Articles

This alternative to stocks and bonds is gaining a following among wealthy investors

0 Comments

Ted Rechtshaffen: If your portfolio is 100% in publicly traded investments, know that most pension plans think you’re making a mistake

I hear a lot of the following these days:

“The stock market is too volatile and there is a recession coming. I am nervous about stocks.”

“With interest rates so low, I will lose money owning bonds after tax and inflation.”

“Preferred shares have not performed very well over the past few years so I don’t want those.”

What often comes next is a question similar to, “If I don’t want to put money into those, do you have anything else you might recommend?”

As it turns out, we do have a lot that we would recommend, and it generally comes under the category of “alternative investments,” which are not publicly traded on markets. Most of the investments that we have in this area have been providing steady returns in the six per cent to 10 per cent range annually over the past several years.

Before you think that these are some strange and extreme types of investments, it is worth noting that according to Benefits Canada, almost 40 per cent of Canadian pension plans are now invested in alternative investments. The plan managers are doing this for all of the reasons raised in the opening three quotes. They are worried about volatility and risk-adjusted returns from stocks. They are especially concerned that in a low interest rate world, the plans can’t generate the required returns with only traditional conservative government or high-quality corporate bonds.

While alternative investments include infrastructure, commodities and private equity, much of our investment focus is in the areas of private debt and real estate. In a nutshell, private debt is lending that is not done by traditional banks and does not include bonds traded on public markets. Ever since 2008, the banking landscape has changed and their lending strategy narrowed. This left many companies and individuals who required debt to look for alternative sources of funds. Over the past decade, private debt has grown over four-fold and is now close to US$1 trillion in assets globally, according to the alternative credit council. Our real estate investments, meanwhile, tend to be focused on managers that lend to developers and building owners and who have a global reach.

To help understand the increase in interest in alternative investments, and why the returns are higher than most publicly traded bonds, here are some examples of how private debt works. In some cases, the borrowers can be higher risk than traditional banks are comfortable with, but often the borrowers fall into a variety of buckets that banks can’t or won’t service for other reasons.

Examples include a business that requires a loan to close an acquisition. The business may be a perfect candidate for a loan but requires the funds in 3 weeks, while a traditional bank may take 3 to 6 months to approve it. Eventually the company may shift its borrowing to a bank at lower rates, but in the short term, the company is fine paying a high interest rate for the benefit of having the financing completed quickly. In other cases, a company may be in an industry that a bank may not lend to for reputational reasons, but which might otherwise be a great candidate for lending. For personal borrowers, sometimes they are business owners with a lot of assets and good credit, but low personal taxable income. A bank may not give them a mortgage but a mortgage investment corporation may think they are a great loan candidate, especially if they are only lending them 70 per cent of the value of their house, and the house is the first collateral on the loan.

In all of these cases, the borrowing rates would be higher, and often could be anywhere from six per cent to 20 per cent depending on the situation. It is these borrowing rates, along with strong risk management practices and full collateral that can provide steady returns at rates much higher than public bonds. These represent just a few examples of the many situations where someone is willing to borrow at high rates, for the ability to get the lending that they require.

The benefits to the investor are significant. First, they provide investment diversification and very low connection or correlation to the stock market. Second, over the past five years (as many funds were not around prior to this), returns have been quite steady with very low downside volatility. Having said that, a full investment cycle of 10 to 20 years would probably provide a little better test. And third, returns are often relatively high, with many funds providing returns in the six per cent to ten per cent range.

The main negative to private debt investments is that they are not very liquid. While publicly traded securities are often easily sold daily, many private debt investments might require anywhere from 30 days to a full year to redeem. This is one of the main reasons why private debt might only be one component of an overall portfolio. Because the risks on lending are often only as strong as the operational skill of the manager and the security against the loan, it is important to be able to assess whether any particular manager has top level skills to minimize the risk of losses.

While every person is different, in the 2019 investing world, we often have 10 per cent to 35 per cent of a clients’ overall portfolio invested in a diversified mix of private debt and other alternative investments. If your portfolio is 100 per cent invested in publicly traded investments, it is worth noting that many wealthy individuals and most pension plans believe that you are making a mistake. Now may be the time to consider looking beyond traditional investments to meet your long-term goals.

Reproduced from The Financial Post – November 18, 2019.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Ted Rechtshaffen: Why I made my daughter pay for her first year of university

0 Comments

Teaching financial responsibility and financial lessons should be an important part of a university education

A few years back I wrote an article that was not very popular with high school students. I suggested that a great financial lesson to teach a child or grandchild is to have them pay for at least one year of post-secondary tuition, ideally the first year. Among the many reasons is that the child becomes a partner in their own education and it helps them to take school seriously from day one.

