Thursday, July 2, 2009

ARM Mortgages, How DSC works, Kelowna Camping & Dr Nick Bontis

Hello my friend,

I hope this email finds you in good summer time spirits.

1) Upcoming Mortgage Wave
2) Do you have 'DSC' funds in your investment portfolio?
3) Dr. Nick Bontis
4) Local camping hot spots


1) Mortgage reset wave about to start in US (see attached image - Please remember this is US not Canadian figures)...

Has the US learnt enough to stick handle through the next mortgage wave. I stumbled on this back in February on 60 minutes and it has been something I have been watching ever since. Also attached is a link illustrating the Subprime issues and what is upcoming for the next wave of Option Adjustable Mortgages. Please remember in Canada we do not have mortgages similar to these but I do believe one needs to keep an eye on the US from time to time.

Click here to view a Bloomberg Article



2) Sample from the attached article...
The more your money grows the more commission the advisor is receiving. In a new DSC type investment the advisor is compensated largely upfront (before they even do anything, really) and then trickled a commission over time… who do you think is going to pay attention more in the long run. Who is building an actual business and who is the salesman…

Who is building an actual business and who is the salesman…
Deferred Sales Charge Explained (DSC)


To explain my point I will use Investors Group (IG) as an example. I only use them as they have an easy to explain business model. I have nothing against IG and wish only here to showcase how different models look.

If you invest $100,000 into an IG (DSC) fund and you withdrew your money in the first 2 years you would be paying 5.5% in fees based on the $100,000. If the market went down since you invested and you had a market value of $95,500 in your account, you would net at the end of the day $90,000 ($100,000 – market loss of $4,500 - $5,500 in fees).

The advisor on this transaction would have made anywhere between approximately 3.0% - 4.5% commission initially once the money was deposited or transferred, depending on his or her years in the business… The advisor will also receive a 0.5% trailer commission every year the money stays in house. Gets you thinking, doesn’t it… You can see how the fees play out for the remaining years.

Redemption fees at Investors Group
When redeemed Fee %
Within two years 5.5
During third year 5.0
During fourth year 4.5
During fifth year 4.0
During sixth year 3.0
During seventh year 1.5
After seven years None

Source: Investors Group Inc.

These DSC type funds used to be very popular in the past and some advisors still actively use them as they believe that DSC funds like this keep their clients locked in through rough times and it helps keep the client focused on the long term… I will not speak for anyone else but I personally like having options, while maintaining long term focus.

There are other models out there that could be more appealing. One of them is called low load funds (LL). This allows you to invest your money in sound investments, allows the advisor to get paid for his/her efforts and if you need to take your money out for an emergency or life change, the fees will not cause you to claim on your life insurance. Here is a Low Load (LL) example from a company called Value Partners Investments.

Redemption fees at Value Partners Investments
When redeemed Fee %
Within 1st year 3.0
During 2nd year 2.0
During 3rd year 1.0

The commission on Value Partners Low Load is between 1.75 – 2.0% once it makes it to the advisor. Some advisors may vary based on their dealer but you get a rough idea of the difference. As well the advisor would receive approximately a 0.8% renewal commission once the 3 year schedule was satisfied.

Low Load gives you and the advisor a win win. You the investor has an incentive to stay invested for at least three years to deter you from trying to time the market with your RRSP’s and retirement nest eggs. The advisor is compensated for preparing your proposal, monitoring your holdings and staying in tune with the overall economy. I guess the third win is; if you need the money in an emergency you can access it without big penalties.

If an advisor is paid less in the upfront but a little more over time and that renewing pay is based on the overall size of the portfolio, you can bet that later advisor is going to pay more attention to what your money is invested in. The more your money grows the more commission the advisor is receiving. In a DSC situation the advisor is compensated largely upfront (before they even do anything, really) and then trickled a commission over time… who do you think is going to pay attention more in the long run. Who is building an actual business and who is the salesman…


3) Dr. Nick Bontis - I recently attended a conference in Indianapolis Indiana. There were a host of top notch professional speakers, presenters and comedians. One that I wanted to share with you is Dr. Nick Bontis. He provides an interesting spin on the economy and the evolution of technology in our society. Attached is a 4 minute video of him sharing his thoughts. (If link doesn't work - YouTube Search - Dr. Nick Bontis Keynote Speaker)

Click here to view a great clip

4) Camping Hot Spots close to Kelowna (within 90 min drive)
- Owls Nest on Kal Lake - I recently stayed here and was very impressed with the value. Clean overall site, clean bathrooms, hot showers, great beach and boat access (launch). Power, sewer and water on most sites and the overall feel was great for adults and children. There is a great fire pit down on the water for relaxing... and there were minimal mosquito's which is always nice. Also for all you hardcore cell phone users out there, there is great cell service and it is close to town if you need to make that special trip to take care of business.

- Mable Lake (Forestry Site) - This is definitely a little more rugged. Great fire pits in the sites, great access to the beach and there is a boat launch. The bonus to this site is if you are an outdoors type the mountains are right there. If you are into ATV'ing, hiking, mountain biking or showing the children how to shoot pop cans with a pellet gun, this is the place. Dogs are allowed and the overall feel was very relaxing.

- Cathedral Provincial Park - if you are into spectacular hiking... look no further!

Have a great summer and as always if you, your co-workers, friends or family have any insurance or wealth management questions I am never too busy.
Dustin

www.serviss.ca

Dustin Serviss, RHU
Associate

The Peacock Sheridan Group
205-1180 Sunset Drive Phone 250.869.1451
Kelowna BC V1Y 9W6 Fax 250.869.1452

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