One thing you must do in 2017

[Cory Sperle]

The single and most important thing one should do is trim the fat and dead luggage from their investment portfolios. There is one simple way to do that:

STOP PAYING EXCESSIVE FEES

It sounds reasonable but the fact is almost all of us are, and don't even question it. Let me ask you three questions:

1. Should the professional be compensated more than the gains you are earning by investing with them?
2. Should the professional still earn a large income stream off of your portfolio if your gains are zero, or worse negative?
3. Should you accept "low" returns as a consequence of so called "poor markets" ?

No, No, and No.. The simple answer? Fire them, fire them all and I will explain why.

Mutual Funds
If your invested through an insurance company in 'segregated' funds your likely paying 2.5% of your balance in fees every year. To put it in perspective, even if the fund was able to generate 5% (rare) you have just paid 50% of your gains in fees. Worse yet, you were in bonds and only earned 2-3% in which your losing money every year. Now add inflation..

The answer? you really should be paying about 1/10th of that in fees. Open up an investing account through your bank and do it yourself. It's not hard at all, and with a couch potato strategy you can easily beat most heavily charged mutual funds. Remember the rule of 72.

Real Estate
People take on the unpleasant hat of landlord for one reason. Self managed rental property can deliver you consistent annual double digit returns if you do it property. Real estate however has a very high transaction cost when you buy or sell, so the best gains are typically realized if you hold for 5 years or more. Investing in Commercial Real Estate can be even more profitable if done correctly. Those that are too busy, or do not have $800,000 for a down payment often will co-invest with experts and share the profits. This is how I got started, and I highly recommend it! But be very wary of fees before you take the plunge...

Every commercial transaction must pay the inevitable $50,000 or so cost of fees associated with purchase. Legal, corporate, mortgage broker, appraisal, engineering report, environmental, etc. will typically cost 50K on a $2,000,000 apartment building. If you have a 75% mortgage this is 10% of your funds gone from day 1, meaning the asset must generate 11.1% just to break even!! Now this is even if you bought the project yourself. Now look at a typical syndication for example. Normally the fees one can expect are sales commissions (7% of funds raised), building acquisition fee (3%), management fee (0.5% per year). Doesn't sound too bad does it?

Well those fees can quickly add up to 20% of the invested funds, meaning the investment must generate 25% just to return to zero! To add insult to injury add the normal acquisition costs mentioned above , its 30% of funds gone, and the vehicle must generate 43% to get to positive territory. ouch!

You need to strike the right balance of do it yourself vs. getting it done. I have made out both very well, and very terrible by investing with others. If you chose this path do your research carefully, see a track record and understand how you will make money in any market or event. Most importantly, be wary of fees!! If you picked up anything from this always ASK ASK ASK, and DEMAND better for yourself and your family.

Best wishes and happy investing in 2017!!

 

[David Salfer]

Attracting potential buyers is one of the main tasks that realtor will face in 2017, I think.

 

[Thomas Beyer]

Well said Cory but of course as a JV expert one tries to maximize fees and equity stake to a point where both sides are happy. We have over the last ten years continuously lowered fees and equity stake with the latest offering ( now on our website ) being a 15/85 split with no management fees. 50/50 used to be sellable but is tough to argue for today in a slower rising market.

 

[Matt Crowley]

Good point @CorySperle ! Thanks for the post

Mutual funds are often better / a good compliment to real estate for several reasons:
- my MF did over 10% last year, my real estate did 2%
- MF through my employer get reduced fees and there are over 20 funds I can choose to invest in right now that have earned over 10% per year (annually, compounded) for the past 5 years, several over 15%. Plus you get the advantage of an actively manged fund
- With DIY real estate investing most people buy where they work. This heavily overexposes them to the local economics and their job risk
- You can invest TFSA in mutual funds and pay no tax on the gains which is really useful as an income compliment that won't interfere with your tax when you retire or a new car, education, home downpayment and can top up in later years as well
- maximum exposure of my RRSP is amount contributed vs. my real estate can destroy my credit and leave me in debt for many years

 

[Thomas Beyer]

Mutual funds should be illegal. The fee grab is unbelievable but they get away with it due to the financial illiteracy of so many Canadians. At least buy a low cost ETF. Same overall gross return but lower fees so overall a 1-2% per year net higher return.

