Choosing a Financial Advisor

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Over the last week or so, 3-time Olympian Harold Backer has made headlines here, in British-Columbia, and not for the right reasons. After retiring from rowing, Backer became a Financial Adviser and Mutual Fund representative. He mysteriously disappeared in 2015 amidst allegations of defrauding former clients. He turned himself in last week and has since been charged with two counts of fraud over $ 5 000.

this story illustrates how badly the financial services industry needs to change

The industry is largely unregulated. Anyone can set-up shop and call themselves a Financial Adviser, a Financial Consultant, a Money Coach, a Personal Finances Expert. You do not need any particular qualifications or experience.

Unfortunately, most canadians do not seem to care and are far too trusting

I don’t know which one I find scarier here, to be honest. A lot of personal finances bloggers also call themselves “experts” when they are anything but. This a post for another day.

So, how do you choose a Financial Advisor?

first, look for the following credentials

The Financial Services landscape is full of designations that can be very confusing. Unlike the Accounting profession, there is no talk of “unifying”.

  • Certified Financial Planner®: this is the “Gold standard” of the profession. This designation is international. To obtain it, candidates need to take classes in Financial Planning, pass exams and have a minimum of three years of relevant work experience. In Canada, the CFP® designation is administered by the Financial Planning Standards Council.
  • Personal Financial Planner®: this an alternate designation, administered by the Canadian Securities Institute. It is very similar to the CFP® designation.

A lot of Financial Planners also have one or more of the following specialized designations:

  • Chartered Investment Manager®: a CIM® usually handles and manages portfolios of wealthy clients.
  • Chartered Financial Analyst®: a CFA® also handles and manages portfolios. They also do research and analysis on companies, stocks and other securities.
  • Trust and Estate Professional®: a TEP® is very knowledgeable in estate planning and management, trusts, wills and taxation. Note a TEP® does not replace a lawyer or notary.
  • Chartered Professional Accountant ®: a CPA® prepares and analyses financial records for companies and non-profit organizations. They also do tax returns.
  • Chartered Financial Consultant®: a CH.FC® specializes in retirement planning and wealth accumulation.

The five above designations are very good complements to a CFP® or PFP® designation. However, as stand-alone, they are not enough to provide comprehensive financial planning.

Ignore the LLQP and Mutual fund license

The LLQP is for people who want to sell insurance products. These two credentials do not cut it to provide sound and objective financial advice.

Then, LOOK FOR A FEE-ONLY ADVISER

In my opinion, this is the best way to receive unbiased advice. A fee-only planner will charge you for their time. Some will charge you a percentage based on the total value of your assets.

It will definitely be more expensive than meeting with an adviser at a bank. The main difference is that a fee-only planner will not sell you any products and will put your interests first.

Experience is a bit more relative. Education is key when it comes to choosing a Financial Planner.

 

Term insurance vs. permanent insurance

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Please note I am not a licensed insurance agent. This post is to give general information only.

Life insurance is probably one of the most confusing and complex financial product out there. In the PF blogosphere, it seems like pretty much everyone is touting term insurance as the only way to go while permanent insurance is shamed at every turn.

unfortunately, life insurance is not so black or white, all or nothing

There are a few considerations you need to look at before deciding what type of insurance is best for you, namely for how long you will need life insurance, your health, your family status, your financial situation and estate.

to simplify things, here is a basic comparison table

 

