Wealth Trivia - Where do You and We Stand?

Came across this interesting post titled Wealth of Nations on the Enough Wealth blog. Want to know where you personally stand on the wealth ladder, or Canada or the UK or the USA? Check out
the original paper "The World Distribution of Household Wealth" by J. Davies, S. Sandstrom, A. Shorrocks, and E. Wolff''. It has lots more fascinating trivia. The data is from the year 2000 in US$ so one would need to add for inflation (16-20%?) to bring absolute numbers up to date.

EnoughWealth does a little calculation to figure out that the USA isn't the richest country per head, it's Japan. Canada is 7th while the UK is 3rd.

Other goodies from the paper:

• Canadians are much less adventurous than people in the USA when it comes to holding stocks and equities - 32% vs 51% of total financial assets (the other choice is liquid assets) are held in stocks and equities; the UK is even further behind at only 25% (cf Table 3) but the Italians are the champions at 55%
• there are about 13,568,229 millionaires in the world, 451,809 people with ten million, 15,010 with a hundred million and only 499 with a billion - each higher step has only 3.3% of the number in the group below
  
• Canada has its wealth spread more evenly than both the USA and the UK - the wealthiest 10% held only 53% of the total in Canada vs 70% and 56% respectively
• the highest net worth per capita was in the USA at about $144,000 - where do you or your family stand? (I think the reason that Enough Wealth's table differs and puts Japan ahead of the USA is that he draws his data from a table in the original report which is per adult not per capita); Canada's net worth per capita was only $89,000 (or $72,000 according to another method the authors used to estimate the figure) and the UK was $129,000; interestingly, Greenland is at $138,000
  

Why an Emergency Fund? Part 2: Job Loss

This is the second in a series looking at the need for a special emergency fund to tide one over through various crises. Part 1 looked at Death.

Today's installment examines involuntary job loss, aka layoff, firing, redundancy, downsizing - take your pick, they all can hurt just as much financially and perhaps emotionally as well. Maybe some forms of suddenly voluntary quitting a job, like abuse or harassment, can be included too, the principles and effects are the same.

In keeping with the pattern of the series, I'll first look at the probability of the event, then the potential cost/consequences and finally the alternative risk responses to decide whether an emergency fund is needed at all and if so, how much is needed for this component. At the end of the series, I'll add the results up and deal with what form the fund (if any) should take.

Event #2 - Job Loss
Probability - There is no single answer for everyone, it depends on your circumstances and you must figure the chances for yourself.

If you are retired, then it's pretty hard to get laid off, no? Cross yourself off as needing an emergency fund because of job loss. Even the 17% or so of retired people who do work mainly seem to do so because they enjoy it, not because they need to, according to the Fidelity report I blogged about a few days ago.

Similarly, if you are self-employed you cannot really fire yourself, though a lack of work caused by external forces can happen and variations or gaps in income are part of the landscape for most. The self-employed contractors and individual consultants that I know tend to keep a financial reserve to even out cash flow from assignment to assignment. But what follows is mainly about and for those working for an organisation as an employee.

The chances of permanent layoff vary a lot according to a number of factors, as revealed in Stats Can's study Permanent Layoff Rates. Here is a rough summary:

Chance of being laid off within the next year -

• men 7-8%
• women 3-4%

Relative to the average, + = higher chance, - = lower
+ for younger people
+ higher paid
++ small firm, i.e. double the chance in a large firm
+ manufacturing (the rising loonie effect)
++ primary and construction industry
- public services
- highly educated

The chances of being laid off changed very little (less than a percentage point) between 1989 and 1999, both good periods for the economy. As the study says but doesn't quantify, layoffs rise during recessions. The study only states the risk of layoff within the next year, not a whole working career, which must be a lot higher. In sum, there is thus a significant chance that a person, on average, will be laid off sometime in their career. The risk is not negligible.

Special circumstances may arise at any individual organisation that can cause a very high risk of being laid off. I'd say that almost always, those periods of threat are very visible to the average employee and are also known many months, often years ahead. In my own case, I have been laid off two and a half times in my career - once, in a federal crown corporation that was abolished through a policy change, which took years from idea to action; once, in the high tech meltdown when the internal rumblings and the external slaughter started 8-10 months ahead of my own walk down the plank, and a half once (through an internal transfer I was able to escape my abolished job), at a municipal government where the council's budget problem was highly public knowledge six months ahead. When those storm clouds start building, don't ignore them!

