GIVEAWAY: Two Copies of QuickTax Standard from Intuit

Posted by Preet on Feb 17, 2010 | 51 comments

A representative for Intuit contacted me last night to offer up two copies of Intuit’s QuickTax Standard (handles up to 8 returns) for a giveaway on the blog. With the deadline for filing your taxes coming up I thought I would agree to the giveaway if they would explain exactly how they can guarantee the maximum refund possible. Their answer is as follows.

Theoretically, if you follow the tax code to the letter, and you know about every possible credit and deduction available to you, you should end up with the same refund/amount owing no matter what method you use to prepare your taxes. In practice, the number can vary quite a lot. Variations in results tend to be due to the quality of the preparation, and with tax software, that comes down to how questions are asked, the interview process, the optimizer tools and the types of support available to the customer. Regarding the latter, QuickTax offers the best support in the business with free phone, email and chat support on all paid products, Live Community and the Ask a Tax Expert option with QuickTax Online. Last year more than four million Canadians counted on QuickTax to get every penny they deserve by ensuring that they have the best possible information relevant to their specific tax situation.

Last year QuickTax introduced the Maximum Refund Guarantee. Users who get a bigger refund using any other tax preparation method can get their money back. It’s that simple. The typical Canadian wants to get their taxes done and be confident that their return’s accurate and they’re getting back getting back every penny they deserve. That’s what the Maximum Refund Guarantee does.

In addition, Intuit offers the 100% Accurate Calculations Guarantee. If you do pay a penalty or interest because of a QuickTax calculation error, we will reimburse you the penalty and interest.

*Note: I am not being compensated by Intuit nor do I have an opinion on the product – I’ve never used it myself.

Contest Rules:

• You may earn one entry by leaving a comment at the bottom of this post on the website.
• You may earn a second entry by re-tweeting the contest. If you have a twitter account, just click here. It will take you to your twitter homepage and all you have to do is click the “update” button.
• I reserve the right to delete any comments that are inappropriate.
• You must submit a valid email address in the comment form. Don’t worry, it will not be visible to anyone but myself and it will never be shared or sold to anyone either.
• Winner must answer a skill testing question.
• Entries must be submitted by 11:59pm on Friday, February 19th, 2010.
• Winners will be contacted using the email address provided only, and will have exactly one week from that point of contact to provide their full contact details in order to claim their prize.
• I reserve the right to disqualify any entries for any reason.

Guest Article: DSC Index Funds

Posted by Jim Stark on Feb 8, 2010 | 2 comments

This is a another guest article by Jim Stark. Jim Stark is a pseudonym for a practicing Canadian financial advisor.

Why are there no DSC Index Funds?  On one hand, pretty much any advisor knows that there is no such thing as a DSC index fund and why that is so.  On the other hand, many retail investors probably never thought about it- and likely wouldn’t be able to accurately explain why this little wrinkle exists even if they did.  There’s likely a pretty severe disconnect on this- a topic that could have applications in the fields of practice management, ethics, client suitability and advisor ‘value propositions’ to name a few.

(Note: there actually are DSC Index funds these days, but they are far from ubiquitous – Preet)

In order to be clear, it needs to be underscored that mutual fund companies “manufacture” products, while financial advisors “distribute” them.  Obviously, no one could be expected to distribute a product if no one is manufacturing that product in the first place.  So, to modify my original question in the interest of specificity, “why don’t mutual fund companies manufacture DSC index funds?”

I’ll try to grapple with the question by confessing my concern right off the bat.  To me, this is a case of undue bias.  I would hope that all readers would agree that in an advisory relationship, the interests of the client should always come first.  Still, advisors are absolutely allowed (indeed, expected) to advocate for whatever products and processes they feel are best and are absolutely allowed to choose their own business model, too.

Many advisors insist that they are “independent”.   When asked by someone who understands the industry, however, one quickly finds that many “independent” advisors have an attitude that is similar to Henry Ford’s early take on car colours: “you can have any colour you want, as long as it is black”.  My take on those advisors who use mutual funds is that they effectively tell their clients that they suggest that they can: “have any mutual fund they want, as long as it pays an embedded compensation”.

This isn’t a topic that is confined to index funds, obviously, since there are dozens of credible actively-managed mutual funds available that never make it on to many advisors’ product shelves, either.  I chose to explore index funds because in the case of actively-managed funds, advisors can always find a similar fund that offers an embedded compensation and skirt the ‘advisor value’ conversation that might otherwise ensue.

The problem, as I see it, is when the business model drives the product recommendations to the potential detriment of the client interest.  The implicit premise of much financial advice is that the advisor is more likely than a layperson to reliably identify outperformers in advance.  Indexing drops all pretense of doing that.  As such, it begs the question of what one might reasonably expect from an advisor.  It has been suggested that the three primary functions of good financial advisors are to:

1. Spot problems and identify solutions.

2. Motivate people to act/change their behaviour.

3. Help people to emotionally detach from investment market events.

Notice that picking stocks and picking people who pick stocks (i.e. picking actively managed funds) is not on the list.  When talking about index funds that offer no embedded compensation, there’s no product alternative available today that has a similar mandate, but with advisor compensation built in.  In essence, advisors that use a commission model simply do not offer index products to their clients.