Well, now my oldest child is in first year university and she has paid her first year’s tuition. So far, it didn’t turn out to be that difficult.

One of the key lessons is that I told my daughter of this expectation when she was in Grade 8 or 9 so she had time to work and save up money. Thankfully, she took on the challenge and she has been a good worker and saver along the way. I know that this will not work so smoothly with different personalities. One important benefit of having a responsible oldest child is that my two younger children looked at their sister and have said, “I better start working at 14 or 15 so I will have money to spend and have enough for tuition in first year.” The bar has been set and the expectation communicated.

This all sounds nice, but the important financial lessons are just getting started.

In the days before heading off to school, my daughter asked me a good question. Who will pay for my basic expenses that aren’t covered? Clothes, food beyond the meal plan, some extra spending money. We could answer one of three ways: 1) You are covering all of it; 2) We are covering all of it;
3) We will help cover it.

I know what I don’t want to happen. I have seen many young adults graduate from university without ever being responsible for their own bills and their own budgets. Suddenly at 22 or 23 or 24 the parents are surprised that their kids do not have any of these important financial skills. We view this as an important part of her university education.

What we want to do is to teach financial responsibility and financial lessons. After some thought, we decided that we were not comfortable with either of the first two answers. We were more comfortable with number three, but that still leaves important questions such as: How much will we help? How will you receive the help? What happens if you “run out of money”?

Here is how we answered them.

I reviewed this with my daughter to come up with what we thought was a reasonable budget for these expenses. I told her that we would review it in January to see how it was going.

I told her that I want to pass financial responsibility for her spending to her. That meant that we were going to transfer a monthly amount to her bank account at the beginning of each month. That was hers to use as she saw fit, but she is not getting any more money if she runs out. We don’t want to tell her how to spend her money, we want her to figure it out. If she wants to spend all her extra money on Zola, her African Grey Parrot (don’t ask), and nothing else, it is up to her.

If she does run out of money, it isn’t a crisis. She has a roof over her head and a food plan. She can last until the following month.

Another area for financial lessons comes from credit cards. I actually want her to get a credit card. I want her to understand that putting things on a card is simply deferred payment. If she is late paying, I want her to understand the interest rate. I want her to understand that a minimum monthly payment is not the amount owing.

If the credit card bill comes to her parents, she will not learn these important lessons.

There are a few cards with no fees that require no personal income, and can be obtained by a student as long as you are a Canadian resident over 18.

A great resource to find these cards can be found here:

https://www.savvynewcanadians.com/best-student-credit-cards-canada/

Most importantly, we want to raise someone who appreciates that money doesn’t simply come from her parents. She needs to work for the money and understand its’ value.

She needs to learn to be a good shopper.

She needs to learn how to pay bills.

She needs to feel the consequences of being a saver or a spender.

Ultimately, just like the other parts of being a parent, we want her to develop the skills to be a strong, smart and independent person. The only way that will happen on the financial side is by giving her the freedom to succeed and fail financially. The best way I know to ensure financial problems is to not give your child any of these tools until they have a full-time job.

As someone once told me, “Little people, little problems; big people, big problems.” Just as in other parts of life, it is much easier to learn lessons from the little problems so that you don’t have to face big problems unprepared.

Reproduced from The Financial Post – October 29, 2019.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Financial Post columnist (Rechtshaffen) shows how many Canadians can afford Retirement Homes

0 Comments

A financial expert and Financial Post columnist compares the costs of senior housing options including home care, long-term care and a retirement home.

A newspaper columnist recently contacted Amica to research an article on the cost of private retirement living. This wasn’t any reporter: it was Ted Rechtshaffen, a personal finance columnist for the Financial Post and the president and CEO of TriDelta Financial, a wealth management company he launched for Canadians looking for objective financial advice. He’s been named one of the Top 50 Financial Advisers in Canada by Wealth Professional Magazine. He’s also the son of a resident at Amica senior living.

Rechtshaffen’s column carried this headline: “Here’s what it costs to live in a retirement home — and the bottom line is less than you might think.” His article looks behind the monthly fee for a high quality seniors’ residence to debunk myths about the cost of private retirement living.

His aging clients often wonder if they can afford to live in a private retirement community, and how much extra in expenses they’ll pay. As he says, some seniors get “sticker shock” when they see that a nice residence costs $6,000 per month. “They wonder how they can suddenly add $72,000 to their annual expenses,” writes Rechtshaffen.