Term insurance Term 100 (permanent) Whole life (permanent) Universal life (permanent)
Coverage length specified period lifetime lifetime lifetime
Payout only if the insured dies during the term guaranteed guaranteed guaranteed
Premiums usually increase at renewal remain the same remain the same remain the same
Medical questionnaire/exam depends on the insurer, age and amount required depends on the insurer, age and amount required depends on the insurer, age and amount required depends on the insurer, age and amount required
Cash surrender value (if policy is cancelled) no usually no yes yes
Investment component no usually no yes, controlled by the insurer yes, more flexibility and choice for the insured
dividend and interest payment no usually no yes yes
Borrowing component no usually no yes, against cash value; decrease benefit amount if not repaid yes, against cash value; decrease benefit amount if not repaid
Use as collateral no usually no yes yes
Riders or adds-on usually no yes, additional benefits can be included yes, additional benefits can be included yes, additional benefits can be included
Overall cost cheaper more expensive very expensive very expensive
Other notes very difficult to obtain after 70-75 can be obtained up to 85; premiums cease at 100; coverage remains can be obtained up to 85 can be obtained up to 85
The major advantage of term insurance is the cost

This is mostly because the odds are in the favor of the insurer. It is very unlikely the insured will die during the term, particularly if they are young.

the main problem with term insurance is that you have nothing to show for it

You pay premiums for a determined period, but once the period has expired, you are basically back to square one. In determining the type of insurance you want, you have to be honest about how you feel about the above point.

the main principle behind term insurance may not be valid anymore

The basis for term life insurance is that as you age, your savings and assets grow, and that by the time you retire, you will have sufficient funds to cover final expenses such as funeral costs, estate taxes or probate fees.

Unfortunately, a lot of people do not accumulate enough wealth during their working years. We also tend to still be in debt upon retiring.

Last but not least, most of us will live well beyond 70-75 years.

the main benefits of permanent insurance are that payout is guaranteed and coverage is for life

Depending on your personal situation, it can make sense to have permanent insurance. For example, if you die at a ripe age with considerable wealth and your heirs are not your spouse or children, the taxes on your estate will be huge. If you want to leave a legacy, you are going to need money.

that being said, permanent life insurance distorts the definition of insurance

Insurance is a tool to replace lost income/property or to cover for a shortfall. It is not meant to build wealth. The returns on the investment component is usually not that great.

the biggest drawback is definitely the cost

Premiums are 4 to 5 times higher than with term insurance. You definitely need to crunch some numbers to see the total cost of your policy over the course of your life. Depending on where you are at, you might be able to save and invest that amount yourself.

final word

I have been reviewing my affairs recently. Although I am single, it doesn’t mean I don’t need coverage or that I don’t need a will.

Based on my personal situation, I am leaning towards a term 100 insurance. This type of insurance would provide me lifetime coverage without all the fuss associated with the investment and borrowing components. It is also slightly cheaper.

Financial milestone: consolidation loan fully paid-off!

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Yesterday, I made a lump-sum payment of a little over $ 8 000, effectively putting my consolidation loan to its final resting place.

Beyond the excitement of being finally rid of this loan, I felt a huge relief and also like a weight had been lifted off my shoulders.

until i saw the balance at zero, I hadn’t realized how much this loan was weighing me down

I initially took out this loan in 2011 to consolidate my student loans, a pretty much maxed-out line of credit and a couple of credit cards. At the time, the total amount was about $ 25 000, with almost half of it in student loans.

If you are wondering how I got to be $ 25 000 in debt, please read my story.

Fast forward to 2014, the loan was down to $ 13 000.00. Clearly, consolidating worked for me.

Unfortunately, I had bought a condo in a building that was not in great shape and I found myself faced with a special assessment of $ 6 000.00 for repairs.

Alas, I did not have that money saved. I had bought the property the year before, and my savings were at around $ 2 000.00. So, I went back to the bank and consolidated again.

I was back to being $ 19 000.00 in debt

It was crushing, and not just financially. I started suffering from debt fatigue. I felt like I would never get out of debt. This loan and the payment amount associated with it started becoming a permanent part of my identity.

then, i decided to fight back

After all, I had dug the financial hole I was in, and it was my responsibility to climb out of it.

I decided to throw in an extra $100 per month towards the “beast”, on top of the bi-weekly payments I had to make.

I had calculated I would pay off this loan 9 months ahead of schedule by doing this.

i lucked out with the sale of my condo

Yes, the very same condo that got me further into debt got me out of it. Ironic, I know. I sold the property last year, at over-asking price. Initially, I hadn’t planned on selling just yet. You can find the details here and here.

