My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, January 30, 2017

Victory Lap Retirement – Book Review and Giveaway

For many Canadians, the new retirement reality is that there will be no such thing as a full stop retirement from working. The reasons for this are varied and many: from our increased longevity (see Part 5 of my 6 part series on How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!), to the realization that a sedentary lifestyle in retirement leads to boredom and a much higher probability of an early death to the disappearance of gold plated defined benefit contribution plans.

In their recent bestselling book, Victory Lap Retirement, Mike Drak and well known writer/columnist Jonathan Chevreau, discuss a new retirement paradigm, in which retirement includes a personally determined balance of work that is enjoyable, fun and stimulating and leisure.

I really enjoyed this book and the creative cartoons. The authors suggest the book should be read by everyone including millennial's and while I agree it would be a great read for a millennial (if you could get them to read a book with retirement in the title), this book resonates with baby boomers who will be retiring in the foreseeable future or have recently retired. I found it almost scary how many insights and comments the authors made throughout the book that struck a chord with me.

Mike and Jonathan suggest that financial planning fails without life planning and this book while integrating the former is really about the later and that is what makes it unique. The book is truly holistic, dealing with the importance of physical health, mental health, spiritual health and how vital it is to never stop learning (as my father-in-law always says, “If you’re not learning, you are forgetting”). The authors note, a Victory Lap “gives you the opportunity to start over and design a new life for yourself, but without being limited by your job or responsibilities to others".

Chapter 4 of the book lists four benefits you may reap when you delay a full-stop retirement:

1. Reduced financial anxiety

2. Longer Life - various studies have shown that by delaying retirement, you live longer

3. Better Health -as you continue to exercise your mind and body

4. Prevents boredom, a huge issue for many retirees.

In the forward to the book, Ernie Zelinski author of How to Retire Happy, Wild and Free and The Joy of Not Working, contributes an un-attributable quote that says “retirement is wonderful if you have two essentials - much to live on and much to live for.”

I love the above quote. It is also the essence of the book. Victory Lap Retirement is predicated upon achieving “Findependence” (a term coined by Jonathan that means you have achieved financial independence and you work because you want to work and not because you have to work) and thus, you have the confidence to focus on creating a lifestyle of work and play without financial stress.

This premise is the one main issue I have with the book. Findependence [defined as when you have achieved sufficient passive income (interest, dividends, rental income) to cover your non-discretionary expenses (essentially living expenses)] is the cornerstone or prerequisite for a Victory Lap Retirement. While this is a financial goal we should all aspire to achieve, it is a goal many people will not achieve for two reasons:

1. Significant savings are required to cover annual discretionary expenses.

2. People such as me, who do not ascribe to the frugal lifestyle, are not even close to achieving Findependence. In my case, as I have discussed many times on the blog, my goal, in part because I had a father die young, is to live my life to the fullest while healthy (see my various bucket list posts including ones on Pebble Beach and my Safari) but at the same time, be cognizant of building up a retirement nest-egg. I will not achieve Findependence based on my "live while you can" lifestyle, that converts what many would consider discretionary expenses into non-discretionary expenses.

Thus, as I told Mike (whom I knew when he was a banker and not a famous author), while I understand why he and Jonathan consider Findependence the cornerstone of retirement, I think they should ensure that they convey the message that the Victory Lap philosophy is not reliant upon reaching Findependence, although it clearly makes the Victory Lap a wind-assisted one.

The one other issue that I don’t think the authors contemplated, is that many business people and professionals who enjoy what they do and would like to continuing doing so in retirement, albeit at a slower pace, are prevented doing such, by non-compete clauses when they sell their business or retire from their firms. I am getting picky here; the book is a great read and I thoroughly recommend it.

Giveaway


Mike has graciously provided me two books to giveaway to my readers. If you are interested in a copy of the book, email me at bluntbeancounter@gmail.com by February 6th and I will notify the winners by email on February 7th.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, January 16, 2017

What Small Business Owners Need to Know - Cyber Insurance Should be Part of Your Insurance Coverage

When I look back five or ten years, I am just astounded by the pace of change, both technologically and otherwise. The impact of these changes on how I practice and how my client's conduct their business affairs are truly astonishing.

When Katy Basi wrote a guest blog post in 2014 on New Will Provisions for the 21st Century - Reproductive Assets, I remember saying to myself, this is incredible, we now have to consider reproductive assets in our wills.

Today, I have the same feeling. Eddie Kehoe of RDA Insurance is writing on the need for cyber insurance. Who the heck would have ever envisioned such a need ten years ago. Maybe you would have, but I certainly did not.

Anyways, if you own your own business, you should carefully read this blog post and consider whether you need cyber insurance if you do not already have such insurance in place.

