Book Review: 52 Ways to Wreck Your Retirement ... and How to Rescue It by Tina Di Vito

Looking for an easy to read and digest introduction for the ordinary "Joe" with the basics of how to make a success of retirement? If so, this book by Tina Di Vito, who is the head of the BMO Retirement Institute, is aimed at you.

Written in an informal style with a smattering of numbers and almost no tables, graphs and calculations, the book speaks to the reader in the manner of a chat at the kitchen table by a knowledgeable friend. Each of the fifty-two chapters covers one or two ideas in about five pages, with single sentence "to do" points at the end of each. It is easy and pleasurable reading.

It is thus no surprise that the content provides a good understanding of the nature of problems and their solutions but for the most part, does not give enough knowledge for the reader to go off and fix things him/herself. It is not a book for the DIY person. Rather it is a book that prepares the reader to be a smarter consumer when going to seek the advice of a professional advisor.

To make the bottom line message of the book "go get professional advice" is fine. But I wanted more detailed and trenchant coverage than we get in the chapter (51) on the topic of who to get advice from. The reader is given a list of twelve types of accredited advisors with each designation's title, initials, website link and description. That's a good start but the descriptions are too overlapping and vague to allow someone to know which to choose for what problem and how or whether to assemble a team.

It was also disappointing not to read more cautions about advisor compensation and the potential for conflicts of interest between what is good for the advisor and what is good for the client. The existence of commission, fee-based and fee-only compensation models is not explained, nor the dangers lurking for clients whose advisors do not act first and only on their behalf. That is as surely a way to wreck one's retirement as any other in the 52.

Similarly, the author could have been more forceful in emphasizing that retirees should pay close attention to the costs and fees for various products mentioned. Whether it is mutual / ETF funds, insurance, principal protected notes, segregated funds, flavours of annuities and retirement income products, costs matter a lot in deciding whether any are worth buying at all. The idea may fit the problem but the fees/costs may be too high.

Favorite Bits:

• see yourself old and save more for retirement ... a research study is cited wherein people who were shown an image of themselves digitally altered into old age saved at more than twice the rate ... since I do not have such software, I'll just have to make do with looking at my parents instead!
• people buying stuff with a credit card instead of cash are willing to spend 50% to 200% more for an item
  
• retirees feel a loss five times more than a similar gain; that sensitivity, aka aversion, to losses compares to the usual 2:1 ratio cited for the average person; I looked up the original study at AARP here and discovered that in fact many retirees scale at 10:1 or more.
  

Rating: Not the complete story but worthwhile, 3.5 out of 5 stars.

Thanks to the publisher Wiley, where the complete table of contents can be viewed, for providing me with a review copy. It is also available there for purchase in Adobe's Digital Editions (software is free download) eBook format, which is how I've read it on my laptop.

TurboTax Online Web Software Giveaway

The Canada Revenue Agency online tax submission service is open for business and the receipts we need to prepare a tax return are being mailed out these days (see a timetable for this tax year here). The tax software vendors are ready too.

Thanks to Intuit, the makers of TurboTax, I am giving away three codes for any online web version of TurboTax. That's right, prepare your taxes for free, a value of $17.99 for the Standard version, or $32.99 for the Premier version (adds investments and rental income) or up to $44.99 for the Home and Business version (contract worker or self-employed) .

Here are the details of the giveaway:

• To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software since I am again working on my annual review of all the CRA Netfile certified packages (last year's review here); use a unique name (Anonymous won't suffice!) so I can distinguish people
• One entry per person please
  
• Entries close Friday, March 2nd midnight EST
• I'll do a random draw of three (3) names from amongst the entries after the deadline
• Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the TurboTax software (your email will not be used for any other purpose than to contact you as a winner)

Good luck, everyone!

Judge Lays Out Limitations of OBSI

A judge would be considered by most an expert in justice and an impartial observer of the conditions that lead to justice. It is thus worth noting the recent comments of Judge Bryan Shaughnessy of the Ontario Superior Court regarding the Ombudsman for Banking Services and Investments (OBSI). Though his comments are made only in relation to whether the OBSI would be a suitable body for resolving a class action in the case before him, I think his list applies in general to OBSI as a means for investors to get justice.

Here are the defects and limitations Judge Shaughnessy lays out:

• the OBSI invites participation by firms but cannot compel cooperation
• the OBSI can make a recommendation but it cannot compel a firm to make the payment recommended
• the only remedy for non cooperation by the firm and/or not following the recommendation is the "rather anaemic remedy" of publishing the name of the firm and details of the refusal
• the enforcement procedure is not binding on the firm; this amounts to "... a denial of access to justice" for investors
  
• the OBSI can only handle complaints for amounts up to $350,000 unless the parties agree
• claims for punitive damages are not an explicit option under OBSI; I would guess this is what the Judge is thinking about when he says later that behaviour modification "... does not appear to be the objective or mandate of the OBSI process".
  
• "The appearance of impartiality and independence of the OBSI is to some extent in play. ... [since] the ombudsman's recommendation is not binding on the Participating Firm or the Complainant. A truly impartial and independent body would have control over its process."
• the OBSI dispute process is sparsely defined
• there is no hearing process for complainants to introduce evidence or make submissions and there is little or no chance for investor participation
  
• the OBSI is not bound by rules of evidence
• the procedure by which recommendations are arrived at does not lead to a record of how the OBSI's recommendation is calculated

So there we have it, a checklist for reforming and strengthening OBSI.

Don't get me wrong. OBSI, even with its deficiencies, has been doing valuable work for investors. It does, however, need a counter to the industry offensive to shun it, no doubt spurred by too many cases where OBSI has taken the investor's side. As the saying goes, the best defense is a good offense. Let's reform OBSI and make it a body with sharp teeth and power. Go to it politicians.

