Category: Market Action

Bare bones!

Bare Bones!

Bare bones!

Bare bones!

On April 15 I mentioned the Lortie attack on unbundled fees; now Rob Carrick of the Globe pens an essay attacking the report’s conclusions:

Investors, you’ll be fine. Already, a new generation of advisers is emerging to serve clients of any wealth level, rich or not, experienced investor or beginner. These online advisers, also called robo-advisers, provide an effective retirement savings foundation. First, they find an appropriate mix of stocks, bonds and cash for your needs, then they build a simple portfolio using exchange-traded funds. Fees are clearly displayed and paid upfront by investors.
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The early narrative on online advisers was that they were primarily something for millennials. However, some firms operating in the Canadian market say their average client age is between 40 and 50. Online advisers themselves are diverse – some are simply about helping you invest intelligently, while at least one is building a specialty in retirement income planning.

This repeats the assumption of the unbundlers that every small investor now served by an advisor will, after such a change is enacted, rush right out and sign up with an on-line service. I’m not convinced of that. Remember the adage ‘mutual funds are sold, not bought’? There’s a lot of truth in that.

There is a great swath of people who don’t decide that they’ve got to do something about their savings plan and then do it. I suggest that there is a huge population of (mainly) small investors, who are aware they ought to be doing something (this is a result of all the generic advertising done by the fund and advice companies) and finally decide … ‘Frank at the club does stocks and bonds. I’ll talk to Frank next time I see him.’ So he talks to Frank and Frank gets another little client and the client gets an equity allocation in his portfolio that wouldn’t have been there otherwise.

With unbundling, a lot of that generic advertising is going to disappear (unless the selfless population of self-styled investor advocates puts some actual time and money on the table to pick up the slack. Ha-ha.) and Frank at the club will go start driving for Uber instead. The money will remain in a package of GICs at the bank; the banks, of course, have no problem with this change because guess what? They’ve got a full time captive sales force and distribution channels out the wazoo! So the change will be a competitive advantage for the banks, which is why the regulators are promoting the idea.

OK, so maybe I’m wrong on this. I’m not an investor advocate, I’m willing to accept that sometimes my gut reaction might be wrong. But that gets us to what really bothers me about the whole deal: it’s not necessary. Fee bundling has been banned in the UK and market adjustments are proceeding there. Why don’t we just put this idea on the back burner for ten years and see what happens in Britain?

Such an approach involves things like ‘evidence’, however, and the regulators don’t like that sort of crap.

On another note, OSFI Deputy Superintendent Mark Zelmer gave a speech titled A New Chapter in Life Insurance Capital Requirements:

I will then briefly explain how the draft LICAT guideline compares at a high level with the Solvency II insurance capital framework recently introduced in Europe, and the new international capital standard that is currently under construction by the International Association of Insurance Supervisors (IAIS).
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When the MCCSR was first introduced it was an international pioneer in many respects in applying a risk-based solvency framework to life insurers. Newer frameworks like Solvency II in Europe have gone further in this respect, and our development of the draft LICAT guideline has certainly benefitted from lessons learned in the construction of those frameworks. Indeed, newer insurance capital frameworks around the world are generally converging towards more sophisticated risk-based frameworks. Thus, it is no surprise that the LICAT is largely consistent with Solvency II and the proposed new Insurance Capital Standard (ICS) currently being developed by the IAIS.

Important differences remain. Nowhere is that more apparent than in how different capital frameworks handle the current environment of exceptionally low interest rates and interest rate volatility more generally. One notable approach is the US capital framework, where Pillar 1 regulatory capital requirements and available capital only adjust to interest rate movements when insurance liabilities and their supporting assets mature and are replaced with new assets and liabilities. Another important point of reference is Solvency II, where initial versions of that regulatory capital framework were very sensitive to interest rates due to their heavier reliance on fair-valuation of cash flows on both sides of the balance sheet. However, more recent versions now include several measures that serve to mitigate excessive volatility in regulatory capital positions.

The parallels with Solvency II are important – Solvency II imposes the NVCC rule on insurers!

