Monday, April 27, 2009

The Truth About Canada's Banks & Their Success

A lot has been made about the relative strengths of the Canadian banking system. The newspapers are filled with stories about how the focus on "retail" has lead to lower risk profile for the Canadian banks. You have also been reading recently about the superior risk management focus of the Canadian banks and the superior compliance regime of both the banks and the Canadian regulators.
That's pretty neat stuff for us Canadians; hey we're number one! It was all pretty reasonable to the average bloke who has not worked inside the machinery of a big Canadian financial institution.....but I have and I can assure you it is all CRAP!

The reason Canadian Banks are so successful is quite simple. They have an oligopoly structure that lends itself to high margins through low competition strategies. In short, they make tons of profit by over-charging for virtually all domestic services! Need convincing? The evidence has been sitting staring at us for years so lets point out a couple of obvious situations to get us started!

High Interest Savings Accounts: For years the Canadian Banks have made a fortune by offering little or no interest on your savings account. In fact the situation got so ridiculous that a foreign bank figured out that they could pay for their whole expansion into Canada by exploiting the fat margins that existed on savings accounts. Thus that annoying ING guy made his appearance and told Canadians the ugly truth! Your banks are not paying you interest you dummies! Of course the banks were not about to fight back over one measely foreign bank offering fair interest rates.

Think about it.....if Royal has ten billion in savings accounts earning 0.25%, they are not about to start paying 2.25% and give up $200 million in profits. They( and all the other banks) just sacrificed a few hundred million in deposits each, that would drift to ING, counting on Canadian apathy to keep most of the money in their accounts! The Canadian banks did not react at all until the credit unions followed ING's lead; at which time they created a high interest saving option that was not as high as ING and the credit unions, but was enough to stem the flow of apathetic money from the big banks!

Credit Cards: Foreign credit card companies also noticed that Canadian rates were very high, even though losses were quite low. In the hyper competitive card market south of the border, aggressive credit granting and extreme marketing competition pushed card companies into high risk credit granting, expensive rewards programs, and aggressive direct marketing campaigns. No wonder the card interest rates were 19% to cover the losses and expenses. In Canada that was not quite the case. Rates were 19%, but marketing was through the branches to existing customers. Credit standards were still very reasonable and losses were consistently below the U.S. experience. Even better, the banks owned the card processing firms and could screw both the customers (think 19% rates) and the merchants who had to pay outragious fees for the privelege of accepting the cards! Again, the Canadian banks took it to the extreme and again foreign banks eventually stepped in. Check your mail box and see how often a U.S. monoline (sells only one product) firm has sent you a pre-approved card at a low teaser rate. Again, the banks are not about to match low rates and sacrifice the profits from tens of billions in outstanding card balances at 19%, or 24%, or 27%. Let Capital One or some other company steal the crumbs from the table, but never give in to the temptation to be competitive!
Need further proof? Canadian banks are paying huge class action fines for illegal foreign exchange fees on the credit cards! Canadian banks are the leading broker and mutual fund firms in Canada.....and Canadians pay the highest mutual fund fees in the world! Ask the small business guy about the cost of banking services in Canada!
So how does that make our banks the best in the world? How do you explain the lower risk profiles and the lack of idiotic leveraging? Simple actually; Canadian banks just were not willing to pull their capital out of Canada and forego the huge domestic profits to chase U.S. sub prime assets, or expand aggressively into the U.S. capital markets. While foreign banks greedily schemed and took risks to gain any slight advantage in terms of profit, it was a totally foriegn concept to the Big Five! Compete for profits? Surely you jest! Stay home; stay fat and happy!

So now you know! The success of the Canadian Banking System rests with us! If we were not suckers who overpay for all our banking services, then the big banks could not have been nearly so clever! Lets give ourselves a hand! Of course don't forget to thank the government, who through the weakest banking regulations in the free world, continue to let the oligopolies thrive!

Keeping with this fine Canadian tradition; you can apply the same logic to some of the worlds wealthiest civil servants, dairy farmers, and financial planners! Low competition, poor regulations and consumer apathy! I am Canadian!

sois mike

Saturday, April 4, 2009



I have poked a sharp stick at some Advisor behavior in past blogs. But it may be time to show my more mellow side; after all, most Advisors are just good folks following the direction of their employers! They do not often intentionally destroy portfolio and kill retirement dreams, it is just an almost unavoidable result of how they make a living.

Fiduciary: What is a fiduciary and who is a fiduciary?

Definition from Investopedia is as follows: “The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit.”

