Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
  • T613.237.5544 x 313
  • 1.800.230.5544
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  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

U.S. firms don’t put their money where their mouth is

The large brokerage firms in the United States have had their blunders, most notably the 2008 financial crisis that almost crippled the world economy. These firms have massive conflicts of interest with their clients, and they put forth great effort to cover this up through advertising.

The United States, like Canada, does not hold brokers to a fiduciary standard; they are required to make suitable recommendations, but do not need to act in the best interest of their clients. This legal nuance is exploited through misleading advertisements that make it appear as if advisors are obligated to do what is best for their clients, while the firms maintain that they are not legally required to do so.

Evidence of this deceptive marketing was put on display in a recent report by Joseph C. Peiffer and Christine Lazaro for the Public Interest Arbitration Bar Association. The legal positions of these investment firms have been taken from legal documents submitted in arbitration proceedings where investors suffered major losses due to conflicted advice.


Advertisement: “You’re In Good Hands”

Legal position: “Allstate Financial Services owed no fiduciary duty to Claimants, and, therefore, no such duty was breached.”


Advertisement: “Until my client knows she comes first. Until I understand what drives her. And what slows her down. Until I know what makes her leap out of bed in the morning. And what keeps her awake at night. Until she understands that I’m always thinking about her investment. (Even if she isn’t.) Not at the office. But at the opera. At a barbecue. In a traffic jam. Until her ambitions feel like my ambitions. Until then. We will not rest.” (Emphasis in advertisement).

Legal position: “[A] broker does not owe a fiduciary duty to his customer in a nondiscretionary account.”

Berthel Fisher

Advertisement: “We are committed to maintaining the highest standards of integrity and professionalism in our relationship with you, our client. We endeavor to know and understand your financial situation and provide you with only the highest quality information and services to help you reach your goals.”

Legal position: “Respondents deny that they owed fiduciary duties to Claimants.”

Ameriprise Financial

Advertisement: “Once you’ve identified your dreams and goals, and you and the advisor have decided to work together, you can count on sound recommendations that address your goals. You’ll be able to clearly see and discuss how the actions and decisions you make today will affect your tomorrow. You can expect to hear about the options you have and any underlying factors to consider. Our advisors are ethically obligated to act with your best interests at heart.”

Legal position: “Respondent owed no fiduciary duties to Claimants and, even if it did, no such duties were breached.”

Merrill Lynch

Advertisement: “It’s time for a financial strategy that puts your needs and priorities front and center.”

Legal position: “Respondents did not stand in a fiduciary relationship with Claimants.”

Fidelity Investments

Advertisement: “With millions relying on us for their savings or the growth of their business, we handle every action and decision with integrity and personal attention to detail. Getting things just right doesn’t mean we’re perfect, but rather setting high standards, refusing to cut corners, and believing that every product, every experience, and every outcome can always be better.”

Legal position: “Claimants first claim fails because Fidelity did not owe [the investors] any fiduciary duty.”

With their clever wording, these firms paint the rosy picture of a fiduciary standard without actually being legally bound by one. When clients suffer financial losses due to conflicted advice, the firms throw their hands in the air and say that they never claimed to be fiduciaries.

There are no Canadian examples here, but similar marketing claims can be found around the world. Without a regulated fiduciary standard in place, investors must proceed with caution.

By: Ben Felix | 0 comments

Observing DFA Canada’s Five Year Performance

In a recent (subscription only) article for the Globe and Mail, Andrew Hallam discussed his observations on DFA Canada’s performance. He noted that while DFA’s U.S. domiciled funds tend to beat the market, most of DFA Canada’s funds have underperformed comparable ETFs over a trailing five year period.

This article is the kind of noise that makes it difficult for investors to maintain a long-term strategy; it also justifies DFA’s decision to distribute their products exclusively through trained advisors who understand the funds. To be fair, Hallam does end his article urging readers not to write off DFA Canada just yet, suggesting that more time is needed to properly assess the efficacy of DFA’s strategies in Canada. This assertion is unfounded, as DFA maintains the same strategies in Canada as it does in the U.S – they will not cease to be effective if the country of domicile is changed. It is not a question of if, but when DFA Canada’s funds will be observed as successful compared to a benchmark ETF; observing short-term outperformance of DFA funds is time-period dependent.

DFA’s strategy is to invest in the broad market with an increased weighting toward small cap and value stocks. Small cap and value stocks have demonstrated long-term outperformance as compared to large cap and growth stocks, while their returns have also proven to be more volatile. Over short time periods, it is far more relevant for investors to understand rather than try to observe the expected outperformance of DFA’s strategies. In the short-term, there is no question that DFA funds will underperform the market, sometimes. They will also outperform the market, sometimes. In aggregate, and over the long-term, it is expected that DFA’s tilts toward small cap and value will yield market-beating performance, as their U.S. funds have. The catch is that this long-term outperformance is only available to the people that understand the strategy and stay invested through periods where they observe underperformance. Assessing DFA’s funds on five year performance is meaningless, and misleading for investors.

By: Ben Felix | 0 comments

After tax returns of DFA Five-Year Global Fixed Income

The notion that premium bonds are highly tax inefficient has been written about extensively by Justin Bender and Dan Bortolotti. In a recent blog post, Justin used his after tax rate of return calculator to demonstrate the tax efficiency of the First Asset strip bond ETF (BXF). BXF was in a league of its own in 2014 with a tax cost ratio 33bps lower than its closest peer – the tax cost ratio can be thought of as an additional MER that the investor pays in taxes. Justin compared ten short term bond ETFs, and BXF had the highest before and after tax returns of the set. The DFA Five-Year Global Fixed Income Fund (DFA231) was not included in Justin’s ETF comparison.