And here’s another bare-bones market report. I’m sorry about this, guys, but I’m really busy!

Some politicians don’t like living under their own rules:

George Osborne has agreed to make MPs exempt from anti-money laundering checks under pressure from moaning Tory backbenchers.

Tory MP Charles Walker claimed MPs and their families were being treated like “African despots”.

MPs appear on automatic watch lists of “Politically Exposed Persons” (PEP), used by banks to prevent money being funnelled into criminal gangs or hidden in offshore tax havens.

It means MPs and their families could be subject to extra checks on their bank accounts.

But the Chancellor said banks could go too far and become “disproportionate.”

The effects of being covered by such rules in Canada were discussed on October 19, 2015.

Parakeet Poloz says the economy might not recover until after his new bosses are re-elected:

“We estimate that it’s a sort of a three-year period while the negatives are still ongoing in the background and the positives are emerging in the foreground,” Poloz told the Senate’s banking, trade and commerce committee.

He added: “It could be longer than three years before we’re settled at that new place where the energy sector will have shrunk relatively to the whole economy and the rest of the economy will have grown to fill that space.”

You know what makes me laugh? Idiotic PMs getting burned by reality makes me laugh:

Great West on April 15 opted not to exercise an option to payback one of its U.S. dollar bonds early. That means the money Great West borrowed in 2006 doesn’t have to be paid back until 2046, and — because the interest goes from fixed- to floating-rate — lenders face coupon payments being cut by more than half if market rates stay where they are.

Now investors are wondering if C$45 billion ($35 billion) more lent to the country’s financial sector could share the same fate.
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Investors say the move by Great West is a rare example of a Canadian financial institution opting not to exercise an early-call option on that kind of fixed-to-floating rate note. It has them wondering if the C$45 billion Canadians lent in their own country under similar terms might also lock buyers in much longer than they bargained for if the floating rate starts to look like a better deal than what a company could get if it borrowed fresh today.

Investors’ fears are manifesting themselves in the market where bonds, originally priced assuming they’d be called, are adjusting to the possibility of the longer term. Great West’s U.S. dollar note saw the yield investors demand to hold it to the call date almost triple after the insurer opted not to call, according to data compiled by Bloomberg.

Another Great West note, this one denominated in Canadian dollars with a year to go before its call date, saw its yield to the call date go from 2.4 percent to 7.1 percent as investors increased the odds it could be extended as well. If it isn’t called, those C$1 billion in notes don’t have to be paid back until 2067.

“Canadian investors never believed a Canadian bank or issuer would do that kind of thing in Canada,” Marc Goldfried, who manages C$3.5 billion as chief investment officer at Canoe Financial LP in Toronto.

The bond in question is described as Great-West Life & Annuity Insurance Capital LP II, subordinated debentures due May 16, 2046, bearing an interest rate of 7.153% until May 16, 2016 and thereafter a rate of 2.538% plus the three month LIBOR rate, unsecured.

The bond that has everybody worried – dropping a bit more than 4.5% on the day according to the story – is Great-West Lifeco Finance (Delaware) LP, Subordinated Debentures due June 21, 2067, bearing an interest rate of 5.691% until June 21, 2017 and, thereafter, at a rate equal to the Canadian 90-day Bankers’ Acceptance Rate plus 1.49%, unsecured.

What’s that I hear? Some Assiduous But Not Assiduous Enough Reader at the back of the room snickering that he doesn’t have to worry about this because he’s got all his money invested in short term ETFs? Let’s have a look at the holdings of ZCS – BMO Short Corporate Bond Index ETF:

That’s right, it’s held in the very first short-term corporate bond ETF I looked at. I warned about this insanity in my article Bond ETFs demystified; holdings of sub-debt in short-term index funds is quite common. I have also warned against OSFI’s desire to get CoCos included in the bond indices. But nobody ever listens to me. This problem, by the way, will become even more severe once ‘Bail-in’ bonds start coming out in quantity; I have every confidence that the unparalleled genius of Canadian regulators, index compositors, ETF merchandizers and salesmen will be thrilled to hold that stuff in short-term bond indices.

