By Tom Bradley

I just read an article by Jade Hemeon in the February issue of Investment Executive, a trade magazine aimed at financial advisors. The piece was on a new product called BMO Lifetime Cash Flow. My experience with the article went something like this.

Investment Executive: BMO Lifetime Cash Flow allows clients to create what the bank calls a “personal pension” that provides steady monthly income. The initial deposit is invested in a portfolio of BMO mutual funds that is rebalanced annually and gradually moved toward a more conservative asset allocation over time. However, the cash flow is guaranteed at 6% annually for the client’s lifetime ...

Sounds pretty good. Certainly with the investors I talk to, especially the ones who are retired or close to it, security of income is a big concern.

IE: For the first 10 years, the money is invested on a tax-deferred basis, and no withdrawals are permitted. For the subsequent 15 years, the client receives guaranteed cash payments equal to 6% of the initial deposit. The payments are categorized as return of capital, and so are tax-deferred.

Looks like I’ve got to look ahead. No income for the first 10 years, but also no tax slips. That’s good. And when I do start to get paid, the distributions will be deemed a return of capital. I like that too.

IE: In Year 26 and beyond, the client continues to receive 6% a year, but the income is now classified as interest and thus fully taxable.

Well, I’ve got to pay the tax man sometime. Interest income is the highest taxed form of investment income, but maybe I’ll be in a lower tax bracket by then.

IE: The performance of the underlying funds will be net of a 2.75% annual management fee.

Ouch, that’s pretty steep for a conservative portfolio. In fact, in a few years when the portfolio is primarily fixed income, it will be ridiculous.

IE: One of the downsides of the new BMO product, says [Dan] Hallett, is that there is no inflation protection for clients – the 6% rate of income remains fixed and based on the original deposit … [and] there is no feature to lock in any portfolio gains along the way to increase the level of income.

Ah, my friend Dan has looked at this product. Now we’re getting a little more balance here. I guess the reality is that by the time I start to receive some income (year 11), it will be of considerably less value. Let’s hope this food and energy inflation thing doesn’t take hold.

IE: Another downside: the BMO Lifetime Cash Flow product is completely illiquid for the first 25 years.

Wow, that’s a long time. I’m a strong advocate of long-term investing, but … wow. Not only is the retirement income guaranteed, but it’s guaranteed that I’m going to be a BMO client for a long time.

IE: As with other guaranteed investment products, such as principal-protected notes, the new product’s portfolio could be tilted toward a conservative asset allocation in the event of any dramatic declines in the equities component to ensure preservation of capital at maturity.

Did Jade have to bring up PPNs? Now she’s got my attention. I’ve never found a PPN that I liked, or any rational investment professional liked for that matter.

So I guess the 2.75% fee and 10 years without income and no protection against inflation and the 25-year lockup isn’t enough to protect the bank. They also have the ability to cripple my long-term return potential if it looks like there is any risk that their profitability will be compromised.

Darn, I thought they were on to something here. I guess Bob Hager was right when he always told me that nobody has come up with a magical new source of return. The performance of any portfolio, or investment product, ultimately comes down to how stocks and bonds do, minus the costs. Well, there certainly is lots of hocus pocus here, and some serious costs, but as Bob says, no magic.