If you MF didn't do 100% since the depth of the financial crisis in late 2008/early 2009 ditch them on any case.

 

[Matt Crowley]

MF are like any investment: there are good ones and bad ones. Why not accept a lower return with a MF if you want lower risk than the market and the MF is based on a defensive strategy? Not an equal tradeoff to buying an ETF and putting 30% into a GIC.

 

[Thomas Beyer]

MF investing goes like this: firm that operates MF makes money whether the market is up or down or sideways.

Stock brokerage firm or firm that sells MF makes money whether the market is up or down or sideways.

Broker or sales person ( aka financial "advisor") makes money whether the market is up or down or sideways.

The investor, meh, he sometimes makes money but often makes little to any.

So, who cares, 3 out of 4 winners: let's continue the MF party !!

 

[Cory Sperle]

Excellent contributions gents much appreciated. With MF I have had good, to not bad, to downright awful returns depending on many factors. The employee plans seem to be the best, currently with Sun life, low fees, and performing quite well, others not so much, but you guys cement the purpose of my post.

With RE, yes do it yourself very challenging and emotional. Thomas, your certainly in the good category, while many are not. The best advice for anyone this year is to invests in the 6 inches between their ears, as it will be another roller coaster, or not depending.

 

[Willyboy]

I have some TFSA and RRSP invested in mutual funds in one of the big banks where I opted for conservative risk when I signed the contract with the adviser. It has been over 4 years now and when I do the math for the annual compounded return it turns out it's 2% to 3% which is nothing to me.
Any advice here guys? I mean should I change the financial institution or should I modify the risk level or whatever else?

 

[ExcellHomes]

Yeah i am agreed with @David Salfer. Its really difficult to attract potential buyers. One of this reason that i understand is huge competition among est realtors.

 

[David Salfer]

@ExcellHomes Thanks for your appreciation

 

[Thomas Beyer]

Any advice here guys? I mean should I change the financial institution or should I modify the risk level or whatever else?

Fire your "advisor".

Do it yourself with ETFs, REITs and dividend paying stocks .. but and forget with fees of 0.5% or less ..

yes change risk level to "maximum" if you are under 50 ..

 

[Cory Sperle]

Willyboy, calculate what you have paid on fees, vs. the gains you have made and then fire any/all. ETF. REIT, and dividend stocks are all good picks with low fees as Thomas mentions. There are also index EFT's that mirror the TSX if that's more your speed, but yes fees of less than 0.5% is what you should be paying.

Realtors, investors, or anyone else who is struggling my suggestion would be that you must be extraordinary in truly terrible times. A few of the best realtors I know today are here because they started in 1982, in truly awful times and survived. It will include a lot of work where you may or may not get a paycheck, answering your phone 24/7 even on Sunday if someone calls and wants to see a place, offer to reduce your end of the commission, or anything else you must sacrifice to survive as those who don't simply won't make it.

 

[Matt Crowley]

@Willyboy well...I think the bank is giving you what you asked for with conservative risk. This is what I would expect for that risk tolerence.

Apart from all this asset allocation, what is my ROI question is a much simpler question of how to manage monthly expenses, credit card debt, and how much you are able to save. Relatively, if you are saving $1,000 / month and can cut out one meal out and a couple coffees and fast food binges to scrape another $100 that is $1200 per year or 10% growth in your principal asset savings. When you are looking to the passive investment territory it is very difficult to beat 10% if you are not actively managing in a very regular basis. I think that is really where financial advisers can provide value... understanding personal balance sheet, income statement, and cash flow statement.

The returns you can make is your speed limit for growth but are you hauling a Smartcar or Freight train at that speed? For me, I choose a moderate speed limit for my ex-real estate investments and invest diligently every month to build the principal as heavy as possible.

Good questions though! I would stay away from buying individual stocks unless you want to make a full-time evening job out of analyzing companies and have at least a couple different company valuation tools solidly under year belt. ETFs are good, tend to be more macro-driven than a lot of MF which often select companies to mirror the composition of the index but believed to have better intrinsic value than the index itself (at least that is why you should be buying them instead of the ETF).

