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

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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

The Financial Media Can Be Harmful to Your Wealth

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“Success in investing doesn’t correlate with I.Q…. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

– Warren Buffet

As Warren Buffet and countless other investment gurus have observed, one of the most important factors for being a successful investor is the ability to control your emotions.  While there are numerous analytical tools that can be used to assess the quality, value, cash flow and potential future returns of an investment, they are often trumped in decision making by an investor’s emotions, particularly greed and fear.

Fear of loss is by far the more powerful of the two emotions.  In fact, behavioural economists have found in multiple studies that investors view the pain associated with losses as twice as emotionally powerful as the joy experienced from gains.  When equity markets drop, investors become more and more risk averse as a result.  The aversion is heightened if the drops are meaningful (5%+) and if they happen over a short time period.

The media, while an excellent source for timely details on the economy and company specific information, is also known to sensationalize stories that play on an investor’s emotions.  By dramatizing a story, the news source can attain a much larger audience, meaning more clicks, views and interest.  Unfortunately, these stirring stories can lead investors to become more emotional and to make bad investment decisions.

During rising markets, stories are often tilted positively to build on an investor’s greed and desire for quick wealth.  During down or volatile markets, stories tend to focus on risks and negative factors that play upon investor’s fears.  These fears often can lead investors to react by indiscriminately selling their portfolio holdings, regardless of that investor’s goals, needs or even whether the investment is of good quality, offers attractive value or needed income.  This indiscriminate selling can result in lower long-term returns and the risk that the investors do not reach their retirement goals.

One recent example was an article on Bloomberg’s website on March 8, 2018 titled “JP Morgan Co-President Sees Possible 40% Correction in Equity Markets”.   While the title was factual, it only told part of the story and in this case, the part it did not tell was far more important.

Daniel Pinto, the co-president of JPMorgan stated that within the next 2-3 years,  there is likely to be a deep correction in US equity markets of 20-40%, so the headline is factual, but it is nuanced to indicate that the correction is imminent or at least likely to occur in the near-term, not in 2-3 years AND the headline uses the most extreme scenario of a 40% correction vs. the range of 20%-40%.  The other element the headline does not include is Pinto’s short-term views, as JPMorgan has generally been positive on the short to medium term prospects for equity markets, i.e. JPMorgan anticipates that the market will rise further prior to a correction.  For example, if Pinto sees the market going up 20% in the next two years prior to a correction and the market then drops 20%, the investor’s return is closer to 0% (including dividends earned).  A near zero percent return is likely insufficient to meet most investors’ near-term goals, but that is a lot less scary than losing perhaps 40% of their current wealth.

While the headline could incite fear in investors, a more thorough reading of the facts presented in the article should instead yield some caution and reflection.  The article highlights that we are in the latter stages of a bull market and due to the low volatility and strong performance of the equity market in late 2016 – early 2018, many investors’ expectations have become too high.  During this later stage of a rally, investors should take a breath and reflect to see if their portfolios are in line with their target asset allocations and risk tolerance.  It is also a good time for investors to meet with a financial professional to review their goals, cash flow needs, taxes, risk tolerance, time horizon and unique circumstances to create a customized and detailed financial plan and investment policy statement.  Investors with formal financial plans and investment policy statements are more likely to stick to those plans and be less swayed by emotions.

Reading a full financial article, not just the headlines, is a good way to uncover useful information for investing.  Coupled with a comprehensive financial plan, thoughtfully reading full articles (not just the headlines), is a proven way to control your emotions and to protect your wealth.

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225

Updated Retirement Income Guide

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When you retire, not only does your daily routine change, but you also stop receiving a pay cheque. With the traditional pension becoming less of a reality for many Canadians, building steady retirement income through your investments, asset base and government programs is a key part of any financial plan.

In our new updated 2015/16 guide, you will learn about some of the best ways to build your own retirement “paycheque” using the resources you already have.


Common questions about different retirement income streams will also be answered, and tax minimizing tips will be provided along the way.

We provide you with some of our best insight on when and how much to draw from RRSPs, RRIFs, TFSAs, investment options, how to access government pensions and where to find other sources of cash flow.

We trust that our new updated guide will be helpful to you. If you have any questions on the ideas and strategies presented or to find out more about our income solutions, please contact us.

To request your free copy of our guide simply click here.

