Are Banks Evil?

Sure, I know, the title brings up images of smarmy, briefcase carrying men dressed in pin striped suits, black polished shoes, and a smirk who play the system for their benefit, take risky gambles with other people’s money knowing they can rely on a government safety net to bail them out should any bets turn sour, or turn a blind eye to Rocky Mountain size bags of cash deposits the source of which happens to be drug money proceeds

And the image sticks. Not least owing to gobs of money paid annually to self-professed masters of the universe whose respect is reserved for money and power. Is the image well deserved?

Well, the 99% might think so, not least because the American financial industry was exposed in 2008 as a glorified Ponzi scheme that eventually collapsed and sunk Western economies into the deepest recession since the 1930s. Oh, and those gazillion dollar payouts to the bank’s head shmos?  These certainly do nothing but reinforce the perception that bankers are self-absorbed, greedy, icky people.

Talking Numbers

What kind of money are we talking about? Check out a sampling of recent compensation packages bestowed on the head shmos:

  •  JP Morgan Chase. Jamie Dimon. $27 million (2016)
  • Goldman Sachs. Lloyd Blankfein, $22.6 million (2015)
  • Morgan Stanley. James Gorman, $21 million (2015)

Sure, you could say, are you $%#*&! kidding me? But before you do, know that Gorman’s compensation represents a pay cut of $1.5m, and Blankfein lopped $1m off his total compensation as compared to the prior year. Shedding tears, anyone?

Look north to Canada’s biggest banks, as measured by market value, and you’ll see how poor the Canuck commanders are compared to their American neighbors:

  • TD Bank. Bharat Masrani, $9 million (2015)
  • Royal Bank of Canada. David McKay, $11 million (2015)
  • Scotia Bank. Brian Porter, $11 million (2015)

Do Canadians settle for less because they’re too nice (in that Canadian way) to ask for compensation on par with New York’s elite ? When the numbers are this big, do we care? Not really.

How Much is Enough?

Evil Banker Guy: ‘Hey, BuddhaMoney, there’s always two or more sides to a story, you know what I’m saying? Maybe these guys are rewarded for being the best in the world, top notch leaders who treat their employees fairly, grow their business well and, as a result, benefit shareholders with increasing share value and regular dividend increases. You ever think about that before spouting off?’

You may be right on point there, Evil Banker Guy. Still, if you’re bringing home that kind of dough, you’re rich. Stinking rich. So, in an attempt to understand, because we here at BuddhaMoney like to think, reflect, and understand the world that we live in, I have to ask: what drives a person  to want more and more and more money?

To shine some light on the matter, what do you say we invite into the discussion a certain guy named Warren Buffett. Like the bankers (though he’s not a banker), he too is a rich guy. I’m talking … beyond-your-dreams-it-would-take-thirty-six-lifetimes-to-spend-all-this- money-rich.

For about 50 years, Buffett and his partner, Charlie Munger, have been at the helm of an extraordinary company named Berkshire Hathaway (BRK:NYSE). So extraordinary that if you had bought $1,000 worth of BRK way, way back in 1964, it would be worth more than $11 million today. Holy doodles!

And you know what? For the past 25 years, these two dudes, Munger and Buffett, they’ve been taking home a salary of $100,000. For what they do, that’s peanuts. Nah, peanut shells. No question, they could choose to take soooooooo much more money. But they don’t. And to tell you why, here’s Buffett himself speaking in his 2015 annual letter to shareholders, talking about who will eventually replace him as CEO (Buffett is 86 and still going strong):

“[The next CEO] will be plenty wealthy so don’t complain about pay. And don’t be greedy. It’s important that neither ego nor avarice motivate [the next CEO] to reach for pay matching his most lavishly compensated peers, even if his achievements far exceed theirs.”

Is Buffett a finance / investor / all around human being superhero to me? Ah, come on, you already know the answer to that one.

(http://buddhamoney.com/financial-freedom-and-balance/is-warren-buffet-buddha/)


unknownEnter Buddha

Greed is one of the three poisons. A dangerous toxin; the source for unquenchable thirst for more and more possessions. Greed is often manifested by stinginess, lack of compassion, hoarding or self-indulgence.  When one suffers from greed, one lives in a state of delusion, having become attached to material things, believing that more is better, and that material possessions will bring happiness.

poisons


So What If Bankers Are Evil?

Do we care if bankers are evil? I don’t ask the question flippantly. And my intention is not to minimize the impact of rich, powerful people who negatively affect the common good. Because ethics matter. Values matter. Right actions matter. For the individual, the community, society at large. We’re all in this game of life together, affecting each other in small and large ways.

But we BuddhaMoney folks aren’t fond of complaining. When a complainer-whiner-why-aren’t-I-getting-my-share person gets going, they kinda suck the energy out of a room, content to grumble rather than take action to change the situation.

BuddhaMoney folks have a constructive attitude. When they’re ticked off about what’s happening in their world, they size up the situation, brainstorm a plan for moving forward, and then do what needs to be done.

What can you, as an investor, as someone who is building your wealth and your financial freedom, DO about bankers driven by ego and greed?

First, put a smile on your face. Smiles are known to bring about Balance, and other juicy feelings. Second, shrug at the knowledge that some bankers earn more in a year than you will in a lifetime. So be it. Third, to better your financial position, consider BUYING BANKS!

Go Shopping for Banks

As an investor looking for steady-eddy-retirees-can-rely-on-this-and-it-pays-a-healthy-dividend kind of stocks, I’m all for banks. Not just any bank though. You should be picky.

You should invest in financial institutions whose business is largely made up of deposit taking and mortgage lending, who pride themselves on solid risk management, returning capital to shareholders, and have a history of efficient, profitable operations.

In other words, companies that engage in good ole’ fashioned boring, boring, boring banking business. The kind of companies who avoid  business activities that make for screaming headlines, have a long history of increasing dividend payouts, and whose share price gradually increases most years.

And when you find a bank like this, be sure to buy ONLY when shares are on sale. So that excludes the present time given the outrageous run-up in share prices of many financial institutions since the US presidential election. Be patient and wait for a pullback in share price, which is only a matter of time.

Check Your List Twice

If buying individual stocks is not for you, and you want to add specific exposure to the financial sector, then look at Exchange Traded Funds (ETF) such as:

  • iShares U.S. Financials (IYF). This ETF holds shares in 286 financial companies listed on U.S. stock exchanges and charges a management fee of 0.44%.