Obviously, the absence of a DSC index option would be a complete non-issue if actively managed products were demonstrably superior.  But what if substantial evidence suggests otherwise?  What if there are a number of clear and compelling reasons for a rational, self-interested investor to prefer an index product?  That brings us to what I believe is one of the fundamental questions in our industry today.  Where does one reasonably draw the line in regard to required disclosures regarding the risks and limitations for competing products and strategies where the relative efficacy of two or more alternatives is not obvious?

When giving presentations to ten or more members of the public, what if the following disclaimer was used:

The views expressed are those of (advisor name) and are not necessarily shared by (firm name).  Debate regarding market efficiency, the usefulness of fundamental and technical analysis, active vs. passive management and the efficiency of payments is ongoing.  To date, neither side has been able to claim unchallenged victory.

I cannot help but notice that people who favour active products and strategies, but fail to compare the two are not required to use the disclaimer.  The question that it begs is: “if neither side has been able to claim unchallenged victory, then how can an independent advisor recommend only one side to clients with a clear conscience”?  The corollary is: “how can it be acceptable to avoid an important disclaimer by simply avoiding a direct comparison”?  At the very least, shouldn’t all advisors be required to disclose that both alternatives exist, irrespective of the approach they favour- especially if there’s a reasonable possibility that the alternatives they favour is inferior to the one being recommended?  The industry hides the ugly truth by tolerating the non-disclosure of material considerations that could alter the decision-making process.

From my vantage point, the issue is not whether or not advisors should be allowed to advocate for one product line or business model or another.  Clearly, they can do whatever they feel is best.  The issue is whether or not they should be allowed to deliberately withhold credible and viable alternatives from their clients and still be considered independent professionals.

Thanks Jimbo. So what do you guys think? I realize this is written more towards advisors (as Jim’s articles usually are), but there is certainly food for thought for everyone.

The Financial Advisor Retirement Plan

Posted by Preet on Sep 8, 2009 | 3 comments

It is possible for an advisor to generate a $1 million bonus to themselves for relatively little work, and it probably happens more than it should.

A not too uncommon retirement plan for some financial advisors (I don’t want to lump all financial advisors together, but clearly there are those out there that are less than scrupulous), is to switch firms a few years before retiring. Why? Because they get paid a bonus to transfer their client assets and they can then sell their clients to another advisor at the new firm a few years later.

Advisor Compensation

I’m going to use a hypothetical example, although I do know that a situation pretty much exactly like this has happened many times before. An advisor who has had a successful career has amassed a book of client assets totaling $100 million over about 400 families. The average gross commissions being earned are going to be in the $1 million range, and if he/she is at a bank-owned brokerage firm, they are probably getting about 50% of that after hitting “the grid“. This means that their net commissions are $500,000 and this is what they would report on their income tax return as their income (they may pay salaries for assistants, and other overhead expenses, but we will leave that out for now for simplicity’s sake).

The Cross

Firms are always trying to recruit big producers. Depending on the profitability and business plans of the brokerages there are times when branch managers from competing firms can offer a recruiting bonus equivalent to the annual gross production of a broker. So from above, our financial advisor who was grossing $1 million in commissions could be offered $1 million to “cross the street”. There will usually be conditions included where “x percent of assets must be signed over in 12 months” or a pro-rating schedule applies. There may also be a clause stating that the assets and advisor must remain at the new firm for a minimum of 2 years, 3 years, or whatever, or there may be some sort of penalties.

The Walk

After the assets and clients have been transitioned it is possible for an advisor to then sell their book to another advisor at the firm. They can negotiate the price, but for argument’s sake let’s assume they decide on “one-times gross commissions”. In this case, since the gross commissions are $1 million, the purchase price would be $1 million.  The purchasing advisor can take a loan to pay the $1 million (in this case) and rather quickly pay off the loan with the commissions generated by the new assets under his/her name.

So What?

Selling a book of clients to another advisor is one thing because it doesn’t affect the clients from a purely monetary perspective. The fees they were paying will most likely stay the same. (From a non-monetary perspective, there are some other issues, but that is beyond the scope of today’s post). But with respect to the recruitment bonuses: that $1 million dollars comes from somewhere. Both advisors and clients should be asking “where?”. If these recruitment bonuses were not allowed, then commission grid payouts could be higher for advisors OR overall fees could be lower for clients (or net earnings could be higher for the brokerages).

Some might suggest that these are just investments from a brokerage’s perspective, they are paying now for a long term income stream. True, but they lose assets to other firms as much as they buy assets – so while there are some who are gaining more than they are losing, in many cases it’s just a costly game of musical chairs.