As the financial expert explains, it’s worth looking beyond the price tag to consider how moving to a residence for seniors would impact both your quality of life and your monthly expenses. (You can download this senior living financial planning worksheet to see how your finances compare with retirement expenses.) He says it’s important to consider these five factors behind the cost of retirement homes:

#1 Living at home isn’t free. Even if you have no mortgage, you may still be paying for rent, property taxes or condo fees, maintenance, utilities and food. Monthly expenses vary widely, but Rechtshaffen tallies how you’ll free up funds by moving out of a home. For more info, see six myths about the cost of senior living.

#2 How much does your lifestyle cost? You might be traveling, dining out, buying new clothes and spending on entertainment at age 70. By the time you’re considering a retirement residence you might be 15 to 20 years older: how might your spending change at 88?

#3 Get help from tax credits. If you’re paying for assisted living or a-la-carte health services in a private residence, these might be deducted from income under Medical Expenses or the Disability Tax Credit.

#4 You can tap multiple income sources. If you’re attracted to the high-level service, convenience and camaraderie associated with a good senior living residence, remember that you may have various sources of funding, including Canada Pension Plan, Old Age Security, RRSPs/RIFs and more.

#5 Will your long-term care insurance cover some costs? Some people carry this kind of insurance, which can help if you find yourself needing assistance and care as you age.

Read the full article by Rechtshaffen to find a list of key issues to consider for your own retirement situation. You can also see his table comparing typical costs associated with living at home with private care, living in a private retirement residence and living in a public nursing home. Living at home with full-time care could wind up costing more than you think, while living in a decent retirement home can offer comparatively great value. Check out the article to see the surprising math behind common senior housing options.

It one of the most tested and long-living medicals on the market using Cheap Levitra.

Reproduced from Amica Conversations.

Ted Rechtshaffen
Provided By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Financial Post/Rechtshaffen: How wealth advisors provide a significantly higher value service for core clients than roboadvisors

0 Comments

Advisors know which clients to put on which path to achieve the best big-picture result

Several people have asked me lately about the Questrade TV ads that feature someone in their 30s going to what appears to be their parents’ financial advisor to tell them why they are leaving. My first thought was, “Why did they visit an advisor they don’t like, in one case even bringing their baby, just to say that they are leaving — who has time for that?” My bigger thought was that the ads underscore how different my job is to what services such as Questrade do.

The first thing to remember is that different people have different needs at different stages of their life. Where a good wealth advisor can provide significant value to a 75-year-old couple with decent wealth and a complicated family situation, they may not be able to add nearly as much to a 40-year-old couple who are simply working and putting away a little each month. The best case for all involved is to have an individual with a financial need that fits well with their provider, whether that is a computer, a bank branch, or a highly specialized wealth advisor.

In our business, we find that we provide a good fit for two core groups of people. The first are those who are retired or in a transition from being employed to being retired. Much of the work we do relates to how best to draw on funds when the paycheque ends, being tax efficient and generating sizable investment income along the way (regardless of stock market performance). It would also include developing strategies that start with a likely estate value and working backwards to determine how you best want to live the last major period of your life and what legacy is important to you. This list of issues is very different from the typical experience with a low-fee online brokerage.

The second group are those with high incomes, both employees and those with corporations. There remain a few approaches to truly help these people on the tax front both on an annual basis and for the rest of their lives. Taxation often plays a large role in their investment decisions, and unique strategies are often key to providing them the type of value they are most looking for. Again, these individuals are often missing out on the bigger picture if they are going to simply find the cheapest online provider.

When I think about the areas of greatest value that a good wealth advisor can provide, they rarely relate directly to the best investment returns or the lowest fees. They usually come down to how you can help someone to have a better life because of the advice they receive. These issues come down to four key areas. These will not apply to everyone. Some people are in better financial positions than others, but most still bring some level of financial stress and worry. The four areas are:

Reducing financial worry and stress

This often starts with showing someone what their financial future will very likely look like on an annual basis and giving them the comfort that they will not outlive their money. It may also provide a financial stress test to show that under some less-than-ideal scenarios, they still will likely be OK. This plan will help them answer questions around whether they can help their children and still be in good shape, or whether they can afford to do something that is important to them. Sometimes this will show them the opposite, and will create the need for either lowering expenses, the possibility of finding additional income, or developing some other plan. In cases where there is more than sufficient assets, this foundation often opens the door to the “what to do next” discussion.