(https://www.ishares.com/us/products/239508/ishares-us-financials-etf)

  • Vanguard Financials ETF (VFH). This ETF holds shares in 402 financial companies listed on U.S. stock exchanges and charges a management fee of 0.10% – Vanguard’s fees are phenomenally low!

https://personal.vanguard.com/us/funds/snapshot?FundId=0957&FundIntExt=INT


For exposure to Canadian financials, review these two ETFs:

  • iShares S&P/TSX Capped Financials Index ETF (XFN).

This ETF holds shares in 27 financial companies listed on Canadian stock exchanges and charges a management fee of 0.55%.

https://www.blackrock.com/ca/individual/en/literature/etf-summary/xfn-summ-doc-en-ca.pdf?nc=true&siteEntryPassthrough=true

  • BMO S&P/TSX Equal Weight Banks Index ETF (ZEB)

This ETF holds shares in only the top 6 Canadian banks, measured by market capitalization, and charges a management fee of 0.62%. Basically, it’s a bet on the Canadian banking system. That said, if history is any guide, it’s a safe bet given the historical performance of Canadian banks. An investment in this ETF near the end of 2009 would have seen you nearly double your money by today.

https://www.bmo.com/gam/ca/advisor/products/etfs#fundUrl=%2FfundProfile%2FZEB%23overview


If you’re comfortable with the volatility of individual bank stocks, and have a long-term investment horizon, then consider these stocks on the New York Stock Exchange:

  • Wells Fargo (WFC:NYSE)
  • US Bancorp (USB:NYSE)
  • Bank of New York Mellon Corp. (BK:NYSE)

The following Canadian banks are dually listed on the Toronto Stock Exchange and the New York Stock Exchange:

  • Bank of Nova Scotia (BNS:TSE) (BNS:NYSE)
  • Royal Bank of Canada (RY:TSE) (RY:NYSE)
  • Toronto-Dominion Bank (TD:TSE) (TD:NYSE)
  • Bank of Montreal (BMO:TSE) (BMO:NYSE)

Solid Foundation

Keep in mind what I mentioned above: financial stocks have had a wild run since November, 2016, and many are now trading near their all time highs.

Sure, you have some talking heads salivating at the prospect that financials will continue to charge ahead, higher and higher. And that may happen. Still, the safer course of action is to be patient and wait for a market correction before bringing banks into your portfolio. You won’t rake in +$10m/year but if history is any guide, as a shareholder, you will reap the trickle down reward: increasing share price and generous dividend payments. The result being a solid asset foundation and income generator for your portfolio.

Ethical Investing … Why Bother?

‘Good People’ have a moral compass. ‘Good People’ adhere to universal ethics. ‘Good People’ care about others. ‘Good People’ care about more than just making money. Therefore, ‘Good People’ who invest their money engage in Socially Responsible Investing (SRI). Following this line of thinking, ‘Bad People’ do not engage in SRI, are selfish, greedy, and immoral.

Yikes! On several fronts that’s too, too, too … it just doesn’t sit right with BuddhaMoney. Okay, still, is it True? False? Simplistic? Naïve? All or None or One or more of the above?

SRI Investors: Who Are You?

Before picking a side and jumping to conclusions, let’s flush out the concept of SRI or Ethical Investing, two terms often used interchangeably.

At its core, SRI implies investing in companies that meet a certain standard of corporate responsibility regarding social, environmental and ethical considerations. Generally, investors who take an interest in SRI fall into two camps:

  • Camp 1: SRI is an investment with a charitable component, in which non-financial rewards of the investment are just as important, if not more so, than the rate of return.
  • Camp 2: While corporate SRI practices may add value to their investment strategy, potential rate of return is the dominant consideration.

SRI Fans

As with any issue under the sun, there are proponents and critics of SRI.

Proponents believe that SRI is about ‘doing good’ by seeking a blended return, i.e., investing in companies that offer both strong financial return and social return.

That said, proponents do not hesitate to acknowledge that a business must turn a profit if it is to survive. But, they say, if the only focus is profit then survival is far from assured.

SRI Boo Birds

As for SRI critics, they hang their hat on the words of renowned free market economist Milton Friedman:

“There is only one social responsibility of business: to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.

Friedman’s followers lay responsibility for social issues at the feet of government, not private enterprise. Further, they assert that SRI investors are willing to accept lower financial returns for only the promise of vague and loosely measured social returns.

What’s the Purpose of Investing?

I’m not looking for a right or wrong answer, or to label anyone Good or Bad. For me, this is a personal issue to be determined by thoughtful examination of your conscience, your beliefs, and by asking your self, what is your purpose for investing?

  • Is investing about ‘doing good’ by seeking a blended financial and social return?
  • Is it about making a difference by supporting organizations that take a stand against human rights violations, lax environmental controls?
  • Is it about penalizing organizations that sell liquor or tobacco, that facilitate gambling and enable addicts?
  • Does ‘doing good’ mean you do not buy shares of companies that bribe government officials, lie and cheat, do not provide safe and fair working conditions for employees?
  • Or does it mean that, although an organization is not blatantly or even slightly offside on the ‘sin scale’, it just doesn’t measure up for other reasons, and whatever those reason are justifies steering clear.
  • Maybe investing is a simpler, singular, concept. I mean, why should it be about anything more than making money?

The thinking here is that if you want to support charitable causes, if you want to ‘do good’, then you will do so through donation of your time and/or money to registered charities, not through investing. Further, so goes this line of thinking, by not restricting your self to investing in SRI organizations, you have so many more available investment opportunities. And the better your investments perform, and the more money you make through investing, the more you are able to support worthy causes.

What do you think? There’s no right or wrong on this one, although some may disagree. The best you can do is to follow your conscience and avoid investing in organizations that do not meet your standards, whatever these may be. Because you have no one to answer to except your self.


Here’s the conventional thinking about SRI Investing:

Advantages

Social Fairness. Through investing, supporting companies that you believe promote social fairness.

Ethics. You vote with your dollars to support organizations that adhere to ethical business behavior.

Disadvantages

Poor Investment Returns. Companies pursuing socially responsible activities may not maximize shareholder value since all capital in the company is not primarily used to increase profits.

Increase Risk. Because there are fewer companies that qualify for SRI, there are fewer opportunities for portfolio diversification. In turn, this may increase overall portfolio risk. As well, companies engaged in socially responsible activities may have higher risk due to lower gross profit margins.

Lost Opportunity. You may be leaving potentially strong investments on the table not necessarily because the company is inherently evil or even terrible on SRI issues but because they don’t measure up to someone else’s standard of what qualifies as an SRI worthy company, even though that company’s products/services do improve the human condition in some manner and creates jobs.