What are alternatives and do they have a place in your portfolio?

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Alternative investments are those other than traditional investments such as stocks, bonds or cash. Some of the more common alternative investments strategies include:

  • REIT’s (real estate investment trusts):
    A real estate investment trust (REIT) is a real estate company that offers common shares to the public. Rather than investing directly in a single property, REIT’s typically hold dozens of commercial properties, including office buildings or exposure to real estate sectors such as seniors homes for example. REIT’s offer tax benefits, a portion of the distribution from Canadian REITs is a return of capital, which is not taxed.
  • Hedge Funds:
    A hedge fund has some similarities to a mutual fund, but they are typically structured differently and have access to a broad range of investment strategies. They are open to a limited range of investors and permitted by regulators to undertake a wider range of investment and trading activities than other investment funds.

    The term “hedge fund” has come to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other “hedging” methods to increase rather than reduce risk, with the expectation of increasing returns.

  • Private equity:
    Private equity refers to an asset class consisting of equity and/or debt securities in companies that are not publicly traded on a stock exchange. The fundamental reason for investing in private equity is to improve the risk and reward characteristics of an investment portfolio. Investing in private equity offers the investor the opportunity to generate higher absolute returns whilst improving portfolio diversification.
  • Venture capital:
    Venture capital is money provided to seed, early-stage, emerging and emerging growth companies. The venture capital funds invest in companies in exchange for equity ownership.
  • Wine:
    The wine industry’s growth has been remarkable. In Canada you can buy high quality bottles of wine and store them with the intention to sell later. This takes a lot of money, space and careful timing. An alternative is to buy a wine investment fund. Toronto-based Accilent Capital Management runs one or you can buy stocks in one of Canada’s many wine companies.
  • Art and antiques:
    Most of us have dabbled in this when buying décor and furniture for our homes, but few of us have made money. To successfully invest in antiques and art, you typically should have an interest in them or better still consult and /or partner with experts.

This largely unknown sector of alternative investments is growing rapidly for a variety of reasons, but primarily the ability offered to access good investments that are largely uncorrelated to traditional stock and bond markets. In fact hedge funds have benefited wealthy and institutional investment portfolios for many years with total portfolio exposure as high as 30 & 40%, so why not individual investors? Regulations have limited access given the many complex structures and potential risk although many options may actually reduce risk and certainly provide diversification.

With the mature S&P 500 bull market, portfolio managers are looking to supplement portfolios with alternative investments for long-term growth.

Bond markets also have elevated risk given the prospect of rising interest rates. This would suggest lowering bond exposure in favor of investments not subject to this risk such as multi-strategy hedge funds, real estate and private equity. These alternatives have historically produced returns that don’t correlate to traditional stock and bond markets and this added diversification will enable less volatile portfolios that should also deliver solid growth.

TriDelta’s investment product lineup includes a hedge fund, the TriDelta High Income Balanced Fund, which was launched in late 2013. Our hedge fund was however only available to ‘accredited investors’ until recently when regulations in Ontario and other Canadian provinces were amended.

At TriDelta our view is that new investment asset classes are always worth reviewing. If we find something that we are comfortable with, we will incorporate it into our overall recommendations. Now that regulatory changes have come about we’re also able to offer some of these solutions to non-accredited investors as well.

Strategies we have researched and analyzed include real estate funds, mortgages, business lending and factoring.

One common theme to alternative investments is that they often have low correlations to traditional investments such as stocks and bonds. This benefits portfolios by increasing diversification. Research has revealed that many large institutional funds such as pensions and private endowments have begun to allocate meaningful amounts of their portfolios to alternative investments such as hedge funds.

Alternative investments includes a vast category of specialist investment solutions and many we feel are simply not appropriate for the average investor. There are however a few very interesting solutions that deliver some unique advantages and better still are largely uncorrelated to traditional stock and bond investments.

Investments in real estate, mortgages, hedge funds, infrastructure, private debt and equity, and the like, continue to grow as a percentage of overall assets for some of the biggest pension funds. They comprise of over 30% of the overall portfolio at pension plans, such as the Ontario Teacher’s Plan (OTTP), Harvard Endowment Fund and the Canadian Pension Plan Investment Board (CPPIB), which manages the funds for CPP payments.

At TriDelta we spend much time reviewing market offerings and TIC (TriDelta Investment Counsel) works with a select group of alternative investment managers to provide similar benefits to our clients.

