• What is Financial Literacy? Part 1 – 2010-03-11
• What is Financial Literacy? Part 2 – 2010-03-18
• What is Financial Literacy? Part 3 – 2010-03-25
• What is Financial Literacy? The Final Segment – 2010-04-01

I am very thankful for this opportunity to voice my thoughts on Financial Literacy, which is an issue I am very passionate about.  More importantly, I am thankful for the opportunity because it was the start of a great professional and personal relationship with Tom Drake.  He has been a tremendous support for all of my online endeavours.

The success of Retire Happy Blog

One year ago, I re-branded my blog from WealthWebGurus to Retire Happy Blog.  It was a smooth transition only because Tom has a skill set that I still don’t really get.  I’ve come a long way but I am not sure I will ever understand how Tom’s brain works.

The success of Retire Happy Blog has a lot to do with Tom Drake.  He does pretty much everything on the technical side so all I have to do is focus on what I like . . . writing.  I’ve said it many times but I will say it again – many thanks to Tom for making Retire Happy Blog as successful as it is.

Moving forward with Balance Junkie

As many of you know, this will be my last regular post on Canadian Finance Blog because Tom and I have entered into a partnership with Kim (Ms. 2 cents) at BalanceJunkie.com.  I will continue writing but my posts will appear at Balance Junkie where I will be sharing my “5 cents” every couple of Tuesdays starting today.

Financial Literacy is important.

My time at Canadian Finance Blog started with a post on Financial Literacy so it seems fitting that end with a comment on Financial Literacy as well.

Thanks to Tom, he has opened my eyes up to a new world of financial literacy on the web.  I am thankful to have met so many personal finance and investment bloggers that have lots of stories, insights and opinions to share with others.  The move to improving financial literacy in Canada needs the blogging community because they represent the perspectives and voice of real people.  Financial literacy is about experience just as it is about products.  It’s about values just as much as it’s about advice.  Financial literacy is about helping the end user more than about the profitability of big corporate product suppliers.

This won’t be my last post on Canadian Finance Blog but it will be the last regular post.  Thanks to all my readers here at Canadian Finance.  I look forward to hearing from you at Balance Junkie or Retire Happy Blog.

Financial Literacy on Canadian Finance Blog appeared first on Canadian Finance Blog.

• A strong belief in the organization,
• A strong value for social responsibility,
• and paying less tax.

Giving to a worthwhile cause is good for the soul, the community and the pocketbook.

Financially, there two times you can give to a charity.  You can give to a charity while you are living, or you can give through your Will after you pass away. When you have a desire to give to a charity in your Will, there are some important things to know.

Specifying gifts in your Will

There are many different ways to give money to charities through your estate:

1. By cash.  This is simple and straight forward.  You can specify a specific amount of money to go to a specific charity or a number of different charities through your Will.
2. By source.  For example, you could designate the money remaining in a bank account, or the net proceeds from the sale of your car.  This approach is also simple and clear.
3. By source with limits.  This is similar to designating a source of funds but also applying a limit.  For example, you could give the money remaining in your bank account, but not more than $10,000.
4. By life insurance.  Using life insurance policies to give to charity at death can be a great way to ‘supersize’ contributions and create a lasting legacy. For more information, check out my past post on Charitable Giving through Life Insurance.
5. Shares of public companies, mutual funds and segregated funds.   Giving shares of these types of investments has an additional tax benefit.  When you donate shares instead of cash, you will not pay capital gains tax and you will receive a charitable donation receipt for the full value of the investments.  This means less income tax for you and more money for the charity or charitable foundation!
6. An amount equal to the funds remaining in your RRSP or RRIF.  When you do this, you effectively give the amount of your RRSP or RRIF, and you get a charitable donation receipt that will offset the amount of income tax you must pay when the RRSP or RRIF is collapsed on your death.  This can be done through the will or with a direct beneficiary designation on the RRSP or RRIF.
7. A percentage of your estate.  Generally, this approach is NOT RECOMMENDED.  Whenever you give a gift of a percentage of your estate, the recipient is entitled to a full accounting of your estate from your executor.  You probably don’t want the board of directors, the administrators, and the office staff of the charity to have access to the full financial details of your estate.