Cost - The impact of job loss is without question enormous for everyone (again excluding retired people) as one's pay is the largest, most often the only significant, source of income to live on. Take your net pay and that's the effect you will feel. It is thus the multiple to use in figuring how many months - from zero upwards - you will need.

Risk Response -
How long will funding be needed?
Before looking at alternative responses, you need to estimate for how long you might need funding. That's a tough one because getting a new job and ending the emergency depends a lot on how much smart effort you expend on the job search and a little on luck (not the other way round ... remember the quote, ''The harder I work, the luckier I get'' attributed to both film mogul Samuel Goldwyn and golfer Gary Player?) It is possible to be out of work for a year or more. An often quoted rule of thumb is about 1 month of search for every $10,000 in salary. My own two layoffs lasted eight months and zero months.

I'd say a year is the maximum I would consider a job loss emergency to last. Beyond that it's no longer a short-term emergency, it's a major life crisis and much more drastic action than a simple emergency fund will be required - e.g. selling and moving home to a new city, career change. Of course, long term, short term it doesn't matter, one still might need to live without a job income and the possibility of such events is a compelling reason to save and invest money. Retirement isn't the only time in life when a person might want to live off savings.

What sources of funding do you automatically receive? These obviously reduce the need for a fund.
In Canada today, we are lucky to have sources of income support to which we are entitled:

• severance pay - for salaried workers in a permanent job, there is a rule of thumb of about one month's pay for every year of service, or for unionized workers it is normally stipulated in the labour contract
  
• Employment Insurance (EI) - the federal government's program kicks in when your severance expires (i.e. right away if you don't get any severance at all) and if you have worked long enough to meet the qualifying requirements detailed here; only about 20% of people who lose their jobs are ineligible for EI according to this 1999 Stats Can study; some of the key points of the EI program are:
• two week period at start of no benefits - the deductible
• max 28 days or less before the first cheque arrives
• payments last from 14 to 45 weeks
• pays 55% of insurable earnings (capped at $40,000 p.a.) up to a max of $432 per week

In other words, these two sources might take care of the funding requirement by itself, as it did for me.

Responses -

1. Reduction of household expenses - most budgets have quite a lot of discretionary spending but of course this is only a partial solution; battening down the hatches is better done once the warning signs appear not when the storm breaks of course
   
2. Job loss insurance - some companies in Canada offer interest protection on line of credit borrowing e.g. the Bank of Montreal's Disability Plus Insurance, some offer balance protection on credit cards e.g. TD Visa's, and others mortgage interest payment insurance e.g. Canada Mortgage and Housing Corp's Mortgage Loan Insurance, Reliant Insurance's Job Loss Program or North Shore Credit Union's Mortgage Insurance; you can thereby obtain cover on loans for house and car, which are the most important and largest expenses, apart from food, that any family is likely to have. Job loss is one of the main causes of foreclosures in Canada. You will be obliged to get insurance if you have a high ratio mortgage but if you are not, get it anyway, it's worth it. Apartment dwellers can obtain lease insurance, such as that of Canada Life.
   
3. Enhance your own human capital - capital is a store of wealth and just as you can have financial capital you can make yourself a more valuable commodity by constantly upgrading skills, competencies and job experience. Your usefulness is what organisations pay for and instead of waiting for an organisation to direct you, take charge, look around and get going where the demand will be and where you have an interest. You might either avoid layoff within the organisation where you are presently or be able to bail out faster at the signs of trouble. Job loss may then even become an opportunity - a programmer who reported to me was also laid off like everyone else, received his severance and then discovered he could make a lot more money as a contractor, pick the jobs he enjoyed and which enhanced his future marketability. He also made sure to set aside time and money for technical training to make sure he would stay in demand. So much for a need for an emergency fund for him!
4. Diversify - whether it is having both partners in a couple earning or having more than one source of income yourself, that can reduce the impact of the job loss. Whether it is investing in real estate to rent out, turning a hobby interest into sideline business or something else it is an extra, independent source of income
5. Family - sometimes mom and dad, or other family members, are able to help out; for some younger singles, moving back home until a new job is found can become the solution
   
6. Don't take a job you hate just because it offers job security - you will be miserable every day, that's not what life is about

In short, for a minority (less than 20%), depending on their circumstances, there may be a need for an emergency fund of up to a year to cope with job loss. For me, an emergency fund for job loss has never made sense even though I was laid off twice because I received severance packages and I had other savings by the time it happened.