Alternative investments make up over 40% of US university endowment portfolios
education_alternative_figure1
Source: http://www.iasg.com/articles/education/alternative-investments
 

The reasons for their growth are that these investments often provide:

  • a more predictable income stream
  • less volatility
  • reduce risk in your investment portfolios.
 
What are the main benefits to hedge fund investment?
education_alternative_figure2
Source: http://www.iasg.com/articles/education/alternative-investments

 

Canadian high net worth portfolios, endowments and pension funds have also embraced alternative investment in recent years.

 

‘Ontario Teacher’s Pension plan asset allocation’ 32% Real assets and ‘alternative’ solutions; 35% Equities & 33% Fixed Income.
otpp
Source: www.otpp.com/investments/asset-groups

 

At TriDelta we believe select alternative investments play a key role in delivering more predictable and consistent returns for many of our clients.

 

Anton Tucker
Written By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448

How the Bank of Canada’s rate cut may have added $100,000 to your pension in one day

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When the Bank of Canada lowered the overnight interest rate by 0.25% this week, the obvious benefit is for those with variable rate mortgages. They will see an immediate benefit in lower interest payments on their mortgage.

Another group who just received a big win may not even realize it: If you have a pension plan, and especially if you have ever thought about taking the cash value of your plan, you just saw an increase in potential value. In some cases, the rate cut could have added as much as $100,000 in wealth in one day. This option to ‘take the cash’ is usually open to those who are retiring or leaving their employer. Sometimes the option ends when the employee turns 50 or 55.

To understand how this wealth boost works, and how much your wealth could go up, can get a little complicated. The best way to explain it is to pretend that you want $50,000 of income per year and go from there.

You could buy a GIC to pay out $50,000 of income per year, and depending on the interest rate of the GIC, you could determine how much you need to invest: At 10 per cent interest, you could buy a $500,000 GIC. At one per cent interest, you would need to put in $5 million for the same return.

In the pension plan example, if they are committed to paying you $50,000 a year, then at today’s super low interest rates, your pension plan must set aside a lot more money to cover off $50,000 a year — just like the GIC example. Here is where your wealth potentially just grew:  In many cases, you have the ability to ask your pension plan for this lump sum of money (often called the commuted value), rather than taking the pension as a monthly payment.

Below is a chart for the Bank of Canada Five-Year Bond Yield over the past 26 years. The highest yield was 11.6 per cent, in March 1990. The lowest yield happened this week at 0.7 per cent.

govt_bonds

Imagine this chart represented an opportunity to lock in a lifetime rate for a loan. If you could choose any time to lock it in, this week would be the best time.

A commuted value of a pension works the same way. You are essentially locking in a value for life, and an important determinant of that value is interest rates.

Put another way, if you were ever going to take the commuted value of your pension, now would be one of the best times in history to do so.

For those who like the idea of a monthly payment guaranteed for life, you can purchase a pension any time by buying an annuity. Having said that, in many ways, at today’s low interest rates, now is perhaps the worst time to purchase an annuity.

One potential strategy is to take the commuted value of your pension today, when you would receive the largest amount. In a few years, if interest rates rise meaningfully, you can take your funds and buy an annuity that will pay you a higher monthly amount than you would ever have had with your existing pension.

The decision of whether to receive a pension in monthly amounts for life as opposed to taking a lump sum is a complicated matter. What I would suggest is that your pension plan does NOT want you to take a commuted value lump sum today. It will cost them too much.  Based simply on that, you may want to take a good look at whether that option is open to you, and whether you might want to take it.

Reproduced from the National Post newspaper article 17th July 2015.

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

TriDelta High Income Balanced Fund

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Today’s investors face significant challenges, not least of which is generating sufficient income in the multi-decade low interest rate environment.

We launched the TriDelta High Income Balanced Fund in late 2013 and have since delivered significant returns to early investors. Our fund overview can be reviewed.

Opportunities to invest are restricted to ‘accredited investors’ currently, but the exciting news is that from May 5th 2015 regulations have been amended by the Ontario Security Regulators to all non-accredited investors to participate as well. This is however subject to it being an appropriate investment given the elevated risk profile. We will however review your situation carefully to determine this beforehand.

The Financial Post published this recent article about our fund:

Article

Click here to read the entire story.

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