Spin. Few companies do not employ marketing spin. Meaning, the company may be adept at creating an image of social responsibility but less competent at engaging in socially responsible activity. So, it’s essential to do your homework, to know that the company’s actions are in line with its image.

I know, that’s a a fair bit of information to chew on. So, hey, go ahead, take your time, there’s no rush. Once some clarity comes your way on this issue, and if you decide you would like to put dollars to work, you might start by researching the Funds listed below (big important note: I do not hold any of these Funds nor am I endorsing them):

  • iShares MSCI KLD 400 Social Exchange Traded Fund (DSI:NYSEARCA)
[https://www.ishares.com/us/products/239667/ishares-msci-kld-400-social-etf]
  • Domini Social Equity Fund (DSEFX)
[http://domini.com/domini-funds/domini-social-equity-fund]

 


Now, if you decide to buy these Funds or other Funds or companies falling under the SRI umbrella, just remember that your ownership of such securities doesn’t qualify you as ‘Good’ or ‘Bad’ People. Nah. No value judgment. Instead, you’re an investor doing what is best for you and your family.

 

Your Brain on Stocks

I have a friend whom I’ll call Anxious Guy (AG). Kind, caring, hard working, AG is a self-taught investor who muddles his way through managing…

I have a friend whom I’ll call Anxious Guy (AG). Kind, caring, hard working, AG is a self-taught investor who muddles his way through managing his family’s $500,000 portfolio. Why does he muddle? Partly because his central nervous system runs too hot. It’s just the way he is. And that’s all fine. Except that when it comes to investing, too much wayward nervous energy is a marked handicap.

For the ten years or so that AG has held the investing reins, his portfolio has returned about 5% annually, net of trading fees. A decent number but nothing to brag about when your portfolio is +90% stocks. I mean, if you’re overweight stocks, you want to see a return higher than 5%, especially when broad equity indexes, such as the S&P 500, are blowing past that number, as it has for the past six out of eight years. This is a matter of looking at investing through the risk/reward lens: because stocks represent higher risk than fixed income investments, you should expect higher reward.


Chewy Bit

‘Stock’ refers to a share in the ownership of a company.


And while AG knows his performance is subpar, he’s oblivious as to why. He doesn’t get that his fired up central nervous system is not advantageous in the investing world; that his emotional entanglement  is busting his investing chops and preventing him from moving the needle past a 5% annual return.


unknown

Enter Buddha

Knowing your self is the highest calling. In learning to know your self, you will understand when to turn left, when to turn right, and when to sit still.


Welcome to Your Brain

Brain exploration. This is the adventure that every determined investor must take. It’s a lifelong voyage and its well worth the trip. And what better place to start than here, with BuddhaMoney as your guide.

Let’s start with the basics.  As a human primate, you are a complex character, with your physical body hosting three brains bound into one.

Three brains? What? When did this happen?

Well, our most esteemed scientists seem to agree that the first inklings of the three-brained human appeared somewhere around the time that our ancestors began walking upright.

But I’m getting ahead of myself. You see, the creatures existing before humans were simpler. Being simple creatures, they had simple brains. As evolution progressed, and a wide variety of new creatures emerged, more advanced brains sprouted from the old ones. These new and improved brains superimposed themselves on, and co-existed with, the old model brains.

Alright, generalities aside, let’s talk specifics in the form of a compact, less than 400 word summary of the history of human brain evolution:

Brain no. 1. Reptilian.

Anyone ever call you lizard brain? Well, don’t take offence because it’s true. We’re all part lizard, not just the guy from high school with the creepy long tongue. But hey, we’re better off knowing and accepting who we are, right?

Made up of the brain stem and cerebellum, Reptilian Brain (or Lizard Brain, just for the fun of it) controls movement, breathing, circulation, hunger and reproduction. Lizard Brain is all about ‘me’; it’s about territory, social dominance, and instinctively responding to life circumstances by fleeing or fighting.

When Lizard Brain detects threat or conflict, whether real or imagined, our fear/stress response is triggered to varying degrees. And though Lizard Brain continues to serve a purpose, it is prone to leading us astray. Why? Because its responses are largely unconscious and automatic.

So when it comes to navigating the wide world of stock investing, with all of the markets ups and downs sparking wild oscillations between fear and greed, we would be better off with Lizard Brain disconnected. However, purposefully or not, the manufacturer did not install an on/off switch.

Brain no. 2. Mammalian.

Climbing up the evolutionary ladder, the revamped model belonging to mammals is fittingly known as Mammalian Brain.

Designed to integrate with Lizard Brain, the Mammalian Brain tacked on body temperature and hormone control, connected feelings/emotions to behavior and events, and allowed for memory formation and long-term memory.

And though both Lizard and Mammalian brain primarily operate on a subconscious level, Mammalian comes equipped with a new and improved bonus feature: it’s programmed for self-discipline, allowing us to harness the otherwise automatic responses of Lizard Brain.

Brain no. 3. Thinking.

Ohhh, the cutting edge version! Wrapped around Lizard Brain and Mammalian Brain is the Thinking Brain or Neocortex.

For fans of the original Star Trek series, think Spock personified.

Neocortex allows for logic and rational thinking, decision making, planning, information processing and purposeful behavior. Present in all primates, but most highly developed in us folks, the humans, Neocortex operates mostly on a conscious level (unlike Mammalian Brain). Meaning, when properly nurtured and skillfully operated, Neocortex may dominate, and effectively shut down the other two models.

Make Friends With Your Brain … Pick Winning Stocks

Now that we’ve had our entirely thorough and informative lesson on brain functioning, you may be asking … so what? Why should you care? How does this help you build a portfolio of mostly winning stocks?

Well, it’s about getting to know your self at the most fundamental level. If you know that there are three different primary parts to the human brain, each part serving a different function, each part integrating with the other though often operating at competing ends, then you may be able to better recognize, understand, and direct your own behaviour.

And clear understanding of your behaviour feeds into wise decision-making. Put in a way that makes sense to your portfolio, excellent investors have learned to tap into rational, non-emotional Neocortex.

As far as Anxious Guy is concerned, he’s been at the investing game a long time. But he still isn’t tuned into him self. So what should he do? Get to a couch. One where he may lay down and open up to study and analysis by a competent professional (oh, I don’t know, say someone like BuddhaMoney). Someone who would work with AG to strengthen his Rational brain for the purpose of subduing Lizard brain, and its prone to flee (investor translation: fear) or fight (investor translation: greed) instinctual responses.