One big problem is that in practise I would guess those who could most benefit from an emergency fund are the least able to save to have one: younger workers in cyclical, non-permanent jobs.

In anticipation of the discussion on how to provide the fund, one thing I would not recommend in the job loss situation is to rely on a line of credit. Not knowing when a new job will be found and the emergency will end makes the possible accumulation of debt open-ended. There is a limit to what lenders will give out. And it is stressful enough to be out of work without having the worry of a growing pile of debt.

The Lowdown on the Most Popular Canadian Financial Comparison Websites

Oops sorry, this is going to be a short post, there seems to be only one, the http://www.moneytools.ca/ of the federal government's financial and consumer agency of Canada. (Thank you to fellow blogger Million Dollar Journey who posted about this site back in March) It is really a rather feeble attempt as it only compares actual products for bank accounts and credit cards, and even then the data is not real time up to date. The only hard fact comparison of discount brokers seems to be on a blog - Million Dollar Journey's post here.

Readers will note my post of yesterday on such websites in the UK, which has a wide range of very good sites. What is wrong with Canada that we don't better? One thing for sure is that the financial services and products market in Canada is pathetically thin and uncompetitive in comparison to that of the UK.

The Lowdown on the Most Popular UK Financial Comparison Websites

Just came across a fabulous report - Compare and Contrast: How the UK Comparison Website Market is Serving Financial Consumers - released by the Resolution Foundation on October 11, 2007.

The report assesses the eight most popular financial comparison websites serving the UK market along with that of the regulatory agency itself, Financial Services Authority:

• www.moneysupermarket.com
• www.fool.co.uk
• www.uswitch.com
• www.moneynet.co.uk
• www.moneyexpert.com
• www.moneyextra.com
• www.moneyfacts.co.uk
• www.kelkoo.co.uk
• www.fsa.gov.uk/tables
• 
  
• www.themoneypages.com - not on the report list but another one I think is worth a look
  

The areas assessed include: mortgages, credit cards, loans, savings and car insurance. From reading the report it seems that mortgages and car insurance are especially tricky areas to get accurate and complete quotes online as many questions need to be asked to get it right and the various websites vary in how well they do it.

Though it specifically states that the aim of the study is not to determine which is the best, the detailed and impartial comparisons give a consumer a pretty good idea of which one is good or not so good in which area. I really like that the comparison dimensions used in the study are all of critical importance to a consumer: accuracy, completeness and impartiality of the information provided, explanation of technical terms, relevance of fact finding to provide an accurate quote, consumer ease and flexibility in searching and sorting results of the website and facility to contact the providers directly. Interesting factoid: not all providers participate in the comparison websites - Royal Bank of Scotland does not, per the report.

The report does conclude, however, ''there was no “all round best performer”''. It does say the websites perform a very valuable service (i.e. they are not slimy, evil things to be avoided), a re-assuring statement since so many people use them and since the number and complexity of financial choices keeps rising. In fact, some of the sites were found to provide better information on secured loans than the providers themselves! The main criticism is that some of the websites don't properly disclose when their editor's choice or best buys are actually the result of commercial sponsor ties and not the objective best value product.

Here's my summary (caveat emptor, it may not be 100% the way you would read it or the way the authors would say it) of the results:
1) Accuracy of product info - the best: moneysupermarket and MoneyExpert; FSA and uSwitch the worst
2) Accuracy of product quotes - the best: MoneyExpert and Moneyextra; Kelkoo is awful
3) Completeness of info - varies between products more than sites; info on mortgages ''generally poor''; Kelkoo weak across the board
4) Relevance of fact finding - generally poor across all sites for mortgages, credit cards and savings; Motley Fool, MoneyExpert and Kelkoo miss key info in every product
5) Terms explained - moneysupermarket best due to forums where people can ask experts; Motley Fool, uSwitch and FSA explain all terms while Kelkoo explained none and has no product guides
6) Consumer experience - MoneyExpert the best by a lot; Kelkoo is c-r-a-p
7) Flexibility - Moneynet the best, Motley Fool not far behind; MoneyExpert the pits, while moneysupermarket is not much better
8) Market coverage - no one wins but Kelkoo loses with ''low coverage''
9) Impartiality - Motley Fool and uSwitch exemplary by being ''frank and open''; moneysupermarket, Moneynet, MoneyExpert and Kelkoo are completely unforthcoming about their editor's choices as being based on commercial relationships
10) Ability to act on info - Motley Fool, MoneyExpert and FSA are the leaders; the others all only give contact info for affiliated providers (is it so hard to look them up yourself if you have their name?)
About my only overall conclusion is to not bother with Kelkoo; it scores lowest on too many dimensions and is really good in none.