Many people face financial challenges to dealing with day to day and month to month cashflow.  While they may want to give more to charity, the financial pressures of living sometimes prevent people from giving to charity.

Giving money to charities through your estate can be a great way to give back to society and to a community.  It’s also a contribution to your legacy.

Do you know of any great inspirational stories about people who gave significantly or uniquely through their will or estate?

Leaving money to a charity through your estate appeared first on Canadian Finance Blog.

The regulators who put suitability standards in place try to protect investors from ‘salespeople’ who are more concerned about selling investments than trying to match appropriate investments with investors.  Although the concept may appear to be relatively straight forward, the practice of determining suitability is not perfect.

Regulators set the rules

In Canada, the regulators set the rules around suitability and one of the common practices in the investment industry is something called the Know Your Client (KYC) rules.  Basically, all investment firms and professionals must complete a KYC form before they can make investment recommendations.

Know Your Client

Under the know your client rules there are a few key things investment professionals and companies must know before they can recommend investments

• Risk Tolerance.  Risk tolerance is simply how much risk the investor is willing to take.  The more conservative the investor, the more conservative the investments need to be.  Investors should not be investing in high risk investments unless they have some tolerance for risk.
• Time Horizon.  Basically, the longer your investment time horizon, the more risk you can accept in a portfolio.  The shorter your time horizon, the more conservative your investments should be.
• Investment Objectives.  What is your primary investment objective?  Is it to grow the portfolio, is it about safety and preserving capital or is it to try to get income from your investments.  Your investment objective will in part determine the types of investments you should own.  If you are a safe investor looking to preserve capital it may not be suitable or appropriate to own lots of high risk growth investments.
• Investment Knowledge.  How knowledgeable are you about investment concepts, information, strategies and ideas?  It’s probably inappropriate for investors with very little knowledge to invest in very complex investments like hedge funds and option strategies.
• Financial stability.  Theoretically, the more financially stable you are, the better you are to withstand risk in a portfolio.

The other document used to determine suitability of and investment portfolio is something familiar to most investors . . . The risk profile questionnaire.  With the risk profile questionnaire, investors are asked to answer 8 to 15 questions and the result matches them to a portfolio that is suitable for their needs.

Suitability is far from perfect

Although I understand the principle behind suitability, there is really are no universal standards of what suitability means.

Having been a financial advisor who has sold product in the past, I know from experience that all of the rules are subject to interpretation and the real problem is that different compliance people can interpret rules differently from office to office, company to company, province to province.  What I know for sure is a lot of money, time and resources are allocated to ensuring that suitability is enforced (which may be part of the reason mutual fund fees are so high).

The other problem is how to define some of these overgeneralized terms and standards.  For example, when someone uses the term conservative, what does conservative mean?  The definition of conservative for a 70 year old may be very different than a 30 year olds definition.  What about a 5 year time horizon?  That might be long term to some and short term for others?

With all the flaws of the system, the principle of suitability makes sense.  It’s all about making sure there is some common sense and prudence put in place in an industry where there are a few bad advisors and institutions that put their selfish interest over the clients.

All investors need to understand that investments should be suitable to their needs and while there are a few documents in the financial industry to determine suitability, investors need to use some common sense and personal judgment as a basic standard.

Are Your Investments Suitable? appeared first on Canadian Finance Blog.

The CPP program was reviewed in 2009 and it was determined at that time, CPP was well funded and on solid financial ground.  CPP will be there for Canadians.

Last week, OAS was the hot topic when Harper made some comments at the World Economic Forum in Davos, Switzerland about making some significant changes to those elements of the Canadian retirement system that are not properly funded. Now the big question is Do You Think Old Age Security needs change?

