Ten Tips on Working With A Portfolio Manager


Over the years, I have had many discussions with people about what is important to them.  Health is nearly always at the top of the list.  Connected to this is having time to enjoy an active and social lifestyle.

Life has become busy, and it is tough to squeeze in everything that you have to do, let alone have time left over for all the things you want to do. Sometimes it is simply a matter of making a choice. One of my favourite concepts I learned years ago in economics is ‘opportunity cost’. It can relate to time, money or experiences. We can’t get it back, borrow or save it. Time is sacred – especially family time and doing your own investing can take time and attention away from your family. So ask yourself – is doing your own investing worth the time you are spending on it?

One way to focus on the things you want to do is to delegate the day-to-day management of your finances to a portfolio manager who can help you manage your investments by creating what is called a ‘managed’ or ‘discretionary’ account. They are able to execute trades on your behalf without obtaining verbal permission, so when the market changes, they are able to act quickly and prudently.

Here are some tips for working with portfolio manager to improve your financial health:

Have a Plan

You are more likely to achieve the things you want if you set goals to paper. With fitness goals it would be things like running your first 10k race or lowering your blood pressure. Financial plans are the same – sit down with your portfolio manager and outline what you want to achieve with your estate, your investments and your retirement. Once a plan is in place, a periodic check-up takes a fraction of the time to ensure everything is on track.

Stay in Control

If you are worried about being out of touch with your investments, there are measures in place to keep you in the driver’s seat. One of the required documents for managed accounts is an Investment Policy Statement (IPS). This sets the parameters with your portfolio manager and provides some constraints/limits around their discretion. For example, you could outline in the IPS that you wish to always maintain a minimum of 40 per cent in fixed income. This lets you delegate on your terms, and ensures a disciplined approach to managing your portfolio. Technology has made it easier and faster for you and your portfolio manager to track your progress, review changes or update the program. Developing a written agenda that gets shared in advance of a meeting, whether in person or virtual, can create efficiencies and ensures nothing is missed. Whether it is email, Skype, or even text messaging – there are many ways for you to stay connected to your finances.

Think About Taxes and Legal Issues

Your finances often involve other professionals such as lawyers or accountants, so it is beneficial to get everyone connected early on. Work with your portfolio manager to complete a professional checklist that includes important names and a list of key documents. If your team can communicate directly with one another, it’s easier to map out planning recommendations and tax-efficient investment strategies. Your portfolio manager can also act as your authorized representative with the Canada Revenue Agency and can even make CRA installment payments on your behalf. Every summer, I am reviewing assessment notices, carry-forwards, contribution limits (i.e. TFSA and RRSP) and income levels to allow my clients to enjoy the outdoors and improve their quality of life

Put Family First

Having a complete picture helps a portfolio manager map out strategies to preserve your capital and to protect your family. If a life event occurs or your circumstances change – from new babies, to inheritances, to critical illness –  your portfolio manager can provide options and solutions. When the family member who manages the finances passes away suddenly, it can be very stressful for the surviving spouse or children during a time that is already emotionally draining. To help in this situation, many families create well thought-out plans that can involve working with their portfolio manager to make discretionary financial decisions in a time of transition. A Portfolio Manager can take care of your finances regardless of the curves that life throws them.

As a portfolio manager, I feel it is critical to be accessible and to keep clients well-informed with effective communication. What I am finding is that conversations are shifting to areas outside of investments, including the financial implications of health issues and changes within the family.

If you are looking for a way to simplify, reduce stress in your life, and proactively manage your finances, a portfolio manager might be a good way to improve your financial health.


Let’s make things perfectly clear


When hiring an accountant or lawyer, you’re billed after services are rendered. In the investment world, it’s not so transparent. With embedded costs, market-value changes, withdrawals and deposits, it hasn’t always been clear exactly what you’ve been charged.

The introduction of fee-based accounts and recent regulatory changes are making significant strides in providing better transparency to investors.

In the past, most types of accounts were transactional, wherein commissions are charged for each transaction. With fee-based accounts, however, advisers don’t receive commissions. Instead, they agree to a set fee schedule, usually charged on a quarterly basis. This fee is normally based on a portfolio’s market value and composition. Buy and sell recommendations are based on the client’s needs and goals. If an investor’s account increases in value, so do the fees paid; conversely, if an account declines in value, fees go down.