Now that you be aware, you can also beware.

Well done to the Resolution Foundation, an organisation devoted to improving the financial capabilities of the low and medium income person.

Update October 29 - we used moneysupermarket today to get car insurance quotes and found one that has saved us several hundred pounds for the coming year. It was very slick, we were even able to complete the deal directly with the provider by phone after generating the quote online using a quote. There were no less than 26 different quotes and there would have been more except a bunch of providers don't want to insure recently arrived Canadians. Very impressive, took about 30 minutes from start to finish.

Retirement Sense and Nonsense from Fidelity Investments

Yesterday, journalist Jonathan Chevreau published an article and a blog post about a report just released by Fidelity Investments Canada, available here under the title The Changing State of Retirement in Canada, which claims that Canadians need to aim to replace 80% of their pre-retirement income in retirement. The post and article do a good job debunking the nonsense aspect of the report, namely the 80% figure, which is too high for a number of reasons:

• in their fifties, most people finish paying off their mortgage and their kids finish school/university, get a job and move out, all of which significantly reduce the expense side of being able to ''maintain the same comfortable lifestyle'', a fact not addressed in the report
• that this is so may be indirectly reflected in the report's survey results, which showed that the 55+ age group are on track to have a significantly higher ratio of income replacement - i.e. I would guess they suddenly started to be able to save at a much higher rate and decided to do it
  
• since when does need = comfortable? comfortable is perhaps a worthwhile goal but it shouldn't be presented as a minimal/hardship level of income
  
• other sources of retirement income are discussed but dismissed - home equity (a much more prevalent form of retirement income here in the UK than in Canada), inheritances (where are all those billions in the preceeding generation to disappear to?) and working in retirement; Fidelity documents the fact of people over 65 (17.8% of those in that age group) continuing to work (primarily because they enjoy it) but doesn't factor that into its calculation of retirement income

Along with the nonsense, there is much sense in the report and several recommendations worth heeding.

• for individuals: 1) Save!! (duh, but how many people actually don't do it); 2) Plan - try to figure out and budget what you will need, which gives you much more confidence than any rule of thumb, whether it be 80, 70 or 60% income replacement rate; 3) Learn about finances and supplement this with help from a professional planner if you find it overwhelming, to which I would add make sure he/she is a good, unbiased, fee-based planner
• for government, employers and the financial services industry: public education, including through the school system; higher specialized training and skills related specifically to retirement amongst planners as often there is too much emphasis on the pre-retirement, accumulation phase of investing and planning
  

Why an Emergency Fund? Part 1: Death

It seems to be a common truism or rule of thumb that everyone should have at least three to six months of living expenses in the form of cash. A quick Google search uncovers such advice at About.com, Bankrate.com, bloggers such as ChristianPF.com, TheSimpleDollar.com, the StingyInvestor, mainstream financial journalists like Jonathan Chevreau and professional financial planning guides like the CF1 Manual (unfortunately not available on-line) of the Chartered Insurance Institute's Certificate in Financial Planning in the UK. There is at least one dissenting voice at the Financial Blogger who states that one need only put in place a line of credit. But even he doesn't dispute the basic premise that there is such a thing as a financial emergency, an unexpected event that can provoke dire consequences without a fund.

Being the sceptic that I am, I will take a closer look at how unexpected and how dire such ''emergency events'' really are. Risk analysis and risk handling are a well established discipline in industry for project management (I knew that PM certification would serve me well some day...) so why not apply it to personal financial management? That involves identifying risk events, assessing their probability, the magnitude of the negative consequences, the alternative methods of dealing with the risk (which includes everything from preventing or actively reducing the chances of the risk occurring, transferring the risk to someone else at a price or simply doing nothing and accepting the chance).

