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 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