Fiduciary 360 defines a fiduciary as “Someone who stands in a special relation of trust, confidence and/or legal responsibility”

Since fiduciary comes from the latin fiducia which means “trust”, one would think an Advisor would naturally be a fiduciary but, alas it appears they are not all up to the task. In fact for most, being a fiduciary would make life much more difficult. Simply put, if an Advisor puts the clients interest in front of their own interest they will find that their real employer is not very happy!

Compensation: Advisors, in general, need a firm where they can hang their cap, gather research, find admin support, and benefit from the marketing packages of large securities firms. The advisor works on an income split with the parent company for the most part. The quality of office, support, income split, and even job title is dependent on the Advisor making the firm happy by bringing in big revenue!.

Double Dilemma: Advisors face a double dilemma; doing what is best for the client will often mean doing what is NOT best for the company that employs the Advisor and it will also reduce the income the Advisor makes from both the investor and the company. So what is an Advisor to do?

The 10% Who Are Fiduciaries: Okay, I made up the number! I am optimistic that perhaps 10% have got it figured out! They actually just do not care all that much about titles, internal recognition, or the fast buck approach to wealth. Any Advisor can act as a fiduciary by just putting the customer first!

How do I know if I have a fiduciary:

I am blessed to have an Advisor Fiduciary who handles my security selection. G.G. and his team came from the pension and investment counseling side of the world where a fiduciary, discretionary approach is much more the norm. In short, he was trained as a fiduciary, hired his team as fiduciaries, and has enough clients to be able to dictate his approach to his bosses without repercussion.

The Fiduciary Difference: Here are some of the clues that an Advisor takes the fiduciary duty seriously!

When income trusts were all the rage and paying fantastic fees my Advisor watched his peers earn fat pay days selling every new issue they could get their hands on. His stature (think total revenue to the company) took a hit but GG felt over exposure to income trusts was a bad move in what was really a tax dependent strategy. We all know how that ended!
The next Fiduciary difference came with Index Linked Notes (PPN’s) that were sold at the top of the market and earned huge fees for Advisors. GG’s approach was that people too nervous to invest in equities should just not invest as much in equities! Wow, what a novel approach! Getting your own money back in 10 years with no inflation protection just did not seem to be worth a huge fee, never mind the “protection event” clauses that most Advisors forgot to read!

An ongoing sign that my Advisor acts as a fiduciary is the fact he has never sold me a fund with a back-end load ( DSC). The DSC hinders your ability to manage your investments on a going forward basis. Any penalty that restricts your ability to move in and out of investments will eventually cause you to face a choice between the right strategy and the cheapest strategy.

Why so few fiduciary Advisors: The security firms that employ Advisors pay big money to Advisors who can attract large amounts of money and keep it invested in expensive securities. They run the industry and that includes the Self Regulatory Organizations (SRO’s) that provide oversight to the industry. They have a lot of political clout and can ensure the Advisors who play ball will have an easy ride from the legal and regulatory side of the business.


The industry has created an environment where just about anything goes. The fox is not only in the hen house, they are running the joint.

1- Advisors are not likely, nor encouraged, to disclose the commission they receive from selling a security. They also will not disclose the various sales options available on the same product with investor costs directly linked to which option is chosen.

2- Advisors are not to provide alternative investment options and the comparative prices and fees on the comparative security. For example if you are sold a Canadian Equity Mutual Fund you are not to be told the relative price or performance of the equivalent Index Fund.

3- Ever notice that you never receive the cost of your investments each year on a statement? My apology to the 1% of you who do! Fees should be tax deductible on your non-registered accounts but it is not if you own mutual funds. Of course if you could deduct the fund fee you would actually know what you paid in fees and that is not the way to make big commissions going forward. Best to let dormant clients remain dormant.

4- Point of Sale disclosure: After significant lobbying, the industry had two small parts removed from the document: Fees earned by your Advisor and the benchmarks to measure performance. Sound like the fox just swallowed a couple of more hens? (P.O.S. Profits Over Service)

5- Ever buy something and not have the vendor disclose the GST ? Funny thing about investments in Mutual Funds; you never see any tax info that might provide a hint to the total fees being charged. Hmmmmmmm

Solution: Ask the tough questions! The best of breed Advisors will love the questions and the average Advisor will have a snit about how you can ask such harsh questions after all you have been through together! You might remind the Advisor that what you have been “through together” is about 30% of your total savings!!!

There are good Advisors out there but you need to ask the tough questions if you are going to find one!

Thankful for GG, but still a skeptic,