CPI, Your Cost Of Living And Your Investing Strategy

Gas prices were a big contributor to the headline CPI data for the last year to November of 2017, which increased by 2.1%. If you drive regularly, you likely experienced an uptick in your cost of living.

However, according to statistics Canada, it is not just what you consume, it is where you consume it as well: if you live in Saskatchewan and Manitoba, your year to year increase in the Consumer Price Index was 3.7% and 3.2% respectively.

Remember, everyone has their own consumption habits so your personal increase in living costs may not be what Statistics Canada's basket of "average" consumer purchases would be.

If you have the time to determine the change in your cost of living from year to year (to compare) it is a worthwhile exercise. Especially when it comes to projecting your living costs going forward, which is a very important assumption in a Wealth Forecast.

As I mentioned in yesterday's blog, a Wealth Forecast is an integral part of any investment strategy. Getting as accurate a read on your lifestyle expenses as possible is a very important  part of understanding how you will reach your long-term goals.

Having an investment strategy without that understanding is like travelling without a destination. You need an end-point and a map of how you are going to get there.  

If your advisor suggests that just having a balanced collection of ETF's (or even worse, expensive MER mutual funds) in your investment portfolio is enough (to get an annualized return of 6-7%), then she or he is driving you in an unidentified direction (and not considering all of the risk metrics that can come in to play). I have spent more than 35 years honing my skills in risk management, so I have a keen understanding in this department and get a huge rush from helping people avoid the potential mistakes that less experienced advisors might bring to the table.

You need to have a plan (at High Rock, we call it a Wealth Forecast) prepared by an expert, Certified Financial Planning (CFP) professional, that includes understanding what is coming in (income) and what is going out (cost of living) and is able to show you how you will get from where you are right now, to where you want to be in the end (your destination).

Why Oh Why?

Yesterday a client sent me an email with a list of holdings in their CIBC TFSA;

You may have to click on the above to see it in greater detail, but what stood out to me was the first line from the client: "I didn't realize how shitty this was!!" 

What is an "escalating" GIC? I wondered, so I decided to further educate myself: you can get more here: https://www.cibc.com/en/personal-banking/investments/gics/escalating-rate.html

But, in a nutshell, it is a "locked-in" GIC that escalates in payable interest over the 5 year time period. Check out the returns:

Again, you may have to click on the table above to see the detail, but pay attention to the far right column: "effective yield", at less than 1.5%.

If your personal level of inflation is at 1.5% (which is likely not the case, we use a 2.5% rate of inflation for our client Wealth Forecasts) then you are making absolutely no real return on this investment. Zero!

If you buy a GIC, you are effectively  lending money to the institution that sold it to you. If you have a line of credit (with the same institution), you are turning around and borrowing that money right back from them at prime or prime plus whatever extra they are tacking on. Prime is 3.2% at the moment, so you are giving that institution a "gift" of at least 1.7% of your hard earned money. 

Why?

Because you are not being properly looked after by that institution. Instead of saying: "oh, it would be a better use of your money to either pay down your line of credit or invest in something a little more advantageous (that might earn a return better than that which you are paying on your line of credit)", they are very comfortable and happy to take your money and add it to the other billions that they are sending to their bottom lines and paying out to their shareholders. 

Because I / we care, we asked our client (in this particular case) what the holdings in their other account were, because it is important for us to understand what level of risk they might have in their investments that they hold away (from our management).

Some believe that it is safer to have multiple advisors. Perhaps, but you also have to make sure that if you are paying them (and you are, likely more than you realize), that you know what you are getting in return.

That is why we prepare Wealth Forecasts, to take a holistic view of our clients current financial position, project how they are going to get to their end goals and create a strategy for the best possible risk-adjusted method to get them to their goals.

I can tell you that a bank that so easily takes a chunk out of your financial hide, does not have your best interest at heart.

So why work with them for anything other than your banking needs, when there are folks out there (like us at High Rock) who will work with you to find the best possible solutions to your financial challenges at a very reasonable cost, with great levels of service and a fiduciary duty to always do what is in your best interest.

2018 Predictions

At the end of 2016, most analysts were calling for US 10 year bond yields to hit 3.5-4% by the end of 2017. That did not happen. Currently they sit at about 2.35%. Bond traders had a tough year.

Inflation, according to the basket of goods that the statistics folks suggest is "average", has barely budged. Central bankers continue to believe that this is due to "transitory" issues, but are struggling to explain why wages are not going up with improving unemployment numbers (deferring to a lack of productivity as the culprit).

