21 November 2019

TD CEO Bharat Masrani Knows When to Hold, or Fold, When the Stakes Are High

The Globe and Mail, Andrew Willis, 21 November 2019

Toronto-Dominion Bank chief executive Bharat Masrani, is one of those card sharks, caught in the late stages of a high-stakes game with Charles Schwab.

Do you ever watch poker tournaments on TV? Here’s what happens: The longer the game, the bigger the wagers get and the more likely players are to go bust when betting on a hand

Toronto-Dominion Bank chief executive Bharat Masrani is one of those card sharks, caught in the late stages of a high-stakes game in the U.S. discount brokerage industry. By all accounts, Mr. Masrani is about to do the sensible and boring thing, and walk away. It’s in keeping with an approach that colleagues say drives all the TD boss’s strategic decisions: Don’t do anything that could blow up the bank.

TD owns 43 per cent of TD Ameritrade Holding Corp. and is expected to support a widely reported but unconfirmed sale of the Omaha-based brokerage to industry leader Charles Schwab Corp. for US$26-billion in stock. Analysts project TD Bank will emerge from the transaction with a 10-per-cent to 15-per-cent stake in a merged company that dominates the do-it-yourself financial-services space.

Cutting a deal with Schwab would be a dramatic exit. Until now, Mr. Masrani backed increasingly large bets by the U.S. investment dealer. TD Ameritrade grew by making a series of acquisitions, each larger than the last. The most recent takeover, in 2016, saw TD Bank put up US$1.3-billion and TD Ameritrade throw in an additional US$2.7-billion to acquire rival Scottrade.

Another round of consolidation became all but inevitable in October, when Schwab decided to exploit its scale with a brilliant marketing move: It offered to let customers trade stocks for free. (Prior to that, Schwab charged US$4.95 per trade.) Schwab has approximately 12 million customers and more than US$3-trillion of assets under management.

Smaller rivals, including TD Ameritrade with about 11 million clients and US$1-trillion in assets, had no choice but to follow suit. The fee cuts will trim future profits, and TD Ameritrade lost a quarter of its market capitalization on the day Schwab changed the rules.

TD Ameritrade was widely expected to stage yet another takeover to keep pace with Schwab. “TD cannot stand still. This is a business of scale and they either have to get bigger or get out,” said Doug Steiner, former CEO of E*Trade Canada, which Bank of Nova Scotia acquired from E*Trade’s U.S. parent back in 2008 for $444-million.

TD Ameritrade’s logical target was New York-based E*Trade Financial Corp. But the table stakes have more than doubled since the Scottrade takeover. Acquiring E*Trade would cost at least US$10-billion. After putting that massive stack of chips into the game, Mr. Masrani would still own a large stake in a volatile brokerage business that is chasing the industry leader, and is not linked to TD’s core retail banking franchise.

TD’s other options included dropping US$12-billion to acquire 100 per cent of TD Ameritrade. Analyst Darko Mihelic ran the numbers in early October and said while the deal made strategic sense, there was no indication an offer was in the works. But Mr. Mihelic said the market expected a resolution on TD’s plans and "since this would be a large transaction with significant stock issuance, we believe many potential TD investors may stay on the sidelines for the foreseeable future.”

TD’s stock significantly under-performed Canadian peers in recent months, owing to uncertainty over the future of TD Ameritrade, according to analysts.

A deal with Schwab, if it happens, would make it easier for TD to expand in the United States, where it already has 1,250 branches. “Assuming a smaller stake in a bigger player situation, TD could have a more liquid asset that it could potentially sell to finance a future U.S. regional bank acquisition,” said Gabriel Dechaine, an analyst at National Bank Financial. In a report on Thursday, he said: “This scenario would be positive for TD’s long-term U.S. strategy.”

Over a 32-year-career at TD, including a four-year stint as chief risk officer, Mr. Masrani has seen the damage that can be done to a bank’s balance sheet when loans go bad, or a division stumbles. Long before former U.S. president Barack Obama made the phrase popular, TD’s boss lived by the motto “Don’t do stupid stuff.” Doing a deal with Schwab, rather than doubling down again on U.S. discount brokerages, is a winning bet.

15 November 2019

After A Rough Patch, Gerry Schwartz Bets On A New Approach at Onex

The Globe and Mail, Andrew Willis, 15 November 2019

Call it Onex 2.0.

Canada’s pioneering private-equity investor, Gerry Schwartz, is reinventing his firm on the fly. At a time when many of his billionaire peers are responding to increasing competition for deals – and their looming mortality – by closing down their funds to play with their grandkids, Onex Corp.’s 77-year-old founder and chief executive is in change mode at the $8-billion Toronto company.

Onex is shifting from selling primarily one product – leveraged buyouts – to a single group of customers – institutional investors – into a broader asset manager to try to win a following among wealthy, individual clients. Contemporaries such as Blackstone Group and Brookfield Asset Management are opening their doors to the same potential investors.

Mr. Schwartz is still staging bold takeovers, as witnessed by Onex’s unexpected $3.5-billion bid this spring for WestJet Airlines Ltd., two decades after the firm tried, and failed, to buy Air Canada. But the key to Onex’s future lies in a growth strategy that is partly based on fixing a struggling business, recently acquired money manager Gluskin Sheff + Associates Inc., and using its ties to affluent families to dramatically increase Onex’s size and profitability.

Mr. Schwartz, always introspective, and his senior colleagues also spent time this fall engaged in a productive session of corporate navel-gazing. The team stepped back and distilled the skills that helped Onex churn out an impressive 27-per-cent average annual return on investments over its 35-year history into a handful of lessons – call it the Gospel of Gerry.

The team also restructured the firm this fall, streamlining management and giving employees clear responsibility for specific investments in an effort to ensure accountability. These evolutionary steps are playing out at a time when Onex shares are underperforming the market. The company is struggling with a handful of problem children – a discount grocery chain and marine-survival equipment business – in its US$38-billion portfolio.

The reinvention of Onex started in June, when the firm closed its purchase of Gluskin Sheff for $445-million. The acquisition added plain-vanilla wealth management, in the form of funds that invest in stocks and bonds, to Onex’s more exotic investment offerings, which include funds that buy entire businesses and invest in loans and other credit products.

After quietly sewing the two businesses together over the past five months, Mr. Schwartz opened up about how everything is fitting together last week before an audience of 850 finance types at the Toronto CFA Society’s annual dinner. He started by highlighting the obvious, explaining Onex is always looking for new customers and it bought a platform that serves some of the wealthiest individuals in Canada. ”We think Gluskin Sheff represents a huge opportunity,” he said.