Cyber Insurance Should be Part of Your Insurance Coverage 

By Eddie Kehoe


If I was to ask you to consider purchasing a cyber insurance policy for your business, your first response – more than likely – would be “why do I need this, I’m not Target, Sony or Home Depot?”. Many of us have learned about cyber-attacks from the high profile breaches reported on CNN and the other news networks. What the news networks don’t often report is that breaches are occurring to smaller business every minute in Canada today. In addition, since the protection and firewalls of Multi-National corporations are often very good, cyber attackers often attack these companies indirectly through Trojan horses carried in by their smaller suppliers. I would suggest your business is likely out of business if your company indirectly led to an attack on one of these large companies.

The International Cyber Security Protection Alliance Statistics reported, in 2013, that businesses with less than 250 employees accounted for 31% of the total data breaches reported. Another misconception is that hackers are responsible for all cyber and data breaches. A 2016 NetDiligence Cyber Claims Study reports that insider involvement accounted for 30% of the incidents, hackers caused 23%, malware/virus 21% and third parties (vendors) 13% of incidents. In short, humans are the weak link!

Virtually every business sector is vulnerable; Healthcare (19%) and professional services (13%) were the most breached sectors followed by non-profit (11%), financial services and retail (10% each), with the manufacturing and construction industries trailing not far behind.

Theses breaches can cost your business many thousands of dollars along with its good reputation. Impending changes to Canada’s Personal Information Protection and Electronic Documents (PIPEDA) will carry the biggest penalty to many. From 2017 (exact date yet to be determined) PIPEDA will hold companies responsible for the mandatory notification to individuals that their personal information has been compromised following a data breach. No matter the severity of the breach, all clients must be notified. Insurance companies estimate that the average cost per notification is in the region of $2 per individual. So, if your business is amongst the 68% of Canadian businesses holding the personal information of others the cost to notify these individuals is not an insignificant amount.

Is Your Company Prepared for a Cyber Attack?


If you still believe that a cyber-attack presents little or no threat to your business, ask yourself the following. How prepared is your company or organization for:

  • Identity theft resulting from lost or stolen SIN numbers or credit cards, driver’s license or financial information?
  • A hacking that results in the theft of confidential information?
  • A lawsuit stemming from a security failure?
  • A lawsuit alleging trademark or copyright infringement?
  • A lawsuit alleging invasion of privacy, defamation, or product disparagement involving information residing as email on laptops, flash drives, servers or on the internet?
  • Business interruption due to a security failure or internet virus?
  • The transfer of an internet virus and the resulting fall out?
  • Cyber extortion?
  • Costs related to privacy notification, crises management and disaster recovery?

Mitigating the Risk of Cyber Breaches and Attacks


So, if we leave organized hacking groups to one side, there is a check list that companies should use to mitigate the possibility of a data breach occurring to them.

Do you:
  • Allow employees to take laptops off site?
  • Allow employees to take paperwork off site?
  • Allow employees to use USB sticks or other portable memory storage?
  •  Allow employees access to social media on computers in the office?
  • Allow sensitive printed materials to leave the office (even if en-route to a meeting)?
  • Vet all company postings on the company website or social media?
  • Erase all data from the hard drives of devices replaced?
  • Ensure that all paper maters are shredded and disposed of adequately?
Now that you’ve identified the potential risk to your company your next question is how can I protect my business? Virtually every insurance company in Canada offers cyber insurance policies of varying limits tailored to meet your company’s specific needs. Theses insurance policies not only pay data breach notification costs, but typically also insure the following:

E-mail liability
 
Defamation (even on social media), libel, product disparagement and infringement

E-commerce extortion
 
Coverage paid due to threats regarding an intention to fraudulently transfer funds, destroy data, virus attack, or disclose customer information

Funds transfer fraud
 
Coverage for loss of money or securities due to a fraudulent transfer.

Network Security Liability 

Third party coverage from a failure of security, including theft of a mobile devices and system intrusion. Coverage extended to outsourced data processing and data storage.

Privacy Breach Liability 

Breach of privacy law or the disclosure of protected and personal data
coverage extends to insured’s employees
proceeding defense and penalties included

Privacy Breach Expenses Includes 

Notification expense
Crises management expense
Credit monitoring and data recovery
Cyber investigation expense

Business Interruption 

Coverage for loss of income and the extra expense incurred to restore operations as a result of a computer system disruption caused by a virus or unauthorized computer attack.

Cyber risk is a very real threat to your business continuity. The statistics and the real life stories show that what you thought was only headline news, may well end up on your door step.

Eddie Kehoe is a commercial insurance broker with RDA Insurance who specializes in cyber insurance. Feel free to contact Eddie directly at EddieK@rdainsurance.com or 905-652-8680 Ext 2379.

The above blog post is for general information purposes only and does not constitute insurance or other professional advice or an opinion of any kind. Readers are advised to seek specific insurance advice based on their business circumstances.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, January 9, 2017

Your Investment Return - What Is It Telling You?

I find it shocking, how many people have no clue what their investment returns are for any given year let alone their historical returns. Some investment firms have been purposely opaque in respect of reporting investment returns for their clients. It is hoped that with the introduction of CRM2 (see this article) there will be far greater transparency in respect of the returns generated on your investments and the fees you pay your investment firm.