Most clients that I talk to (when we perform their Wealth Forecast reviews) will argue that their respective annual inflation rate (i.e. the increase in their cost of living from year to year)  is nowhere near and significantly higher than what we are told it is supposed to be.

This will certainly continue through 2018.

Central bankers will take heart and continue to focus on the "normalization" of interest rates and monetary policy (take Bank of Canada governor Poloz's comments yesterday as an example), removing financial liquidity from the system.

If the US government increases their deficits with tax reform and increased infrastructure spending and there is less liquidity around to support bond issuance (to pay for all the new debt and deficits), asset prices (bonds, stocks and houses) will fall in price.

I am not even going to try to predict the potential outcome from a breakdown in NAFTA, shifting power balances and possibly a war in the Middle East, the Trump factor, North Korea, China, Russia, cyber terrorism and bubbles.

When asset prices fall (and they inevitably will), investor portfolios and net worth will take a hit. Balanced ETF portfolios, which have been the latest rage, won't be enough to protect them.

Investor apathy and complacency (which has escalated with the prices of stocks with a false sense of security) has allowed risk levels in portfolios to reach lofty levels, significantly higher than most investors actually realize. 

The concept of risk management, which has taken a backseat to passive investing in recent years will move into the spotlight.

High Rock phones will be ringing (as they did in early 2016).

Want to get ahead of the herd, protect your net worth and financial goals before the drama begins (which is how we manage our own money, in the same way that we manage our client's money)? 

We have low cost, fiduciarily responsible, risk and wealth management with tailored, personal investment strategies to suit your specific goals.

Why put your financial future at risk?

More Debt For Canadians In Q3

Canadian households added to their debt burden in the third quarter of 2017. Household debt to disposable income is up to $1.71 for each dollar of income earned (a new high). Importantly, while debt is rising, the value of household assets (savings, investments and house prices) remained the same, which can be a dangerous situation if this uptick (chart above) continues (if the value of assets turns lower).  Definitely a concern for the Bank of Canada as it weighs the outlook for interest rates in Canada. The two 1/4% increases in Q3 does not appear to have had much of an impact on Canadian's desire for debt. In the short-term, rising debt levels are good as increased household spending helps economic growth. However, that debt can be a longer-term problem, especially if the economy slows and the ability to service the debt forces asset sales (and asset prices fall, see 2008).

Meanwhile, south of the border, The US Federal Reserve raised rates by 1/4% for the third time this year and appear to be prepared for another three 1/4% increases in 2018:

Should the Bank of Canada follow the Fed's example (and they are never really that far behind), that might also create debt servicing issues for Canadians. 

Our work (at High Rock) is to look beyond the current hype / noise built into "record setting" equity markets at those things (not necessarily good) that are not being given appropriate consideration in the current determination of value.

Our work is intended to find opportunities for growth while remaining aware of all the underlying risks and making prudent investment decisions for ourselves and our clients within the context of the goals that we have set for ourselves.

Bond Markets Lead All Financial Markets

So it is very important to pay attention to what they are telling us. Whether or not the over-used cliche that "this time it is different" is or is not the case.

The US Federal Reserve will announce that they are raising interest rates by 1/4% at 2pm today. Of that there is little doubt.

What will be more important will be the pace of future interest rate increases and how they will impact economic growth into the future.The flattening of the yield curve has been something that we have been discussing (and you all may think over-discussing) lately. We certainly bring it up on our most recent weekly video (dressed in our holiday appropriate attire).

Rising interest rates will not be benign as financing record amounts of US household debt becomes more difficult without rising wage growth to help it. It cannot help but deter the consumer and the consumer is 2/3 of the US economy.

The consumer has been very confident of late and unemployment is at multi-year lows and they have been told by their President that there is better stuff yet to come. There are, however, a number of pretty smart economic minds that might argue the impact of the new tax reform on the average consumer over time is not what it is being billed as. 

The flattening of the yield curve is the real story. Bond markets are telling us that as short-term interest rates go up (without economic growth spurring inflation), that there is the potential for economic slowing (despite the current level of consumer confidence).

Stock markets appear to be ignoring the bond market's warnings and focusing on all the apparent good news (expected earnings growth, etc.), while paying limited attention to whatever bad news lurks in and behind the headlines.

We (at High Rock) know that it is folly to ignore the warning signs and will be ultra-cautious heading into 2018 as to how we want our and our client's money to be put to work.