Then he dived into the strategy. Rather than competing based on low fees or last year’s performance numbers, he said, it’s all about trying to provide white-glove service to the rich. And that means more than investment products. ”Gluskin Sheff has the ability to be close to clients, to talk to them not just about their investment returns, but about their interests in philanthropy, then introduce them to charitable opportunities and build a vibrant, strong relationship.”

Gluskin Sheff opened its doors in 1984 and strove to build a brand that is to wealth management as Tiffany’s is to jewellery or Rolls-Royce is to your ride. Clients needed to commit a minimum of $3-million. For that price, they became members of an exclusive club with breathtakingly modern offices, plenty of hand-holding on financial decisions and head-turning events. The firm’s party to celebrate the Barnes exhibit of paintings at the Art Gallery of Ontario in 1994 is still a high-water mark in Toronto society.

That cachet took a beating after founders Ira Gluskin and Gerry Sheff stepped down as executives in 2009, and left the board in 2013. The two executives turned around and sued their former company for $185-million, claiming unpaid benefits. An arbitrator eventually awarded the duo $13.8-million in 2017. The dispute was a distraction for both Gluskin Sheff management and the company’s customers, most of whom had ties to the departed leaders.

Investment performance also became an issue for some clients. Prior to Onex’s arrival, Gluskin Sheff was bleeding assets. It went four consecutive years with existing clients pulling out more money than new customers put in. The outflow of funds was $235-million last year and $236-million the year before.

Onex is attempting to turn the tide with a renewed commitment to service and new flavours of investment products. Gluskin Sheff is out recruiting, with plans to build a team of seven experts focused solely on estate and tax planning. Financial results released last week show Gluskin Sheff clients committed US$199-million to Onex’s credit-based funds in the three months ended Sept. 30 – the first full quarter after the deal – and an additional US$52-million to Onex’s private-equity offerings.

In total, Gluskin Sheff takes care of US$6.4-billion, including US$60-million from Onex’s own employees. In a recent report, analyst Phil Hardie at Scotia Capital said: “The outflows Onex saw at Gluskin Sheff during the first half of the year appear to have slowed significantly.”

Onex, like other private-equity companies, earns the bulk of its profits when it sells businesses, but this income is lumpy. In contrast, Gluskin Sheff generates a steady stream of management fees. The firm charges clients a 1.5-per-cent commission on portfolios, plus performance fees that range from 10 to 25 per cent of investment gains. Those fees will translate into recurring profits for Onex.

That, in turn, is expected to mean a premium valuation for the company’s stock, according to analysts. Last year, Onex collected US$199-million in management fees. Onex projects that acquiring Gluskin Sheff will boost the total to US$328-million this year.

Onex is far from the only private-equity player striving for greater scale and more fees from taking care of other people’s money. The drive to diversify is playing out at U.S. private-equity pioneers KKR & Co. Inc. – a firm launched by Mr. Schwartz’s former colleagues at investment bank Bear Stearns – as well as New York-based Blackstone and Toronto-based Brookfield.

Onex is relatively a minnow in this school of fish. KKR is four times larger when it comes to assets under management, while Blackstone and Brookfield are more than 10 times its size. In an increasingly competitive industry, asset managers want to accumulate as much cash as possible to do the largest possible transactions, on the theory that there are fewer rivals for the biggest deals.

Onex’s founder is the first to concede the massive amount of capital now committed to private equity makes it increasingly difficult to find attractive targets. In his talk to the CFA Society, Mr. Schwartz said when he started his career in the 1970s, the total amount of capital committed to private equity, globally, was about US$300-million. Today, there is US$2.5-trillion looking for deals. Onex alone is sitting on more than US$2-billion of what is known in the industry as “dry powder,” or capital it is looking to put to use.

“It is a very, very difficult market,” said Mr. Schwartz. He said many private-equity fund managers are willing to risk overpaying to buy businesses because they are “desperate to get invested and move on to the next fund raise.”

Onex is willing to row against the tide. While the company is still scouting for takeovers and working to close the WestJet acquisition – the airline’s shareholders approved the deal in July but it still requires a thumbs-up from regulators – the priority is selling stakes in businesses, to take advantage of public markets that are hitting record highs. So far this year, Onex has raised more than US$900-million for its own account and millions more for clients by parting with holdings in seven businesses, including U.S. fast-food chain Jack’s and Swiss packaging company SIG Combibloc Group.

Onex plans to invest more money in fewer sectors. Historically, the company’s 119-member investment team cast a wide net for deals. After what analysts describe as an “operational review” that concluded ahead of its investor day in October, Onex conducted an internal restructuring that narrowed its focus to just four areas: industrial businesses, service companies, health care and financial services. Scotiabank’s Mr. Hardie said: “These cores notably exclude the retail segment, which we believe has been a source of some of its recent challenges.” (The boardroom discussion of the decision to avoid retailers would have been fascinating, as Heather Reisman, chief executive of bookstore chain Indigo Books & Music Inc., is both an Onex director and Mr. Schwartz’s wife.)

Onex is in the midst of a market slump, and a grocery-store investment is partly to blame. Its stock price is up 7.3 per cent year-to-date, while shares in peers such as KKR, Blackstone and Brookfield soared by between 45 and 85 per cent. Analysts say Onex shares now trade at a 15-per-cent discount to the underlying value of the company’s assets. While this has happened in the past, there have also been times when Onex stock commanded a premium to the value of its holdings.

Analysts trace the negative sentiment to investor concerns over two business that are turning in disappointing financial performance, U.S. discount grocery chain Save-A-Lot Ltd., which Onex acquired in 2016 in a US$1.4-billion transaction, and British marine-equipment supplier Survitec Group Ltd., bought in 2015 for £450-million. Analyst Geoffrey Kwan at RBC Dominion Securities said the problems, while significant, are in Onex’s past. “Underperforming investments have been written down to almost zero, so any further deterioration should have minimal impact on Onex,” Mr. Kwan said. “Historically, the best times to buy Onex were when the shares traded at a discount to net asset value.”

Onex’s recent makeover also saw the company rework its structure. Analysts say the company got rid of “pods” of employees who were assigned to sectors, deciding the structure limited the opportunities for its staff to get to know how each company really worked. Instead, executives assign employees direct responsibility for specific investments, in a drive to increase accountability.