As of December 31, 2016, your investment statement should start reporting a personal rate of return. From what I understand, the reporting of your returns will only be mandated for 2016 and prior year investment returns do not have to be reported (some investment advisors/managers are very lucky; as 2016, the first year of reporting was a strong market year and this may allow them to hide poor past performance - thus, I would also request personal return information for the last three years, the last five years and since inception in addition to the 2016 return information). While your statements will not necessarily provide index benchmarks for you to compare your return against, at least you will have a return number!

If you have an investment advisor or investment manager and they have not reviewed your returns and strategy on a yearly basis before this required reporting, I would put them on notice you are disappointed and expect far more going forward. In addition, you should also review the investment fees you paid in 2016, which should also be provided on your statement. If you manage your own investments, you should be reviewing your performance on a yearly basis, or you are doing yourself a disservice.

Okay, enough with my rant. Today I actually intend to talk about what your investment returns are actually telling you about your investment strategy and investment policy and whether you are adhering to your strategy or chasing returns. (As an aside, if you are a good writer, you always tell your audience what your intended topic is within the first couple lines, you do not wait until the fourth paragraph. So do as I say, not as I do :).

Your Investment Strategy


When you engage an investment advisor or investment manager etc. the first thing that should be done is to create an investment policy statement and strategy based on your needs and risk. This will include a target allocation between fixed income and equities and target allocations between different asset classes and global diversification among other considerations. You should also be provided benchmark indices to compare your fixed income, Canadian, U.S. and World allocations against; unfortunately, this is often not provided.

For this post, let’s assume for simplicity sake that you want an asset mix of 30% fixed income and 70% equity which is allocated 30% Canadian, 30% World and 40% United States.

What Are Your Returns Telling You?


For purposes of illustration, I am going to use 2015 stock market returns since there were some of the larger variances within portfolios I have seen in years (I personally observed returns ranging from up 12% to down 17%). I will only briefly comment on 2016, since most statements are just being mailed.

So why the wide variance in returns in 2015? The reason was simple. The Canadian markets and resource stocks in particular were weak and preferred shares, especially rate reset preferred shares (due to low interest rates that were not contemplated when the shares were issued) were hammered. The TSX ended 2015 down around 11%. The U.S. market was down around 3% or so (but there was a huge foreign exchange gain where you held U.S. stocks because of the increase in the U.S. dollar relative to the Cdn dollar). World markets were also fairly weak.

So I ask you. If you had a 3-5% return in 2015, was that good or bad? This is a loaded question. If your allocation was the 30/70 mix I note above, that was probably somewhat expected and almost all due to the 30% or so increase in the U.S. dollar. Is that good investing or proper fund allocation? I would say a bit of both.

I noted that I saw people with losses as high as 17%. Was this bad? The answer surprisingly could be yes or no. If you had a large Canadian equity allocation with a resource bent (some people believe in investing most of their funds in the country they will live and retire in) then, the 17% loss may not have been as bad as your initial reaction and somewhat expected. That same portfolio will have exploded to the upside this year. Personally such a portfolio has too much volatility for me, but it may have been in adherence to that person’s investment strategy. Where you had a 17% loss because of rate reset preferred shares the investment industry sold and pushed (especially to seniors), but did not understand, that is another story.

For those people who had a 12% return in 2015, these returns were solely because they were over-exposed to U.S. stocks. I would say those returns, while excellent, were gained at the expense of risk (too much U.S. stock allocation) and you would have to understand the downside risk on a reversal in the dollar.

Some people told me their advisors did a great job over-allocating to the U.S. in 2015 and they were scaling back in 2016 (these conversations were in early 2016) to protect against a F/X reversal. When I hear comments such as the above, I cringe, since this says to me that their advisor has not created a disciplined strategy, but is stock picking, which more often than not, ends up badly.

2016 Returns


This year both the Canadian and U.S. markets have done very well. So if we look at the sample portfolio, one would expect a return somewhere between 8-11%. If you are this person and your returns are 18% I would want to understand why I outperformed far greater than my expected asset allocation. A better than expected return may indicate something amiss with your investment mandate. The same goes if your return was 6%, why were you below your expected return?

In conclusion I suggest the following:

1. Ensure your investment advisor/manager provides you with current and historical returns don’t just accept the 2016 returns that will be on your December, 2016 statement. Meet with them to discuss your returns and compare them to your intended strategy and investment policy and compare your returns to benchmark indices you agree upon. Ensure the returns you are provided with are net of management and investment fees and that the returns are not varying significantly from your expected returns. Variations both up and down may be cause for concern.

[BTW: If you are unhappy with your advisor and looking for a change, let me know. Depending upon your asset base, I or a colleague, may be able to assist you with financial planning and investment oversight and provide you access to several investment managers I work with directly (as an accountant I cannot provide specific investment advice, so I must work with an investment manager)].

2. If you manage your own investments, ensure you have created an investment strategy that it is written down and then compare your returns to what you expected and ensure you kept a disciplined approach in line with your strategy.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.