So why had this loan not been paid off earlier, you are probably wondering. Because I also had other competing priorities, like a lot of people.

I repaid the amount I had taken out of my savings for the deposit on the purchase of my second condo. Then, I bumped up my emergency fund, which was, for me, a necessity.

The lack of emergency fund is what got me into debt in the first place. I don’t want to be in that situation again.

My parents also came to visit me, and yes, I used some of the proceeds to enjoy my time with them. I don’t regret doing that for one bit!

Last but not least, I initially wanted to pay-off my car loan instead, as the amount was slightly lower and I would have owned my car outright.

I debated quite a bit and it took time to reach this decision. I am glad I did. The consolidation loan amount was for a longer period and a higher interest rate. I also had it for too long.

i saved $ 2 000.00 in interests

My bank periodically sent me information about my loan agreement. If I had let this loan run its full course, I would have paid an extra $ 2 000.00.

i now have more options, and it is freeing

It is really liberating not to have that bi-weekly payment above my head anymore. I am now on to tackling my car payment and increasing my retirement savings.

2018 will be the year of becoming debt-free!

Is paying an annual credit card fee worth it?

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I have been contemplating upgrading my American Express Air Miles card to the Air Miles Platinum one. With Air Miles announcing miles are no longer expiring, it could be worth upgrading for me. Air Miles has had a lot of controversies over the last few months and the company has been slammed many times by the general public as well as the media.

air miles has always worked for me

Or rather, I should write I have always made it work for me. Over the last few years, I was able to get 2 planes tickets, receive free gas and free groceries as well as going to the movies with a friend on numerous occasions.

The Air Miles Platinum card comes with an annual fee of $65.00. In comparison to other credit cards, it is actually fairly modest. Some cards come with annual fees in excess of $ 500.00!

most of the times, if you want better rewards, you will have to pay for them!

The whole purpose of this post is to figure out if paying a sometimes hefty annual fee is worth it.

the value of the rewards offered needs to far exceed the annual fee

It is -almost- as simple than that! You need to calculate the dollar value of the card benefits and rewards and compare it to the annual fee.

In my case, switching to the Platinum card would yield an extra 5 000 miles per year, on top of what I am currently earning. 5 000 miles could get me to New York during the low season, or I could go to San Francisco, then Las Vegas -still off season-. During peak season, I could go all the way to Montreal. That’s economy class for all.

If, for example I had to pay for a return ticket to SFO in October -low season for Air Miles-, it would cost between $ 300 to $ 325, as per google flights. The value of the reward largely offsets the annual fee.

There are also a few other considerations to look at before deciding to apply for a credit card carrying an annual fee:

you need to pay the balance in full each month

Credit cards can charge up to 30% of interest, with the average being around 20%. If you carry a balance and have to pay interests, you will loose the financial value associated with the rewards.

you need to charge everything to your chosen card

In order to reach and reap the rewards, you need to “centralize” your purchases. The big reason I have been able to enjoy various Air Miles perks is that I have been charging pretty much everything to my Amex over the last 6 years.

you need to redeem your points/miles

It sounds almost dumb to write this, but if you merely collect points or miles and never use them, paying an annual fee is a waste of money!

final words

Don’t discard a credit card with an annual fee right away. Do your research and compare; analyse your spending. You may find out paying an annual fee can work to your advantage.

Consumer proposal explained

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Please note I am not a Trustee in bankruptcy. This post is for information purpose only. 

There is an option to bankruptcy many people have never heard of: consumer proposal.

let’s start by defining a consumer proposal

A consumer proposal is a legal, binding agreement in which you agree to pay a portion of your unsecured debts; your creditors agree to forgive the balance.