Event #1 - Death
Probability - Nowadays, the life expectancy at birth is roundabout 80 years for men and women in Canada. That means it is unusual for people to die prematurely, much as we grieve for those unfortunate few. The younger you are, the less chance of dying soon. Insurance companies know this and charge less for life insurance for young people. In his fine book Insurance Logic (which I have reviewed here), Moshe Milevsky presents some data from Stats Canada that shows how rare is premature death. Though the data is from 1996, there probably has not been a big shift to today; if anything, I'd guess early death is a little less likely. Below is the table reproduced. It certainly surprised me.

What is the Probability of Dying Within the Next 10 Years?

Current Age	Female	Male
30	0.5%	0.9%
40	1.0%	3.0%
50	3.0%	6.0%
60	9.0%	16.0%
70	22.0%	35.0%
80	50.0%	66.0%

Cost - The first direct effect is the cost of the funeral and burial. Estimates range from $4,000 to $15,000 (e.g. Sandra E. Foster in her book, You Can't Take It With You, p.283). It seems the most common number is $5,500 to $7,500. This is a number which obviously can be controlled to a significant degree depending on the options one chooses.

The second effect is the possibility that the person dying may have dependents, for whom the disappearance of the breadwinner may have disastrous consequences.

Risk response -

1. First, note that by the age when death becomes a much more likely event, people will have reached retirement age and probably have accumulated savings or investments of other kinds to pay for funerals. Financial institutions will almost always allow the executor or family members to access such reserves of a deceased person for funeral expenses so it doesn't have to fall on you to pay for someone else before an estate gets freed up by probate. Investments can be sold within a few days and the money made available long before the bills come due.
   
2. Second, as noted above, death expenses can be kept at the lower end and that can decided at the time of the event.
   
3. Third, a person can avoid the problem by pre-paying for funeral expenses to a funeral home. The amount put aside can even grow tax-free waiting for your demise, a last comforting thought for those scrooges among us. Since for all but one person in history (and even that is disputed by some), death is a certainty, if you have the capability of putting money aside for an emergency fund then you can also direct that money to pre-paying your funeral.
4. Fourth, you can buy life insurance or just funeral expense insurance. This can spread the cost out in small monthly payments. Maybe you will even die early and get a bargain.

The response to the support for dependents should be dealt with through insurance, not an emergency fund. Death isn't temporary so a short-term fund of six months of living expenses won't do the job.

In short, death isn't a good reason to have a highly liquid emergency fund.

But there are other possible reasons that I will examine in the next posts: job loss, home repairs, injury or illness, car repairs, divorce/separation, legal problems, care for parents/relatives, pregnancy, wedding. And once all these have been reviewed we'll see where that leaves us overall.

Q&A on IFA, DFA with Michael Hill

Readers of this blog may be aware that I consider the website of IFA Canada to be one of the best for the quality and quantity of investment information, a mix of financial theory and practical application of significant usefulness to the DIY investor.

At my invitation, Michael Hill of DeThomas Financial, who also represents IFA Canada, has written responses to my questions on IFA and DFA. Note that I do not own any DFA funds, nor do I have any business relationship with DeThomas or IFA. I just borrow their ideas, which they willingly offer to everyone - even their competitors(!) - as you will read below.

1) What is IFA Canada and what is the difference or relationship between IFA, Dimensional Fund Advisors (DFA) and De Thomas Financial? What about other financial advisors such as Milestone Financial who also say they offer DFA funds?

IFA Canada is an educational company which provides information, data and portfolio allocations and design as well as a proprietary Risk capacity survey which allows Canadian investors to fully understand the power of index investing. IFA Canada's mandate is to "Change the Way Canadians Invest." This is accomplished by providing peer reviewed, empirical evidence showing the results of index based portfolios. The Risk Capacity Survey further refines the investor’s knowledge in directing them to the proper portfolio allocations. Although Index Funds Advisors Canada may provide data, information, and content relating to investment approaches and index mutual funds, you should not construe any such information or other content available through the Site as legal, tax or investment advice. You should not consider any information on www.ifacanada.com as an offer to sell or solicit for sale any securities listed or mentioned on the website. Securities may only be sold by qualified licensed broker/dealers in Canada.

There is a distinct difference between IFA Canada, De Thomas Financial and Dimensional Fund Advisors (DFA). IFA Canada as described above is an independent company separate from De Thomas Financial and DFA.