Unlike the ETFs examined by Justin, DFA231 is not an index fund. It is a short term fixed income fund that shifts its holdings based on changes in the yield curve, while keeping the maturities between one and five years. If the yield curve in a country is upward sloping, the fund will hold longer maturity bonds in that country as the risk of holding longer maturities is being rewarded. If the yield curve is flat, the fund will look similar to the index as there is no significant benefit to holding longer maturities. If the yield curve is inverted, the fund will hold very short maturities. The fund has the flexibility to find opportunity in yield curves around the world, and it is hedged back to the home currency (CAD) allowing global bonds to be pursued without adding volatility due to currency fluctuations. The fund, as at September 30, 2014, had just over 10% of its holdings in Canada, while more than 26% were in the United States, and Australia was also notable at 8%. DFA puts forth an effort to keep the coupons low, reducing the tax issues presented by premium bonds.

Does it work?

This fixed income strategy has been successful. In 2014, both the before and after tax returns beat out the toughest competition by a healthy margin. To be fair to the competition, DFA231 tended to have a longer average maturity and duration than both BXF and the iShares Canadian Short Term Bond Index ETF (XSB) through the year. The fund’s higher returns can be attributed to increased risk, the risk was just well compensated over this time period. It is also true that DFA231 carries a higher MER at .38% than BXF at .20% and XSB at .25%, which contributes to its lower tax cost ratio; more of its taxable distributions are absorbed by fees before they reach investors.

PWL Capital - Blog: After tax returns of DFA Five-Year Global Fixed Income

2014 was not the first good year

DFA231 has had a long history of outperformance and tax efficiency compared to XSB, a short term bond index fund with a ten year history available for comparison.

PWL Capital - Blog: After tax returns of DFA Five-Year Global Fixed Income table 2

There is no way to determine if the strategy will continue to be this successful in the future, but it currently appears to be a tax efficient option for short term fixed income allocations.

By: Ben Felix | 6 comments

Evidence of Good Financial Advice

Dimensional Fund Advisors is a little known fund company that has gained notoriety over the past few years, but is still far from being a household name. This is by their own design; they do not market their products, and they are very selective when it comes to allowing advisors to use their funds. The advisors that do successfully go through Dimensional's training and commit to their strategy are submitting to the idea that nobody can predict the future, so investors are best served when they focus on what they can control. One of the most important things for investors to control is their own behaviour, but it is easier said than done. Jumping in and out of the market based on rumours, the media, and behavioural biases can be extremely damaging to an investor's long-term success, but it is common practice.

The following charts might demonstrate some of the value that the advisors using Dimensional funds provide to their clients.

The first chart shows the net cash flows from 2005-2014 into (out of) all Canadian domiciled funds contained in three Morningstar fund categories: US, International, and Canadian equity. The net cash flows have been highly volatile through time, which would be expected when investors are piling money into funds during periods of high returns and pulling dollars out during periods of poor performance.

The second chart shows net cash flows from 2005-2014 into three of Dimensional's Canadian domiciled Core funds: US, International, and Canadian. Since 2005, Dimensional has seen consistent positive net cash flows into these broad asset class funds - this means that in each year, significantly more money went into the funds than came out. This cash flow data would be expected when investors are sticking to a long-term strategy and staying invested through varying market conditions.

PWL Capital - Blog: Evidence of Good Financial Advice

Source: Morningstar Direct, Dimensional Fund Advisors

This is not a demonstration of how great Dimensional funds are, it is a demonstration of the value that a small subset of advisors with a shared belief of how markets work has been able to provide to their clients. One of the most notable periods was in 2008, a time of severe market distress. While the aggregation of funds in the Morningstar categories displayed net outflows (investors were selling low), these Dimensional funds continued to see positive net inflows (investors were buying low). It is this type of discipline that results in long-term success for investors.

By: Ben Felix | 0 comments

Warren Buffett’s Investing Lessons from the 2014 Berkshire Hathaway Annual Report

A distinction must be made between volatility and risk. Volatility and risk are very different things, but when stock prices exhibit volatility, investors (long and short-term) tend to perceive risk. What is often overlooked by long-term investors is that avoiding volatility over long periods of time can be the biggest risk of all.

“Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions.”

Bad investor behaviour is very risky. Long-term stock investors get fixated on avoiding losses while earning excess profits, resulting in them taking unnecessary risks. This behaviour is influenced heavily by triggers from the media, mutual fund companies, and social interactions with family and friends.

“Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.”

Finding a good active manager is nothing more than a gamble. Active managers do occasionally succeed, over both the short-term and the long-term. When choosing to pursue an active strategy, one of the biggest challenges for an investor is picking a manager that will have continued success. Every manager, fund, and fund company has a sales pitch (Dynamic Funds: Don’t hug the index. Beat it into submission.), and powerful motivation to convince investors to hand over their money.

“There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.”

Despite being cited often as living evidence that active management can be successful, Buffett has long agreed that low-cost index funds give investors the best probability of success in creating and preserving wealth.

By: Ben Felix | 0 comments