Formal responsibility for running the firm’s different units went to three Onex senior managing directors: former banker Seth Mersky, ex-Berkshire Hathaway executive Bobby Le Blanc and Anthony Munk, son of entrepreneur Peter Munk. Each executive is in his 50s and has spent more than two decades at Onex. Those looking for signs of succession planning would start with this trio.

Finally, Mr. Schwartz and his colleagues came out of the management sessions with what could be described as Onex’s private equity playbook, or the Gospel of Gerry. Scott Chan, a Canaccord Genuity analyst, summed up their efforts by saying Onex created a formal process for investing that included “a dozen key criteria predictive of investment success, such as cost-savings, growth projections, valuation of tax assets, etc. This will help adopt a more agile and targeted investing approach.”

Onex deal makers all have a story on Mr. Schwartz’s dedication to the company and his passion for deals. Five decades into his career, he still makes calls on Sunday nights, sweats the details of pitches to potential targets and clients, and pushes to expand the company. The founder’s recent moves speak to his legacy. By acquiring Gluskin Sheff and attempting to instill a shared, methodical approach to investing, Mr. Schwartz is attempting to ensure Onex will have the scale and culture required to sail on, long after he leaves.

01 November 2019

Derek Neldner, New Head of RBC Capital Markets Has Work Cut Out for Him

The Globe and Mail, Rita Trichur, 1 November 2019

Derek Neldner took the reins as group head of RBC Dominion Securities Inc. on Friday, and he’s got his work cut out for him.

Make no mistake: RBC’s capital-markets arm still defines the big leagues on Bay Street and is a Top 10 global investment bank. But these days, its bankers have a little less reason to swagger. Corporate clients are more cautious about deal making and borrowing because of uncertainties stemming from a slower U.S. economy, Brexit and high-profile trade spats.

While those trends are weighing on investment banks around the globe, RBC’s bragging rights are also in shorter supply because of its own foul-ups. A spate of regulatory smackdowns, mostly south of the border, are creating new reputational risks for RBC’s capital-markets division which once prided itself on being the Boy Scout of investment banking.

Mr. Neldner, 46, has plenty of cred on the Street. But he still faces a formidable challenge. Not only must he propel new revenue growth without excessive risk taking, he must also keep his bankers and traders on a tighter leash. And if that wasn’t enough, his outspoken predecessor, Doug McGregor, will still be looking over his shoulder – at least for the time being.

Mr. McGregor, 63, spent more than a decade at the division’s helm, and during that time, earned a reputation for his blunt talk and imposing personality. On Friday, he became chairman of RBC’s capital-markets division and will remain in that job until he retires on Jan. 31, 2020.

It’s hard to imagine Mr. McGregor holding his tongue, especially given the division’s challenges. During its fiscal third quarter, net income and revenue from RBC’s capital-markets division fell – both year-over-year and quarter-over-quarter.

Results were hurt by lower investment-banking revenues, lower equities-trading revenue, a slowdown in mergers and acquisitions activity and bigger provisions for impaired loans.

While Mr. Neldner can’t control those macro trends, shareholders will expect him to improve certain financial metrics. For starters, the capital-markets arm’s return on equity of 11.1 per cent is sagging relative to the bank’s other divisions including personal and commercial banking (28 per cent), wealth management (17.2 per cent) and insurance (39.2 per cent).

There will also be more pressure to control costs, including in the way RBC pays its bankers and traders. The capital-markets division’s ratio of total compensation to revenue – which includes a variety of compensation costs including salary, benefits, stock-based compensation and retention bonuses – stood at 37.9 per cent during the third quarter.

Mr. Neldner, meanwhile, is also heir to other headaches, including the fallout from cultural and conduct problems.

Last year, RBC abruptly dismissed Blair Fleming, then-head of its U.S. capital markets business, after an internal investigation found he allegedly violated company policies pertaining to workplace relationships.

Mr. McGregor later encouraged employees to 'speak up' when they see improper behaviour, an obligation that Mr. Neldner now inherits as regulators sharpen their scrutiny of misconduct risks at banks.

The division’s compliance issues have come to the fore again in recent months. In August, RBC agreed to pay a $13.55-million financial penalty to the Ontario Securities Commission to settle charges that it failed to supervise foreign-exchange traders over a three-year period.

Regulators alleged that traders used electronic chatrooms to share confidential customer information with their peers at other companies between 2011 and 2013. What’s more, the OSC alleged that RBC didn’t completely correct its chatroom compliance problems until 2015. (Toronto-Dominion Bank separately agreed to pay the OSC $9.3-million).

And just last month, the Commodity Futures Trading Commission (CFTC) slapped RBC with a US$5-million fine for 'failing to meet its supervisory obligations, which resulted in hundreds of unlawful trades and other violations' from late 2011 through May 2017. This was despite the fact that RBC was punished for similar compliance violations in 2014, when it was ordered to pay a US$35-million penalty for engaging in illegal futures trading.

There’s no understating how harmful blunders such as these are to RBC’s brand, especially after the Michael Lewis book Flash Boys lionized the bank’s do-gooder culture.

The bank made public-relations hay from the publicity for years. Perhaps, its executives’ biggest mistake was believing their own PR.

Mr. Neldner, who has worked his way up the ranks at RBC since 1995, is now responsible for mopping up such messes. The bank cannot afford more hits to its reputation. His troops will have to fall into line.

30 October 2019

National Bank is the Only Bank to Outperform the S&P/TSX Composite (YTD)

The Globe and Mail, David Berman, 30 October 2019

Among Canada’s Big Six banks, just one is trading at a relatively high valuation: National Bank of Canada. And that gives the stock one extra hurdle to clear as the fiscal year ticks down.

Over all, the biggest banks are on a roll after rebounding from a sell-off toward the end of 2018, with average gains of 13.3 per cent year-to-date.

But National Bank, the smallest of the Big Six, stands out as the clear winner. This year, the stock is up 21.2 per cent (not including dividends), outperforming its peer average by a remarkable 7.9 percentage points.

The second-best performer, Royal Bank of Canada, is up 14 per cent. The laggard of the group, Bank of Montreal, is up just 10.9 per cent. Another way of putting National Bank’s performance into context: It is the only big-bank stock that has outperformed the broad S&P/TSX Composite Index, which is up 15.2 per cent this year.

The source of the bank’s winning ways is no mystery: National Bank is focused on Quebec, while its peers are more diversified across Canada and internationally.

In 2018, 58 per cent of National Bank’s revenue came from Quebec, compared with 29 per cent from all other provinces combined (the remaining 13 per cent of revenue came from outside Canada).

