanical gardens, says "Simplicity means the achievement of maximum effect with minimum means." This could also be applied to an investment portfolio. See the link for the rest of the article.


Sunday, May 11, 2008



Did you ever wonder why that hot fund you bought is suddenly a dog? The fact that it has happened so frequently makes you start to think the market is personally trying to make you the world’s worst investor. You can relax, there is a good chance it’s not you that is the problem.

When you look at Mutual Fund advertising you can begin to understand the primary reason why investors almost inevitably buy the wrong funds at the wrong time. The reason of course, is that you do not really buy mutual funds; somebody sells them to you. Whether you read about the fund in the paper, saw the marketing at your bank, or had it recommended by your advisor, there is a good chance the seed was planted through a sophisticated marketing program.

That most marketing programs promote yesterday’s success is not important to the marketing machine; they need “outstanding returns” to put in big bold letters above the tiny warning about past returns not guaranteeing future returns. In fact, the warning should state that past returns are likely to foretell a weaker return in the future. Mutual fund companies know it, the advertising companies know it, and your sales person knows it! It’s really basic mathematics!

In statistics it is referred to as “reversion to mean”. That basic statistical rule suggests that over time the returns on markets, securities and funds will move toward the average. If a fund had a great 2007 then there is a great chance it will have a sub par 2008. If the fund had a great 2006 and 2007 then there is still a great chance it will have a sub par 2008. Knowing this basic rule, it would seem that promoting a poorly performing fund is just as likely, if not more likely, to produce superior results in 2008.

If you need proof Just look at the world’s indexes by country. Hong Kong was the top country in 1991,92 and 93 and just as you and I figured it out it went to last place in 1994. In 1994 Japan was number one and in 95,96 and 97 it was in last place. In 1999 it was back to first place. The U.S. was last in 1993 and second best in 1995,97 and 98 but careful because as you jumped in 98 the U.S. was headed for last in 2003,04 and 05. If you followed the industry marketing you jump in at the end of the bull and you sell out in frustration at the bottom of the bear market. The fund companies and advisors however take their cut in good and bad markets so they were not hurt nearly as bad as you.

What does the smart money do? The smart money is often called contrarian because it refuses to chase last year’s winners. The smart money also avoids the bubble stocks because they invest on sound fundamentals, not on marketing noise. Retail customers however invest by listening to the marketing campaigns. If everybody is getting into energy then I better call my advisor and get some energy stock. If everybody is buying REITS I better get some too. If everybody is buying Nortel I better get some too. To make the urge to chase hot securities seem legitimate you have the marketing supported by buy side analysis and seemingly independent sourses like Business News Network and the national papers with buy side articles telling you the top securities every week, month and quarter. How can all these folks be wrong?

Reversion to mean is vicious because it is relentless. What goes up does indeed come down and most often it does so shortly after you bought it. The smart money leads on the way up and the suckers follow as the security turns negative. Unfortunately in the security markets, retail investors are often played as the suckers.

How do you beat this cruel reality of the markets. You have two choices. You can find a great contrarian manager and hope their returns do not revert to the mean, or you can buy the indexes and accept the mean returns as a fair return on your equities. The indexes of course are not exciting, but they are cheap to own . Best of all in a well diversified portfolio you can accept the markets random emotional turmoil without wondering if you are the smart money or the sucker.

A lot of good will happen if you stop chasing last year’s winner and just accept that reversion to mean will balance your returns over time. You can play the market but you cannot beat the market by looking in your rear view mirror.

Tuesday, May 6, 2008

fee"dumb" 55





The real cool part about this marketing program is the fact that it was the type of marketing that would naturally appeal to people nearing retirement; and yet that is the segment that it could do the least to assist. Unless you suddenly win a lottery at age 45, you will be hard pressed to find freedom from financial worry at age 55.

In fact this advertising should have been focused on graduating students who, depending on student loans, might be able to survive the high fee mutual fund market and retire at age 55. In fact a student who graduated at 20 and put $1,000./yr in an RRSP earning 6% would have a not very significant $125,000 to retire on at age 55. That is actually less than $50,000 in today’s dollars. So if you wanted to retire at 55 and visited your high fee sales person at age 40 you better be a mega income earner or have a great pension plan before you arrive.

