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)

CEO Pay: Houston (Toronto, London), we have a problem

People may have noticed the rich pay for CEOs in 2010 reported in Canada's CEO Elite 100 and dismissed it as the usual envious chatter emanating from a left-leaning policy institute. From my perspective as an investor with holdings in all these companies, direct or indirect (we pretty well all do through our pension savings, ETFs, mutual funds etc) I think they have a point.

An epidemic of overpaid CEOs
The plain fact is that CEOs earn too much. All the pay-for-performance, maybe-they-earned-it arguments fall by the wayside when one realizes that CEO pay has been rising much faster than employee wages in those companies. The pre-amble to the CEO report says the average CEO collected 189 times the average Canadian wage in 2010, up from 105 times in 1998. Have we entered a golden age of company profits and investor returns? Have CEOs been responsible for all good things in industry such that they merit the lion's share of any gains?

A long-developing epidemic across industries and major countries
It's not just the current whipping boys in the banks and the financial industry either. The phenomenon cuts across all industries. It's not just Canada either. The same meteoric CEO pay increase has been happening in the USA (e.g. see this recent academic paper by Jerry Kim, Bruce Kogut and Jae-Suk Yang on SSRN which refers to many studies on the topic, or Meritocracy vs Plutocracy on The Big Picture blog) and in the UK (see Pay and Performance: creating a fairer share of rewards) where it is such an issue that Prime Minister Cameron is promising to legislate shareholder votes on CEO pay that bind the corporation.

The research papers document that the epidemic began around 1980 and really took off during the Internet boom. The Kim et all paper maintains that though the Internet stock price bubble popped, it did not pop on pay. Instead the bubble caused a lasting upward shift in the norm for CEO pay expectations.

Update March 27 - Two other papers reinforce the idea that a problem exists by showing a longer historical perspective and pinning down wages as the main culprit. Note how the top income earners are getting a bigger share since around 1980 in TOP INCOMES IN THE UNITED STATES AND CANADA OVER THE TWENTIETH CENTURY by Emmanuel Saez:

Note also how wages is the main driver of this trend in this chart:


The Rise of Canada's Richest 1% by Armine Yalnizyan of the Canadian Centre for Policy Alternatives has this chart that shows the trend continuing unabated up to 2007. Table 2 in the paper also confirms that wages are the main component of top earner incomes.


CEOs acting like children and playing leapfrog
Every parent will recognize the basic mechanism by which CEO pay goes up. If one child gets something then the other expects the same thing. Peer comparison is the most important factor by far in establishing the pay level for a CEO. Despite all the complicated schemes (read the details for any public company in its annual Management Information Circular which is available on Sedar - click on Search Database then Search for Public Company documents - for every Canadian TSX listed company), they all boil down to more or less what similar companies pay. Apart from the academic studies that confirm the fact, the telling and remarkable result of these complex compensation plans is that somehow, year after year, whatever company financial results or stock performance, CEO pay almost always rises, often in huge upward leaps, and almost never goes down.

A paper by Thomas DiPrete, Greg Eirich and Matthew Pittinsky says that the few CEOs who manage to leapfrog each year to the upper end of the pay scale pulls every else along in a chain reaction. A governance failure in one firm propagates through all companies.

CEO Myths - motivation, retention and talent
It is astounding that CEO performance motivation is constantly invoked as a primary justification for high pay and big bonuses. Hey, I went to business school too where I learned that Maslow and Herzberg long ago determined that pay is not a performance motivator. At best it is a potential dis-satisfier.

There is evidence from Harvard Law School that high CEO pay harms a company - "Corporate Pay Slice [CPS = CEO's percent take out of the top five execs] is negatively associated with firm value" - in CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer.

Another oft-cited reason is that should the big pay not be granted, the CEO will leave and perhaps the Board will resign too. Fine, let's call their bluff, let 'em resign. In the UK, Easyjet founder and major shareholder Sir Stelios Haji-Ioannou denounced fatcat bonuses proposed by the Board, noting that the Board and executives could be easily replaced. One of the things you quickly learn in the corporate world is that life goes on without you, you can quickly be replaced and forgotten.

There are plenty of competent people around. The plain fact is that almost all of the so-called corporate superstars are nothing of the sort. Most are managers, keeping things going that others have created with improvements at the margin. Very few make orders of magnitude positive difference. Many destroy a lot more value than they create.