Stronger than expected economic growth for 2017 does not necessarily guarantee stronger growth (and earnings) for 2018 and the bond market is telling us that. It is a behavioural trait of us mere mortals to expect what has transpired in the recent past to continue on into the future and many of us who have not been on the current bandwagon may feel tempted to jump on board. 

We shall resist that temptation and allow our 35 plus years of experience in financial markets to be our guide.

Myth Busting Of The Bonds In Your Portfolio

We preach balance in your portfolio. Balance between stocks and bonds (fixed income). Most of us know how stocks work (more or less) and that they are considered to be somewhat more risky than bonds (which will ultimately depend on the issuer of the bond).

For the moment let's focus on government bonds because they are the safest: Moody's Investor Service grades Canadian Government Bonds as Aaa (which is the highest level offered).

Generally, the safer the bond, the lower the interest income that the bond issuer will have to pay. Interest is usually paid semi-annually.

The math for bonds can be complex and confusing, but basically, because the interest income is fixed (i.e. fixed income) at the interest rate attached to the bond when it is issued for a set maturity date: when interest rates rise, the bond gets discounted in price as new bonds are issued at the higher interest rates and the bond becomes less valuable (bond price falls) at that moment. The opposite occurs when interest rates fall: the price for the bond will rise.

If you bought the bond when it was issued and hold it until its maturity, you will receive your initial investment at the original purchase price (we call that par value) and for the number of years that the bond has existed you have received the semi-annual interest payments.

However, bonds trade daily in a secondary market and the prices for those bonds adjust relative to the state of the economy and most importantly inflation and future interest rate expectations.

So bond prices move, up and down (which adds another dimension of risk).

The questions that we seem to get asked rather often are related to:

1) The coupon or interest rate: why own a bond that is only paying 1.5%? 

2) What maturity is best to own when interest rates are going up (or when they are going down)?

1) is relatively easy: in 2008 when all financial assets with any risk attached to them fell in unison, only cash and high quality government bonds were desired and prices rose (interest rates fell). It is wise to have the safety of those two asset classes when risk is high (as we believe it to be today).

2) is more difficult to understand, so lets use this chart:

The gold line is the yield (relative to the price and coupon) for Canadian government bonds for each of the maturity dates from 3 months to 30 years on January 1 2016 (we call this the yield curve).

The green line is the yield curve (same maturities) at the close of business yesterday. 

Between then and now, the Bank of Canada has raised rates 2x by 1/4% each time.

The myth that confuses most advisors and investors is that if interest rates are going up, then prices of shorter term bonds will go down less than longer term bonds and as a result you should own shorter (duration) bonds in your portfolio.

That has certainly not been the case this year: with inflation remaining low, longer term bond investors have not been demanding a premium (higher yielding bonds) for inflation protection and as the Bank of Canada tries to preempt future inflation (by raising short-term rates), longer term bonds (15 year maturities and beyond) have actually gone down in yield (up in price).

In essence, then, one should have had a longer term duration in their bond portfolio.

A client who recently joined us transferred in a portfolio full of short-term bond ETF's. Clearly, his advisor had mis-positioned him / her.  No wonder their portfolio was under-performing the benchmark.

If inflation jumps higher, then we need to be concerned about longer term bonds. However, at the moment, that does not appear to be the bond markets concern. In fact, as I mentioned in yesterday's blog, the flattening of the yield curve has potentially greater significance.

Bank of Canada Recognizes Risk Is High

As we suggested on our High Rock weekly client video, the Bank of Canada kept rates unchanged today.

"The global economy is evolving largely as expected in the Bank's October Monetary Policy Report (MPR). In the United States, growth in the third quarter was stronger than forecast but is still expected to moderate in the months ahead. Growth has firmed in other advanced economies. Meanwhile oil prices have moved higher and financial conditions have eased. The global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies."

Currency traders who were hoping for a different outcome after last Friday's employment report are abandoning their C$ bets (for now):

Uncertainties remain foremost in BOC decision making: NAFTA, Brexit, North Korea, the Middle East and a more aggressive US foreign policy are at the forefront of their radar screen and while optimistic (still) they are choosing to err on the side of caution.

Seems to make good sense. Investors should take note. The risks in financial markets are high and have been rising.

In US equity markets, price to earnings ratios are a good 23% above their 10 year average on a 12 month forward looking basis and that already has an expected 10% increase in earnings built in (for the next 12 months).

