Bank Notes

In a move that clearly demonstrates they're on the cutting edge of the 19th Century, Royal Bank manned up this week and announced they were lowering their online investing commissions to a more reasonable $9.95 for users with $100,000 in their account or who make more than 30 trades in a quarter.

That's some nice window dressing, but I see this as largely a symbolic act. Cutting prices for customers who A) already have the most assets and B) are more likely to recompense your losses by using the service far more frequently is not what I'd call forward-thinking customer service. The discount for active traders is particularly irksome to me because it really looks like RBC is trying to rope people into being day-traders by offering them 'savings'. But I digress. RBC and the other big banks can get away with doing stuff like this because Canada's banking system is an oligopoly, and people like me will more often than not keep our business with them -- especially when I hear about the headaches people have have with the actual discount players like Questrade, Etrade and Credential Direct. As a Big Bank shareholder, bring on the screw-job, I say.

On the opposite end of the spectrum, PC Financial, where I keep my emergency fund/condo downpayment, has very quietly raised their rate on their savings account. It's now at 4.25% for people with more than $1,000 in the account, like me. By my count, this keeps them a full 0.5% ahead of the granddaddy of them all, ING Direct.

What can I say, besides, "I'm glad I made the switch." I'm tempted to open up a no-fee chequing account there and keeping $1,000 in it just to rack up some free grocery points, but I haven't crunched the numbers to see if the money I'd lose in interest would be replaced by the amount of free groceries that would buy me.

Too little, too late

ING Direct has been taken a beating of late. And whether it's been in these parts, elsewhere in the blogosphere or even in the mainstream media, they appear to be slowly responding.

According to an e-mail ING sent me recently, they're upping the interest rate on their high-interest savings account to 3.75% from the 3.5% its been stuck at for quite a while, staring September 1st.

My take? A resounding "meh."

This is quite simply too little, too late. They've narrowed the gap between the other players like Achieva, Altamira and PC Financial which have better posted rates and are just as easy to deal with, and ING have given themselves a bit more breathing rom on the big five banks who were starting to gain on them.

But they're still laggards. That Norse pitchman likes to paint the company as some sort of saving innovator, but I'll be keeping my money at PC Financial until ING wakes up and quits with the smoke and mirrors.

Want my money? Then gimme the best rate.

It really is that simple

The end of an era

I'm in the process of transfering to a new high-interest savings account.

Netherlands-based ING Direct deserves credit for literally starting the high-interest savings account movement in Canada. When they set up shop a decade ago, Canadians really weren't very well-served by the Canadian banking oligarchy. Banks, to my teenaged eyes, were basically places where you could go to borrow money, or keep your hard-earned cash safe against things like theft and fire. But looking at my monthly statements every month (where the service charges for accessing the money outnumbered the interest payment I got at the end of the month) banks certainly didn't seem like a particularly useful tool to build wealth with.

For introducing the breakthrough concept that a bank should pay you somewhat-significant monthly sums for the privilege of holding your money, ING deserves accolades. Because in the 10 years since then, a host of other players have crowded into the market -- most notably, even the Big Five. (Although their offerings fall predictably short of the mark, in my opinion.) Won over by their no-nonsense, generic Scandinavian pitchman, I've kept whatever savings I could accumulate over the years in an ING account.

So I'm generally well disposed towards ING for getting the savings ball rolling -- the orange savings ball, as it were. But it really needs to be said: ING seems to be getting a little complacent, and away from what they do best -- offering a simple way to save with a great savings rate. All of the players, ING included, try to distract consumers with a bunch of flashy bells and whistles like same-day transfers, points, and temporarily-inflated rates to lure you in. But all these things distract from the central issue: which interest rate gives you the opportunity to grow your money the quickest. And maybe it's because they seem to spend more than the other players on marketing, but ING has simply fallen behind when it comes to offering the best savings rate.

Even a cursory look at the posted rates shows ING is lagging behind. I can count no fewer than a half-dozen no-fee places to park my money that have a better rate than ING's current 3.5% and are just as easy to access and transfer money online. That's why I'm saying sayonara to ING and moving over to PC Financial. Loblaws is my primary grocery store, so I'm seriously considering moving over my everyday chequing account and accumulating PC points while I'm at it.

Rest assured, if ING wakes up in the near future and offers me a rate better than the 4% PC Financial has offered, I'll welcome them back with open arms. But until then, I'm ignoring the smoke and mirrors. Banks have zero loyalty to me, so I don't really see why I should have any to them. It's one of the joys of living in a capitalist system.