With findings in hand, AG may then decide whether he is up for the challenge. And if he is, it would be really helpful if he considered the following Need To Knows before resuming his picking stocks ways:

 1. Buy Value


Chewy Bit

Never buy a stock when it’s trading at or close to its 52-week high. Sure, the price may continue to rise. And if it does, oh well, let it go and look for the next opportunity. Because odds are the price will drop before it resumes an upward climb. So wait for the price to pullback, to go on sale, then go shopping. This is how you maximize profit: by maximizing value.


Unfortunately for AG, he does not honour this Chewy Bit. And as if buying high weren’t bad enough, he sells low, when stock market hordes are delusional and panicked with fear. Oy! What are we going to do with you, AG?

You’ve probably heard this before: the basic rule with stocks is buy low and sell high. How many investors actually do this? Way too few.

Because Lizard Brain takes over and manipulates investor lemmings into running for cover when it appears the doomsday comet is moments from implosion (fear spreads, selling intensifies) or piling in when word spreads that stock prices are on a one way ticket skyward (greed surges, indiscriminate buying results).

The thing is, comets rarely strike and stocks are not immune to the law of gravity. By not paying attention to these realities, AG’s profits are minimized when he buys at a high price, and his holdings get burned each time he sells at a bargain basement price to some other primate with a more finely tuned Neocortex.

Buy low, sell high. A simple formula rarely executed. You’ve got to master this if you’re going to invest in stocks. You’ve got to tamp down fear when the market has fallen 30%, sit tight and wait for the rebound. Better yet, when turmoil strikes (not if, but when) and the share price of your favourite, fundamentally sound company has fallen near its 52-week low, gather the courage to buy more because its share price is likely to bounce back once market wide fear subsides. And when it does, and the shares approach their 52-week high, you then have to crack the whip at greed (it will go higher and higher, forever and ever – NOT), and take profit off the table; then put those funds to work again in a company that offers better value.

2. No Sure Thing

There are no guarantees, no certainty, in the stock investing game. If someone tells you about a ‘sure thing’, run the other way. Fast. Because they are wrong.

3. Tune Out

The stock market should come with a warning label: Watching daily stock market gyrations may cause you mild to extreme discomfort. Knowing this, do yourself a favour … stop watching.

Unless you’re a day trader (I’ll write about this another day; for now, know that you should never day trade unless you suffer from the ‘I-want-to-lose-my-money-real-fast-and-kick-myself-real-hard-afterward’ disease) there is no reason to check stock prices or your portfolio daily other than to give yourself an ulcer. Sure, you should monitor your portfolio on a regular basis, say once every few weeks, but if you’re locked in every day, you’ll drive yourself nuts.

4. Ignore Headline News

If your ulcer wants company, say hello to migraines by reading the financial pages every day.

Don’t give media the power to influence how you feel. Remember that media is in the business of attracting eyeballs and clicks and advertisers. Boring does not make for a good story. Sensationalism sells. Objective facts get in the way of selling news. Go ahead and stay informed about domestic and global events, but don’t let headlines influence your investment strategy. Sound research and objective information should be your sole sources of investment decisions.

5. Can You Afford To Lose?

If you cannot afford to lose your investment dollars, then don’t buy stocks. Go enjoy life and be content with the knowledge that your principal is protected with low interest, low risk and/or guaranteed return investments.

6. Know The Risk

Stocks are volatile. You know this. But does this mean they are inherently risky? (‘Risk’ defined as the chance of losing money).

Risk and volatility are not the same. Stock volatility, now that is constant, it isn’t going away, let’s say ever. And stock risk? Well, the risk attributed to a well designed all stock portfolio is largely a function of time.

What this means is that, given a short-term investing period, say 1-2 years, stocks are a riskier asset class than bonds or cash-equivalent instruments. But here’s the thing: when you look at a 5, 10, 20 year or longer investing period, non-stock portfolios are actually riskier than well designed stock portfolios. How so?

First off, take a look at history. According to Morningstar (MORN:NASDAQ – investment research company) since 1926, large cap stocks have an annual average return of 10% and long term government bonds have an average annual return of between 5-6%.



Chewy Bit

‘Large cap’ means a company with a market value of more than $5 Billion.


The risk with fixed income does not necessarily come from excessive risk of losing money. Rather, it’s the lost opportunity from not investing in a better paying investment.

Think about this: if you’re earning 5% on a bond, and inflation is running at 2%, and taxes take 1% of the investment return, your net return is a mere 2%. Now, today, we could only wish that there was a safe 5% bond yield on offer. If you can get 1-2% on a blue chip corporate bond, you’re doing well.

But guess what? With a current inflation rate of 1.5%, that 2% return becomes 0.5% (inflation erodes your purchasing power, reducing what you get for your money; at a minimum, you want your money to grow at a higher rate than inflation to maintain your purchasing power). After taxes and after inflation, that 2% bond return likely reaches zero or negative. Sad but true.

Granted, history does not predict the future but it may offer a general guide. And with a long-term investing horizon, investing in stocks appears to be a worthwhile risk.

7. Seek Dividends

Dividend paying stocks offer compensation not offered by non-dividend paying stocks.


Chewy Bit

‘Dividend’ is a payment made by a company to its shareholders. Depending on the company, a dividend is paid monthly, quarterly, semi-annually or annually. 


Let’s use Ford (F:NYSE) as an example. If you owned Ford in 2015, you would have seen a share price loss of more than 5%. But with the company paying a dividend of more than 4% during 2015, your loss would be in the neighborhood of 1%.

Generally speaking, unusually high dividends (above 7% and we’re getting into the ‘high’ category) should be closely watched owing to increased risk. If a company’s earnings are weak or there are insufficient funds available to pay dividends, then the dividend payout will be reduced or cut altogether. When this happens, share price often tanks.

8. The $64 Question: Is Your Brain Wired For Stock Investing?

Many, many books have been written about stock investing. If you want to dig deeper, please inform and educate yourself by reading and studying some of the classics. Here’s three of my favorites:

  • The Intelligent Investor, by Benjamin Graham
  • How To Make Money In Stocks, by William J. O’Neil
  • Stocks For The Long Run, by Jeremy Siegel.

And remember, even if you read these books, and other books, and an array of financial publications, and glue your self to the business section of the Wall Street Journal, Financial Times, Barrons and other notable major media outlets, and you listen to the so-called experts, and talk to as many people as you can who work in the financial industry, and make the annual pilgrimage to Berkshire Hathaway’s shareholders meeting to listen to Warren Buffett and Charlie Monger share their wisdom, and you amass all the knowledge about finance and business and investing that this universe has to offer, you still have to ask the question that only you may answer … is that sexy and wonderful brain of yours made for stock picking?