Every time we have a new client transfer in, I feel such a great sense of relief to be taking risk off of the table for them. They must feel the same way because we have seen an increase in Assets Under Management (new clients) this year by about 40%.

Bond markets are telling us something: yield curves are flattening and at the risk of becoming rather repetitious, flattening yield curves tell us of what is to come:

A flattening yield curve (the decline in the gold line) means that short term rates are rising and longer term rates are either rising less, remaining neutral or falling. Investors want the safety of long bonds, even in a low interest rate environment. The blue areas are times of recession (in the US) and you can clearly see the historical significance of what follows the declining gold line: the ensuing blue area.

In Canada the yield curve is doing this:

The spread between the 2 year and 30 year bonds has flattened to about 0.65%, the lowest since 2007.

Clearly, while not mentioning it, the Bank of Canada is aware and watching closely (so they are not raising short term rates today, which would push this flattening further).

We (Paul and I) have been trading and / or managing wealth through turmoil in 1987, 1998, 2001 and 2008, so we have a little bit of experience with these things.

What I see a lot of these days are portfolios with way too much risk relative to the signals coming from forward looking indicators (as opposed to backward looking economic data).

Want to know if you have too much risk in your investment strategy?

scott@highrockcapital.ca

Canadians Feel Financial Services Have Become Less Affordable

According to the Legatum Prosperity Index 2017. 

Canada fell to 8th in the world from 5th (out of 149) in the overall rankings.

Meanwhile Canada's banks are announcing record profitability, led by significant increases in earnings from wealth management.

 Connecting the proverbial dots: Canadians appear to be paying more for financial services but appear to be less aware of how to find other options beyond banks.

In fact, reading further into the report: "Canadians now feel that the government is doing less to counter monopolies; as a result, for the first time in ten years, the US has regained its advantage in Economic Quality over Canada".

And: "The nation's entrepreneurial environment suffered too, as people feel less convinced that working hard will get them ahead".

I read personal income taxes into the latter statement, the impact on professional corporations (doctors, dentists, etc.) from new tax measures will not make this any better. 

In fact: "Canada has also struggled considerably in the last decade in Health and fell considerably in this pillar in 2017".

If we don't allow our health care professionals better financial lives, we will be less able to keep the best and brightest in this field and we all suffer, especially as the population ages and more medical professionals are needed.

But, I digress.

What needs to happen is that Canadians need to be made aware that there are great quality (well-regulated) options for wealth management services outside of the traditional bank / investment dealer offerings.

You can have your bank accounts with your favourite deposit taking institution, but it does not mean that you have to save and invest through them at "increasingly unaffordable" costs. With modern technology (electronic fund transfers), moving money between financial institutions (big and small) has become safe, fast and easy.

There are alternatives for saving and investing and what we do at High Rock is one of them. We can offer a superior wealth management experience (wealth forecasting, risk management, fiduciary duty and personal service) at a very reasonable cost (likely not much more than a robo-advisor after all costs are considered).

We just need to get that message out there, but we can't compete with the advertising budget of the big banks.

So my friends, we need your to help spread the word: forward this blog on to someone that you think might be interested!

Too Much Money Chasing Too Few Assets

There is no shortage of commentary on the Bitcoin "craze" (chart above), you can read about it anywhere, in some cases there are plenty of people way smarter than me weighing in. It will end when it ends and there will be plenty of tears and lost fortunes.

This is what happens when there is too much liquidity in the financial system which is the fallout of the aggressive central bank extra-ordinary easy monetary policy post financial crisis.

The problem is that this money is not necessarily finding its way into long-term economic development (which would elevate productivity) and a good chunk of it is entering the "casino economy" with classic "get rich quick" human behaviour.

And we know how that usually ends:

A classic case in point (and a scary sign of the times): I talk to lots of pretty regular folks on a daily basis. Some are clients, but many are non-clients looking for some help. The sign of the times is that many of these calls are from investors who have been afraid of investing since they suffered through  and the frightening and gut-wrenching 2008-2009 stock market collapse.

Just now are they regaining the confidence to be comfortable stepping back in. Oh dear, I think, not exactly the best of times for that. Volatility has been low and they have been successfully (with small amounts of money) buying ETF's on the dips in stock markets. This has been building their confidence and they are looking to commit larger amounts.

The big problem, of course, is that when asset bubbles burst (and they will) all risk assets become more closely correlated. That means that selling of risk assets intensifies across the board: as assets get sold to pay for the losses on other assets.