Lenders can try to confuse me with semantics all they want. At the end of the day, it comes down to simple arithmetic: 4 > 3.5.

I'm a bad little asset allocator...

Asset allocation -- it's the cornerstone of any long-term investing plan and it's a topic I find myself thinking about a lot of late, mainly because I think I'm cheating on the fixed income portion.

For newbies, asset allocation refers to the ratio in which you keep the funds you have in different investment vehicles. At it's most basic level, asset allocation means deciding how much of your total nest egg you earmark for safe fixed-income instruments like bonds, GICs and high-interest savings accounts, and how much you put into stock market equity, which generally holds the potential for higher returns, but also a higher risk of losing capital. Other asset allocation models are even more complex, including things like real estate, precious metals, etc. into the total financial outlook, but generally speaking most asset allocators stick to a fairly striaghtforward strategy like the one above. The idea is to diversify so that all your investments don't move up and down in lockstep -- as one investment moves up in value, you sell off a little and buy into the classes that haven't done as well to hedge your bets over the long term.

An oft-quoted rule of thumb for asset allocation is that the percentage you devote to fixed income should be equal to your age -- the idea being that the older you are, the more conservative you want to be, so the less risky, more capital-preserving investments you're going to want to gravitate towards. That framework always sat right with me.

If that's the case, I should be directing 26% of my net worth (currently at $29,443 according to my NetworthIQ report for this month) towards fixed income products. In my case, the vehicle I've chosen is a high-interest savings account with ING. So my fixed-income holdings should be at around $7,655 if I were a good little asset allocator. As it stands, I'm way above that level, with more than $11,000 sitting around in cash, gaining interest every month. I generally like to roll the dice a little bit and devote more funds towards equities while I'm young, so I was surprised to find myself devoting nearly 40% of my net worth, effectively, to cash, but then I realized that number is skewed a little for three main reasons.

No. 1 -- I plan on buying real estate at some point in the next 18 months. So I'm filling that high-interest savings account with as much money as I can under the pretense that I can't afford to lose this as I need those funds to be around for a downpayment fairly soon. Secondly, while my ING account is my de facto house fund right now, it was originally started as my emergency fund where I stashed enough cash to cover my expenses for three to six months should the need arise. It’s since ballooned well beyond that, as I said, now doubling as a downpayment fund. But I still want to keep those few thousand dollars worth of "just in case" money in there, not really as an investment per se -- more like peace of mind.

The third reason I find that section of my portfolio larger than it should be is that I can't shake the nagging feeling I have that the stock market, particularly the TSX, is a tad overvalued. Things have been too good for too long, so my natural inclination is to keep a lot of cash on hand both to minimize my losses and also be able to buy back in after a correction -- something recent events seem to suggest might be happening as we speak.

This is the area where I think I'm "cheating" at my asset allocation. Technically, your asset allocation is supposed to change as your circumtances change, so I guess I'm just responding to the stimuli of my own situation the way you're supposed to. But at its core, the whole reason asset allocation works is because it forces discipline on to an investing plan. It's meant to veer you away from making decisions like piling more money into the latest hot sector or emerging market -- or the flipside, where you panic and sell off all your holdings in a particular class because of a bad quarterly statement. Indeed, you're supposed to shave off some of your winners and pad up your losers to come up ahead in the long run.

At any rate, I don't really see myself cutting back on my cash allocation, as all three factors I listed are strong actors on my decision-making process at the moment. But it still doesn't sit right that here I am, making excuses why it's OK for me to veer from the long term asset allocation plan "just this once." I'm consoled by the fact that if anything, I'm being overly cautious, as opposed to aggressive, by having a lot of money tied up in low-yielding investments. At the end of the day, nobody ever went broke by having too much money in their savings account.

Questions and comments welcome as always

Free money? Good. Unexpected free money? Better

When I set up my automated savings program at ING Direct to automatically deduct a chunk of every paycheque back in September, I liked the idea mainly because it would force me to save. It wasn’t too difficult to get myself to live off of about 3/4 of my usual paycheque. And the balance would be socked away, working for me at a generous 3.5% rate, making my eventual downpayment on a house as big as it could be.

Sure, an added bonus was the possibility that I’d win one of the bank’s quarterly draws for $10,000, but I wasn’t really counting on it.

But when I checked my account today, there was great little bit of news for me:

11-Dec-2006  ASP Setup Bonus - $20

Apparently ING has been good enough to front me an extra $20, just for setting up the automated payment program. Sure it’s only 20 bucks, but it really brought a smile to my face. Especially since I didn’t know that was part of the deal when I set up the process.

What a great bank.