Saturday, April 7, 2018

Would you become or use such a financial planner?

Time for a rant, I guess.  A former tenant of mine, an Iranian oil facility engineer who emigrated into Canada and into our fair Calgary city, texted me an invitation last week to attend an introductory investment seminar with an international personal investment company, let’s call the company, ‘WTF’.  I have great respect for my former tenant who came into town in late 2015. He has a wife and teenage son and with oil in the middle of an ugly price collapse, his timing could not have been worse. 

He did what it took to create income for his family and ended up working at Canadian Tire for minimum wages. (I have geologist colleagues who try to get through this downturn as bouncer, as renovator and I am sure a few drive taxis). Employment insurance is more an hindrance than support in making a new living. My tenant’s wife also took on a job and they paid the rents on time and like clockwork. It could not have been easy to live in a small 2-bedroom (750 sq ft) wood-frame apartment with 2 adults and an adolescent son (usually I don’t rent these units to a family, I prefer a young couple or a single person with some other rental experience under the belt). But they got by and after 2 or 3 years they finally had enough means to move to a larger place and we parted on good terms. My tenants are the ones who makes owning my rental apartments possible. If they win, I win. They are the much-revered clients that make my business (renting real estate) possible. And many tenants are hard working, clean and admirable people.  I like to support them if I can.

So, my Iranian ex-tenant texted me last week to attend this event at this new employment opportunity on the side (2nd or 3rd day job – who knows). From searching the internet, I quickly learned that ‘WTF’ was a U.S. based operation and by many considered a multi-level marketing scheme. They train their new members (for a fee of course) in a month to get a license good enough to be let lose on the public and provide ‘investment advise’. Some of these new members are successful, although I suspect that, like with many multi-level marketing operations, the drop-out rate is enormous. At the presentation I met a few of those ‘successful’ members as speakers – one speaker was out of an insurance sales job and now moved into his latest career about a year ago. He was a good speaker, but the information presented showed they were aiming their services at people that were trying to start at the bottom of the investment ladder. With the member’s investment knowledge - being their own life experience and the one month certificate - they would do their utmost to help their naïve clients to reach a better retirement. The second speaker was a single mother, ex nurse, ex-chiropractor, and whatever else ‘ex’ who worked for ‘WTF’ close to 8 years. The presentation was on a level that people may have before they start reading ‘The Wealthy Barber’ or ‘Rich Dad-Poor Dad’. The ex-nurse-etcetera also introduced the very useful stalwart rule of 72.  Divide 72 by the rate of return and you get the years it takes to double your money.  If investing was only that simple.

So, it was calculated that it would cost the average retired couple to eat for 20 years, 3 $5-meals per day, in excess of $200,000 and who has $200,000 in retirement right?  They also told that banks were basically leaches who made record profits in 2008 and have you ever heard of a bank going broke?  I wanted to jump up and shout, anyone remembering what 2008 was really like?  Duuuh! Bear Sterns, ABN-Amro, Fannie-Mae; Freddie-Mac, AIG,  Merrill Lynch, Royal Bank of Scotland, do-I-have-to-go on?  In a subsequent private conversation, it was pointed out they were of course referring to Canadian Banks. Of course, there was never a Canadian Banking institution that went broke! Well…  remember all those 3rd world bank loans in the 1980s? How many Canadian banks were suffering badly from those?  Oh.. and then I remember that TD took over Canada Trust and around the same time there was in Alberta the infamous Principal Group that was closed down by that province’s government because of unsavory investment practices with something as ‘safe’ as GICs. I remember well because me and my wife had to wait over seven years to get our original GIC investment back (in part) and we never saw a penny of the interest. But banks don’t go broke, and for sure not Canadian ones. Yeah right!  In 1967, Western Bank of Canada was wound up. In 1985, Northland bank was ‘wound up’ and in that same year so was: Canadian Commercial Bank. It caused a lot of upheaval and was the subject of the Estey Report.  In 1991, yet another Canadian bank went truly bankrupt: Bank of Credit and Commerce International.  Really... no Canadian banks go kaput!  (I didn’t remember all those events precisely – time wears my memory out but I got a boost from an article on the internet: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1521015
So basically, this was a group of financial planners, licensed after a one-month course to sell universal life insurance and mutual funds. In the private discussion the ‘mentor’ of my tenant (the latter of course has absolutely no investment experience), tried to explain that all those segregated mutual funds were only balanced funds (40% bonds, 60% stocks). Of course not, I told him they are similar to other mutual funds we can buy nearly anywhere but with a bit higher commission and a maturity date. Just like a RRSP they have creditor protection and if there are any profits left after MERs and front load and/or back load commissions then at least that would be tax free. Plus you get a life insurance.  I fell once for that scheme and held a universal life-insurance for nearly 10 years or so and never made a penny. Well, at least it was tax free!  Yes and if the value goes down during a bear market and you want to back out, you cannot even collect the capital loss tax credits! Finally to ad insult to injury, these segregated funds often have a maturity and if you want to get out before maturity you get a big penalty on top of your losses or none-performance... I don’t think that universal life insurance is such a good deal for a beginning investor client. For me this is kind of like buying liquor in the tax-free store; in your angst to save on taxes they eat you alive with commissions, management fees and penalties. But, to each their own.
Financial planners may have a place in industry, especially to advise inexperienced people on planning their retirement. But, if they make their money from the commissions and MERs on mutual funds and insurance policies then they have a major conflict of interest and they are unlikely to advise you on other investment instruments. And to be honest, if their education is only that one month required for the license, then I would run for the exit at top-panic-speed.
Some financial planners are fee based; they should be more objective. But the ones that I sat down with, they either try to sell you a tax shelter corporation plus accounting services or sell real estate or whatever other investment that throws of commissions. Really, 95% of those financial planners, and I apologize to the real good ones, are not worth the money and risk of entanglement once you are hauled in as 'client'. I really hope, that after my discussion with his mentor, my ex-tenant carefully considers what he is getting himself into because becoming a financial planner can be a very nasty business.

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