In doing some research on OAS, I found some interesting data that I thought would be worthwhile sharing:

• Canada’s first public pension plan had been introduced in 1927 with the passing of the Old Age Pensions Act. That legislation established a means-tested pension for men and women 70 years of age and over who had little or no income.
• The Old Age Security Act came into force in 1952, replacing legislation from 1927 requiring the federal government to share the cost of provincially-run, means-tested old age benefits.
• Back in 1952, OAS paid a $40 per month universal, flat-rate pension for people 70 and over, with 20 years residence in Canada immediately prior to the approval of an application as sufficient qualification. 308,825 people were participating in the program
• In 1965 the age of eligibility was moved from age 70 to age 65 over a 5 year period (to 1969).
• In 1967, the program was expanded with the Guaranteed Income Supplement (GIS).  The GIS program was and still is a tax-free, income-tested supplement to pensioners in receipt of the Old Age Security Pension, but with little or no other income.
• Indexation of benefits was introduced in 1972
• In the 1996 budget, a new Senior Benefit was introduced that would replace OAS, GIS and 2 tax credits for seniors. Although the government argued that 75% of seniors would have the same benefit or higher, the proposal never materialized.
• In 2000, benefits and obligations were extended to same sex common law partners as well

How much does OAS pay?

Currently (2012) Old Age Security pays a maximum of $540 per month at age 65.  You cannot collect OAS earlier than that.  If you don’t apply, you don’t automatically get it.  You must apply.

OAS is also income tested so Canadians need to be aware of the OAS clawback.

Before the government messes around with OAS and cuts the retirement income of Canadians, I think they need to look at their own lucrative MP Pensions which is costing taxpayers a lot of money.  Canadians, you need to voice your thoughts before any changes are made to Old Age Security.

The History of OAS appeared first on Canadian Finance Blog.

Accomplishing goals can be very rewarding so sometimes it’s great to set some little goals that create a positive feeling that you have achieved some milestones.  Achieving smaller success can be a great stepping-stone to bigger goals.

He’s a list of 10 goals that anyone should be able to accomplish

1. Make an extra mortgage payment this year.  There’s no secret to the math.  Making one extra mortgage payment in a year every year, can mean you will be mortgage free years sooner and save you thousands of dollars in interest.
2. Find a lower interest rate credit card.  So many people are keeping balances on high interest credit cards which is a sure fire way to pay too much interest.  If this is you, you will surely benefit from finding a lower interest credit card and it may be easier than you think.
3. Do you own tax return this year.  Many people need the help of a professional to complete their tax returns but if you attempt to do your own return first, you may become more knowledgeable and aware of strategies and ways to reduce your tax bill.
4. Review your will – Reviewing your will is not hard to do.  The hardest part might be finding a copy to review.  So many people have outdated wills with the wrong beneficiaries, executors that have deceased, and do not reflect their current situation.
5. Check the beneficiaries on your RRSP, RRIFs, Pensions, TFSAs.  Some plans require direct beneficiary designations and there can be benefits to having the proper beneficiaries to save money on taxes.
6. Review your life insurance coverage.  When reviewing your life insurance, there are a few questions to help you:  Do you need life insurance?  How much insurance do I have?  How much do I need?  Do I have the right type of policy?  Are my beneficiaries correct?
7. Do a home inventory.  In a material world, it’s easy to accumulate things and if you are anything like me, you accumulate way too much.  It’s good to just take stock from time to time by doing a home inventory.  Diarize some of the more expensive items in the home in case you need it for insurance purposes.  Take a video camera around the house as part of your home inventory strategy.  Taking stock can sometimes allow you to purge and get rid of unused and unwanted items by throwing them away or even selling them for money
8. Figure out your personal investment return on your portfolio.  I meet far too many people that have no idea what they own in their investment portfolios and even if they do, they have no idea what their personal investment return is.  If you don’t know how your portfolio is doing, it’s time to break the habit and engage.
9. Rebalance your portfolio.  The most common strategy to manage a portfolio is BUY AND HOLD.  As much as buy and hold has some merit, it ignores one of the key components to making money.  It ignores the sell side of the equation.  In my opinion the better strategy to manage a portfolio is to rebalance from time to time.  If you simply re-visit your portfolio, you can’t help but BUY LOW, SELL HIGH which is the best strategy to making money.
10. Complete your net worth statement.  Knowing your worth is so important to getting ahead financially because it’s one of the key ways to measure wealth.  How would you know how you are doing financially if you had no idea how much you are worth?  It’s not a hard process.  Take a piece of paper and draw a line down the middle.  One on side write down every thing you own (assets) and on the other side write down everything you owe (liabilities).  Take your assets and subtract your liabilities and you have your net worth.  If you want to download some examples and templates you can check out this article on net worth statements.