How many real business superstars are there? Think of the difference between the ultimate results of true superstar Steve Jobs and former Apple CEO John Sculley (isn't it interesting that Sculley was the highest paid executive in Silicon Valley in 1987). A corporation is a team and the CEO may have an important role as the captain but without the rest of the players, he or she won't succeed. The CEO Forum has a good discussion of the matter in Is talent overrated? (the answer is yes it is).

CEOs get their real reward from the feeling of power, of being the top guy. Pay only matters to the extent that it is close enough to peers.

Set the ball rolling in the other direction.
A few days ago, Royal Bank of Scotland CEO Stephen Hester turned down a bonus of £963,000 (it is interesting in itself how many news reports talked of a £1 million figure, as if the difference is inconsequential; I daresay most taxpayers would be overjoyed to receive that £37,000 in small change, which was treated as a rounding error) just after the RBS Board Chairman Philip Hampton had himself decided to forego his £1.4 million bonus. The fact that the RBS came to be majority owned by the British taxpayer during the credit crunch gave politicians the leverage to cause the bonus refusal.

But hey! Now we have a new peer reference point for Canadian banks to apply the peer reference method so cherished by compensation schemes! Hester's salary is £1.2 million, or about $1.9 million. The CEO of Canada's own Royal Bank, Gordon Nixon, pulled down $11.8 million in 2010 according to the CEO Elite report. Hmm, that looks to be about $9.9 million too much. Since RBS is actually more than twice the size of RBC - £1522 billion (CAD$2395 billion) in 2010 assets vs $718 billion - Nixon should get about half what Hester gets, shouldn't he? Yet, even including the refused bonus Nixon made almost four times as much as Hester.

Another peer benchmark possibility, since most of these CEOs are not much more than bureaucrats - indeed it is debatable whether a CEO's job is tougher than a senior civil servant who has to contend with public politics not just the corporate variety - would be to benchmark CEO pay against the civil service. The feds pay a maximum of $360,600 in the top GCQ-10 scale and $513,000 at the top of the crown corp scale.

What's comparable anyway? "Long time ago, a CEO explained to me the only difference between big business and small business was the number of 0s after the number" from FrontOfficeBox.

Compromise CEO pay proposal
Let's set the maximum ratio of total CEO compensation to a firm's median employee pay at 40 times (e.g. if median employee is paid $40,000, CEO gets at max $1.6 million) which was more or less the situation around 1980 when things started down the wrong path. Let Boards figure out whatever arcane method they wish to arrive at that result. 40x is very generous, as the CEO earns in one year what it takes the employee 40 years, almost a whole working career, to earn.

Putting fatso CEOs on a money diet
Many of the mainstream proposed solutions to reign in CEO pay involve improving corporate governance. These include: limiting poison pills, eliminating golden parachutes, stopping so-called shareholder rights plans that entrench management, enhancing board independence etc. But governance has been improving in the last decade at least, while CEO pay has continued to rise disproportionately, so it's doubtful that will have a big effect.

Perhaps "say-on-pay", especially if it is mandated by legislation, would have some effect. Since Canadian governments have said not a peep even about advisory say-on-pay, I'm not holding my breath.

The most effective mechanisms would affect what I think is the root cause of this long-lived bad trend. A culture change is required. Corporate Board and executive thinking needs to change.

Hit 'em in the ego where it matters. Praise the good guys for reasonable pay, dump on the greedy, make reasonable pay a morality issue, practise social ostracism - something like the drinking and driving campaigns that transformed attitudes and behaviour. A good example of that kind of expression of disapproval is the stripping of the knighthood granted to the man whose actions as RBS' boss almost sank the bank, Fred Goodwin. Apparently he cannot find a new job. Good, Goodwin's kind of "talent" isn't really needed by the world of business. The hysterical reaction of the British business community indicates the arrow of scorn has hit its mark.

Canada could stop awarding honours like the recent the Order of Canada to people such as Calvin Stiller, notorious as founder of the horrible money sinkhole investment fund, the labour-sponsored Canadian Medical Discoveries Fund. To add insult to the financial injury to investors, the Order cites his "his leadership as a medical entrepreneur"! Check out the Morningstar price chart for CMDF, see what people on Financial Webring think of it, a sentiment with which I totally agree since I lost 80% on my own investment in CMDF). Perhaps Stiller is an outstanding doctor but a successful entrepreneur he ain't.