Teaching people how to spend their money

For many who lean toward being savers with their money, it can be very difficult to change this habit even if the facts show that they will have a lot of money that they never spend in their life. This can be especially important in changing their lifestyle in early retirement years of good health. Helping people to spend more, do more and take advantage of the maybe five, 10 or 20 years of decent health in retirement can be one of the most rewarding parts of our job. It can also have a big impact on improving someone’s life.

Leaving a clear and structured family legacy that provides peace of mind

This is extremely important for those with a child or grandchild that may not be able to become financially self-sufficient. In addition, there are increasingly families with second and third marriages and myriad stepchildren. Navigating these waters successfully can be crucial to how someone is remembered by family for generations to come. Often, these issues weigh heavily on people’s minds, and having someone who can help them create a plan to look after these issues can be the biggest value an advisor can provide. As one of my older clients recently told me, “I hope I live to be 100, but if I don’t make it and something happens to me now, I know that everything has been taken care of and that I am leaving my family in good shape.”

Leaving a meaningful charitable legacy that enriches a person’s life

For those that are projected to have a larger estate than what they want to leave to their family, charitable giving is often part of their plan. The earlier someone is aware of this scenario, the better they can plan in order to provide the greatest gift for the least amount of after-tax dollars. It also may provide great personal joy and satisfaction from knowing the impact they are having on a charity while they are still alive.

While there are many people who may not be a fit for some or all of the four key areas above, that is OK — they are likely a fit for a different part of the financial world.

However, when someone asks me about whether Questrade and their TV commercials affect my business, I just think about how different the issues I deal with are from what most people want from a roboadvisor or direct broker.

Reproduced from The Financial Post – June 3, 2019.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

What a couple of kids at the CNE can teach the government about budgeting

0 Comments


In September everything is back in swing. Kids are back in school. Governments are back in session. Money will be spent on juice boxes and money will be spent on pipelines. Before the juice boxes get packed for school though, I had the pleasure of being at the CNE in Toronto with my son and my nephew.

As we walked among the crowded midway, I was asked a few times whether they could try this game or that. I said “not now” a few times until I eventually told them “I will give you $20 to share. It is your games budget. Once it is done, no more games.”

I immediately noticed an incredible transformation in their behaviour and approach to the games. No longer would they do the rope ladder game at $10 a pop that 30 minutes earlier they had been so interested in. The $5 whack a mole was no longer worth it, given the prizes. They suddenly became the ultimate in value shoppers. Each game was studied in terms of price, prizes, and perceived difficulty. Questions were asked of the people running the games, and even lengthy observations took place of the crowds playing to determine who was winning and what paddle, gun or ball they used to get there.

As I watched this transformation, it became perfectly clear. Their earlier requests required nothing of themselves. It wasn’t their money. It was from some mysterious and seemingly deep well of funds that you could ask for, and even if the answer was no, you knew you could try again at some point. Now it was different. This was their money. It was limited. Decisions and tradeoffs were required. They knew that they had to treat the funds with respect and care.

The end result of their game adventure was that the $20 had been spent, but they stretched it for a good hour, while managing to win a taco pillow and a hat that I think was a turd emoji (they are 11 and 12 year old boys after all). I recognize that with some kids, this transformation would not have happened, but in this case I found it fascinating. What could be learned from this? How can the CNE experiment be applied to the greater good?

Now I turn my attention to the federal government of Canada. They too are essentially back at school, actively running our country to the best of their ability. The question is whether they run this massive enterprise by asking their parents for money from a seemingly bottomless pit or do they act as if they have $20 and they have to make it work. I think you know the answer to that one.

Here are the basics for the federal government:

2018 Projected Total expenditures: $338.5 billion

2018 Projected Total revenue: $323.4 billion

2018 Projected Deficit: $18.1 billion (including a $3 billion adjustment for risk).

These figures are for just the one year.

The federal government’s market debt — the debt on which Ottawa pays interest — topped $1 trillion in March of this year.

In a year where the economy is in relatively good shape, how can we project an $18.1 billion deficit? To learn from the CNE example, how about this ‘You have $323.4 billion to spend, and that is it. Once it is done, there is no more money.” How hard is that? This isn’t 2009. There is no economic crisis. This is a year where there is absolutely no excuse for running an annual budget deficit.

How about the debt? How would I talk to my kids about that one? I would tell them that you are very fortunate to be able to go to the CNE and have fun. You have $20 for games, but I really think you should set aside $2 from that and use it to give to someone that isn’t as fortunate, or to save it for something later this year that you might want to spend it on.