 

[Willyboy]

Thanks guys for the invaluable information.

 

[KhoaN]

@Willyboy well...I think the bank is giving you what you asked for with conservative risk. This is what I would expect for that risk tolerence.

Apart from all this asset allocation, what is my ROI question is a much simpler question of how to manage monthly expenses, credit card debt, and how much you are able to save. Relatively, if you are saving $1,000 / month and can cut out one meal out and a couple coffees and fast food binges to scrape another $100 that is $1200 per year or 10% growth in your principal asset savings. When you are looking to the passive investment territory it is very difficult to beat 10% if you are not actively managing in a very regular basis. I think that is really where financial advisers can provide value... understanding personal balance sheet, income statement, and cash flow statement.

The returns you can make is your speed limit for growth but are you hauling a Smartcar or Freight train at that speed? For me, I choose a moderate speed limit for my ex-real estate investments and invest diligently every month to build the principal as heavy as possible.

Good questions though! I would stay away from buying individual stocks unless you want to make a full-time evening job out of analyzing companies and have at least a couple different company valuation tools solidly under year belt. ETFs are good, tend to be more macro-driven than a lot of MF which often select companies to mirror the composition of the index but believed to have better intrinsic value than the index itself (at least that is why you should be buying them instead of the ETF).

@Willyboy well...I think the bank is giving you what you asked for with conservative risk. This is what I would expect for that risk tolerence.

Apart from all this asset allocation, what is my ROI question is a much simpler question of how to manage monthly expenses, credit card debt, and how much you are able to save. Relatively, if you are saving $1,000 / month and can cut out one meal out and a couple coffees and fast food binges to scrape another $100 that is $1200 per year or 10% growth in your principal asset savings. When you are looking to the passive investment territory it is very difficult to beat 10% if you are not actively managing in a very regular basis. I think that is really where financial advisers can provide value... understanding personal balance sheet, income statement, and cash flow statement.

The returns you can make is your speed limit for growth but are you hauling a Smartcar or Freight train at that speed? For me, I choose a moderate speed limit for my ex-real estate investments and invest diligently every month to build the principal as heavy as possible.

Good questions though! I would stay away from buying individual stocks unless you want to make a full-time evening job out of analyzing companies and have at least a couple different company valuation tools solidly under year belt. ETFs are good, tend to be more macro-driven than a lot of MF which often select companies to mirror the composition of the index but believed to have better intrinsic value than the index itself (at least that is why you should be buying them instead of the ETF).

I work at the bank but I agree with Matt's points because he's been fair. There are good MF and bad MF, good advisors and bad advisors. I always give clients the options to see which one is best fit to them. If they have the time, the knowledge and comfortable to do them self, absolutely go self directed, there are also series D that available thru self directed channel. Majority of clients won't take the risk but then complain later when they heard what their coworkers' MF made. Most of clients don't have the time and knowledge, so they just park their money in saving accounts, earning 0,5% but if they invested in a conservative MF, they could earn an average of 6% after fees in the last 5 years, keep them up with the inflation, so we can see which one is better.
About fees, unfortunately Canada MF have one of the highest fees but recently we start seeing the decline due to the competitiveness, so that's the good sign. However, saying they should not charge fees if the fund has negative return is not reasonable. It's just like any other investments, they still pay their staffs, taxes, admin. and trading commission... Do all the REITs managers get their shares first every year? Absolutely!
Anyways, it's not a right or wrong answers, just choose what works best for you. Just my 2 cents.

 

[Thomas Beyer]

Do all the REITs managers get their shares first every year? Absolutely!

Do they ? They usually get a salary and/or mgmt fee as a % of asset value, and a bonus only if certain targets are exceeded. REIT fees are very slim in Canada.

 

[Cory Sperle]

However, saying they should not charge fees if the fund has negative return is not reasonable. It's just like any other investments, they still pay their staffs, taxes, admin. and trading commission... Do all the REITs managers get their shares first every year? Absolutely!
Anyways, it's not a right or wrong answers, just choose what works best for you. Just my 2 cents.