All of these ideas are things that can be accomplished fairly quickly.  This list is far from exhaustive so do you have any ideas or suggestions for financial goals that might be easy for people to accomplish?

Financial Goals That Are Easy To Accomplish appeared first on Canadian Finance Blog.

Pooled Registered Pension Plans (PRPP)

In January 2011, Finance Minister Jim Flaherty introduced the concept of a new PRPP as a means of trying to address the big retirement gap in Canada.

Later on November 17, 2011, the Harper government introduced the Pooled Registered Pension Plans Act(Proposed Act) legislation as the next step to the process of implement the federal portion of the PRPP.  The government describes the PRPP as a change to Canada’s pension landscape that will make saving for retirement easier for millions of Canadians.

Being a strong advocate of workplace savings programs and financial education in the workplace, I have followed this story closely and written some articles:

• The Key to Success of the new PRPP
• A year end PRPP update
• How the new PRPP should work?
• PRPPs are the future of pension reform
• Benefits of Pooled Registered Pension Plans

The next steps for the PRPP is the Federal Government needs to pass this Proposed Act and adopt regulations. At the same time, work on provincial legislation and the multilateral agreements will need to be undertaken.

Task force on Financial Literacy in Canada releases their findings report

In the 2009 budget, the federal Minister of Finance announced his intention to establish a national task force dedicated to the issue of financial literacy. The Task Force would provide advice and recommendations to the Minister of Finance on a national strategy to strengthen the financial literacy of Canadians. Appointed in June 2009, the Task Force on Financial Literacy is comprised of 13 members, drawn from the business and education sectors, community organizations and academia.

On February 9, 2011, Canada’s Task Force on Financial Literacy today made public its report to the federal Minister of Finance, recommending urgent action on a national strategy to strengthen Canadians’ financial literacy.  I am watching this story to see if this whole process makes an impact on the future financial literacy in Canada.

Vanguard comes to Canada

Back in June, US mutual fund giant Vanguard announced it’s intention to come to Canada with a series of Exchange Traded Funds (ETFs).  In December they actually launched 6 ETFs  with very low management fees.  The management fee for all six Vanguard ETFs averages 0.24 per cent and the Canadian Equity Fund is reported to be 0.09 per cent.

I’m especially interested to see if the Vanguard Canada is able to create more awareness about the high fees being charged by the mutual fund industry.  Canada has been reported as having some of the higher mutual fund fees around the world but despite that it remains the investment of choice for Canadians with $775 billion dollars of assets under management.  ETFs have significantly less assets with less than $40 billion in assets under management.

Vanguard is targeting their ETFs to investment dealers and fee based advisors because the do-it-yourself market is too small (only 5% of all investors in Canada).  Here’s a few articles I wrote on the topic:

• Will Vanguard start the mutual fund price war?
• Investors need to pay attention to their investment fees
• The Ongoing Mutual Fund Fee Debate
• Mutual Fund Fees do matter

Another year of Market Volatility

The last hot topic of 2011 was another tough year with more volatility.  The TSX finished the year in negative territory (-8.89%) despite some hopes for a Santa Claus rally.  The TSX hit a high of 14,329.50 and a low of 10,848.20 with 8 of 12 months with negative returns.  September was the worst month of the year where the TSX lost 8.66% in a single month.  October followed with the best month rebounding a 5.61% return.

In my line of work, I see a lot of investors who have accepted the volatility as normal and others who are just sick and tired of all the ups and downs and the market taking away any gains they make the previous weeks, months or years.