Thanks to Ken Kivenko of CanadianFundWatch.com for the heads-up on this court case (the details of which seem to show some odious, abusive practices involving mutual funds, financial "advisors" and inappropriate leveraging advice). Ken's website also has a very practical (and sobering) investor guide to dealing with the OBSI. The pdf judgment from which I extracted the Judge's ideas is linked to on this page of the website of Thomson Rogers, one of the law firms in the case.

CEO Pay: Seven Canadian Companies with their Heads Screwed on Right

My last post about the insane escalation of pay for CEOs over the last few decades finished with a teaser. It promised a list of companies where some sense of sanity seems to prevail against the tide, where the rewards for CEOs can be more justified, a) in relation to wages of average earners (e.g. 40 times a $40k wage, or CEO pay maxing out at $1.6 million) and b) in comparison to what the shareholders obtain in returns.

So here we go. Below is a table of my star companies, entered in the Globe's WatchList to show some performance data. Note how all the companies have positive five year total stock returns - shareholders have made money in every case and in most cases have made a lot of money. Just as low cost funds give good investor returns, so do low-CEO-cost companies! They are all generating earnings and in all but one case, sport a healthy return on equity.



1) Ritchie Brothers Auctioneers - CEO Peter Blake earned $796,000 in 2005 going up to $1.1 million in 2010, a increase of about 1.4x. That salary is among the lowest on the TSX yet the company isn't the smallest by any means. Total shareholder returns from 2005 to 2010 can be seen in the graph and table below from the company's Management Information Circular for 2011 available from SEDAR. Ritchie has outdone the TSX by a big margin.


2) Keyera Corp - CEO James Bertram enjoyed pay of $1.4 million in 2010, up 1.3x from 2005. Meanwhile shareholder return climbed by an even higher multiple of 2.0x. This company pays a healthy and growing dividend. It has cranked out consistently rising profits since 2006 and the latest quarters continue the trend. Pretty darn good, to put it mildly.


3) First Majestic Silver - CEO Keith Neumeyer's $1.4 million pay packet in 2010 represents a 7.0x rise over 2005 pay. Mind you, at the end of 2010 he was also sitting on $6 million or so of value in uncashed in-the-money options. Shareholders still enjoyed a 7.2x return during the same 2005-2010 period.

4) Fairfax Financial - CEO Prem Watsa chooses not to be paid like other CEOs since he is also the company founder and controlling shareholder. Therefore I've replaced Watsa's pay with the next highest exec's, COO Bradley Martin - $1.2 million in 2010. He got $841k in 2005. That's up 1.5x. The 2005-2010 shareholder total return, shown in the graph below, outstripped that handily, up 3.2x. There's a decent and rising dividend too. Recent quarterly earnings have been hit hard but at least we know the CEO is suffering along with the rest of shareholders. As the Management Information Circular puts it: "Mr. Watsa’s compensation arrangements reflect his belief that as a controlling shareholder involved in the management of the company, his compensation should be closely linked to all shareholders; this close link is achieved by his “compensation”, beyond a fixed salary, coming only from his share ownership." Hear, hear.


5) Pembina Pipeline Corp - CEO Robert Michaleski pulled in $2.6 million in 2010, up 2.4x over the 2005 figure. Shareholders got more or less the same increase. Pembina pays a healthy dividend, which has been rising at a reasonable rate too. The pay level is starting to get high but includes no options. Instead it is about half in shares so the CEO's fortunes should continue to evolve more or less in line with those of shareholders.

6) Silver Wheaton Corp - CEO Peter Barnes's pay of $3.3 million was up 2.0x from 2008 to 2010 while shareholder returns were 4.9x. At the end of 2010, Barnes also held in-the-money options worth over $19 million and had exercised options during 2010 for a gain of $7.4 million. This company is not typical of other more mature companies as it was only launched in 2004, Barnes being one of the founders. During 2005 there was no actual salary paid to the CEO as management was compensated through a contract with another company, which is why I've compared only from 2008 onwards. Silver Wheaton has a lot more the allure of a situation where entrepreneurial founders have perhaps earned greater gains by creating true value ... or perhaps they have been lucky so far since the business model depends hugely on a high and/or rising price of silver.

7) SXC Health Solutions - CEO Mark Thierer made $3.7 million in 2010, a rise of 3.3x over 2005. Meanwhile shareowners in the same period made a far greater return of 8.2x. That's generally what investors would like to see! However, it's hard not to notice the extremely high P/E of 43, suggesting that shareholder returns are exposed to a possible drastic fall. For example, if the stock price fell by half to a high but more normal P/E just over 20, the shareholder return of 8.2/2 = 4.1 would still be as good as the CEO's. Seems fair enough. (The company has never paid dividends, so all the return is share price appreciation.) SXC has grown by leaps and bounds since its IPO in late 2005. Revenues rose from a mere $79 million in 2006 to $1936 million in 2010, with the biggest jump occurring in 2008 with a very large acquisition. Profits have been consistently rising though nowhere close to the same pace as revenue.

It is encouraging to see that at least a few companies have their CEO head screwed on right. The above companies are not the only ones so blessed, though others that fit into the mould are not numerous.

Addendum: a few more companies where CEO pay meets my criteria (2010 pay in brackets): Reitmans Canada ($1.5M), Aecon Group Inc ($1.5M), Inmet Mining ($1.6M), Russel Metals ($1.6M), ShawCor Lt ($2.2M), Laurentian Bank ($2.2M)