 

Cheat Sheet to Stock Investing

This really smart guy I know, lets call him Really Smart Guy, has made a whack of dough through his business. He’s married with two kids and owns a beautiful house in a so-called desirable neighbourhood in stunningly beautiful, and outrageously expensive, Vancouver, British Columbia, that’s worth a few million bucks. His excess cash he shovels into residential real estate, buying homes and renting them out.

Why residential real estate? I’ll leave that one alone for another blog entry, since the topic demands a space all its own. For now, let’s just say that Really Smart Guy bought into the conventional wisdom that bricks and mortar is always a good investment. And for the most part, he’s done well.

Is That a Brick In Your Head?

The other day he was talking to me, telling me how he sold two properties at a slight loss. Feeling sorry for himself, he says to me, ‘you know, if I had invested the same money in Royal Bank of Canada back in 2008 (Canada’s largest publicly traded financial institution with a market value of about $140 Billion Canadian dollars [RY:TSE] – or about $107 Billion of the more valuable American paper [RY:NYSE]), I would have tripled my money! Shoot, I’d be really rich by now!’


Chewy Bit

Every publicly traded company (i.e., company listed on a stock exchange) is given what is known as a ‘ticker symbol’. The purpose of a ticker symbol is to identify a particular security listed on a particular stock exchange. The ticker for Royal Bank of Canada is RY. Since it is listed on two stock exchanges, RY:TSE indicates Royal Bank of Canada, Toronto Stock Exchange. And RY:NYSE, indicates Royal Bank of Canada, New York Stock Exchange.


I’m listening to Really Smart Guy, not saying anything. But I’m processing what he just said, ‘I’d be really rich by now’. And I say to myself, Wow.

Here’s someone who owns his own business, runs his days however he wants with no one telling him what to do, he and his wife and two children are all healthy and thriving, and he’ll likely never have to worry about paying rent or a mortgage, putting food on the table, or providing shelter or clothing to himself and his family. Not only are his basic needs taken care of but he has the wherewithal to satisfy most any other need or want.

Batshit Blind

Yet, Really Smart Guy doesn’t see it this way. He’s already sailing with the top 1% but that’s not enough. He wants more. He wants to be ‘really rich’, whatever that means to him.

Channeling Buddha, I say to myself, okay, here’s a person who’s filthy rich and doesn’t know it. What should I say, what should I do? Well, my perpetually smiling friend tells me:


unknown

Enter Buddha

There is nothing ‘to say or do’. Really Smart Guy is on his own path. Who are you to tell him to be grateful for what he has, for what he’s accomplished? Maybe his perspective will shift one day, maybe it won’t. Either way, your role is not to offer unsolicited advice about living life. What you’re here for is to offer investment advice; that’s the only thing Really Smart Guy asked of you.



blog-3


This Way or That

After some more talking about how rich he could have been if only he knew then what he knows now, Really Smart Guy tells me he has never invested in the stock or bond market and he wouldn’t even know where to start.

I get it. There’s so much noise out there coming from mainstream financial media, banks, investment houses, mutual fund companies, exchange traded fund companies, financial newsletters, economists, analysts, central bankers, blogs (except BuddhaMoney, naturally), advertisements, well-meaning but misinformed friends …

… and the noise can be persuasive, pulling you every which way, screaming at you to BUY this; SELL that; stocks are best for the long run; balancing stocks and bonds is essential; buy gold, dump everything else, the system is crashing, paper money will soon be worthless; no, no, no, cash is your best friend; mutual funds are the only way for most people to adequately diversify; scratch that, mutual funds are too expensive, buy me, I’m an Exchange Traded Fund (ETF) that is essentially a mutual fund that charges you lower fees; global markets are down 4% and falling fast, the sky is falling, sell SELL!; global markets are up 4%, sunny days ahead so buy now while stocks are on sale, buy stocks, buy real estate, buy commodities, buy, buy, BUY!

If you want to ride an emotional rollercoaster and in the process drive yourself completely nuts, read these kinds of headlines everyday. That said, because you’re here, cozying up to BuddhaMoney, I assume you shimmy toward inner peace and balance. Bravo.

And if you’re a daily follower of the markets frenzied gyrations then, at this very moment, you agree to take a solemn vow to change this behaviour, to stop allowing mainstream financial media to push your emotional buttons, simply because it will be good for you, good for your BuddhaMoney soul, to shut out the noise.

Still, how do you know what to tune into and what to tune out? What sources are objective and reliable, not touting their own self-interest? How do you know what to buy/sell, when to buy/sell, how much to buy/sell?

Check out our next blog post (ahhh, the cliffhanger), I’ll be talking more about stock market investing, where to start on your investing journey, and how to figure out what’s best for you.

Build Wealth. Buy Real Estate.

My grandmother (let’s call her NaNa), a shrewd businesswoman with a big heart, invested her family’s minimal excess income in real estate.

She started by buying a duplex. Her family lived in one part of the duplex and rented out the other half. Rental payments covered her mortgage, general expenses, and allowed for a bit of extra cash. Maintenance costs were held to a minimum, as my grandfather took care of repairs.

In time, NaNa saved enough for a down payment on a second duplex. With much of the rental income being deposited into a savings account, she soon had enough to buy a third property. Eventually, the family was rewarded the luxury of not worrying about taking care of their basic needs.

Nana Teaches The Son

Ever a keen and interested observer, my father learned from NaNa. She taught him a whole lot about property investing, including:

  • What issues to consider when evaluating a potential purchase.
  • Benefits of maintaining a property’s value.
  • Importance of being fair and respectful to tenants.
  • How to draw a budget.

Having the advantage of NaNa’s tutelage, a university education, and an extraordinary work ethic matched by ambition, by the time my father reached middle age, he had assembled a decent-sized portfolio of apartment buildings that he referred to as his retirement fund.

And all of this was accomplished in his spare time, outside of regular work hours. That’s just who he was. Some people play tennis for fun, others get their kicks out of working, building, creating.

The Next Generation Adds A Twist

In my late twenties, starting to accumulate savings, I considered following in my father’s footsteps and buying apartment buildings as a way to build wealth. But I didn’t. Not because I didn’t want to but because the cost of apartment buildings had rocketed out of my financial league.

Small, independent property owners like my father had been bought out by deep-pocketed corporations who owned and managed thousands of rental units across the country. These corporations are known as Real Estate Investment Trusts (‘REIT’).