This is very different from a bankruptcy, and there are definite advantages to choose a consumer proposal over the latter:

your assets are protected

Unlike a bankruptcy, your house, car and/or savings are not on the line. You can keep them.

you don’t have to make surplus payments

In a consumer proposal, your payment amount is fixed and for five years maximum. You don’t have to make any additional payment and you won’t forfeit your tax refund, if you receive one.

you are protected from your creditors

Your wages can no longer be garnished. Collection agencies can no longer harass you.

Here is how the process works:

a licensed trustee in insolvency works out a payment plan and presents it to your creditors

A consumer proposal is managed by a professional trustee. Payments will go through the trustee.

your creditors have 45 days to accept your proposal

No news means your proposal is accepted. Your creditors can also request a meeting to discuss further. Once the proposal is accepted, you have to adhere to all its conditions and attend two financial counselling sessions.

Most creditors accept consumer proposals. They know it is better for them than you declaring bankruptcy or not paying them.

a consumer proposal does impact your credit score & file

Although, it is “easier” than a bankruptcy, a consumer proposal has the same negative impact on your credit file. You also won’t be able to apply for credit until your proposal is completed. Your existing credit will be cancelled.

if you don’t meet the proposal’s requirements, you will be back to square one

That’s right, your proposal will be annulled and your creditors will come back after you for full payment of what you owe.

you need income to pay for the proposal

This is a mandatory requirement. Consumer proposals are also usually more expensive than a bankruptcy. You also need to pay the Trustee. These people do not work for free.

SECURED DEBT IS NOT INCLUDED

Your mortgage cannot be included in a consumer proposal, as well as any student loan less than 7 years old.

final word

A consumer proposal can definitely be a better option than bankruptcy. But before you decide to go with one, you should always try to pay your debts by yourself or obtain a consolidation loan.

 

New fee disclosure rules for Canadian investments (CRM2)

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Last July, long-awaited changes to the way fees on investments are disclosed came into effect. Under the auspices of securities regulators and the Mutual Funds Dealers Association, CRM2 finally rolled out. CRM2 stands for Customer Relationship Model 2.

This new model is primarily aimed at mutual funds and exchange-traded funds (ETFs).

the goal of crm2 is to provide better clarity on the cost and performance of investments, but does it really?

Here is what is changing:

some fees will now be disclosed in dollar amounts instead of percentages

Under the new rules, investors will know the dollar value of trailing fees, annual fee-based charges, commissions and administrative fees. Trailing fees are commissions a broker receives for as long as an investor holds a mutual fund or ETF.

This is interesting for D.I.Y. investors. Many banks now offer “low-cost” mutual funds, on the basis that self-directed investors do not ask or receive advice. Yet, they are still paying for it!

performance will be calculated using the money-weighted method

The money-weighted method is more encompassing as it includes all contributions and withdrawals as well as dividends and capital gains. The time-weighted method only looks at the length of time the money is invested. It is the financial industry’s preferred method, as it is a good indicator of a fund’s performance. This method does not give an investor any indication as to how their own portfolio is doing.

Statements will also need to show returns for previous years.

unfortunately, this is only half of the story. crucial info will still not be disclosed

Mutual fees and ETFs -the latter to a lesser extent- both cost money to manage. This is known as Management Expense Ratio, M.E.R. The ratio encompasses various expenses such as professional fees, administrative fees, advertising , accounting and legal fees…etc. These expenses are paid regardless of the fund’s performance.

The new rules do not require fund companies to give a detailed breakdown on the M.E.R. This is where CRM2 is lacking, as it is the most important piece of information! The M.E.R. has the biggest impact on a fund’s return.

investors won’t know how much their ADVISER is paid

The fee disclosed is the one paid to the firm not to the adviser. It is a lump-sum.

CRM2 does not address the elephant in the room

Although it is a step in the right direction in terms of transparency, Canadian investors are still largely kept in the dark when it comes to the true cost of having mutual funds and ETFs.

Most importantly, Canadians pay the highest fees on their investments. CRM2 fails to address this.