In fact this campaign may single-handedly disappoint more Canadians than any in history. Retiring at 55 is not possible for most of us and even less possible if you have been paying 2.5% MERs!

Another great financial marketing scheme is being played our as we speak! Manulife is turning investing on its head with Income Plus! We can understand that a lot of blood has rushed to the investors head! How else do you explain an investment that is sold as a “guarantee” that will help you sleep at night; but has so many confusing twists and turns that it can keep you up at night just trying to figure out the odds you can ever reset and make a profit above what you put in!
At the end of the day one of the most common warnings comes to mind: if it is too complicated for investors to understand then the person selling it is making a huge commission. As with most “guaranteed” products, you pay a huge price to avoid an unlikely future loss over the life of the investment.

These two marketing schemes stand out as great examples of marketing to the unlikely dream on the one hand and the unlikely fear on the other! Greed that you can find a quick easy way to retire early and fear that the market will suddenly crash just as you retire! Both fear and greed can cause investors to look past fees and the skeptic might even think the ads count on that!

Let me know what marketing scheme is catching your eye these days!

Friday, May 2, 2008

Put Your Advisor on a Diet

Diversification Drift: The Diabetic Portfolio Syndrome

Imagine if you will a person on a strict diet who is working in a candy shop! Moderation is the key, and every day they remind themselves to be disciplined! It can’t be easy and inevitably most will fall off the wagon!
Well advisors can fall into the same trap! They know that equities need to be constrained to reduce the risk in your portfolio, but gosh they are hard to resist. They just look so good with a gooey analyst buy rating spread over the top!

The key to every great portfolio is to get the asset mix right! Nobody even argues that fact any more as history has proven the impact of asset allocation on portfolio volatility. Asset allocation is the primary reason why good advisors start with a financial plan. From the plan you can determine the rate of return needed by a client, and from that you can build an asset allocation model. In fact almost every investor can dig up an old account set-up and find an asset allocation model they received from their advisor long ago!
I challenge you to do so, and when you find it if you are over-weighted in equities please send me a nickel…..forgive me, I will have to write quickly as I am expecting a deluge of coin soon and might be retiring by the end of the week!

So why does it happen? Why would advisors increase the riskiest component of a portfolio above the agreed to targets! Well, advisors are only human. They are bombarded daily with equity recommendations from their bosses, their research departments, BNN, the newspapers and even from clients looking for the next Google! Combine that with the sugar high of big fat commissions and trailer fees and it is a wonder investors ever even know what a bond is! Equities are the sizzle; bonds are the roughage.

Slowly but insidiously, the equity component rises in the portfolio. Fortunately rebalancing should prevent the damage from being too severe or long lasting. Alas, rebalancing is a lot like exercise. It might be good for you, but somehow it keeps getting pushed to the bottom of the “to-do list”. That same old account set-up you found may well list the rebalancing schedule that hasn’t happened and the semi-annual face to face meeting that was not deemed necessary. All these non-events contribute to allowing the equity assets to become the fat kid of the asset class!

Probably my favourite ongoing example of equity drift occurs when I look at an E. J. statement. The statement lists the target for every asset class in the account;and beside that percentage is the actual weighting in the portfolio. It is amazing that clients don’t seem to rebel at the discrepancy from what the E.J. statement recommends and what the advisor actually has them holding!
Now I am sure not every E.J. Advisor is recommending clients be over-weighted in equities and it is probably just my small sample that distorts the fine work they do. I will say the E.J. statements at least show the recommended asset weighting which is more than many of the big brokers do!

So what is an investor to do? Put your advisor on an equity diet. And like any good dietician, have them check in for a semi-annual review to ensure they have not bulked up by nibbling on too many IPO’s or equity buffets. It may be your advisors diet, but the impact of too many equities will damage your portfolio long before your advisor shows any symptoms!

p.s. Beware structured notes which claim to be roughage but are filled with sugary equities and laced with fees!

Tuesday, April 29, 2008

Darwin Meets Investment Advice!