This geographic concentration is a plus when the province’s economy is humming. In July, Quebec’s gross domestic product (GDP) increased for the 10th straight month, marking the best winning streak on record for the province. GDP has risen by 3.4 per cent (at an annualized rate, after inflation) over this 10-month period, which is far better than the 1.5 per cent GDP growth nationally.

“Quebec’s economy continues to churn out historically strong growth, and remains one of the most positive economic stories on the Canadian landscape,” Robert Kavcic, senior economist at BMO Nesbitt Burns, said in a note.

The province’s economic activity has been beating the national average for nearly two years. Quebec’s unemployment rate sits at just 4.8 per cent, versus 5.5 per cent nationally. And while low energy prices have weighed on Alberta, Quebec benefits from lower energy costs.

National Bank, then, is in the right place – and it has been making the most of it. Over the past three years, the bank has produced average annual profit growth (on a per share basis) of 10.3 per cent, versus a group average of 8.9 per cent, according to CIBC World Markets.

The bank is also making strong progress in controlling costs. Its efficiency ratio, which compares expenses to profit (lower is better) improved to 53.5 per cent in the third quarter, down from 55.8 per cent in the third quarter of 2017.

The problem? The stock is no bargain.

The shares trade at 10.8 times estimated earnings, according to Bloomberg. That’s higher than the 10-year average estimated price-to-earnings ratio of 10.2, according to data last week from RBC Dominion Securities.

National Bank is the only big-bank stock with a valuation that exceeds its long-term average: The other five stocks trade at discounts. Canadian Imperial Bank of Commerce, the cheapest, has a P/E ratio of just 9.3 (again, based on estimated earnings), versus a 10-year average of 10.

Most big-bank stocks are cheap for a reason: They have been struggling to produce meaningful profit growth amid a slew of challenges. Canadians suffer from high levels of indebtedness, loan losses are rising, low interest rates are crimping lending margins and the U.S.-China trade war is muddying the global economic outlook.

The big banks’ fiscal third-quarter results, released in late August and early September, showed that profits increased just 3.7 per cent year-over-year and they were flat from the previous quarter, according to DBRS, the credit-rating agency.

Most of the banks reflect this unattractive backdrop, with relatively low valuations. National Bank is the exception, and the stock’s higher-than-average valuation could be its biggest challenge.

26 July 2019

Reimagining RBC: How Canada’s Biggest Bank Is Tackling the Never-ending Threat of Disruption

The Globe and Mail, James Bradshaw & Tim Kiladze, 26 July 2019

Top executives at Royal Bank of Canada were feeling pretty confident in 2016 that a new retail strategy they were crafting would be groundbreaking.

Their plan, dubbed Vision 2025, would reshape the way they approached retail banking. A decade out, RBC imagined acquiring customers in bold new ways, including starting businesses that had very little to do with banking but would attract entrepreneurs and new immigrants. The bank also planned to rely more on digital apps to handle simple transactions – and to glean insights about client behaviour.

Then they landed in China.

On a reconnaissance trip, the executives were confronted with a cluster of digital behemoths such as WeChat already touching every corner of a consumer’s life. The popular messaging app lets users make payments and money transfers, book flights, hail a ride-sharing car or order food delivery, all from a mobile phone. From each of these services, WeChat learns more about its consumers’ lives in an era when customer data – once a domain in which big banks held a significant advantage – are increasingly valuable.

“As we met with Alibaba and the large digital firms there, [we realized] they’re already three years down this path,” recalls Neil McLaughlin, RBC’s head of personal and commercial banking. The harsh truth about RBC’s strategy to embed itself more deeply in all aspects of a customer’s digital life was laid bare: “This isn’t us innovating, this is us coming to the same conclusion that another market already got to."

Even more terrifying, he adds, was the pace of change. Chinese digital giants seemed to be moving five times faster than RBC.

For Canada’s largest bank, this raised the prospect of an existential threat. Retail banking is a profit machine for RBC, delivering nearly half of last year’s profit.

In Canada, it can seem as though the banks are too big to disrupt – they appear to have neutralized the initial threats from financial-technology companies, or fintechs, and weathered the first forays into financial services by Silicon Valley giants. Apple Pay, for instance, has been slow to catch on.

But RBC is still focused on addressing the threat, because it isn’t going away. As the bank celebrated its 150th anniversary in June, chief executive Dave McKay and Mr. McLaughlin spoke to The Globe and Mail about the challenges ahead, as well as their vision for what the bank, and the industry, might look like in 2035.

“We’re reimagining the role we play in a client’s life,” Mr. McKay said. “Because that role has been kind of fixed for 150 years, it was pretty straightforward. But now … barriers are breaking down between industries.”

RBC executives are consumed with imagining how clients’ habits might change as new technologies and tech companies transform how – and where – they spend their money. Why borrow from a bank to buy a car if, 10 years from now, Lyft offers a subscription service that meets most driving needs?

Then there is the “open banking” movement. The Canadian government is currently weighing new rules that make it easier for clients to move all their account info and data to startup financial institutions.

“Executives are rightly nervous,” said Paul Battista, the head of Ernst & Young’s Canadian financial-services consulting practice. “There is a lot of fundamental change going on right now … and it will be profound when it hits.”

Rising threats

One of the first things RBC tackled when revamping its retail-banking strategy was customer acquisition. For much of its history, banks pursued clients using traditional sales tactics, such as mailing millions of credit-card offers directly to Canadian homes or relying on branches to serve as large nets. Once clients walked in, staff could offer a variety of financial products.

In a digital world, signals of what’s going on in customers’ lives and where they’ll spend their money are increasingly showing elsewhere – on social media, through search engines and from online purchases. Although banks still gather a fair amount of information through transaction data, it is often not as detailed as data collected by tech companies. A credit-card statement might show a purchase from Amazon.com, but not what was purchased. In that instance, Amazon can gather far more intimate portraits of a customer’s intentions.

So the bank launched RBC Ventures in 2018, a startup accelerator of sorts whose businesses are designed to reach clients long before they consider a banking product. For instance, instead of advertising small-business loans, the bank built a new digital business in-house called Ownr that walks the user through all the steps necessary to set up a company – hoping that, eventually, the customer will borrow from RBC. Another app, called Arrive, provides step-by-step guides to help new immigrants get set up in Canada, giving the bank a way to reach prospective customers as soon as they touch down in the country.