The Beauty of REITS

Instead of taking on the risk of a huge mortgage to finance the purchase of an investment property, and spending time learning the nitty gritty of property management, I turned to REITs as a way to dive into real estate investing. But before I chatter on about why REITs are an excellent investment, one worth getting to know better, I’d like to offer a few chewy bits about this asset class:


Chewy Bits

  • A Real Estate Investment Trust (short form: REIT, rhymes with ‘eat’), is a company that owns or finances income-producing real estate.
  • Most REITS trade on public stock exchanges (i.e., New York Stock Exchange; Toronto Stock Exchange).
  • REITS are income oriented and usually offer a higher dividend yield than most common stocks (the income component is one part of their attraction).
  • REIT shareholders earn a share of earned income, and participate in capital gains (yahoo!) or losses (boo!) just as with any other company trading on a stock exchange.
  • Commonly, REITS have a specific focus, such as apartment buildings, hotels, industrial facilities, office buildings, retirement homes, shopping malls, storage centers and student housing.
  • REITs typically provide investors with a monthly income stream; most paying dividends anywhere between 2.5% – 9%.
  • Think of REIT investing this way: the monthly dividend you receive is like collecting rent without the attendant headaches of managing your own property. Really, after you click to buy the REIT stock with your online broker, you can just sit back and watch your monthly dividend be deposited into your account each month. Sweet.
  • Since 1991, as a group, U.S. REITs have outperformed the S&P 500, 11.2% to 9.1%.
  • REITs are not highly correlated to the price of stocks and bonds. Meaning, since the price of REITS do not necessarily follow stock or bond market movements, they may play a part in smoothing out portfolio volatility.

For all these reasons, you may want to start a love in with REITs, in the wealth building sense that is. Ahem. That said, know that, like other asset classes, the finance gods did not create all REITs equally.

Hint, Hint: Be patient, and diligently research which REITs are a good fit for your portfolio.

Apartment Building REITS

Personally, I’m a big fan of Apartment building REITS, and not just for sentimental reasons. Rather, my crystal ball brings up images of a North America that is heading in the same direction as some Western European countries, where home ownership is much less prevalent.

Look at Switzerland, with home ownership at 38%, Germany at 41%, France at 55%, compared to about 68% in the US and Canada. Why the difference? Because property is so, so, so expensive in these countries that most people cannot afford to buy. And for a good percentage of those who do own a home, it was passed on to them by their parents, or grandparents or great-grandparents, etc.

So people rent. And that’s just fine. In European countries, there is no stigma to renting like there is in some pockets of North America where ‘the dream’ of home ownership in a white picket fence neighborhood is relentlessly marketed to us by the usual suspects: banks, mortgage lenders, home builders.

Not to mention the social pressure we feel from friends and family (after all, we are encouraged to live our life in a similar if not the same manner as those who came before us). And, our own dark angel contributes to the desire for home ownership: the human propensity to covet thy neighbor.

Now, this isn’t to say that there are not thoughtful, legitimate, excellent reasons for owing a home such as:

  • Control. The house is yours. Do whatever you want with it, repairs, renovations, etc.
  • Stability. Unless you go into default on your mortgage, no one can force you to move.
  • Capital Appreciation. You benefit from any property value increase.
  • Forced Savings. Each mortgage payment gives you more equity in your home. Especially important for those who are challenged in the … I Really Don’t Want to Think About Investments Because It Hurts My Brain department.

Okay, so you see, I’m not anti-homeowner. Not one bit. To borrow a phrase from two creatures who live with me known as ‘teenagers’, I’m ‘just saying’ that renting is a viable alternative, sometimes a preferred alternative depending on several factors including how pricey property is in your town.

And as property values continue to increase, outrageously in some urban centers such as San Francisco, Vancouver, Manhattan and Toronto, more people turn to renting. The result being that apartment buildings maintain high occupancy rates, which is good for apartment building REITs, and puts a smile on the face of REIT shareholders as they reliably collect monthly dividend payments.

Crunch, Crunch, Crunch the Numbers

My friend, Condo Lover, doesn’t agree. He says the better investment is a condo that you rent out. With a small down payment and mortgage financing to cover the balance of the purchase price, you’re now the proud owner of a condo.

But you don’t live in the condo, you rent it out. The rent payments cover your mortgage, maintenance and repair costs, and property tax. If you’re lucky, there’s change left over for spending money. So cash flow to cover condo costs isn’t a problem, and you sit and wait until property values increase to the point where you can sell the condo and cash out a sizeable capital gain.

I get it. I see the potential benefits of buying a condo as an investment. But if the condo is used solely for investment purposes, not as a second home, then I would take a pass.

Here are the primary issues, and the risks, I see:

  • Assuming I don’t have enough in the kitty to pay all cash for the condo, I’m taking out a mortgage. What if I can’t find a solid, upstanding tenant who pays their rent on time each month, or who pays their rent at all? Will I still have enough to cover mortgage payments?
  • If I’m going in with my eyes open, I’m factoring in repair costs, general maintenance, property tax and increases in property tax. Ideally, a steady stream of rent checks pays these expenses. But what if they don’t? Do I have other resources to cover expenses?
  • What if I want to sell the condo but the real estate market is weak, the timing of sale is unknown, and I have to drop my asking price, possibly taking a loss? Am I prepared for this scenario? Could I absorb the financial hit without breaking stride?

Compare this to being a property owner via a REIT. I buy shares in the REIT with cash held in my investment account. I don’t borrow to pay for the purchase.


Chewy Bit

Buying on Margin. This is an investment term that means you pay for a certain percentage of your stock purchase and borrow the balance owing from the investment brokerage. DON’T DO THIS! EVER! Leave buying on margin for the speculators. It’s not for reasonable investors.


As a REIT shareholder, I don’t have to worry about bad tenants destroying my property or not paying any expenses associated with the property. And when it comes time to sell, well, I only buy fundamentally sound REITs, meaning there is always a liquid market (i.e., sufficient volume of buyers and sellers), so I can sell any time I like. I collect a monthly, purely hassle-free dividend (amount of dividend dependent on the individual REIT), and if I purchased a REIT when it was out of favor (i.e., price was down; we here at BuddhaMoney love buying investments on sale), there’s the opportunity for capital gain when I sell.

Now, tell me, what’s not to love about REITs?

The Extinction of Financial Advisors

It was raining. Nothing torrential; more like gentle spitting rain. This was last month, December, and accompanying the rain was the cold. It was chilly outside, moreso as Hiker Friend and I made our way up a small mountain (there’s no shortage of these geological marvels in the Pacific Northwest).

The higher we climbed, the deeper the purple shade of my hands. Ach, so what, I thought. So what if my extremities are being drained of blood? If my fingers are becoming stiff and immobile? Small price to pay for being outside, in the forest.