To help investors, here’s a few articles I wrote about dealing with market volatility:

• Three consequences of selling in a bear market
• Has the stock market changed your day to day life?
• Strategies to deal with market volatility
• The Five Realities of the Stock Market
• Market Volatility creates opportunity to rebalance

Are there any interesting stories you are watching for 2012?

Best wishes to everyone in 2012.

Four Interesting Stories From 2011 appeared first on Canadian Finance Blog.

As we near the end of the year, I thought it would be fitting to share some of my best and most popular articles of 2011.  I can’t believe I wrote about 200 articles this year so I thought it would be best to organize my top picks by category.

Three most popular posts of 2011

• How much will you get from Canada Pension Plan in Retirement?  By far, my most popular article in 2011 was this article on Canada Pension Plan.  There are 68 comments and this article gives you a really clear perspective on how much you can expect from CPP in retirement.
• New Proposed Changes for CPP  On May 25, 2009, Federal, provincial and territorial Ministers of Finance recommended changes to the Canada Pension Plan (CPP).  These proposed changes are set to be implemented for January 1, 2012.  This article goes through the four biggest changes that will affect Canadians.
• Everything you need to know about RRIFs  Most Canadians choose a Registered Retirement Income Fund (RRIF) as their primary retirement income option. This article shares with you some of the most important decisions you need to make with your RRIFs

Best three articles on investing

My three top picks for investment articles revolve around the choppy markets in 2011.

• 5 Realities of the Stock Market
• Strategies to deal with market volatility
• The Science of building a diversified investment plan

Top articles on retirement planning

For my top articles on retirement, I will revert back to the basics:

• 3 Basic steps to a retirement plan
• What rate of return should you use for your retirement plan?
• How much money will $100,000 pay you in retirement?
• Retirement planning with gross incomes can be misleading

Top articles on estate planning

Estate planning is a topic I have become more passionate about because of personal circumstances with my late mother and now with some health issues of my father-in-law.  Here’s some of the essential things you need to know about estate planning

• Estate planning starts by getting organized
• Should you write your own will?
• Three legal documents of an estate plan
• How often should you review your estate plan

Top articles on wealth and money

To finish my list of top posts, I offer you some of my picks on general wealth and money issues

• Developing financial routines for financial success
• How to become a millionaire by 35?
• Know your spending
• 5 Strategies to manage your debt levels

My Best of 2011 appeared first on Canadian Finance Blog.

Most recently, the government has released it’s framework for the Pooled Registered Pension Plan.  Ted Menzies, Minister of Finance, said “the PRPP will be aimed at the self employed and workers at small-and mid-sized firms, companies that often lack the wherewithal to administer a private sector plan.”

It seems the new framework for the PRPP is being highly criticized by many people in the financial industry:

• In my most recent appearance on Alberta Primetime’s Money Panel, we discussed the merits and shortfalls of the PRPPs.
• York University Professor says the PRPP is not a Pension Plan
• Labour Unions across Canada are not fans of the PRPP
• Personal Finance blogger Mike Holman is skeptical about PRPPs
• Media personality and blogger Preet Banerjee also has some reservations that they may not help the people who need it most
• Even I have expressed some concerns that the PRPP missed the point of saving

At the end of the day, despite the criticism, there are some really strong points about the PRPP that should not be forgotten.  It’s easy to criticize what others are doing but if the plan helps some people save for retirement then maybe it’s not such a bad thing.  Here’s a few of the good points I see coming out of the new PRPP:

The PRPP is targeting the right people

Over 60% of Canadians do not have a workplace pension plan.  This is not a good statistic because saving through work is one of the best ways to pay yourself first and develop the critical discipline of saving money for retirement.  I’ve always believed if we can get more people saving through work we would close the retirement gap more effectively.  People who retire with pensions tend to retire earlier and have better incomes in retirement than people who have no workplace savings programs.  Although the PRPP is targeting the right people, will these plans be mandatory?  I doesn’t look like it!  Will employers step up and match employee contributions?  I hope so but it looks like the only incentive is employer contributions will not attract payroll tax like CPP and EI deductions.

The PRPP will have low fees

There’s no question in my mind that low fees are better than high fees.  That being said whether you like it or not, some investors have to pay higher fees if they want advice, help, service or plans from financial advisors.