That was just Step 1. RBC’s leaders are now working on a new strategy, dubbed Vision 2035, and no question is off limits.

“What does the consumer balance sheet look like [in 15 years]?" Mr. McKay wonders. Could the traditional approach that led RBC to accumulate $1.38-trillion in assets become less relevant – or even a liability?

"I don’t know. I don’t have an answer for you,” Mr. McKay said.

RBC’s leaders are also trying to anticipate the next wave of disruption. For one, as technology breaks down barriers between industries, Mr. McKay expects more customers may ask home voice assistants built by Apple, Amazon or Google, “What’s the best mortgage rate?” The machine might spit out a single search result and access to that customer could be sold by the voice-assistant maker to the highest bidder.

“How terrifying is that?” Mr. McKay said.

Meanwhile, Canada’s federal government is currently weighing the merits of so-called open banking. The movement, already established in Britain, is essentially a set of rules that will allow consumers to share and move their banking data from one provider to another, often with a swipe of a finger.

If it unfolds as expected, it could increase customer switching rates between financial institutions, loosening the grip incumbent banks hold on their customers – and that’s the last thing RBC, the largest of the Canadian banks, would want.

How RBC is responding

Risk-averse banks may seem ripe for disruption, but RBC contends banking is not simply about transactions and that its track record is hugely valuable.

“An awful lot of retail customer decision-making is emotional, not logical," Mr. McLaughlin said. Customers will subconsciously think, “I have an affinity for this brand, and I trust them.”

To better understand the way clients think, RBC began hiring ethnographers a couple of years ago. Ethnographers are trained to observe people in everyday situations and RBC sends them to visit customers’ homes and employees’ workplaces to explore the different relationships people have with money. At a basic level, Mr. McLaughlin explained, ethnographers “help what is a very logical industry think through, ‘Here’s how we need to speak and interact with customers.'"

The exercise has reinforced how vital brand loyalty is to RBC. So the bank is trying to expand the appeal of the banking bundle, adding on discounts, rebates, loyalty points and special offers to create as many reasons as possible to dissuade customers from taking any part of their business elsewhere.

RBC recently partnered with Petro-Canada to share some customer data, persuading clients to link their cards from the two companies by offering discounts at the gas pump. The bank also launched Ampli, a proprietary loyalty program in tandem with WestJet Airlines Ltd. and major Canadian retailers, that will offer perks and travel rewards designed to tie customers ever more closely to the bank, and aggregate their data.

The goal is to make customers question whether the grass really is greener at rival institutions, especially at fintech startups. "Are they going to offer cents off at the [gas] pump? Do they give me a discount on my mortgage?” Mr. McKay said.

At the same time, RBC is trying to expand the scope of what a customer does through their bank. Traditionally, a bank served a prospective homeowner with products, such as mortgages and lines of credit. RBC’s mission is to solve as many “pain points” associated with housing as possible, and “not just financing,” Mr. McKay said.

For instance, if RBC can refer a borrower taking out a mortgage to a real estate listings site, a moving company and a contractor to do renovations in the span of a few clicks, RBC will seem more indispensable to that client. “That’s where opportunity lies for banks and non-banks,” said Geoff Rush, a partner at KPMG Canada.

However, it requires rethinking the way these relationships are structured. “The interesting challenge is, in that end-to-end experience, who owns the customer?” Mr. Rush added.

Amid all this change, RBC’s leaders also plan to make full use of the bank’s size. Banks are already spending billions of dollars annually on new technology systems – RBC spends well in excess of $3-billion each year. But because it has annual revenues in excess of $42-billion, which leads all Canadian banks, it can spread those costs more widely across its business.

Last year, CIBC World Markets analyst Robert Sedran summed up RBC’s approach in two words: “Weaponizing scale.” In a note to clients, he wrote: “Not only does this bank have an advantage on the sector, that gap is growing.”

The major question is what all of RBC’s investments will add up to. Two startups tied to RBC Ventures – the financial-advice app Finfit and wellness app Carrot Rewards – have already shut down, proving how hard it can be to build a digital following and to run digital businesses. And some of that cash spent on digital experiments could have been returned to shareholders or poured back into improving existing businesses.

But RBC’s executives say they can’t risk giving digital challengers even the smallest chance to pluck away products and services that make banks valuable to their clients.

"We never want to give a customer a reason to go shop across the street," Mr. McLaughlin said.

24 April 2019

RBC Capital Markets Is Playing In A Different League Than Its Canadian Rivals

The Globe and Mail, Marina Okhromenko, 24 April 2019

It’s time to acknowledge that when it comes to investment banking, RBC Capital Markets is playing in a different league than its Canadian rivals. The deal-making arm of Royal Bank of Canada churned out $8.4 billion in revenue last year, almost as much as its second- and third-ranked domestic competitors put together. In the same way it seems preordained that football’s New England Patriots will be Super Bowl favourites every year, it now appears certain that RBC Capital Markets will make far more money than any other Bay Street dealer.

What's the secret to this run? Like the most successful coaches in sports, Royal Bank CEO Dave McKay says staying on top in increasingly complex markets starts with keeping things simple. “The beauty of the capital markets strategy is consistency and what I call the simplicity,” he said at a conference in March. “It is [built] around great people, using your balance sheet, creating value, advising and cross-selling, and it takes time to build up those relationships.” To use another gridiron adage, it's also about the team, rather than individual superstars. When that teamwork kicks in, it can turbocharge revenues and earnings.

Like many perennial winners, McKay pushes his team to do better each year, too. RBC Capital Markets earned a $2.8-billion profit in 2018, which translated into a healthy 13% return on equity—a performance any other Canadian bank would envy. But McKay isn't measuring his team mainly against Bay Street rivals such as Bank of Nova Scotia, which posted capital markets revenue of $4.5 billion in 2018. Royal Bank is competing against global players such as JP Morgan Chase, which generated $35.4 billion (U.S.) in revenue from corporate and investment banking.

RBC Capital Markets began to pull away from the rest of the Canadian bank-owned dealers in the late 1990s, when it found itself advising many of its Canadian corporate clients on international expansion plans. The division's leaders in that era, including long-time CEO Anthony (Tony) Fell, decided that to stay relevant to those clients, it needed to grow with them abroad, with an initial focus on the U.S. market.

In 2000, Royal Bank spent $1.5 billion (U.S.) to acquire a technology-focused investment bank, Minneapolis-based Dain Rauscher Corp. When the tech bubble burst in 2001, Dain Rauscher started losing money. Royal Bank also targeted relatively small growth companies, which was out of step with its focus on large-cap clients in established industries. Veteran real estate banker Doug McGregor was dispatched from the head office in Toronto to Minneapolis to turn things around.