Forests are amazing. Losing your self (or finding your self) in nature, craning your neck to gaze up the length of 150 foot tall Fir trees, being mesmerized by sounds of gurgling water flowing through narrow creeks, smiling at the sound of harmonies sung by Robins, Finches and Stellar Jay birds, and all the while chatting with Hiker Friend. We shared thoughts and ideas, discussed the happenings in our lives, the good, the challenging, the downright mind boggling hold your head and run away screaming, and the not so trivial matter of whether feeling would eventually return to my fingers. Gloves, we both agreed, would be useful.

That’s the way it is with friends. You listen to each other, you share stories, you connect, empathize, sympathize, support, joke around and laugh. No airs, no trying to be a certain way, no costumes, no masks. You get to be your self, your whole self, and you get to be accepted for who you are. Unconditional acceptance, letting people be as they are, not trying to bend anyone in your direction … this feels good, feels right, and it’s a recipe for minimizing needless conflict, leading to more happiness.

We need friends. They keep us healthy. They enrich our social/emotional life. They give us financial advice? They …

What? Excuse me? Pardon? Huh? Did you say financial advice?

Whoa! Guess I got carried away there. Friends and money, it’s a difficult topic for most, similar to religion and politics where it’s best, for the sake of the friendship, not to go deep, or even not to go there at all, if you are not of like minds. If you do want someone to bounce ideas off of, or someone to guide you through the crowded financial arena, then it’s best to hire someone in the business.

Financial Advisors Are Not Your Friend

First off, let’s get something straight. A Financial Advisor (FA) is not your friend. A FA is, or should be, a professional money manager, someone with whom you have a business relationship, someone who provides objective advice when looking out for your best interests AND making money for you.

Why am I insisting that a FA is not your friend? Because I’ve known too many good people who pay good money for the services of a FA who doesn’t get the job done. These good people complain of poor portfolio performance, shrinking nest eggs, delayed retirement owing to investment losses … but refuse to end the relationship.

Instead, they choose to grin and bear it, to shrug, to suggest there is nothing that may be done to improve the situation (Hello? Hello? Keeping your head in the sand only serves to make the problem bigger). When, trying not to show my exasperation, I ask why they don’t end ties with FA, the most common response is, ‘well, he/she is a nice person and they are doing their best’. Agh! Really? Really?! Come on people, time to step up and take the reins.


Enter Buddha

You have entrusted someone to care for you and your money. This money represents your financial security, mortgage payments, children’s education, future retirement, financial freedom.

If you and your money are not properly cared for, not properly nurtured, then you suffer, your family suffers.

Though he/she may be sympathetic to your loss, the FA will not otherwise suffer. In fact, no matter how poorly your portfolio performs, the FA earns money from you. For performing poorly at his/her job.

Though you may rightfully extend empathy, the FA is ineffective and, as a result, is causing you harm. Your primary responsibility is to remove your self from harm’s way, to care for your self and your family.


Well said, oh wise BuddhaMoney.

Here’s the takeaway: Do not, under any circumstances, make your relationship with FA personal. Recognize the boundary dividing personal and business, and don’t cross it.  And if FA is not doing the job they were hired to do, then for your sake, for your family’s well-being, end the relationship.

Should You Hire a Financial Advisor?

The most common reasons why people hire a FA include:

  • No time to manage investments.
  • Would rather pull your own teeth than spend time thinking about investments.
  • Lack confidence in ability to choose suitable investments.
  • Believe that someone else will do a better job than you.
  • Not being taxed with the responsibility translates to less stress, more balance.

For those of you who tick the box next to one or more of the above worthy reasons, then a FA or a Robo-Advisor (welcome to the 21st century – keep reading, more discussion and explanation follows) may be suitable for you.

If you do choose to hire a FA, please, please, please take your time, be cautious, and do your homework before hiring someone to care for your hard earned life savings. Like any occupation, you have good and bad apples. Unfortunately, the FA occupation has ridiculously low entry hurdles as far as background, education, and credentials are concerned. So, in the FA universe, you have qualified FAs working alongside poorly qualified, and are-you-kidding-me-you-don’t-even-know-how-to-button-your pants-unqualified FAs.

My Unfortunate Detour Into the Financial Industry

For a short period of time, some years ago, I worked as a FA for one of the largest North American financial institutions. Measured in months not years, my stay was short for two reasons:

  • Corporate culture and I do not fit.
  • First and foremost, FAs are salespeople.

I would have walked off the path sooner had I been quicker to understand that without sales skills you do not survive in this industry. Having suffered through the training process, I can tell you that the bulk of your time is spent being trained in sales, understanding what pushes peoples emotions, and how emotions affect financial decision-making.

Now, let me be clear here: I am not denigrating those who sell products/services to earn a buck. When you think about it, in our consumer society we all sell products or services, in one form or another, to varying degrees. So, ‘selling’ in itself is not an issue. Rather, the issue is that the financial industry can be less than forthright (i.e., mislead, obfuscate and lie) about what they are selling.

For anyone who has watched the movie, The Big Shorthttps://www.netflixreleases.com/big-short-2015/, or read the book (I strongly recommend the book, much more informative, just as engaging as the movie) you know that the industry has a history of irresponsibly packaging and selling financial products that, for the most part, benefit only the salespeople and their financial institutions.

Take mutual fund fees as an example. A FA who makes their living on transaction fees (i.e., money earned on every purchase and sale of a security), may want to place clients in a mutual fund instead of an index fund. Why? Because they earn much more money from mutual funds.

Here’s how Mutual Funds work:

  • Mutual fund company charges a management fee.
  • This fee is listed as a Management Expense Ratio (MER).
  • Charging a fee is to be expected. People should get paid fair value for their work. No problem there.
  • However, what most people don’t know is that the MER is shared with the FA. So if the MER is 2.5%, then FA typically receives 1.25%. Basically, it’s a kickback. So the more client money invested in the Fund, the more FA earns.

To use a dollars and cents example, lets say FA has $1 million of client money invested in Mutual Fund. Based on an MER of 2.5%, this $1m generates an annual fee of $25,000, half of which is paid to the mutual fund company for managing the Fund, the other half paid to FA for placing client in the Fund.

Now, after a few years working as a FA, you’ll have about $40m of client assets under management. If you don’t reach this magic number within a certain time frame, you’re fired.

If FA is managing $40m, and that $40m is in Mutual Funds charging 2.5% MER, then FA is collecting $500,000 every year (the other half million is paid to Mutual Fund company). Wow. Just for steering their client toward the Mutual Fund and making sure they hold it, FA sits on his/her ass and  collects half a million bucks every year.