De Thomas Financial Corp. is a licensed mutual fund dealer in BC, Alberta, Ontario and soon Quebec. De Thomas Financial acts as a Certified Broker/Dealer given authority to use IFA Canada's portfolios for their clients. IFA Canada has criteria for Certified Broker/Dealers and all dealerships in Canada are eligible to use the IFA portfolios should they agree to fulfill the obligations of a Certified Broker/Dealer. http://www.ifacanada.com/brokerdealers/index.asp IFA Canada does not charge investors a fee or commission for use of its data or Index folios. Certified Broker/Dealers agree to pay a monthly fee to IFA Canada for use of their portfolio allocations and data. These costs are fixed and NOT passed on to clients or investors.

DFA is a provider of index mutual funds for most IFA Index folios. Dimensional Funds Advisors Canada is the manager, trustee, principal portfolio advisor, and promoter of the funds, while Dimensional Fund Advisors (US)acts as sub-advisor for each of the funds.

Other dealerships in Canada many offer DFA funds, but only Certified Broker/Dealers may use the IFA portfolios legally for their own investor clients. The advantages of using the IFA Portfolios are many:

· No minimum limits (as imposed) by DFA on investments per fund. (DFA and others have a $10,000 minimum investment per fund)

· 80 years of back tested data showing the advantages of proper asset allocation using index funds

· Lower MER costs per fund as per exclusive IFA Canada portfolio allocations then other retail Brokers (see web)

· None, absolutely no trading costs for purchases, sales, rebalancing or withdrawals.

· Constant maintenance and auto rebalancing to original IFA portfolio allocation.

· Reduced fees and tax considerations.

· All fees for non-registered accounts completely tax deductible.

· Lower minimum to invest $100,000.00 at a cost of $1,000.00 per year not $5,000.00 annually.

There are other dealers in Canada who sell DFA funds but nobody in Canada has compiled an 80 year data base of 20 index portfolios specifically matched to an investor's Risk Capacity.

2) Are the funds offered by IFA mutual funds or ETFs?

Again, IFA Canada does not "offer" any investments; the investments used to build the portfolios are index mutual funds not ETFs. We chose DFA's index funds for a number a reasons, value, small cap, reduced tracking error and low cost, but also because we would be able to compile and execute the portfolios with no trading costs. ETFs have trading cost each time one buys, sells or attempts to rebalance, the IFA Index folios are designed with no trading fees- over time this saves clients money and keeps them in line.

3) Why do you think IFA's offering is superior to other investment possibilities, whether mutual funds or ETFs? Your website says IFA focuses on passive investing using index funds - how is this different or better than ETFs?

There is a distinctive difference between Index funds and ETFs, and it is for these reasons the IFA portfolios are built with index funds.

· ETF's track a particular index as closely as possible if not almost exactly, but of course there are costs involved. MER's range from .17 to .25 or more plus it costs each time to trade.

Aside from these costs, perhaps more important is a concept called tracking error. You may look here for a detailed description, but suffice to say tracking error costs investors between 0.75 and 1.5% per year.

Another reason for Index Funds over EFTs is securities lending. Index funds such as DFA lend securities out of their holdings and earn income for the unit holders from these transactions . This can amount to 0.25 to 0.50% per year.

The largest reasons though we use DFA funds are that they are tilted towards value and small cap, when all other index funds or ETFs are not. (This is all based upon the Fama/French Work). The chart below provided by DFA will help in understanding why we use their investment products to build the Index folios.

Dimensional Management Compared to Traditional Portfolio Management
Dimensional Management		Active Management		Index Management and ETFs
Assumes markets work.		Assumes markets don't work.		Assumes markets work with no liquidity cost.
Captures specific dimensions of risk identified by financial science.		Attempts to beat the market through security selection and market timing.		Allows commercial benchmarks to dictate strategy.
Minimizes transaction costs and enhances returns through portfolio design and trading.		Generates higher turnover, transaction costs, and taxes due to speculative trading.		Accepts high transaction costs and turnover in favour of tracking.

4) What are the fees charged individually and in total by DFA, IFA and De Thomas?

First, all returns posted on IFA Canada are net of fees, meaning all MERs, management fees, auxiliary fees and advisor fees are subtracted before returns posted. The fees breakdown this way:

· IFA fees to investors. 0.0%. IFA charges no fees to investors as it is not a dealership or advisor. IFA receives fees from Certified Broker Dealers for use of the data.

· Index Fund fees (DFA etc) range from 0.25 to 0.70% - See http://www.ifacanada.com/indexfolios/indexes/#CC

· The De Thomas Fee 1.0%

5) What does the client investor get for each set of fees?