McGregor and his colleagues stuck with a U.S. expansion strategy, but eschewed another acquisition, opting to take a slow-and-steady approach by hiring individuals and some entire teams from U.S. banks. They did the same with British, French and German rivals in Europe.

If Dave McKay is Royal Bank’s head coach, the role of quarterback falls to the 61-year-old McGregor, who’s chair and CEO of RBC Capital Markets and head of the bank’s investor and treasury services. A champion wrestler in his university days, McGregor looks like he could still pin an opponent, and he is disarmingly blunt and direct. He says the big-ego Masters of the Universe financiers made famous by author Tom Wolfe were never welcome at RBC Capital Markets. McGregor has hired 31 senior bankers in recent months, and says his goal in every interview has been ensuring the new partners are a “safe” cultural fit, which means “understated and team-oriented.”

As the bank has expanded internationally—RBC Capital Markets now has 3,300 employees in the U.S., 2,700 in Canada and 1,300 in Europe—McGregor and his colleagues say the concept of teamwork became more essential. No one player can do everything for large and complex corporations.

Take health care. Derek Neldner, RBC Capital Markets head of global investment banking, says that a generation back, one banker could be the sole contact with a pharmaceutical company. Now, he says, “if you are going to offer serious coverage to a health care client, you need an analyst who can talk authoritatively on medical devices, an expert on pharmaceuticals, one on biotech and so on.”

To cover the cost of employing all those specialists, a bank needs global scale, Neldner says. He adds that one of RBC Capital Markets' most significant internal accomplishments in recent years was devising a compensation system that ensures bankers and traders get paid for helping on a transaction even if they don't have direct ties to that client.

RBC Capital Markets' reach now vastly exceeds that of any domestic rival. The firm played a role in $1.5 trillion (U.S.) worth of syndicated loans last year, $74 billion (U.S.) in stock sales and $764 billion (U.S.) in bond offerings for Canadian and international clients.

Teamwork often boosts revenues, which is why McKay fixates on cross-selling. Jonathan Hunter, RBC global head of fixed income currencies and commodities, remembers working on an acquisition in British Columbia for a German client. Along with helping negotiate the deal, RBC arranged debt financing and used derivatives to hedge currency risk. “If our fee was a dollar on a conventional advisory assignment, we were able to earn a buck-sixty here by providing extra services while also doing a better job for the client,” Hunter says.

Size and outsized profits in capital markets also bolster the premium valuation for Royal Bank stock, analysts say. “When the waves pick up, we prefer to be on a bigger boat,” said CIBC World Markets analyst Rob Sedran in a recent report on Royal Bank. Like the Patriots, in good markets and bad, McKay’s team just keeps winning.

10 April 2019

Why Shorting the Canadian Banks on Housing Makes No Sense

The Globe and Mail, Tim Kiladze, 10 April 2019

When Steve Eisman warns about a downturn, investors listen – so his recent bet against Canadian banks is getting a lot of attention. Famous for his prescient call against the United States housing market before the 2008 global financial crisis, one of the fantastically profitable wagers profiled in The Big Short, Mr. Eisman, a fund manager, is now predicting trouble for Canada’s largest lenders.

He is very clear that he does not expect a U.S.-style housing collapse, yet he worries that Canada’s housing market is cooling quickly. Mr. Eisman also fears the fallout from a sluggish economy. Because the Big Six banks dominate domestic lending, he expects they will suffer.

It is a compelling story, one that other hedge funds have been making as well. The problem with the thesis, however, is that there are a number of holes in it.

From afar, the statistics about Canadian debt are jarring. Household debt has risen to 179 per cent of disposable income. The bulk of that debt is from mortgages, and the vast majority of these loans are financed by the Big Six lenders. So the banks look particularly vulnerable in any downturn.

But the specifics about the market structure matter, and Canadian fund manager Rob Wessel, who runs Toronto-based Hamilton Capital Partners Inc., has zeroed in on these in a new research note to push back against the short trade. The same is true for Australia, he argued, a country whose banking system closely resembles ours.

“While the housing story has not yet been fully written, we believe the ongoing corrections will remain orderly and that a ‘big short’ position in the Canadian and Australian banks will continue to be challenging,” he wrote.

Mr. Wessel has an interesting vantage point. His firm specializes in investing in financial institutions around the world, and he personally knows the Canadian market intimately after spending years as an equity research analyst who covered the domestic banks.

Crucially, he noted, healthy levels of collateral and mortgage insurance “provide huge buffers to direct losses for the banks." He isn’t completely dismissive of the short story, but he believes "it would take a truly significant decline in home prices for Canadian and Australian banks to incur a large increase in direct mortgage credit losses.”

Major Canadian banks have an average loan-to-value ratio of 54 per cent on their mortgage portfolios. That means if a buyer were to default, the bank should be able to repossess the home and sell it for far more than the remaining loan value.

Mortgage insurance provided by Canadian Mortgage and Housing Corp. is also a crucial element of the Canadian market, protecting the lenders when they’re issuing mortgages with smaller down payments. On average, 44 per cent of Big Six bank mortgages are insured, so the lenders are protected if borrowers on these insured loans default.

As for the argument that a sluggish economy will cause problems, Mr. Wessel notes that the national employment rate of 5.8 per cent hasn’t been this low in decades. The broad labour market strength should do wonders because loan losses are positively correlated with unemployment rates. Plus, for all the doom and gloom, Canada’s gross domestic product is still predicted to grow over the next two years.

Lately, bearish investors have cautioned that the expected economic expansion is smaller than recently predicted. Yet, Mr. Wessel writes, that means interest rate hikes will likely remain on hold, and that has started to push borrowing costs down.

Despite the vocal arguments made by fund managers such as Mr. Eisman, recent statistics show broad swaths of investors aren’t growing intensely bearish – at least not yet. Since the start of the year, total short interest in the Big Six banks has remained flat around US$10-billion, according to S3 Partners, a financial analytics company. Of these lenders, Canadian Imperial Bank of Commerce has the highest percentage of its float shorted, at 5.6 per cent.

But bank CEOs have still had to defend their institutions. On Tuesday, Bank of Nova Scotia CEO Brian Porter spoke at the lender’s annual meeting, and he provided a detailed riposte to the short narrative.