Canadian CEOs bloated from eating too much shareholder lunch
On my other blog recently, I posted my choice of the worst CEO pay offenders, like Marc Tellier of Yellow Media and Frank Stronach of Magna International.

To keep the proper positive outlook for the future, next post will cover some of the few Canadian companies that I think are closest to being on the right pay track.

Risk-Efficient Indices - Evidence from Live Results

One of the biggest problems with any financial research is that patterns and strategies that worked in the past may not work in the future. The folks at the EDHEC Research Institute who created supposedly "new, improved" Risk-Efficient Indices about which I wrote a year ago, have now come out with data in the Live Results article that tests their theory. It uses actual results from the last two years, data that comes from the time after the new index method was worked out and thus could not merely be suited to the method simply because it was part of the data set used to create it.

The "new, improved" indices are put up against the traditional cap-weighted index method which is taken as the benchmark or representation for all major markets like the S&P 500, the TSX 60 or Composite, the FTSE 100 and which underpins all the biggest ETFs around. EDHEC also compares results of other alternative indexing methods (which die-hard cap-weight believers refuse to call indices at all) like Equal-weighting, RAFI Fundamental and Minimum volatility. Here's one of the EDHEC charts for the US market.



1) The good ole cap-weight S&P 500 loses to every other method, not only in terms of raw return but also in various measures to adjust for risk (Sharpe ratio, Sortino ratio, Information ratio, Treynor ratio), just as it did in the model-building time period.
2) The FTSE EDHEC Risk-Efficient Index wins by the most and by a huge amount over the S&P 500.
3) Minimum Volatility is a close second, perhaps even first, given the risk adjustment ratios. Perhaps the new ETFs launched on this basis, which I wrote about in my other blog in Low Volatility ETFs - Promising Safety and Reward, are worthwhile.
4) The Risk-Efficient out-performance is repeated separately in the UK, Eurobloc, Japan and Developed Asia ex Japan. RAFI fares indifferently (oh-oh, for my portfolio!). The other two couldn't be tested.
5) The Risk-Efficient performance is primarily NOT due to exposure to small cap and value factors. It comes from better stock weighting.
6) "... provide some evidence that the performance advantages of efficient indices largely stem from the improved diversification."

So far, I've only been able to find one actual live fund that applies the new Risk Efficient index method, the Parworld Track FTSE EDHEC-Risk Efficient Eurobloc traded in Luxembourg. Expect more to come from the ETF industry.

Is this a real improvement over cap-weighting, or an artifact of data that doesn't go far enough back (only to 1959 for the S&P 500)? Of course, by the time there is enough data to satisfy everyone, we will all be dead.

World Economy Trends from McKinsey: Long Slow Recovery in Progress

Consulting firm McKinsey Global Institute's Debt and deleveraging: Uneven progress on the path to growth tells us that the recovery from the global credit crisis, three years later, has only just begun and will still take many years to complete. That's the bad news. The good news is that this is in line with past similar crises.

Canada used to be so much better off than the USA in terms of total debt but now things are fairly equal as Canadians have added debt while Americans have shed it. Amongst major economies, the USA is going fastest in the right direction according to McKinsey. Breaking the debt down by sector, another chart (Exhibit E4) shows that Canadian financial institutions have considerably more debt proportionally than those in the USA.

Exhibit A4, copied below from the long version of the report, shows that counting unfunded US government pension and health benefits for retirees pushes the US debt burden up to 140% of GDP. That still leaves it no worse in total than countries like Spain and France. The two countries by far in the worst overall debt shape, both of which have not even started deleveraging, are Japan and the UK, yet their borrowing costs are not at crisis levels. Huh?

Takeaways for investors: 1) Canadians should not be smug and should not count out the USA (you don't get to be number 1 for no reason); 2) Expect 3-4 years more of uneven weak economic times before things get much better though the "getting worse" phase seems to be finished; 3) Opportunities will arise for companies in infrastructure and public sector projects since governments won't be able to add more debt to build them; 4) Consumer demand won't be strong.