What do they get?

· IFA: superior and vast investor education

· DFA (etc):, Custodial services, fund access and research, record keeping, legal and tax filings, audit and valuation.

· De Thomas: access, support, brokerage, portfolio development, trading and research and distribution reporting, planning and more.

6) Is it true the minimum account size you will take is $500,000? Why so much?

No, $500,000.00 is not our minimum investment level. To complete an IFA Canada Index folio, the minimum is $100,000.00, yet we realize and understand that not all investors have $100,000.00; therefore, we have developed the Easy Chair Portfolio using the same concepts as IFA Canada, but with less administration for accounts beginning at $25,000.00. The Easy Chair website is not yet completed but when ready we will send you a link. The portfolios are complete, and we are accepting investment, but the website and brochures are not ready.

7) Any suggestions for investors with smaller portfolios?

See #6 above.

8) Does IFA / De Thomas handle all types of accounts, taxable, RRSP, LIRA etc and if so does this change the asset allocation?

De Thomas Financial is a full service broker dealer. We have a great deal of experience with all types of accounts including but not limited to RRSP, RRIF, LIRA, LIF, Open Cash, RCA and IPPs. In fact, De Thomas Financial has just reached an agreement with Canadian Western Trust and West Coast Actuaries to provide the IFA Canada portfolios for IPP (Individual Pension Plans). The purpose for this is to create in Canada the most efficient, low cost and transparent IPP. In fact, IPP investors can now save over $20,000.00 or more per year on their IPP plans. Yes it does make a difference in the allocations as each plan type has a different goal, income, savings, tax deferrals, pension building and income splitting.

To add to the answer- Yes it makes a difference in the type of account, in particular whether the account is an open cash account or a registered account. We like to treat the entire portfolio as one entity, meaning that all accounts would be looked at as a whole and allocated across all investments as if they were one portfolio, but sometimes this is not possible as in withdrawal accounts (RRIFs) or open accounts since taxes will play a large role. For open accounts we like to have a higher equity portion and in registered accounts more of the fixed income, since they are non-taxable. We also attempt to rebalance open cash accounts with new capital rather than sell then buy as new capital allocations do not create taxable events and sells and buys do. Thus if an account had too high a weighting in Emerging Markets for the risk capacity they need, we may deposit into all other funds except EM to rebalance the account and thus avoid a taxable event.

In general each account does not change the allocation of the overall plan, but may change to allocation to each type of account. Some clients find it easier to just have a similar account allocation in all plans suited to their risk capacity.

9) Why has DFA/IFA structured all its portfolios on the basis of geography and not, for instance, sectors such as financial, industrial, mining etc?

We are asked frequently about geographical allocation verses sector allocation. Our view and the view of IFA Canada, DFA as well as the empirical data suggest that global indexing and sector investing are very similar. Consider for a moment the TSX. If, and it does, our Core Index covers the entire universe of the TSX then we will have:

· Financial

· Mining and Minerals

· Industrial Products

· Consumer Products

· Agriculture

· Other (Energy, gold, real estate, income trust, health care etc.)

US and International investments have the same outline and thus by allocating on a Geographical basis we do cover each sector. What we will not do is overweight or underweight a sector in hopes our guess is correct.

10) Why do Canadian Index Folios contain a significant Canadian equity component while those of the US site for US investors don't have that? Wouldn't financial theory suggest that the optimal proportions of any portfolio be the same world portfolio according to market value?

The Canadian content has been zeroed in on because of its higher than world capitalization content and a lack of disclosure in the IFA (US) portfolios but this apparent disparity has been accounted for. I say apparent because Canada is represented in the IFA (US) portfolios via (International, Small Cap and Value). In the USA, DFA included Canada as foreign whereas here (Canada) we have segregated Canada out as a separate "Core" holding. We (DFA, IFA and others) have noticed that each world area of portfolio development has a "home bias", that is a bias towards having assets based in local currency and in local surroundings. Canada is no different. We looked at the relationship between the TSX and the S&P 500 and found a correlation of 89%. Given this and the home bias which exists, we allocate only up to 20% to Canada in lieu of a greater US content to which IFA (US) has. If one accepts the premise of "North America", then the world and our portfolios are in line with world capitalization.

11) Does IFA/DFA do any hedging of its foreign equity funds? What is the logic for the policy followed?