“We stress-test our portfolio on a regular basis, a daily basis. And we stress-test it against what we would view as very harsh metrics," he said, offering examples such as a 600-basis-point increase in interest rates and a huge jump in unemployment. Even in those scenarios, "our business is still profitable, the bank still pays a dividend, and we carry on.”

09 April 2019

Scotiabank Spending $300-million a Year in Anti Money Laundering Efforts

The Globe and Mail, James Bradshaw, 9 April 2019

Bank of Nova Scotia is spending about $300-million annually to combat money laundering even as it pulls out of some riskier markets, at a time when Canada’s government is promising new resources to fight financial crime.

The bank’s chief executive officer, Brian Porter, voiced support for an array of new measures unveiled by the federal government in last month’s budget, speaking to reporters after Scotiabank’s annual meeting of shareholders on Tuesday. The new initiatives are the government’s response to continuing criticism over significant gaps in Canada’s anti-money-laundering regime.

Scotiabank spent nearly $300-million enhancing anti-money-laundering capabilities last year, and expects to invest “pretty close to that in 2019," he said. And he acknowledged that Scotiabank is keenly aware of growing scandals over money-laundering lapses at two Nordic lenders, Danske Bank and Swedbank, that have claimed executives’ jobs, damaged those banks’ reputations and drawn heightened attention to global flows of illicit funds.

“This is a big issue and it’s one I think about a lot," Mr. Porter said. “We’ve all read in the papers about Danske Bank and Swedbank and what went on there."

Scotiabank spends more heavily on anti-money-laundering controls than some of its peers, partly as a function of its geographic footprint. Not long ago, the bank operated in more than 50 countries, from Russia and Turkey to the Caribbean and Latin America, many of which have been targets for those looking to wash illegal funds. Since Mr. Porter took over as CEO five years ago, the bank has sold businesses in some 20 countries, focusing the bank’s international footprint but also reducing its exposure to money-laundering risks.

Money laundering is only one risk factor the bank has looked to mitigate by “divesting some smaller markets. It’s a function of managing operational risk,” he said.

Scotiabank has made key hires in recent months to bolster its anti-money-laundering efforts, including naming Stuart Davis as its global head of financial crimes risk management. Mr. Davis was formerly the global chief anti-money-laundering officer at Bank of Montreal.

The bank had previously scaled back its metals business, ScotiaMocatta, having failed to sell the unit in 2017 after it was linked to a money-laundering scandal. In 2015, Scotiabank reached a written agreement with U.S. regulators to fix its oversight and monitoring of suspicious activity, correcting gaps in its compliance program.

Some estimates suggest that the total sums of money laundered each year add up to between 2 per cent and 5 per cent of global gross domestic product (GDP), or trillions of dollars, though it is hard to be precise about funds that exist in the shadows by their nature. “And this isn’t just drugs, it’s human trafficking, it’s all sorts of terrible things going on," Mr. Porter said, noting that banks have "an important role” to play in stemming the flow of such funds.

In recent years, Canada has received lukewarm ratings for its effectiveness at combatting financial crimes such as money laundering and terrorist financing. In response, the latest federal budget promised a series of investments and measures to try and “modernize” Canada’s regime to enforce anti-money-laundering laws.

The government promised to invest $16.9-million over five years in the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), and to boost the RCMP’s investigative capacity with tens of millions of dollars in annual funding. There are also plans to create an Anti-Money Laundering Action, Coordination and Enforcement (ACE) Team, drawing together experts from intelligence and law-enforcement agencies to boost co-operation.

“I think that’s good for the system, good for the country, and we’re supportive of that," Mr. Porter said.

08 March 2019

Big 5 Banks Led the 2009-2019 TSX Bull Market Run

The Globe and Mail, Tim Shufelt, 8 March 2019

On Day 1 of the recovery from the worst bear market since the Great Depression, the big Canadian banks led the charge on the Toronto Stock Exchange.

Royal Bank of Canada’s shares rose 14 per cent on March 10, 2009, as investors stormed back into the much-maligned financials sector. RBC’s fellow Big Five incumbents all posted double-digit gains of their own.

That day would prove to be the inflection point that separated the global financial crisis and devastating recession from one of the best bull markets in history.

It would also usher in a decade of bank dominance in the Canadian stock market, displacing resources as the main driver of domestic equities.

In the 10 years since the market bottomed out, the Big Five together have contributed nearly half of the total returns generated by the S&P/TSX Composite Index. Just five stocks contributed 47 per cent of a decade’s worth of gains in an index that contains around 240 of the country’s largest companies.

“The banking sector hasn’t really had a bump in the road in 10 years,” said Tom Bradley, president of Steadyhand Investments. “They’ve just had these howling tailwinds.”

But it’s hard to imagine those tailwinds being quite as intense in the years ahead. The burdens from indebted households, a moderating economy and a slowing real estate boom mean the next decade in banking, and bank investing, is unlikely to have the same sheen as the gilded decade past.

In the aftermath of the global financial crisis, Canada’s banking sector became the envy of the developed world. With relatively little exposure to the toxic securities that felled 25 U.S. banks in 2008 and destabilized the global financial system, Canada’s banks remained quite profitable. They didn’t even cut their dividends.

The World Economic Forum ranked the Canadian banking system as the world’s soundest, while U.S. President Barack Obama recognized Canada as “a pretty good manager of the financial system.”

While the banks themselves were spared from the worst of the carnage, their stocks fully participated in the crisis. Amid fears of contagion infecting the Canadian financial system, the diversified bank group declined in share price by 58 per cent from their 2007 peak to the market’s 2009 nadir.

“In a downturn, investors don’t look at earnings any more,” said Bill Dye, a banking analyst and portfolio manager at Leith Wheeler.

The combination of operational strength and cut-rate valuations set the Canadian bank stocks up for a monumental rebound. Citigroup Inc. provided the spark. After the company survived only by virtue of a bailout in the form of US$476.2-billion in cash and guarantees, Vikram Pandit, Citi’s beleaguered chief executive, told his employees on March 9, 2009 – the very day of the market bottom – that the bank turned a profit in the first two months of the year.

By the end of 2009, Canada’s group of big bank stocks had more than doubled. There was much more to come. Over 10 years, the banks have generated an average total return of more than 18 per cent a year. Not only did that performance trounce the broader Canadian stock market, it beat the S&P 500 index through the longest bull run in history. It even beat Warren Buffett – Berkshire Hathaway Inc. shares have returned 15.7 per cent a year over the same period.