The more articles you see on how “advice” is sold, the more you want to run for the hills! I think Jonathon Chevareau has been trying to get to the meat of the matter with his recent articles on how different advisors charge fees, but sheeeeesh, should it be this tough?

Perhaps we need to take a trip back to a simpler time when trading stocks was the purview of the elite (i.e. you and I were not invited into the game)

Step 1: Back before Darwin, Brokers sold stocks to wealthy people who paid big commissions for the right to own companies…..you and I bought GICs and looked at the rich with awe and envy!

Step 2: That was good into about the early 1980’s. Then we demanded the right to play in the market; but being simple people we were not likely to understand the complexity of buying one stock! So the smart people set up little baskets of stock we could buy (mutual funds….even sounds a little socialist) at a modest fee. Since we were indeed quite simple, they decided not to bother us with the cost of owning these…they would use hidden fees and trailer fees we wouldn’t have to see for fear it might confuse us!

Step 3: As we paid these high fees without complaint the dollars rolled in and brokers split into two groups, the old guard serving the rich and Mutual Fund Salespeople to milk….er service the rest of us!

Step 4: Then along came a tough challenge for the industry, “discount brokers”! That allowed the mutual fund crowd to get their feet wet in stocks without paying the old guard their full stipend! It also caused fee leakage from MF’s into the DB’s (discount brokerages).

Step 5: Ever on the lookout for ways to make those fees, the smart guys started to stoke up the marketing machines and overwhelm the new investors with new products that they could buy. Soon discount brokers were the home of the money machines known as “day traders”! The average guy/gal thought it they read enough on the internet, watched enough ROB TV, and read the huge ads in the newsprint (think RRSP time); we could do it faster, better, and more frequently than the old guard brokers! Of course our dreams were quickly dashed when the “tech wreck” showed most of us we really were not that good at finding winners!

3b. (love my new math) So we had to back track and return to the MF guys, tails between our investing haunches, and buy more funds. However, we were a more educated bunch now. We knew the cost of a trade and we did not like the MERs on those funds any more!

6. (we are making progress again) Now the field began to divide up depending on our aptitude, level of over confidence/ability,and willingness to do our homework. A few who did not lose their shirts stayed on in the DB channel, those who lost total confidence went to GIC’s, some went back to the traditional broker but now the trade prices had to come down and even “buy &hold” became popular! Through it all, the rich stayed rich (big surprise) but with common folk now in stocks, more of the rich went to Portfolio Managers (fancy schmansy and an entry level deposit requirement to keep us out). Of course many, poorer but wiser, remained with the funds even though the heady days of fantastic gains seems to have gone away!

7. (we’re getting to the end) The deal breaker, earth shaker, and transformational change that occurred next actually began with but a whimper. Out of the U.S. came Index Funds”! They were cheaper than MF’s, they typically outperformed most other funds, and you did not need to pay an advisor! The marketing machine of the “buy side” kicked into high gear and the battle continues to this day! Brokers created new complex products that you had to have; index linked notes, structured products, hedge funds….i don’t know what they do but all the “smart money” is buying them! Heck, they even have this phenominal deal where they keep your money like seven years then guarantee they will give it all back!!!!!!

Finally: Love or hate MF’s or Equities or Bonds or Income trusts….the fact is investors today have more choice than ever! The real issue is the smoke screen of competing products, different fee structures, different types of advisors (fee-based,fee-only,commission sales and trailer based) and a marketing machine that changes the landscape daily with new commission schemes disguised as new products.

Now: What are we to do? Well, do what you understand! Regardless of what channel you decide to invest in WATCH YOUR FEES, ask questions, do not buy what you do not understand! Do not look for the friendliest advisor, look for the cheapest advisor and then monitor your account to make sure it is going up at least as much as the relevant benchmark indexes!

The Future: Planning advice will be bought separately from the securities selection advice! Overall strategy and planning decisions come from one advisor and decisions on what to buy or sell come from another totally separate source. One will not be allowed to impact the other, and like any good balanced approach, each keeps the other honest!

…..at least that’s how I see it all evolving! soismike