2010-04-25

Income Trusts Were A Loss To Investors

I find myself in absolute agreement with the author's assessment about income trusts. It was indeed a major disappointment that a "onservative leader like Stephen Harper would abolish it. Income trusts, when used appropriately within a diversified portfolio, were an excellent investment option; one in which Americans didn't have I might add.

Just give you an idea how people become attached to a good thing, one client needed a certain amount per month to meet his living expenses. I couldn't meet his requirements within the current structure of the portfolio and suggested he rethink his goals. Relative to the funds available, it was impossible to squeeze the portfolio anymore unless we invested in high risk investment. Of course, he wanted maximum return with the least amount of risk. They all do. Their concept of risk is different from an advisor.

Finally, he first asked if we could convert the entire portfolio into income trusts because of their tax advantages and outstanding high yields. When we balked at it explaining the inherent risk - putting eggs in one basket, what if gas and oil (most of the top income trust were energy and gas and oil based) drops in price?, what if the government changes the structure? etc. It's called hedging your bets by keeping these considerations at bay - he complained to the managed of the branch and ordered we do it.

So we did. He paid all the necessary fees and next thing I knew, his $450 000 nest egg was an income trust onto itself. I nodded my head in disapproval but at least he got his monthly take - barely.

Soon after I left the business - thankfully - and shortly after my departure Harper pulled his income trust nonsense. I shutter to think what happened to the client. He probably blamed us no doub.

It does happen where a client is explained in detail about the risky endeavour they're about to embark on and they turn around and try and blame you when things go sour. The classic case is the semi-sophisticated investor who plays big boy games in the options market with a margin account. The leverage effect is vivcious on a downturn. Naturally, the bank wanted its money when a margin call came. The client, in turn, would be surprised at how much they owned. No matter how many times you explained how margin works, they would still claim "robbery."

It's why we did very little option trading and/or margin investing. Margins were reserved for the sophisticated, high net worth investor as an added tool if needed. Used properly, margin can be beneficial but it takes enormous caution and discipline.

Back to the post. Yes, I agree with his assessment on income trusts. I agree less with how he chose to connect it with the debate in the U.S. regarding health care reform. What is "Misinformation" is really depends where you sit. Despite "death panels" there were legitimate concerns attached with the bill; prime among them was how those selling didn't read the bill itself. The size of the bill is absurd thanks to all the kickback not only to those who opposed it but to assuage and gain the votes of Democrats. In the end, it still narrowly passed. And then there's the whole democratic notion of listening to the majority of which most were against. One could argue because of the "misinformation" but I'm not so sure of this.

Financially, and the author ought know this, America is not in the best position  to take on such a task at this time. One need only look at Canada to see how fast universal health care costs rise. In Quebec, health takes up 45% of our budget. Most of the costs go to labour.

And there is a valid debate to be made with overall quality to cost; that is, is Canada's universal health care system providing quality care? Not when one looks at OECD studies. Everytime I read it, we rank at the bottom.

In any event, finacially speaking, there is no doubt in my mind the math used by the Democrats was confused and enaged in misinformation as well. They deliberately used vague buzz words like "deficit-neutral" and that taxes would not increase. Look, only two ways can pay for such a thing: You borrow the cash or you raise taxes. Or both.

Yes, and the author mentions it, if you happen to feel caring for all is worth the cost then so be it. It's a fair and humane argument. Almost enough to put up with how government runs things. However, it doesn't follow because people don't agree it automatically makes them unsympathetic and spreaders of misinformation.

All this to say, I enjoyed his post.

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