The recent increase in fee-based accounts correlates to the implementation of the second phase of the “Client Relationship Model” (CRM), a regulatory initiative passed by the Canadian Securities Administrators in March 2012. The CRM affects both the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada.

While the key objective of CRM1 was relationship disclosure and enhanced suitability, CRM2 is designed to increase transparency and disclosure on fees paid, services received, potential conflicts of interest and account performance. All of these mandatory disclosures are being phased in from 2014 to 2016.

Last July, CRM2 mandated pre-trade disclosure of all fees prior to an investor agreeing to buy or sell an investment. With transactional accounts, an adviser must disclose all of the fees a client is required to pay, such as commissions when buying or selling positions. Many investors have complained about hidden fees, especially in mutual funds. With CRM2, all of these fees now have to be disclosed prior to the transaction.

Certain types of transactions had no disclosure requirements in the past. For example, an adviser used to be able to purchase a bond and embed their commission in the cost of the bond on the trade confirmation slip. Now, fixed-income trades also require full disclosure. In other cases, even if there was disclosure in the legal sense of the word, understanding this disclosure required clients to read the fine print in lengthy prospectus documents.

With fee-based accounts, the client has a discussion about fees with their adviser up front, and an agreement with full disclosure is signed by investor and adviser.

Another reason for the popularity of the fee-based platform is that many advisers can offer both investment and planning-related services. Many advisers can offer detailed financial plans and access to experts in related areas, such as insurance, and will and estate planning.

In a traditional transactional account, where commissions are charged for every buy or sell, it has always been challenging for advisers to be compensated for additional services such as financial planning. Consequently, many transactional-based advisers would not offer these services to their clients.

Fee-based accounts also offer families one more opportunity for income splitting by setting up account-designated billing for their fees. The higher-income spouse can pay the fees for the lower-income spouse.

Another benefit of a fee-based structure for non-registered accounts is the ability to deduct investment counsel fees as carrying charges and interest expense. Anyone who has non-registered accounts would be well advised to read Canada Revenue Agency’s interpretation bulletin 238R2. Investment counsel fees cannot be deducted for registered accounts, but there is the benefit of paying the fees for registered accounts from a non-registered account.

Adviser-managed accounts have been the fastest-growing segment of the broad fee-based group. In this type of account, the adviser is licensed as a portfolio manager and able to use discretion to execute trades. In setting up the adviser-managed account, one of the criteria is that the account must be fee-based. Regulators have made it clear a portfolio manager is not permitted to use discretion when it comes to commissions or transaction charges. One of the starting points to setting up a managed account is to get a defined investment policy statement that sets out the relevant guidelines that will govern the management of the account.

Regulatory Change Helps Drive Popularity of Fee-Based Investment Accounts


The investment services industry is changing at a dramatic pace, with investors demanding more choice, more transparency, and more personalized advice. One of the fastest growing trends within the financial services sector is the use of fee-based accounts. While there are many reasons for the increasing popularity of these accounts among advisers and clients alike, recent regulatory changes have been a major catalyst.

Traditional vs fee-based account structures

In the past, the most common type of account structure has been a transactional one, wherein commissions are charged for each buy or sell transaction. With fee-based accounts, however, advisers do not receive commissions—instead, they agree to a set fee schedule, usually charged on a quarterly basis. This fee is normally based on the portfolio’s market value and composition. Buy and sell recommendations are based solely on the client’s strategic needs and goals. If an investor’s account increases in value, so do the fees paid to the adviser; conversely, if an investor’s account declines in value, so do the fees paid. With a fee-based structure, the adviser has a direct (and overt) incentive to ensure that the investor’s account increases in value.

Client relationship model initiative enters second phase

The recent increase in the use of fee-based accounts correlates to a large extent to the implementation of the second phase of the “Client Relationship Model” (CRM), a regulatory initiative passed by the Canadian Securities Administrators in March 2012 The CRM affects both the Mutual Fund Dealers Association and the Investment Industry Regulatory Organization of Canada.

