In episode 24 of the Canadian Couch Potato podcast, I’m joined by Preet Banerjee, the Renaissance man of personal finance. After a stint as an investment advisor, which ended in disillusionment, Preet went on to become a media personality, an author, public speaker, fintech entrepreneur and academic. In our interview we discuss his current research on the plight of the Canadian investor, as well his latest project, called Money Gaps, an online tool designed to help advisors offer better financial planning services to their clients.
The worst argument for active investing ever?
In the Bad Investment Advice segment, I almost lose my composure responding to an article that recently appeared on the Forbes website called Why Most Index Funds and ETFs Are Not Good Investments.
The author of this piece uses a common technique in the financial industry: he takes some seriously biased data compiled by an investment firm, dresses it up as a “study” and tries to pass it off as evidence that active funds should be expected to outperform index funds and ETFs.
The term “study” suggests some academic rigor, but what we have here is actually a marketing piece created by Fidelity Investments to sell its active funds to advisors. Anytime someone with a vested interest presents data like this, it’s important to understand the methodology. And in this case, if you dig into the fine print you’ll be smacking your forehead in disbelief.
I wasn’t the only one who was blown away by this shabby, irresponsible argument: Jason Zweig refuted the Forbes article and Fidelity’s claims in a piece in the Wall Street Journal (subscription may be required). Sometime later, Fidelity removed the offending slide deck from its website. Can’t say I blame them.
Should you buy a condo or REITs?
Our listener question this time comes from Sheraz, who is thinking about buying a rental property and is wondering whether a REIT fund might be a good alternative.
A lot of investors like to draw a parallel between purchasing property and buying real estate investment trusts. Some homeowners say they would never purchase REITs in their portfolio because they already have a significant amount of their net worth tied up in their house. Renters, on the other hand, sometimes argue they should add REITs because they’re not getting any exposure to real estate through homeownership.
The problem with these comparisons is that houses and condos are unique, undiversified assets, and they are unlikely to have any correlation at all with a portfolio of REITs. For example, the iShares S&P/TSX Capped REIT Index ETF (XRE) holds 19 individual Canadian REITs comprising about 30% retail properties, 24% residential, 11% office space, 10% industrial, and a number of other smaller categories. There must be hundreds, perhaps thousands of individual properties in this portfolio, and they will be spread out all over the country. The price of your suburban bungalow in southwestern Ontario or your two-bedroom condo in Calgary is likely to have zero correlation with Montreal office towers, a Burnaby shopping centre, or a senior’s residence in Moncton.
That’s why I think it’s unhelpful to think of this decision as, “Should I buy a condo or should I buy a REIT ETF?” This is not much different from saying, “Should I start my own business or buy a broad market equity ETF?” Everyone can appreciate that owning one business is fundamentally different from owning a small stake in hundreds or thousands of businesses. But this seems somehow seems less obvious in the context of real estate.
The decision is really more about whether you are prepared to be a landlord, or whether you would prefer the more low-maintenance option of owning a diversified portfolio of ETFs.
It’s probably fair to say that a traditional index portfolio will generate less income than one that includes REITs, but that’s not necessarily a problem, even in retirement: it’s easy enough to generate regular cash flow from your portfolio even without investments that focus on yield.
@30 minutes : So if our assets stand somewhere BETWEEN 50k and 5 million (most readers presumably), would we or not be able to find and independent financial advisor? I realise this may be hard to answer with just a monetary value (and thus Bannerjee’s wide gap) but t would be very useful to have a more precise idea before wasting hours searching for one.
I don’t think you ever got around to posting the income generating link: https://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/
@Andrew: Many thanks, I have updated the post to include the link.
@Selfinvested: Preet was exaggerating to make the point, but it is not unusual for good, low-fee advisors to have minimum household account sizes of $500K to $1M. And that is more than the vast majority of Canadians have to invest, so this is a real problem. I think it is still worth looking if you are in the $200K to $300K range, but it will be very hard to find someone with excellent service and low fees with a portfolio smaller than that, unfortunately. That’s why many people should consider some kind of DIY or robo-advisor option, perhaps with a fee-only financial planner when necessary.
Another great podcast, Dan.
I suspect that many DIY investors including followers of Canadian Couch Potato have a blind spot when it comes to financial planning. The typical advice “find a fee for service financial planner” is incomplete, because, as Preet mentioned, you don’t know if you are going to get a good planner or not. Also, as mentioned, financial plans tend to go stale after a couple months and need to be updated on an ongoing basis, or at least as life events change.
I think there is a need to be filled here – DIY financial planning. DIYers are a bit of a different breed – they want to take control of their own financial plan, run scenarios, and update it on an ongoing basis. Cut out the middle-man completely. Are you aware of any such tools or resources – existing or in development – that would allow DIYers to take charge of their own financial plan?
As Mark says, for the (perhaps lower range) DIYs, a book on financial planning would be good. Is Preet writing one?
By the way, appreciated the inside look early in podcast re: what financial advisors within banks can or cannot say in public…
Very informative & helpful.
Thank you both.
Really enjoyed listening, a big Thanks to you and the team!
Sorry to go a little off topic, but I had some questions regarding the Fidelity ZERO Total Market Index Fund and the Fidelity ZERO International Index Fund you had mentioned in a Moneysense article.
Is there a way for Canadian investors to buy these products?
@David: No, it is not possible to by US-domiciled mutual funds in a Canada account.
For clients that have min $100K there are the financial planners at the bank branches (CIBC Imperial service, RBC financial planning, etc.) or the independent financial advisors from the likes of IG. Banks actually take the household’s financial assets and sometimes even family members like aunts uncles can be included in the total, so the $100K may be more plausible. And these financial planners can offer fee-based asset management with competitieve rates.