PRPPs might bring awareness to fees on the group retirement plans but I’m not convinced.  When I educate employees in my programs about fees, I think people get it but few people are really interested in becoming do-it yourself investors just to reduce fees.

People already have access and the ability to save in low cost fees for retirement through index products and exchange traded funds.  These products have merit but they tend to appeal to the do-it-yourself investor who has the time, passion, knowledge and ability to self-manage and do research.  Unfortunately most Canadians lack these qualities and will need help from the financial community.  It will be interesting to see if there is any education around these new PRPP plans.

The PRPP offers portability between jobs

One of the biggest problems with the current pension system is it is complicated given that every province has it’s own set of rules.  What we have is a mish mash of pension rules that has created a lot of confusion.

Since workers in small business tend to change jobs often, it’s important that their PRPP can follow them to their next job. It looks like it’s going to be easy to roll money from one PRPP to another.

I am still hoping that the PRPP legislation will have one set of rules instead of different rules for each province but if looks like there many be some differences provincially.

Benefits of the Pooled Registered Pension Plan (PRPP) appeared first on Canadian Finance Blog.

In my financial education programs, I meet a lot of people every year and I have come to believe that despite the increased amount and access to information, most people still need the help of a financial advisor.  Who needs a financial advisor?  I believe most people lack one or more of the qualities to be able to do it yourself:

1. They don’t have the time
2. They don’t have the knowledge
3. They don’t have the desire
4. They don’t have the confidence

Without these qualities then you may be the ideal candidate for working with a financial advisor.

What does a good financial advisor do?

Contrary to popular belief, I do not think a good financial advisor has superior investment skills or the ability to consistently outperform the market.  I think A good advisor has to care, communicate and deliver but most of all, a good advisor puts the client interests first (which is near impossible to do).  This is not easy to do because of the inherent conflict of interest that comes from the fact that most advisors are compensated from the sale of products like mutual funds, GICs, stocks, and insurance products.

Because of compensation, the focus of advice is usually centred around products.  For example many financial advisors, their primary focus is on investing and the management of a portfolio because that’s how they get paid.  Another example is estate planners often focus on insurance product solutions because that is ultimately how they get paid.

In my opinion, a good advisor goes beyond just the sale of products.  The best advisors I know focus on good financial and retirement planning and will deliver advice and solutions that are not just product based.

What are some signs of a bad financial advisor?

This is a great question but a tough one to answer because there are so many subjective and personal issues that can occur in a relationship between and advisor and the client.  Two people can have the same advisor.  One thinks that advisor is great while the other thinks they are lousy.

I think one of the key issues I see is the issue of good service and communication.  In most cases, people think their advisors are bad because they have lost faith in their advice or the service from their advisor.  A bad advisor is someone you no longer trust.

How can a financial advisor help those in need?

Unfortunately, too many people are financially illiterate or disinterested in their financial affairs.  Anyone who knows me, knows I have a very strong opinion on this.  I’ve always said that nobody cares about your money more than you care about your own money.  Nobody cares about your finances more than you care.  The best financial advisors might care but they still can’t care more than you.

I’m in no way anti-advisor.  In fact, I am the opposite.  As I said earlier, I think many people need and should have advisors but the problem is too many people think a financial advisor is going to solve all their problems or put them on that magic path to financial freedom.

Financial advisors are there to help you but they can’t do everything for you.  I would hope that a good financial advisor helps raise people’s levels of financial literacy instead of just saying “Don’t worry, I‘ll take care of everything for you.” While this may sound like what people want, it’s very dangerous to relinquish too much management to others.  Ironically, I think the best advisors move clients from being totally dependent to being independent and accountable for their own financial affairs.

The bottom line is you have to care to get ahead.  If you don’t care, then who will?  Read more, take courses, look up some basic stuff on the internet.  The information is out there, you just have to find some time and desire to get it!

How much will you pay for a good advisor?