While the key objective of CRM1 was relationship disclosure and enhanced suitability, the key objective of CRM2 is to increase transparency/disclosure for investors with regard to fees paid, services received, potential conflicts of interest, and account performance. All of these mandatory disclosures are being phased in from 2014 to 2016.

In July 2014, CRM2 mandated pre-trade disclosure of all fees prior to an investor agreeing to buy or sell an investment. With a traditional transactional account, an adviser must disclose all of the fees a client is required to pay, such as any commissions for transactional accounts when buying or selling positions. However, many investors have complained about “hidden” and unexpected fees, especially with respect to mutual funds. With CRM2, all of these fees now have to be fully disclosed prior to the transaction.

This move to greater transparency is a major shift from certain types of transactions that had no disclosure requirements in the past. For example, an adviser used to be able to purchase a bond and embed their commission in the cost of the bond on the trade confirmation slip. Now, fixed income trades also require full disclosure. In other cases, even if there was disclosure in the legal sense of the word, understanding this disclosure required clients to read the fine print in lengthy prospectus documents. Similar CRM2-type regulations for full disclosure were implemented in Australia and the UK in 2013, requiring transparency regarding all fees. Not surprisingly, this resulted in a significant reduction in the number of financial advisers working in the industry in both countries. It’s possible that we could also see a reduction in the number of advisers here, once the new rules are fully implemented in Canada.

Fee-based accounts are already onside of the new rules, as transparency is embedded in their structure: The client has a discussion about fees with their adviser up front, and a fee-account agreement with full disclosure is then signed by both the investor and the adviser. 


Another reason for the growth in popularity of the fee-based platform is the fact that many advisers now offer a comprehensive wealth offering, which includes both investment and planning-related services. This differs from the role of the stock broker of the past.

Clients have a variety of financial planning needs, primarily with regard to retirement and estate planning. Many advisers can offer detailed financial plans and provide access to experts in related areas, such as insurance, and will and estate planning. An adviser will often communicate with the client’s accountant and lawyer to ensure everyone is on the same page.

In a traditional transactional account where commissions are charged for every buy or sell, it has always been challenging for advisers to be compensated for additional services such as financial planning. Consequently, many transactional-based advisers simply would not offer these services to their clients.

Some unique benefits

Certain benefits are unique to fee-based accounts.

Rebalancing without additional cost

For example, this structure enables wealth advisers to rebalance portfolios as needed to reduce risk at no additional cost. Multiple types of rebalancing are important when managing risk. At the macro level, let’s assume a client’s optimal asset mix is 60% in equities and 40% in bonds. After a period of strong equity markets, the client’s equity percentage rises to 68%. Reducing equities by 8% and allocating this to fixed income is rebalancing at the macro level. At the micro level, there is an optimal position size for one holding. In this example, let’s assume the optimal position size is $24,000 for each company held in the portfolio. If one stock rises significantly above or below the optimal position size, then consideration for a rebalancing trade should occur.

Several trades could be required on an annual basis to rebalance a portfolio. With transactional accounts, the commissions for doing multiple small adjustments would likely be prohibitive. However, not doing the trades because of the commission payable in a transactional account means that you’re not managing risk as effectively.

The adviser’s ability to make tactical shifts in an account is another benefit of fee-based accounts. For example, there are times when investors benefit from moving in or out of USD-denominated holdings. Being able to make these changes when the currency is right should be done without concern for the trade’s commission cost. Being able to move between sectors based on current outlook can also be strategic, especially when transaction charges are not a factor (if a transaction charge is 2% to sell and 2% to buy, then the cost of any switch trade has to increase by 4% to break even).

Income splitting and “householding”

Fee-based accounts also offer couples and families one more opportunity for income splitting by setting up account-designated billing for their fees. For example, the higher income spouse can pay the fees for the lower income spouse. Let’s assume the lower income spouse has an RRSP and a TFSA. The higher income spouse can put funds into the lower income spouse’s account as a contribution of fees without attribution. In another example, a client with multiple fee-based investment accounts (i.e. one non-registered and five registered) can arrange to have all of the fees paid out of the non-registered account.