Operating within a comfortable oligopoly, banks have undergone a decade of growth and become wildly profitable in the process. In fiscal 2018, the six largest banks generated $45.3-billion in earnings, amounting to more than $1,200 for each Canadian. They have thrived off of a generational housing boom, have come to dominate the wealth-management business in Canada and have used their domestic proceeds to expand well beyond Canada’s borders.

“They got through the crisis okay. They’ve grown their dividends. They put up these unbelievable numbers. What’s not to love?” Mr. Bradley said. In return, Canadian investors have developed a cult-like loyalty to the banks, which form the cornerstone of countless Canadian investment portfolios. “I get people that ask me, ‘Why wouldn’t I just own the five banks?’” Mr. Bradley said. That kind of radical concentration is one sign that sentiment toward the banks is overwhelmingly favourable, he added.

And yet, bank valuations never seem to get too out of hand. Despite their vaunted status among the investing masses, the big banks trade at an average forward price-to-earnings multiple of about 10.5. That’s considerably less than the valuation on the S&P/TSX Composite Index of about 15.

“Their valuations just don’t seem to get higher over time,” said Christine Poole, CEO of Toronto-based GlobeInvest Capital Management. “Some bank CEOs argue that they are fairly defensive and stable businesses, and ask why they’re not getting a higher multiple.”

But there is a good reason such highly leveraged businesses trade at a significant discount to the market. As a result of high leverage ratios, “when things turn down, the banks tend to get hit very hard,” Leith Wheeler’s Mr. Dye said. “Retail investors sometimes forget that.”

The financial crisis served up a good reminder of that, not that anyone’s anticipating Canadian bank stocks to face such a severe test any time soon. But the forces that have elevated the mighty banks since the financial crisis are undoubtedly weakening. With household debt near record levels, the average Canadian has little room left to borrow.

“Over the next few years, loan losses are likely to be higher than they are today, even if there isn’t a recession,” Mr. Dye said. “And earnings growth is almost assuredly going to be lower.”

22 February 2019

Comparison of the All-in-One Diversified ETF Portfolios

The Globe and Mail, Dan Bortolotti, 22 February 2019

In many aspects of our lives, we embrace convenience. We buy prepared meals instead of assembling and cooking the ingredients ourselves. We shop in malls rather than driving to four or five individual stores. We recognize our time is valuable and our mental bandwidth is limited, so we look for very good solutions, not perfect ones.

Except when it comes to investing. It’s the one area where simple, excellent options are available, yet too many people resist them because they’re too, well, simple. Here’s hoping a recent trend in the ETF marketplace will help investors overcome that tendency.

In the past year or so, all three of Canada’s largest exchange-traded-fund providers have launched products that allow investors to own a complete portfolio with just one trade. Each includes a mix of global stocks and bonds, so anyone with a brokerage account can get extremely broad diversification with minimal maintenance and rock-bottom costs.

Vanguard Canada was the first ETF provider to launch one-ticket solutions just over a year ago, and iShares followed in December. Earlier this month, BMO joined the party with its own family of all-in-one portfolios.

Let’s look at a typical example: the Vanguard Balanced ETF Portfolio (VBAL). Like its counterparts, it’s a “fund of funds” built using seven underlying ETFs. There are three for fixed income: one each for Canadian, the United States, and global bonds. Then there are four equity components: Canadian, U.S., international developed and emerging markets. Vanguard has estimated that the portfolio offers exposure to about 94 per cent of the world’s public markets.

VBAL has a long-term target of 40-per-cent bonds and 60-per-cent stocks, which is the traditional split for a balanced portfolio. But there are other options for people with different risk profiles, ranging from just 20-per-cent stocks in the Vanguard Conservative Income ETF Portfolio (VCIP) to 80-per-cent stocks in the aggressive Vanguard Growth ETF Portfolio (VGRO). All the funds have the same components, just in different proportions.

The iShares and BMO families are very similar. They vary in their specific holdings, but they all include a target allocation of Canadian and non-Canadian bonds, plus an equity mix with one-quarter to one-third domestic stocks, with the remainder split between the U.S. and overseas markets. In all, we’re talking about thousands of stocks and bonds from around the world, which is all the diversification anyone needs.

Moreover, as markets move in different directions and at different rates, the ETFs will be rebalanced so they maintain those long-term targets. This feature makes them virtually maintenance-free, and it puts some competitive heat on robo-advisers, the online services that charge about 0.50 per cent and advertise automatic rebalancing as one of their key benefits.

And the price tag for this elegant portfolio? The management fees range from 0.18 per cent to 0.22 per cent, which is about 90-per-cent cheaper than traditional balanced mutual funds. On a $100,000 portfolio, the monthly cost is a little more than you’re paying for Netflix.

The good news is that these all-in-one ETF portfolios have been embraced by many do-it-yourself investors: VGRO, for example, has attracted more than $570-million in assets in barely a year. But there has been resistance, too. I’ve heard from many investors who are concerned the funds are not optimized for tax-efficiency, or that you could reduce your fees even further by buying the underlying holdings individually. But how many honestly believe they can build and maintain a better portfolio? In the real world – where people are busy with work and family, and would rather watch the hockey game than fiddle with a spreadsheet – no one manages their portfolio optimally.

Others dismiss these funds as cookie-cutter solutions, or argue that they’re only appropriate for very small accounts or unsophisticated investors. What nonsense. I’ve reviewed a lot of portfolios over the years, with six- and seven-figure balances, many of which were designed by people who manage money for a living. Almost none of them were more thoughtfully structured than what Vanguard, iShares and BMO have packed into a single ETF.

Are these products right for everyone? Certainly not. Are they perfect? No, but neither is any other option. And here’s the thing: You don’t need an optimal portfolio, you just need an excellent one. No one has ever failed to meet their financial goals because they had exposure to only 94 per cent of the world’s stock and bond markets, or because they failed to keep their investing costs lower than 0.18 per cent. Countless millions have failed by trying to do better.

Eating well and staying in shape takes a lot of effort: It’s much easier to flop on the couch and order pizza. Learning to speak Gaelic, playing the trombone, nurturing a romantic relationship – these take a lot of work. But successful investing is the opposite: You usually thrive by doing less, not more. With the appearance of these all-in-one ETFs, building an extremely well-diversified portfolio has never been easier or cheaper. The only problem that lingers is the one in the mirror.

Dan Bortolotti, CFP, CIM, is a portfolio manager at PWL Capital in Toronto. He is the creator of Canadian Couch Potato, an award-winning blog about index investing.