 

Travel insurance explained

 

Image result for travel insurance picturesPlease note I am not an insurance agent or broker. This post is to provide basic information only. 

Many Canadians believe their healthcare system is universal, but it is actually not exactly true. It would be more accurate to say it is compulsory, i.e. everyone has to register by law for coverage. In Canada, healthcare administration is a provincial responsibility, not a federal one, meaning there is no unique and unified system.Each province has its own program.

Your health coverage does not work abroad or in another province

While most Canadians are aware their healthcare system does not work abroad, very few are aware that it also does not work in another province….technically. Should you require medical assistance while in another province, you will only be covered at the rates in your province of origin. If the costs of another province are higher, you will have to pay for the difference out of your own pocket.

That’s why it is always a good idea to buy travel insurance if you are going away, even for a few days.

Here are a few tips to ensure you get the right coverage and that it actually works when you need it:

your travel agent is not an insurance specialist, buy from an independant broker instead.

Travel agents are usually not licensed to sell insurance. They will push for you to buy from them as they most likely receive a commission. They are not knowledgable enough to answer your questions, and you could end-up with insufficient or inadequate coverage.

beware of pre-exisiting conditions and disclose them

A few years ago, a story about a pregnant woman who gave birth in Hawaii made headlines in Canada. The couple had purchased travel insurance but the insurer denied their claim, based on a pre-exisiting condition and the fact she hadn’t been cleared for travel by the company’s doctor. The couple found themselves facing a 950K bill. Each insurer has its own definition of a “pre-exisiting condition”. It could be anything from heart surgery to pregnancy or a broken leg 10 years ago. You will most likely have to pay more for them to be covered.

beware of your leisure activities

If you are into scuba diving or bungee jumping and something happens to you while practising these activities , chances are that you won’t be covered.

your doctor’s opinion is not the insurer’s doctor’s opinion

Because your doctor cleared you for travel, doesn’t mean the insurer’s doctor has also cleared you for travel.

make sure you fill the application correctly

For example, don’t forget to include all the names of the people who need coverage.

ask a lot of questions

Ultimately, it is your responsibility to understand your policy and what it covers and what it doesn’t. When in doubt, it is best to ask.

Remember, insurance companies are not charities. If the insurer has an opportunity to deny your claim, it will do so!

Should you ever take a pay cut?

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A reader of the Money Savvy Blog asked when and if it ever made sense to take a pay cut. The surprising answer is yes! There are a few instances when it makes total sense to accept a job offer at a lower salary . Sometimes, there is actually no other option.

You are changing career

If you are moving from Lawyer to Teacher or from Teacher to Mechanic, you can’t expect the same salary, as you probably don’t have any experience in your new chosen field.

you are changing industries or fields

You may still have the same type of job, but if you are moving to an industry you know nothing about, chances are the offer will come with a minor pay cut. Same goes if you move from a technical field to an administrative one, even in the same industry.

you have been out of work for a while

At some point taking the same job with a lower salary makes more sense than remaining unemployed. Unfortunately, the economy has still not fully recovered from the 2008-2009 meltdown. The unemployment rate remains rather high and job prospects scarcer. I get it that salary is important, but if you get too picky, you may have to accept a survival job paying even less!

you need/want more work/life balance or flexibility

If you want to work fewer hours and take more vacation, or work from home, you should expect a cut. Unfortunately, you can’t work 30 hours a week and expect to be paid like you work 100 hours.

you are becoming self-employed

As I previously mentioned here, most of the times your company will not earn money right away. It may also take some time before your clients pay you.

you want to keep your current job

If your employer is having difficulties, you may have to accept a pay cut in order to keep your job.

remember, it is not just the salary

When considering a job offer, also look at the benefits offered such as extended health insurance, bonuses, vacation time, sick days etc…the value of a benefit package can add thousands of dollars to your base salary and save you money.

In my career, I took a pay cut a  few times: when I became self-employed, when I changed careers or when I had to pay for my bills. It did not prevent me from progressing money-wise.