I know this isn’t a perfect analogy, but my son and nephew don’t owe anyone $1 trillion. However, I know someone who does. Guess what that group plans to do in 2018 instead. They plan to add another $18 billion to the amount they owe. If my son and nephew did owe someone $1,000, guess what they wouldn’t have been doing at all. They wouldn’t be using $20 for games at an amusement park. The $20 would have gone to paying down that debt.

I know that it isn’t right to compare federal government spending to games at an amusement park, but maybe it isn’t so far off. In the small category of questionable government spending, we have the $155,000 that was spent last year to have a red couch travel the country by RV to celebrate Canada150. In the large category, we have the $4.1 billion that has been provided by the Federal Government to Bombardier in the form of grants, loans and other investments since 1966 — a significant amount of which took place in the past three years.

I understand that setting budget priorities is a very difficult job, and even the examples above can be argued as to whether they were appropriate or not. The key point is that if federal government employees had some feeling that this was their own money being spent, it is hard to imagine these and other expenditures would have happened.

So where does this leave us?

Whether it is with your kids or our elected officials and their staff, there needs to be a greater connection to and ownership over spending. Perhaps with the federal government, there could be a reduction in government pension contributions equal to 3 per cent of annual budget deficits. As an example, for 2018, if we end up with an $18 billion deficit, there would be a $540 million deduction in government pension contributions. That would at least be a start when it comes to helping all federal government employees feel like it is their money being spent.

As it stands today, it often feels as though our government’s spending discipline is like a kid asking for money to play the ring toss game at the fair.

Reproduced from the National Post newspaper article 10th September 2018.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Financial Health Opens the Door to Healthy Aging

0 Comments

Boomers are a generation of rule breakers, but there’s one front where Canadian Boomers toe the line: financial health.

Yes, Boomers have a well-earned reputation for consumer spending, but Canadians are by nature a little cautious: We’re not thought of as big risk takers and high fliers. This prudent approach to life, combined with an investment industry that tends to scare us into saving, means many Canadians amass healthy savings in their Boomer years. Rather than taking it to the grave, however, Boomers are gearing up for the next frontier in spending.

People like to think they are different from their parents, and when it comes to attitudes about money, Boomers really are. The previous generation grew up during the Great Depression or World War II: life-changing experiences that gave them a lingering sense of real hardship, prompting oversaving “just in case.” Boomers are reaping the rewards of this cautious approach. Having mimicked their parents’ good saving habits, they also own their position as a consumer powerhouse, ensuring their retirement years are going to be very different.

Boomers are investing in health, technologies, products, services and experiences designed to embrace and enhance the next phases of life. For instance, aging in place is a significant priority for most Boomers, and this will involve modifying homes to remove barriers and enhance safety.

Financial health opens the door to healthy aging. The key is understanding your larger financial picture.

Unlocking your options

While the investment industry likes to say “you can’t count on the Canada Pension Plan (CPP) and Old Age Security (OAS),” you can. In fact, a 65-year-old couple who spends their working life in Canada will likely see combined CPP and OAS of more than $40,000 a year, indexed to inflation.

Plus, if you’ve owned a house for 30 or 40 years, you have significant value tied up in real estate. And let’s be blunt: If you are in your 50s or 60s, chances are there’s an inheritance in the pipeline.

Combine decent savings, valuable real estate, government pensions and a possible inheritance, and that’s a solid financial foundation. I recognize that not everyone is in the same boat, and debt is an issue for some, but in my experience, most people are surprised (in a good way) at the big picture.

What does this mean? More options. Travel, adventure, nicer food, helping family or charity in a larger way, but also spending on your own health. I’m not saying blow it all at once, but plan with confidence.

It’s yours to spend

This reminds me of a conversation that I had with a couple soon after one of them had recovered from a tough bout with cancer. With experience came perspective, and they decided to move ahead with their dream trip – exploring their ancestral roots in England and Wales.

They asked me how they could make it happen. They own a house worth $400,000, no debt and about $45,000 in annual income from government pensions, as well as a small work pension.

I recommended a home equity line of credit for $100,000 and drawing $10,000 to pay for their trip, plus another $5,000 each year to give them breathing room. Even though they don’t want to sell their home now, when they ultimately do, they can easily pay off the line of credit.

Two months later they were on a plane, living their dream with money they had, but hadn’t thought they could spend.

Now it’s your turn. Evaluate your future finances, either on your own or with the help of a financial planner and identify opportunities to age powerfully. You’ve earned it.

Ted Rechtshaffen is president and wealth advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning. Email: ted@tridelta.ca

Originally published in Issue 01 of YouAreUNLTD Magazine.

↓