Some are receptive to my cautious approach, others tell me stories of their search for an "advisor" where the sales pitch has been based on the notion of a continued multi-year bull market and that there is no time like the present to jump in.

I would not want that kind of risk in my portfolio when the metrics that we use to measure value are screaming "expensive" at me.

As per usual, I suggest that if they want good risk management and long-term stewardship for their wealth, then we are the folks to turn to (see our most recent 11 minute weekly video on how we assess risk). If they want to gamble, we are not.

Past performance is no guarantee of future results, but at High Rock, we work very hard to try to get the best possible risk-adjusted returns for our clients.

Trying To Reason With The Holiday Season

In North America, the consumer is 65-70% of the economy. So we all watch to see what the consumer mood is at this time of year to get a sense of what retail selling will bring to the economic landscape. In the US, the consumer will spend about 1/4 of their annual retail purchases over the course of the next month.

The traditional "Black Friday" data has been watered down in recent years with the advance of "on-line" shopping, so the early signals of consumer spending are not as easy to read. Needless to say, there are lots of analysts watching closely.

From the Wall Street Journal : "analysts see robust holiday sales, underpinned by rising wages, low unemployment and strong consumer confidence". Black Friday sales were expected to grow by close to 5% over last year, but that is only the third busiest shopping day. Now "Cyber Monday"  and the Saturday before Christmas are the top two shopping days.

Lots of optimism has been built into the current scenario and Amazon stock has hit new highs:

If shoppers are spending more, where is it coming from?

Wage growth in the US has stalled (and has not returned to pre-financial crisis levels):

And as we suggested on last weeks weekly video, US consumer debt levels are pushing to record highs:

We haven't seen the Q3 Canadian Household Debt to income data yet (due in mid-December), but the Q2 numbers showed debt levels rising while income levels were falling.

What this tells us is that spending may be helping economic growth in the near-term, but it may also be veiling a growing potential problem with consumer debt levels.

If the US Federal Reserve raises rates in December (mid holiday season) as they are expected to do, debt servicing costs are going to start to rise and cut into consumer spending power. The greater the debt burden, without wage growth, the less the consumer will have at their disposal for discretionary spending.

If 2/3 of the economic power becomes burdened in this manner, the medium term economic prospects are going to start to look a little more grim.

Our job is not to get caught up in the moment (the hype), but to try to see what is out there on the horizon.

Enjoy the holiday season, the New Year may bring some surprises.

You Don't Have To Be Worried About Money

But about half of Canadians are: read Rob Carrick in the Globe and Mail "One in two Canadians is a bundle of nerves about money".

At High Rock, we do Wealth Forecasts (prepared by our Certified Financial Planning , CFP, professional) for all of our clients: from ages 25 to 85 (because we also have multi-generational families that we are working with) before we even begin to discuss investing strategy and there is no obligation to work with us if we are not the right fit.

We leave that for you to decide.

However, we also know that a Wealth Forecast is not worth the paper it is printed on if it is not regularly monitored, updated and the accompanying investing strategy adjusted to ensure that whatever goals you have are within your reach.

So that is what we do.

We can set up automatic withdrawals into your investment account from your bank account so that you can become comfortable with the payments and it just becomes part of your regular monthly cash outlay.

We can't force you to save. You have to take that initiative, but we can help you get it started, by creating a plan and helping you steward that plan forward.

It costs you less than many mutual funds do, so it is cheaper than what most banks can offer.

And it is personal (not robo) service.

Help yourself if you are in the 47% of "money-stressed" Canadians. Our clients sleep at night. It is amazing what seeing your net-worth projection can do for you and how much it can motivate you into believing that your financial goals are achievable.

10 Years Of Globally Diversified Balance

On this week's High Rock Weekly Video, Paul and I briefly discussed the long-term returns that we use to justify our expectations for long-term client portfolio growth assumptions.

We think that a portfolio of a blend of our 3 models should be able to achieve somewhere in the vicinity of 5-6% average annual growth over a multi-year period (before fees and taxes).

I thought I might go into this in a little more detail:

As we are reasonably close to the end of the 2007-2017 investment cycle (peak to peak), if we look at a global equity index (I normally like to use the MSCI All Country World Index, but there wasn't quite enough Bloomberg history, so I am using the MSCI World Index , fewer constituent companies, but generally the same idea) over the last cycle:

The 10 year average annual return has been approximately 7.45% in C$ terms (some years better than that average, some years significantly worse). That would represent a globally diversified equity portion of a portfolio.

In a 60% equity portfolio, this is a weighted annual average return of 4.47%.

