Million Dollar Journey

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Book Giveaway Winner

Let start off the weekend with another book giveaway winner. The prize this time is a free autographed copy of the financial and spiritual book “Does Your Bag Have Holes“. Out of the entries, Mihai was randomly drawn as the winner! Congrats Mihai, I hope that you enjoy the new book.

We typically have book giveaways a couple times/month which are drawn fairly quickly. If you are interested in participating, you can keep up with the updates by subscribing to the free daily feed via RSS Reader or sent directly to your E-mail (see our privacy policy).

New Anonymous Poll

There is an anonymous poll running on the right sidebar.  If you haven’t already, please take a moment to cast your vote!

Weekend Reading

The Restaurant Blogger writes an interesting article about a topic that we’ve covered before, service tipping! The article is called “The Truth Behind Tips“, and it explains how tips are typically dispersed in a restaurant.

The Simple Dollar has an interesting piece on spending titled “The Battle Between the Stuff I Want and the Guilt I’m Left With.“

Congrats to Canadian Capitalist for making top 5 on the best of blogs! We were top 5 for a while, then Wall Street Fighter made a strong comeback to bump us out. We finished 6th. Congrats guys!

Lazy Man and Money talks about The Power of The Dream.

The Digerati Life gives 7 Compelling Reasons Why Long Term Investing Is Better Than Short Term Trading.

Generation X Finance does an analysis and asks the question about Investing in the Stock Market Over the Past 10 Years: How Did Dollar-Cost Averaging Fare?

Brip Blap tells us why you need to write your goals down.

The Sun’s Financial Diary writes about some of the disasters going on in China in his article China: 2008.

Money Smart Life advises us to Keep Your Health Insurance Coverage Current During Life Events.

My Dollar Plan lists 6 Steps to Secure Your Financial Future.

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The topic of Return OF Capital has been discussed at nauseum in the comments, but I thought that I should bring it to the front page as the same questions keep coming up.

What is ROC?

Return of Capital is when a publicly traded company distributes money collected from their share holders back to the share holders themselves. The resultant distribution is non taxable but decreases the adjusted cost base of the original purchase (tax deferral). When it comes time to sell in the future, providing that there is a profit, the capital gains tax will be paid on the new adjusted cost base minus the selling price.

An Example

Purchase XYZ income trust for $10, it distributes an annual ROC of $1. Sell 1 year later for $20. The capital gain is: $20 - ($10-1) = $11

Who distributes ROC?

Income trusts and some corporate mutual funds. The biggest indicator of ROC is if the distribution is extremely high relative to the yields of the strong dividend stocks.

What about ROC and Leveraged Investing?

For leveraged investing, it is not preferred to buy anything that has a return of capital component in their distribution as ROC reduces the tax deductibility of the investment as it is received.

One way around this is to use the ROC distribution to pay down the investment loan and re-invest if desired. Technically though, this should be the same as leaving the ROC distribution within the investment account. However, this assumption needs to be confirmed with CRA or an accountant.

Receiving ROC in a leveraged investment account can also be an accounting nightmare if dividends/interest/ROC are mixed together in a distribution, and regular withdrawals from the leveraged account are needed (like with my version of the Smith Manoeuvre).

Please see the article “Key Considerations of an Investment Loan” for more details.

I would be grateful if tax experts/accountants would chime in!

Disclaimer: Information provided in this article are for entertainment purposes only and if used, it is at your own risk. Please consult a tax expert before implementing anything you read here

4 Comments

It has been a while since I’ve opened up the mail bag to share. This time around, I received an email from Jeff looking for advice on how to reduce his investment fees.

Here is the email:

How do you go about investing in stocks without attracting fees. As it stands now - I give my money every month to a financial advisor and they invest my money for me. Now, my question is - I could go and invest in BMO or something else through my advisor - but I also cringe at the fees that I am likely to be charged - just like I cringe at what I’m being charged inside my mutual funds.

So - how do you do it without seeing those fees? Is it as simple as signing up to E-trade or something else?

Anyways, it seems like cutting out the middle man - the financial advisor - may not be a bad idea - specifically when I see that a lot of these people do not seem to have much more knowledge about the industry then I do.

Lets start off by taking a look at how some financial advisors are compensated. To my knowledge, there are typically 4 ways:

1. Salary + bonus. The personal finance banker at a big bank who has access to mutual funds exclusively typically get paid on salary with bonuses given depending on total account size (ie. CIBC).
2. Percentage of clients portfolio. The independent financial advisor, who may work under one of the bigger, high net worth companies like Scotia Mcleod, or CIBC Woodgundy, get paid a portion of the value of your portfolio. This fee is typically 1% of the total value of your portfolio / year. These advisors typically have access to all sorts of investment instruments, often with lower MERs to offset the annual charge.
3. Commission only. There are a bunch of these advisors around, for example, RBC advisors. These financial advisors do not get paid unless you purchase one of their mutual fund (or insurance) products which typically have higher MER’s. A portion of the MER is kicked back to the advisor on a monthly/annual basis.
4. Fee only planner. These guys usually work under an independent firm and their advice is usually unbiased as they don’t receive kickbacks for their recommendations. I don’t have much experience with fee only planners, but I imagine that they get paid on an hourly or per visit basis.

So Jeff, seeing the above list, you might not be “ripped off” per say, but paying for a service. Hopefully your advisor is looking out for your best interest and not his/her own. If you have a “good” advisor, and don’t have the time to research the markets yourself, then the fee may be worth it.

I think one of the biggest red flags to look out for in an advisor is if the portfolio contains a bunch of mutual funds with high MER’s (see morningstar.ca) and deferred sales charges (DSC). If that is the case and the portfolio is under performing, then evaluate the DSC penalty for leaving and find someone else. Check out WhereDoesAllMyMoneyGo for more info on how the advisor benefits from mutual fund sales.

To “cut out” the middle man, you’ll have to spend more time to research investment instruments based on your risk tolerance. If you want to stick with DIY mutual funds and want to reduce your fees, then you’ll have to go with index based funds. The TD E-Series is a popular place to start looking. Other low cost brokerages allow mutual fund purchases/sales, but typically charge extra.

If you want to trade your own stock or ETF, then you’ll have to pay commissions for every trade and be comfortable with doing your own research. Check out my comparison post of Canadian Discount Brokers for various fees/commissions side by side.

Do you guys have anything to add?

Photo credit: Nieve44/La Luz

9 Comments