Really?? This was the purpose of this post, and why Canadians need to wake up and smell the coffee and demand better. Going back to my original questions to ask yourself:

1. Should the professional be compensated more than the gains you are earning by investing with them?
2. Should the professional still earn a large income stream off of your portfolio if your gains are zero, or worse negative?
3. Should you accept "low" returns as a consequence of so called "poor markets" ?

So for 1. absolutely not. In fact as Mr. Beyer mentions if you did not double since 2009 it's a 'fire in any case' situation. I cannot think of ANY situation where the advisory should earn more on your money than you do on your savings, unless they knock one of the park.

For 2. Surely not, and I firmly believe the adviser should largely be compensated for performance, and not based on investor ignorance. Laws have recently forced firms to disclose their previously hidden fees.

For 3. Definitely not. Calculate your return vs. fees paid, in low earning funds this can easily exceed 50% or more. Reduce your fees to 0.5% or less. (500% fee reduction from 2.5%!).

For all things being equal, the classic 50/50 REIN model is the best. Win/win if all goes well, and if it does not at least the investor recovers as much as possible and the expert did not make anything for screwing up. In the real world of course this is not reasonable, but accepting the status quo is also not reasonable today for most Canadians, go on your own with a few EFT's and then compare to your other advisers, just don't become complacent and accept what is unacceptable.

 

[Thomas Beyer]

Really?? This was the purpose of this post, and why Canadians need to wake up and smell the coffee and demand better. Going back to my original questions to ask yourself:

1. Should the professional be compensated more than the gains you are earning by investing with them?
2. Should the professional still earn a large income stream off of your portfolio if your gains are zero, or worse negative?
3. Should you accept "low" returns as a consequence of so called "poor markets" ?

So for 1. absolutely not. In fact as Mr. Beyer mentions if you did not double since 2009 it's a 'fire in any case' situation. I cannot think of ANY situation where the advisory should earn more on your money than you do on your savings, unless they knock one of the park.

For 2. Surely not, and I firmly believe the adviser should largely be compensated for performance, and not based on investor ignorance. Laws have recently forced firms to disclose their previously hidden fees.

For 3. Definitely not. Calculate your return vs. fees paid, in low earning funds this can easily exceed 50% or more. Reduce your fees to 0.5% or less. (500% fee reduction from 2.5%!).

For all things being equal, the classic 50/50 REIN model is the best. Win/win if all goes well, and if it does not at least the investor recovers as much as possible and the expert did not make anything for screwing up. In the real world of course this is not reasonable, but accepting the status quo is also not reasonable today for most Canadians, go on your own with a few EFT's and then compare to your other advisers, just don't become complacent and accept what is unacceptable.

Well said. I think 50/50 is unreasonable if investor provides money and the mortgage. Mortgage qualification is getting tougher these days in Canada, and as such it is worth around 20% of profit. Money is 50% and expert 30%. So 30/70 if investor is on title only, or 40/60 if both JV partner and expert are on title together and qualify together as the 20% gets split.

As both an investor and a syndicator I am also looking for some skin in the game for the expert.

Another model is a hurdle rate, say 8-10%/year for the money partner and a management fee for the manager, then 30/70 to 50/50 depending on deal. The more money you raise the lower the % for expert usually.

 

[Cory Sperle]

Yes certainly 50/50 is tilted in favor of the investor, but for a standard single family purchase with money partner providing funds and mortgage qualification, while the expert does the work makes things clean, simple, and repeatable. No doubt mortgage qualification is tough these days (almost ridiculous).

In my opinion 'hurdle rate' is a distraction from the excessive funds many syndicators take from day 1 having done little to no work, like a 3% acquisition fee which on a 25% down purchase works out to 12% of the cash raised! The syndicator cares not that he must give the first 8% to the money partner much later as he has already lined his pockets heavy from day 1. His primary motivation is to buy as many projects as possible with high leverage, and only has to worry about delivering a skimpy 8% years down the road.

Any investor needs as much cash as possible working from day 1, in any type of investment.