“Householding” is a term used in fee-based accounts to link accounts together for fee-billing purposes. As the total of the householded assets increases, the percentage fee for the adviser’s services decreases. Let’s say we have a middle-aged couple with $400,000 in investments. The couple has parents with $680,000 in investments, over which the couple has power of attorney. The couple also has a corporate account totalling $120,000 in investments. By householding, or combining all accounts under one agreement, the household value becomes $1,200,000, which results in lower overall fees for everyone.

Deducting investment council fees

Another benefit of a fee-based structure for non-registered accounts is the ability to deduct investment council fees as “carrying charges and interest expense.” Many investors are still not aware of these tax benefits. Anyone who has non-registered accounts would be well advised to read the Canada Revenue Agency’s (CRA) interpretation bulletin on this topic (IT-238R2). The investment council fees cannot be deducted for registered accounts, but there is the benefit of paying the fees for registered accounts from a non-registered account, especially for younger clients where registered accounts are deferred for many years.

Adviser-managed accounts

Over the last several years, adviser-managed accounts have been the fastest growing segment of the broad fee-based group. In this type of account, the adviser is licensed as a portfolio manager and able to use his or her discretion to execute trades.

In setting up the adviser-managed account, one of the criteria is that the account must be fee-based. The regulators have made it clear that a portfolio manager is not permitted to use discretion when it comes to commissions or transaction charges. One of the starting points to setting up a managed account is to get a clearly defined investment policy statement that sets out the relevant guidelines that will govern the management of the account. At this same time, a fee-based agreement is signed that clearly outlines the negotiated fee structure.

Shifting to a new model

As the financial services industry continues to change and evolve, so do the solutions being offered. There is now more flexibility and choice in how a wealth adviser and an investor can work together.

High-net-worth clients are looking for advisers who have the credentials and licensing to offer discretionary portfolio management. Within that context, there is also an expectation that financial planning and other related services will be part of the overall fee-based structure. The traditional model of solely doing stock trades for trading commissions is becoming an increasingly difficult business model to sustain.

Kevin Greenard is a portfolio manager and associate director of wealth management with ScotiaMcLeod, a division of Scotia Capital Inc. and ScotiaMcLeod Financial Services Inc.

Behind the scenes with trade execution

If we define every transaction in an account as a trade then we can start a conversation about the basics of trade execution.

Some people may believe that trading is executed through a primary stock market. If we keep this article specific about Canada, the primary exchanges are Toronto Stock Exchange and the TSX Venture Exchange (for small and medium sized companies). Both of these exchanges have trading hours between 9:30 am and 4:00 pm eastern time, Monday to Friday, with the exception of certain holidays. In British Columbia, this means the primary exchanges close at 1:00 pm.

Over the last decade new marketplaces have emerged in Canada, these have been referred to as Alternative Trading Systems (or ATS). These systems at first grew in popularity because brokers were able to avoid paying the exchange trading fee. Also, an ATS may have different hours of operations than the primary exchanges. The Investment Industry Regulatory Organization of Canada (IIROC) regulates the above noted primary exchanges and the following ATSs: Canadian Securities Exchange, Alpha Exchange, Bloomberg Tradebook, Chi-X Canada, CX2 Canada ATS, Instinet Canada Cross Limited, Liquidnet Canada Inc., Lynx ATS, MATCH Now, Omega ATS, and TMX Select.

When an advisor enters an order it may be executed on the primary exchanges, an ATS, or a combination of both. The main factors effecting where the trade is ultimately filled is best available price, historical liquidity, and likelihood of execution. If a Canadian trade is executed on just one exchange then your confirmation slip would have a message something like “AS AGENTS, WE TODAY CONFIRM THE FOLLOWING BUY/SALE FOR YOUR ACCOUNT ON THE TORONTO STOCK EXCHANGE/CANADIAN VENTURE EXCHANGE/ALPHA/OMEGA/ etc.” If the Canadian security transaction was executed by a combination of exchanges/ATS then the message on the confirmation slip would reflect this by stating something like “AS AGENTS, WE TODAY CONFIRM THE FOLLOWING BUY/SALE FOR YOUR ACCOUNT ON ONE OR MORE MARKETPLACES OR MARKETS. AVERAGE PRICE SHOWN. DETAILS AVAILABLE UPON REQUEST“.

