In my last post, I discussed a few takeaways from a book entitled The Fireman and the Waitress. This book was written by Dessa Karpardlov, a financial advisor, who takes her clients through a trademark process called Dessanomics, a process to get a handle on debt, build wealth and lower your tax burden. I thought the book and the trademark process was interesting but I did struggle with a few principles Dessa endorses to her clients.
A few weeks ago, I emailed Dessa a few questions, those key Dessanomics principles I struggled with in The Fireman and the Waitress.
Dessa was kind enough to chat with My Own Advisor and answer my questions during a telephone interview. This blogpost will summarize what I wrote to Dessa and include her responses. Let me know what you think about the Q&A.
My Own Advisor Email Question #1:
A Dessanomics key states “When you incur debt to gain wealth and get a tax refund, that’s a really good thing. Borrowing to invest, commonly known as leveraging, is an example.” Dessa, is this really a good way for most Canadians to invest? A summary of what I wrote Dessa in my email:
As a 30-something with a 6-six figure mortgage but no student loan debt, credit card debt or line of credit debt, but still a 6-figure mortgage, the last thing I want to do right now is to be borrowing more money against my mortgage for investment purposes. Sure, I can borrow money rather cheaply right now, but many investors will be tempted to sell their income bearing investments when the first bad news appears in The Globe and Mail. I think leverage can be a good tool for seasoned investors and more importantly, seasoned investors when they are making money. Leverage is dangerous when you’re not making money. Ask some seasoned investors who margined their accounts during the tech bubble and I think we’d find the scars still exist.
Another struggle I have with leveraging, if you’re in need of financial help, the last thing you want to do is to incur debt and try to “select” a means to generate income. Most Canadians don’t have an income problem they have a debt problem, including me. I have a fat mortgage! A mortgage payment in any interest rate environment is a guaranteed rate of return. Most people are getting a guaranteed rate of return of 4% or more on a lump sum mortgage payment.
The last big issue I have with leverage, once you use the loan or line of credit to invest, you really shouldn’t withdraw the principle. Don’t take a vacation or go to Cuba for March break with the money. If you do, you’re defeating part of the purpose of this loan not to mention reducing the remaining principle that is tax deductible. You always want your interest tax deductible.
While I agree with what you say, bear in mind in my book I think leveraging is a great option for candidates who have pensions. In Mel and Molly’s case, they also have paid off a significant part of their mortgage and so it could be a great option for them. For other professionals, like teachers, police officers and health care workers with defined benefit pensions, leveraging is a way to reduce tax burdens and invest for the future. It takes discipline and a plan, but that’s where these individuals can consider taking on greater risk because of their existing income security. It must be a case-by-case decision.
My Own Advisor Email Question #2:
Starting on page 53 in your book and on subsequent pages, you imply individuals need to insure their single greatest asset much more – their earning power. For example, on page 57 it states for your fireman and waitress clients “Our insurance-needs analysis showed that Mel needed another $250,000 on top of the current amount of $455,000 that he had.” Dessa, if most Canadians had $455,000 in insurance, term, whole, other – I think most Canadians would be doing very well! Why so much insurance? A summary of what I wrote Dessa in my email:
My personal philosophy on insurance, and again, it’s personal – you only need as much insurance to cover debt liabilities and maintain a similar standard of living before the loss. Otherwise, what are you insuring against?
In your book, Molly makes $30,000 per year. Assuming Mel’s portion of his salary is paying for the $125,000 mortgage, $18,000 line of credit and $4,500 in credit card debt payments then we can assume Molly’s $30,000 can pay for living expenses. With Molly’s own CPP, pension spousal benefit, OAS, $125,000 in Mel’s RRSP and her own LIRA and RRSP investments, you have plenty of assets to cover financial disaster and that excludes the $455,000 in existing insurance Mel and Molly already had. $455,000 is already a healthy sum – suggesting $750,000 seems overkill. One of the pillars of insurance is this: liquid resources to protect against a catastrophic loss. It’s about income replacement to a point where it compensates for the catastrophic income loss. It’s not about providing a huge sum or increasing the standard of living for dependents.
Nobody can predict the future and life insurance is part of the guarantee so you don’t need to predict anything at all. I’ve heard from many clients, premiums seem like a waste but you really can’t afford not to have ample insurance. I’ve seen too many clients underestimate their insurance needs. After you assess your income replacement, your living expenses, debt payments and other obligations, it doesn’t take long to amass a $750,000 insurance need. People don’t buy insurance for themselves. They buy it so the people who depend on them financially won’t be left in poverty and in grief. Don’t forget about critical illness insurance, it’s something I discuss in my book purposefully since for many clients, it’s an essential part of their holistic financial plan.
My Own Advisor Email Question #3: Starting on page 71 in your book and on subsequent pages, you extol the merits of segregated funds. Why segregated funds for your clients? These are high-priced products? A summary of what I wrote Dessa in my email:
I won’t make my comments too long in this section, but based on my own experiences, readings and experiences of others, mutual funds and segregated funds are not great investment vehicles for the majority of Canadians. Most Canadians are best served to hold broad-market indexed products (such as Exchanged Traded Funds (ETFs)) and keep their investment costs as low as possible for as long as possible.
I was a little surprised by your comment on page 73: “Seg funds are more expensive, of course, but as usual, you get what you pay for.” I don’t agree with this. In investing, My Own Advisor feels what you pay for is the money you don’t keep yourself!
Segregated funds are like mutual funds but include an insurance guarantee. The problems with this are many in my opinion. These products are owned by the life insurance company – not the investor – so to me this is counter-productive to helping the client. You are also under contract, often for up to 10 years. While you are guaranteed part or all of your investment (usually capital can be guaranteed at 75% or 100%), there are major fees to pay if you break the contract. On the topic of fees…segregated funds are expensive. During my quick search on the internet, I found many segregated funds charge upwards of 3% management expenses every year. That means every year you have to return at least 3% on this product just to break even and you’re in the whole still after inflation is factored in.
Why advocate segregated funds and not broad-market ETFs? Why not put many clients in fixed-income products that track the DEX Bond Universe Index if they want security? Why not laddered bonds instead of segregated funds?
Further, the top-10 holdings of most segregated funds are the same stocks most dividend-investors could buy outright. If clients wouldn’t be comfortable with dividend-paying stocks, just buy the ETFs that hold them; XDV and CDZ in Canada are a couple of great ones.
I certainly see where you are coming from, but for some of my clients, this makes sense. What I mean is these products can work very well for clients who only have self-employed income since their assets are insurance-protected, protected assets in case of a legal claim for example. For seniors, these products can make sense to avoid equity risk or preserve capital in the few years before they die, because for estate planning, proceeds go to the beneficiary upon death. I agree these products are not for everyone, but they make sense for our self-employed fireman Mel and the part-time waitress (Molly) in my book. Again, everything needs to be looked at in a larger context, which is my role.
Overall, The Fireman and the Waitress had an interesting storyline that allowed Dessa to share her Dessanomics principles along the way. Thanks to Dessa for chatting with My Own Advisor, and sharing her approach with clients with me.
Got any comments about the Q&A above? Did these blogposts about Dessanomics clarify your investment approach – what could work for you for your financial journey?