What about you? Have you ever had to take a pay cut?

Four phases to financial freedom

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If I asked 10 people about their definition of “financial freedom”, I would most likely receive 10 different answers.

Financial experts and PF bloggers have identified 4 financial stages that most of us will be in at some point. Most of us will eventually be in stage 3, financial independence, but very few of us will actually land in phase 4, financial freedom.

  • Phase 1, Financial dependence: we all start there. We are first dependent on our parents. Then, we are dependent on our paychecks. Money -or lack thereof- is not really a concern. We may be racking-up debt, not saving anything or both. During that period, we tend to make financial mistakes after financial mistakes after financial mistakes. We are usually jostled out of this phase by a single event, for example a job loss. In my case, it was becoming a homeowner.
  • Phase 2, Financial stability: at this stage, we take our money more seriously. We are focused on paying debt-off, on ensuring our bills are paid in full and on time and on having some sort of financial buffer, a.k.a. emergency fund. We may also start saving for retirement and learn about investing and personal finances.
  • Phase 3, Financial independence: In this phase, we are consumer debt-free. We may still have other debts such as a mortgage. Some will actually be completely debt-free. We also have a significant buffer and are well on track in our retirement savings. In this phase, we start realizing we have more options for our lives. For example, we may be able to change jobs or take extra time-off without any hardship on finances.
  • Phase 4, Financial freedom: This is the ultimate Graal. In this phase, we are free to live the life we want to live. Money is truly not a concern.

A lot of people confuse financial independence with financial freedom. They are not the same. The truth is that achieving financial freedom can be hard and take a long time.

I personally am in phase 2, financial stability, but teetering on phase 3. What about you? What financial phase are you in?

Buying a pre-sale property

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Both the real-estate and construction sectors are hot commodities in Metro Vancouver. New developments are spurting everywhere and everyday. Clever marketing makes it sound and look very attractive to buy a piece of property without actually seeing the finished product. But is it really the case? Let’s explore!

A pre-sale or an off-plan is an agreement between a buyer and a developer, where a developer agrees to supply a property by a certain date in the future. The buyer agrees to pay an initial deposit and then, once the property is built, complete the purchase. Deposits are usually paid in installments over a number of months or years. This is what helps the developer with obtaining further financing.

The major advantage of a pre-sale is that the property will be brand-new and in most cases customized to the buyer’s tastes. The property will also have warranty protection, usually 2-5-10 years . If something goes wrong during that period, it can be fixed at no costs to owners. An important advantage is also the building of equity. As house prices rise so does the contract on the property.

Pre-sales are hugely popular with investors. Pricing is usually a bit lower and they can usually see a profit before the property is built, and because it is brand new, they can rent it for a higher price. There is also a 7-day rescission period, in which the buyer can decide to opt-out.

Now, on to the disadvantages, as yes, there are a few.

  • GST is mandatory, 5% on top of the purchase price, which could mean thousands of dollars more
  • You may not qualify for a mortgage on a pre-sale. A lot of lenders are reluctant to pay for something that does not exist. A lender may also agree to fund only what the property is worth when built. It could be less than your purchase price.
  • Since the property will take a few years to be built, a lot can happen during that time: changes in your circumstances, in the real-estate market, in mortgage rules….you have to be aware of this before committing.
  • There could be delays in construction or in delivery date and you will be required to pay occupancy fees, even when you don’t live in the property. Nothing you can do about that!
  • Once you have signed, you can’t back-out of the purchase. Reassigning the contract could be difficult.
  • You most likely won’t be able to sale your property before the developer has sold all the units/lots.
  • The end-result could be different from what you asked.

As with everything, you need to do your own due diligence and research before buying a pre-sale and assess your risk tolerance. Be sure you have a lawyer or a realtor review the documents from the developer. The majority of developers will try to discourage you from having a lawyer or a realtor assist you. Don’t get fooled by this.