No, DFA does not hedge currency except for the fixed income investments. Exchange rates are notoriously difficult to forecast. Efficient-market research conducted on exchange rates has found the same random walk phenomenon also occurs in interest rates, stock prices, and many other capital market instruments that are priced by competitive forces in a free market. Furthermore, there is no reliable evidence to suggest that the expected currency return is anything other than zero. Currencies don't produce anything; and although they fluctuate relative to each other, the fluctuation is unpredictable.

All currencies, by definition, can't go up and down at the same time, so the concentrated portfolio of currencies in this example is effectively fully hedged; to do otherwise defies the concept of diversification, especially when you consider the impact foreign exchange rate fluctuations have on the client's overall wealth management goals and corresponding financial needs. In other words, clients consume imports, they travel, and their financial needs are affected in several other ways by foreign exchange rates.

Here are the following key points as to why:

	1.	By definition, foreign exchange rates are a zero-sum game, so currencies have a zero expected return.
	2.	There is no evidence that foreign exchange rates can be reliably predicted.
	3.	Diversification works whether we like it or not.
	4.	Maintaining discipline, as always, is a key ingredient of a long-term, successful investment experience.

12) The general investing background information on IFA's website is incredibly detailed and useful. Probably most people who become your clients don't even read a fraction of it, while those who do are probably do-it-yourselfers like me. I really love the website, but aren't you worried you are giving away the shop?

Are we worried we are giving away the shop? Sometimes, but in reality no, we are not giving away the shop. The data, studies and theories exist independent of IFA Canada and thus the shop was never ours to give away. To more fully address the question, investors will fall into three categories in no particular order:

A. DIYs such as yourself.

B. Those who need help, but know the industry is in conflict with them.

C. Those that need help, but don't know about what.

By setting up IFA Canada in the manner in which we have, we are "giving away the shop" but we are resolved that investor education is the most important goal. If any of the above groups learn from IFA Canada then we have accomplished our first priority. If they need or want help our Certified/Broker Dealers are there to provide low cost, high level help in developing their risk adjusted Index folio.

There is one other group using the IFA Canada.com site and this helps to achieve our goal, but in a more round about way. 10-15% of investors are other investment advisors, managers or sales people attempting to figure out what we are doing. If they take our data and use it with their clients so be it. They are helping to educate investors and that is our goal. If the really believe and understand then they may wish to join us rather then try to copy us.

13) Your risk capacity survey on the website includes questions on investment knowledge and reactions to market swings/drops. I presume the implication is that if the investor is ignorant and nervous, he/she gets shunted into a low risk portfolio, which may not be able to meet the investor's long term goals. Shouldn't financial advisers be more like doctors, telling people to take their medicine as their health demands, not as the they feel?

Wow, another great question to which a new thesis could be written. The full answer is here http://www.ifa.com/book/book_pdf/10_risk_capacity.pdf but for purposes of the Q and A, I will outline the theory for our Risk Capacity Survey. There are 10 dimensions of risk which have been identified by theorists and academics. Five have to do with portfolio risk and five with the particular investor attempting to choose a portfolio in which to invest. (Investor Capacity) The five IFA Canada are most concerned with are Investor Capacities. These capacities are time, knowledge, attitude, income and net worth. Your question deals with attitude. You ask if some are ignorant or nervous if they are shunted to a low risk portfolio and that is just not so. The attitude dimension attempts to assess the aversion to risk an investor has, their ability to stomach inevitable declines with the knowledge that risk is the currency returns are purchased with. While a low attitude towards risk will move one down the scale from 100, it only amounts to a small % move and not a full out drop to a lower level. To use your analogy of a doctor, consider a person who has an aversion to needles or cannot swallow large pills. Does the doctor tell them to "do as the feel"? No, they will work out solutions based upon knowledge and the other information gathered to diagnose and create an environment which allows the long term goal to be met, while still allowing the patient to "feel good". Perhaps the pill is broken down, or the needle given in smaller doses over time. It may not be perfect, but two greatly needed goals are met.

1. The patient gets what they need and

2. They do feel good about what they needed and the way it was delivered and become open to new concepts and ideas that they were afraid of before.

Michael's titles and contact details:

Michael J. Hill, CIM, CFP mjh@dethomaswindsor.com
President IFA Canada

De Thomas Financial Corp. (Windsor)

Visit us at www.dethomaswindsor.com
Ph 519-973-5719
Fax 519-973-1845