As I mentioned earlier, most advisors are paid commissions through the sale of a product.  Although fee and compensation disclosure is required, many clients have no idea how much they are paying their advisors.  In fact, many people think they are not paying anything in fees because the fees are bundled and indirectly paid.

The message I think is important is that people need to ask the questions about compensation:

• How do you (the advisor) get paid?
• How much will you (the advisor) earn (a dollar amount)?
• How much am I paying in fees?

Clients have the right to ask and know the answers to these questions.  Remember it’s your money.  You have to care enough to ask.

Who Needs a Financial Advisor? appeared first on Canadian Finance Blog.

I’ve heard a lot of complaints of lousy performance and unfortunately, for their financial advisors, they become the easy scapegoat.

Is your advisor to blame for bad performance?

In many cases, people hire financial advisors to help them manage their portfolios and make good investment decisions because they feel like a professional should and can do better than they would on their own.

Ironically, however, investment returns is one of the things that financial advisors cannot control or predict because the markets by nature are unpredictable.  This is one of the great disconnects of the financial industry.  Investor expectations cannot be met if they expect their advisors can select investments that do not lose money or beat the markets consistently.  Some investors think advisors are better equipped to understand the markets, predict the markets or even to have insider information.  This is a fallacy in thinking!

So the irony is that firing and hiring an advisor on performance and investment return may be the worst reason to do so.  Moving to a new advisor that promises better returns is destined for failure because most advisors are in the same boat.

Welcome to the world of relative benchmarking

When you experience bad performance, is it because your advisor picked bad investments?  Or is it really because the environment is not conducive to strong performance?  For example, when the stock market goes through a broad correction, it happens because most of the individual stock prices have dropped.  You could be the best stock picker around but in a bear market, you are probably going to still lose money.  If you think about it, most advisors are highly subject to the market performance which they can’t control or predict.

As a result, most of the financial industry thinks in relative terms.  How well you do is dependent on how well everyone else does or how with environment allows you to do.

Relative performance is simply looking at the performance of your investments or your portfolio and comparing it to the performance of other benchmarks. Two of the most common relative benchmarks are the index comparisons and peer group (average) comparisons.

So how well have you done compared to others?

I met Steve two weeks ago at one of my workshops and he is frustrated because he wants to retire but over the past 10 years, he feels like his portfolio has gone nowhere.  The first question I asked Steve was “What is your personal rate of return?”  Steve did not know.

How can you know if you are doing well or poorly if you have no idea what your personal rate of return is?  Ask your advisor to give you your personal rate of return.  That does not mean a list of the investments you own with the performance of those investments over the past 1, 2, 3 , 5 or 10 year returns.  Those are called investment returns (or something I call newspaper returns) which can be very different than the investor returns.

Once you know how you are doing, then you can compare those returns to an appropriate benchmark.  This is where it gets tricky.  I’ve always said I can make any investment looks good with real statistics, it just depends on what statistics I show you.  Let’s use a real example to help you understand what you need to know to figure this all out.

Let’s say Steve has a balanced portfolio with about 60% equities and 40% stocks and over the past 10 years, he has only made a 2.5% compound return.  By Steve’s standards, that is really disappointing.  Is Steve’s disappointment justified?

Well, if you compare that return to the average Canadian Balanced Fund with a 60/40 mix, the average 10 year return to the end of September 2011 was about 4%.  If you compare Steve’s return to the 10 year return to the Morningstar Canadian Balanced 60/40 index, the index made a 7.7% compound average annual return.

In this example, I think Steve has a valid case to be disappointed but he has to also make sure that he knows the numbers.  I’ve seen people fire and hire advisors on the basis of emotion and judgement only find that the grass may not be greener on the other side.

Before you are going to fire you advisor, make sure you get some data and make sure it’s not just about performance.  Make sure you are looking at other things like service, creating financial plans, communication, advice beyond just the portfolio.   It’s OK to get a second opinion too but it’s hard for advisors other than the current advisor to determine your personal rate of return.  Make sure you know why you are firing an advisor so when you interview new ones, you know what questions you should be asking.

Is a poor return a good reason to change your financial advisor? appeared first on Canadian Finance Blog.