Compare the Mutual Fund MER to an Index Fund, that typically has an MER of between .10% (which would equal an annual payment of $20,000) and .60% (which would equal an annual payment of $120,000), and you see why FAs are chomping at the bit to place clients in Mutual Funds. And why not, this would earn them more money.

Right. Why not? Well, how about something called ethics? How about this seemingly dated notion called duty to the client? Here’s what is outrageous about the industry: the absence of a legal obligation on the FA known as a Fiduciary Duty.

Fiduciary Duty is legal mumbo jumbo for, ‘FA has no responsibility to place their clients interests ahead of their own’. In other words, what is most important is that FA earn a living off client’s money. Client’s interests place second.

Go ahead, read that part again. Now for those of you who are not sufficiently incensed, let me be more clear: if FA chooses to ratchet up his (for better or worse, likely worse, the industry is overwhelmingly testosterone based) take home pay by placing clients in high MER mutual funds primarily to make more money for himself, that’s okay. Legally, absolutely nothing wrong with this.

I recall watching two FAs high five one another after sharing the news of how much money one of them made on a $250,000 mutual fund purchase. There was no talk about the merits of the Fund or the suitability of the Fund for the client. It was all about the money earned by FA.


Enter Buddha

Greed. When one feels hollow within, there is the effort to fill your self with stuff, including money. The effort will fail because whatever you accumulate remains outside; it does not enter within. To become full, one must seek solutions within.


Not all FAs place their own interest ahead of their clients. But too many do. Ultimately, it’s the industry that must shoulder responsibility since heavyweight corporate players are the ones who have the heft to fight against, and prevent, adoption of an across the board Fiduciary Duty.

Regardless of who should bear responsibility or what legal obligations are placed on FAs, as an investor, you would be wise to take matters into your own hands. This means informing your self, educating your self, learning how the game works. And if you have any doubts, well, that’s what BuddhaMoney Posts are here for, to guide you down the path that is best for you.

Golden Rule of Investing: Protect Your Self

Like I said, there are good and bad apples everywhere. And despite the somewhat negative portrayal of FAs (hey, I’m calling it like I know it and see it) in the preceding paragraphs, there are good FAs out there who will compassionately and honestly care for your money. That said, if you hire a FA, protect your self by starting with the following:

  • Remember that you’re the boss. FA works for you. Do not be ‘sold’ on their ideas without fully understanding what they want to do with your money. A good FA will take time to explain their decisions and will not proceed with any investments if you are not comfortable.
  • A good FA will place your interests ahead of his/her own. They will act as if a Fiduciary Duty does exist.
  • žInsist on full written disclosure of all fees on a monthly basis.
  • žStarting premise: only Index Funds will be held in your portfolio. If FA wants to add mutual funds, stocks, bonds, etc, have them explain to you, in exhausting detail, how and why these will benefit your portfolio.
  • If fees are charged as a percentage of the portfolio, negotiate this fee. Shop around and compare fees; see what the competition is charging. Typical annual FA fee equals about 1% of total portfolio value.
  • If your gut is telling you that FA is not the right person to care for your life savings, then end the relationship and move on.

Save Yourself the Hassle: Hire a Robot

Which do you choose?

HUMAN ADVISOR, replete with human frailties working within a regulatory system that facilitates unfairness.

or

ROBOT

What? A machine will manage my money?

Okay, let me back up here.

In an attempt to capture internet savvy consumers demanding lower investment fees, Robo-Advisor was created.

Robo-Advisor’ is a term used to describe automated, algorithm based investment advisory services.

Robo-Advisors are kind of a middle ground between do-it-yourself investors and those who use a FA. It’s a middle ground because Robo-Advisory services offer a combination of automated online (and through apps) and personal (i.e., human) online guidance. Though one size does not fit all when it comes to investing advice, beginning investors and those with somewhat uncomplicated portfolios may be best suited for the Robo-Advisor option.

As more financial institutions offer Robo-Advisory services, more people are turning away from the animal known as Human Advisors and entrusting their investment dollars to Robots.

Robo-Advisor Advantages

  • Efficiency. All business is conducted online.
  • Lower Fees. Generally, half of what a traditional brokerage will charge, partly because the financial institution does not have to pay for a legion of FAs to sell products (the primary reason why human advisors are on the path to extinction; fewer employees, more automation, means higher corporate profit).
  • žClient First. Client’s financials interests always placed first.
  • Fully transparent. Online access to current list of all fees.
  • žConvenience. For those who are comfortable cozying up with the Internet (statistics show that more than 60% of Robo-Advisor clients are of the Millennial Generation), access and manage your accounts 24/7.

How Robo-Advisor Works

First, Robo-Advisor gets to know you by asking questions related to your current savings, assets, investment goals, details of any mortgage, loans or other debt, children, education costs, charitable giving, etc.

Second, questions related to determining your investment risk tolerance and investment time horizon (i.e., when do you expect to draw money out of the account).

Once you’ve provided Robo-Advisor with all relevant information, numbers are crunched, your profile is sketched, and a portfolio comprised of Index Funds is recommended. After your money is invested, Robo-Advisor monitors your portfolio and automatically rebalances assets to target allocations.

Who Are These Robo-Advisors?

The independents got the game running. Currently, the two leaders in this space are:

https://www.betterment.com

https://www.wealthfront.com

A little later, financial behemoths adopted the technology:

https://intelligent.schwab.com

https://investor.vanguard.com/advice/personal-advisor

https://us.etrade.com/investing-trading/guidance-advice/adaptive-portfolio?gclid=CKDkj9zapc0CFYQ2gQodTu8CsA

For Canadians, there are two large blue chip institutional options:

http://www.bmo.com/smartfolio

http://www.questrade.com/portfolio-iq

… and several independent companies, such:

https://www.wealthsimple.com

https://www.nestwealth.com

Other players who recently entered the Robo-Advisor space or intend to do so in 2017 include:

  • Wells Fargo
  • Bank of America
  • Capital One Financial
  • US Bancorp
  • TD Ameritrade

Recent Robo-Advisor acquisitions of independents by large financial institutions include:

  • Fidelity acquires eMoney
  • BlackRock acquires FutureAdvisor
  • Northwest Mutual Insurance acquires LearnVest
  • Invesco acquiring Jemstep
  • UBS acquires SigFig.

Robots Rule

Robo-Advisors are the future of money management. If your future is now, when deciding whether to choose an independent or an established financial institution, keep in mind that some independents have been swallowed up by large financial institution (see above) who prefer to move into the Robo-Advisor space at potentially less cost and time than would be incurred if they built their own.

My guess is that, in the next five years, more independents will cease to exist, either because they don’t attract sufficient business to turn a profit or are acquired by deeper pocket financial institutions.