Sunday, April 8, 2018

Why I am so angry with Personnel Planning companies such as “WTF’

For years now, I have tried to coach my friends, colleagues and peers in investing. I also try to do this on a larger scale through this blog. Via this blog, I may reach a larger number of people than just my immediate circle of influence, but the percentage of blog viewers actually paying heed to my drivel is probably minuscule. I myself benefit from expressing my opinions on investing as well. It improves my thinking and hopefully my investing performance which is something quite elusive.

Many of you have probably heard of the rule of 72. When you divide 72 by the rate of investment return you get the number of years it takes for that investment to double in value. So let’s say that your investment returns you 10% per year, then your investment money should double every 72/10 = 7.2 or rounded 7 years. Not bad, you may say. But here is the crux, there are 3 factors that impact those returns enormously.  Uno: your friend the government who sets your marginal or top tax rate. That is the tax you pay on the highest portion of your income.  Say you earn $40,000 per year from your job, then the investment returns you earn are placed on top of that $40,000 and taxed at your marginal tax rate for federal and provincial income taxes combined.  If you make $50,000 income you are not very far from the country's highest top income tax rates. Maybe you have to make $60,000 to be in the top tax bracket and then set your marginal tax rate at 50%.  Your government though, doesn’t ask you how much you made on a real return basis it includes inflation and doesn’t acknowledge at all that your earnings made on investment includes a significant amount of protection against lost purchasing power that year. If that isn’t as unfair as you can make taxes then what about RRSPs?
But lets get back on topic. On your investment income you typically pay 50% taxes. Your after-tax investment return is not 10%, it is now only 5%. You must have guessed by now what the number two  influencer is of your real after-tax investment return. Right, numero dos is inflation.  So, historically, we have 4% inflation and thus your real return on an after-tax and after inflation basis is your nominal return of 10% minus 50% of 10% taxes minus 4% inflation or 10 – 5 - 4% = 1 percent.
Then there is the third factor. What is there more? Yes you bet.  Numero tres! There is your ‘friend’, the banker, stock broker and financial planner. Especially the financial planner who sells you products on commission basis.  These ‘experts’ that work for mass marketing companies such as ‘WTF’ in the previous post, charge top commissions.  Not minimal commissions like the discount broker or the ‘modest' commissions (if you keep a close eye on your investments) charged by your full service broker but your ‘ friend’ the financial planner charges sky-high commissions. They sell at super high commissions plus super high hidden mutual fund MERs (mutual funds charge each year a Management Expense Ratio applied to total investment value) or worse segregated mutual funds (typically at an MER that is at least another ½ percent higher). These last commissions and MERs often add up to 2 or 3% per year, unlike the much lower ETF MERs which are often a fraction of a percentage point. So we were down with your 10% return being reduced to a real, after-tax return of 1% and now you have to pay out of that your ‘friend’ the commission-based mass marketing financial planner, and you end up with a negative return. Multi-level marketing operators like ‘WTF’ don’t care and neither do their inexperienced investment advisors.  The latter, recruited from a mass of naïve investors that just started out to learn about these things, they often don’t even realize how much damage they do to your investments.
That is it: Taxes, inflation and commissions those are the real threats to your portfolio performance. That and one of the most insidious ‘tax shelters’ your government offers you under the guise of ‘tax -advantaged retirement accounts’: RRSPs and RSPs. With RRSPs and RSPs you get taxed to the max whenever you withdraw money from them often at your top margin rate that may be a lot higher then when 30 years before,  you made your tax-deferred contribution (not counting forgone dividend and capital gains tax credits). Unless you keep your total retirement income at the absolute minimum you will pay those deferred taxes through the nose! Did you bargain for that? Even after saving all your life, this government is still ripping you off big time. Then that same government turns around and accuses you of being an evil tax avoider. The hypocrisy is just beyond believing.  The only tax shelter that does not take you to the cleaners and lets you keep all your profits to yourself is the TSFA and here, the defender of the middle class, Justin Trudeau, reduced your, already very modest contribution limit. God forbid, you are no longer dependent on the state! 
After learning this, do you still love Justin, or would you want Stephen Harper back (too late)? Harper who created the TSFA and increased its contribution level to a more meaningful $11,500 per year. Remember, one of the very first things young Trudeau did? Yes, he reduced that contribution as fast as he could. Next his buddy Morneau started an ‘upgraded’ taxation scheme to ripp off small business even further.  You know, a population does not get the government it wants, but the one it deserves (that is a very old and wise expression).
If you think that I am to hard on those commission driven financial planners, I hope this post makes you think again.

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