As for the fixed income component, we can use the Canadian Bond Index ETF XBB:

The 10 year average annual return here has been 4.49%. This represents the fixed income portion. 

In a 40% fixed income portfolio this is a weighted annual average return of 1.80%.

Combining both of these gives us a total annual average return over the cycle of 5.87%.

Of course, historical returns are no guarantee of future returns, but can we let this be our guide for our expectations for future returns?

In the future, as we tell our clients, we will likely have some years that fall below the average annual return and others that might exceed the average.

As we take a longer-term perspective, we consider the most important part of our work to be not just getting decent (relative to historical averages) returns, but to get these returns in light of taking reasonable risk.

At the moment the risk free rate of return (a 90 day Government of Canada T-bill, no risk in owning this investment) is a little under 1%. That will not get you much after taxes (interest income is fully taxed at your marginal rate) and inflation (in the vicinity of 1.6%, but depending on where you live and what and how you consume).

So to stay ahead of inflation and taxes, you do need to take some amount of risk with your investments. The type of risk that you take can certainly influence the outcome. That is why we focus on the return per unit of risk. 

Even in a balanced and diversified portfolio, you can get risk that can unhinge a longer-term portfolio performance. Especially when the traditional correlations between equity and fixed income markets are no longer working to protect you.

The past 10 years (including the financial crisis) have hopefully provided you with something in the vicinity of the 5.87% with balanced and diversified investments alluded to above.

The next 10 years may not necessarily do the same because the risks change. Being on top of those changing risk parameters is extremely important. That is what we do to prudently protect our and our clients money: find good opportunities and understand the risks inherent in them.

Under The Heading: What On Earth Can they Be Thinking?!

More here: http://funds.rbcgam.com/pdf/fund-pages/monthly/rbf272_e.pdf

As will happen from time to time, I get to meet some bright young people (often referred to me by one of our clients) and engage them in conversation about their current investment situation (as was the case earlier this week). As is often their situation, they are hard working (at their chosen profession) and have little time (or have had little time up until now) to explore and learn more about their savings and the possibilities for building and managing their wealth. Usually, they have trusted an institution (usually a bank) to assist them with the growth of their savings.

Most are relatively conservative about the type of risk that they should be taking (which is why they have ended up talking with me) but also realize that to stay ahead of inflation in the longer term, they are going to have to do better than low yielding GIC's.

They often have a somewhat difficult time getting hold of their bank advice giver to find out exactly what their returns have been and what fees they have been paying.

CRM2 (the legislation that requires both $ fee outlays and annual portfolio performance) is supposed to make this easier, but apparently the conversation with their advice giver does not offer up a whole lot of clarity.

I, in no way want to bash the institution above (who I bank with and actually get pretty good personal banking service from) however, if you look closely you will see that this particular mutual fund (which I am using only as one example amidst thousands of others), which their asset management division manages, has 5.6 BILLION dollars under management. 

The cost of the managing of this balanced fund (to the investor who has their money invested in it) otherwise known as the MER is 2.16% (see above) annually. 

If you invested $10,000, 10 years ago (pretty much the full investing cycle, through the 2008 crisis) in this fund you would now have $13,686 (according to the above chart) a little over 3% per year in growth. Likely, you paid over $2,200 over this same time frame just in management fees alone. You probably do not realize that you have paid them because they are listed in the fine print and rarely part of the conversation with the advice giver.

How does 5.6 Billion dollars find its way into paying such an exorbitant amount in management fees?

At High Rock, as an example, we can cut that management cost in half. We run balanced portfolios and charge our clients a management fee of 1%.

So why on earth would anybody pay 2% for a balanced mutual fund that only returns 3% ?

Why are 5.6 Billion dollars (in this one fund alone and there are thousands of these funds out there) doing so? It makes no logical sense.

I would suggest that it is because it is just not being made clear to the investors.

The intelligent people that I talk to, when they finally have the time to realize that their money has not been growing as well as it otherwise should have, can't seem to get straight answers from their bank advice giver.

The straight answer is: you have been paying too much and it is not in your institution's best interest to tell you. So they don't. They hem and haw and avoid directly answering the question.

At High Rock we don't avoid the question. Which is the way it should be: total transparency above and beyond the CRM2 requirement. You can also throw in great client service and fiduciary responsibility as well. We not only try to get the best risk-adjusted returns, but also save our clients money in fees and costs.

Ask the tough questions. If you don't get good answers. We have them for you.