Anyway, today’s bare-bones preferred share market report is:

Bare bones!

The University of Calgary School of Public Policy has published a report titled A MAJOR SETBACK FOR RETIREMENT SAVINGS: CHANGING HOW FINANCIAL ADVISERS ARE COMPENSATED COULD HURT LESS-THANWEALTHY INVESTORS MOST:

Nevertheless, one thing arguably more problematic than clients receiving potentially conflicted advice is clients not having access to any advice at all. And based on the experience of other jurisdictions that have ordered fees to be unbundled and instead be structured as upfront fees, that is the result that ends up occurring for investors below a certain income level. In the U.K., after the decision was made to unbundle fees, the number of financial advisers fell from more than 40,000 in 2011 to just over 31,000, and has not recovered. Major banks, meanwhile, cancelled their financial advice services for clients that had only modest assets. The opening of investment accounts worth less than 100,000 pounds fell by half. After Australia required fees to be unbundled, there was a similar effect.

There is little to suggest that Canadians would not be left with the same income-related “advice gap” were regulators to require fees unbundled here. Simply put, many clients are unwilling to pay upfront for unknown results. And any reform that causes investors to separate from their advisers, or to never hire one, would be counterproductive to the public policy goals of helping Canadians better prepare for retirement. If it is adviser conflicts that regulators are worried about, there are better ways to address them — for example, the regulatory regime governing fiduciary duty and the potential to enhance the competencies, proficiency and professionalism of financial advisers — than creating a system that results in fewer people providing financial advice, and fewer people willing to seek it.

One self-styled investor advocate asks ‘Is conflicted advice better than robo advice?’, which I will assert does not just miss the point but shows a fundamental lack of understanding of how the market really works.

The alternative to a relatively high-fee mutual fund account is not a balanced ETF portfolio. The alternative to conflicted advice is not robo-advice. The default investment position of most investors with modest sums to invest – and sometimes not so modest! – is a package of GICs, bought on the advice of that nice young man at the bank who explained about ‘laddering’.

This point is actually confirmed by an opinion piece that seeks to discredit the ‘advice gap’ concept:

Consumer Panel chair Sue Lewis said: “Consumers do not always seek professional advice, even when they could benefit from it: some are not aware of what is available; they do not want to pay for advice because they do not understand the price or value of it; they cannot afford it; or they prefer to take decisions themselves.

“We would emphasise that financial advice is the same as many other professional services. People pay for professional services in other areas, such as for accountancy advice. Some people can afford this, others can’t.

“Services are accessible to those who need them at the market price.” Yet fellow consumer group Which? believes the advice gap is a real issue, given the barrier of the cost of advice.

Figures obtained by Money Marketing show that based on 1,000 UK adults with between £10,000 and £50,000 available to invest, Which? found 58 per cent of those against using an adviser cited advice as being too expensive. One-third said they would not trust an IFA to act in their best interest.

But the Which? data also suggests the demand for advice is not as high as some would believe.

The research found 67 per cent of respondents have never considered using an adviser for advice on a specific investment.

Nobody that I know of is actually arguing that there are people looking for advice who can’t get it; at least not as a significant part of the argument. At the low end, it’s all marketing, it’s all sales, it’s all about convincing somebody that they want something they haven’t really thought about before. Some of these salesmen are nasty predators. Most of them are just guys trying to provide a service and thereby make a living. As investment advisors, they’re not so hot. As conduits to get people into halfway reasonable portfolios that capture some of the equity premium and are a hell of a lot better than a package of GICs … they’re better than any alternative I’ve seen to date.

Dividend Growth Split Corp., proud issuer of DGS.PR.A, has been confirmed at Pfd-3 by DBRS:

As of April 7, 2016, the downside protection available to the Preferred Shares is 36.5%, down from 45.2% in April 9, 2015. The dividend coverage ratio is approximately 0.98 times. The confirmation of the rating of the Preferred Shares at Pfd-3 is based primarily on the current downside protection available and the minimum downside protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.