For example, a client wants to sell 2,500 of ABC Company at market after watching BNN and seeing the the price per share at $15.59. If all the shares were sold and executed at this price, the proceeds would be $38,975. The actual value once we enter the order is almost always different. The reason for this is both depth of quote and dark liquidity.

Depth of quote is when we can see the quantity of shares available and the current bid and ask at each price level. Prior to the above trade execution I outlined the depth of quote with my client (see table below). Advisors assisting retail clients typically have what is called Level II quotes where they can see both bid and ask at different price levels – I refer to this transparent part of the market as the “lit” system. Using the above example of a client wanting to sell 2,500 shares of ABC Company at market, the beginning few lines of the bid side of a depth of quote/level II would provide the following information:

Depth of Quote/Level II

Orders          Size           Bid

14                       700            $15.57

22                     1,600           $15.54

  9                     4,200           $15.50

  3                      9,000           $15.40

15                    10,000           $15.37

Orders represent the number of limit orders entered on the lit system. It is possible for the same client to enter multiple limit orders. Size is the number of shares available at the bid price on the lit system.

Using the above Level II table, 700 shares would be sold (also referred to as filled) at $15.57, 1,600 filled at $15.54, and 200 filled at $15.50. An Advisor could communicate to the client what is visible on the lit system and that the total estimated proceeds would equal $38,863. It is possible that once the sell button is pressed that the actual trade is executed at a higher price as a result of dark liquidity (also referred to as dark pools).

Dark liquidity is a term that relates to traders being able to enter orders without providing the above transparency to other market participants. Effectively, the trades are not transparent or lit; thus the term dark pool came about because the orders can not be seen. Retail clients and advisors typically do not have direct access to entering trades with dark liquidity. Most financial firms have traders that assist Portfolio Managers, Wealth Advisors and institutional clients with larger trades.

Traders can use dark pools on both the primary exchanges and ATS. Dark pool trades in Canada are nearly all limit orders, and are typically done for institutions executing large trades. Using the above table, if an advisor entered an order to sell 100,000 shares at market, the price would immediately get driven down to as low as $15.00 (assuming no dark pool orders to buy). The benefit of dark liquidity for institutions is that they do not have to “show their cards” before they are played. In other words, an institution may want to sell 100,000 shares of ABC Company with a limit price of $15.57. A trader could work the order with acquiring smaller fills without creating big swings in the price of the security. The trader could enter a limit order putting 20,000 shares on the lit system so it shows on level II, enter 50,000 in a dark pool at the same price so it is not displayed, and hold off entering the remaining 30,000 in order to continue to work the order.

Wealth Advisors must verbally confirm each trade with clients and then execute the trade right after they obtain confirmation. With frequent small trades at different points in time, dark pool trades are not generally used in Canada at the retail level. In the US, dark pools are much more common, even for smaller sized trades. Some individual clients may have large holdings in a particular security and the traders are available to assist. Portfolio Managers on the other hand often execute large block trades (combining all the shares for all clients) on a discretionary basis. Once a quantity of shares to buy or sell is determined the Portfolio Manager is often in direct communication with the traders.  Together they can choose to use dark pools, or not.

Dark liquidity is still relatively small in Canada when compared to the United States. Earlier this year, the US Securities and Exchange Commission noted that around 40 per cent of all U.S. stock trades avoid the exchanges. The increase in dark pool transactions make it more challenging to determine the true liquidity and price transparency of a security. Market makers assist in the lit market but are non-existent in the dark pool. The Canadian Securities Administrator and IIROC have already implemented a few rules with respect to dark liquidity and I would suspect that further rules will be unveiled in the future.


Kevin Greenard CA FMA CFP CIM is a Portfolio Manager with The Greenard Group at ScotiaMcLeod in Victoria. His column appears every second week in the TC. Call 250-389-2138.


On having enough financial resources through retirement

Balancing living for today and not running out of money in retirement is perhaps the greatest financial challenge most people face.  Even financially well-off people wonder if they have enough for retirement.

In past decades, people with limited resources have received assistance through government funded programs, including subsidized residential care and extended care.  There is a general concern about how the government will be able to continue funding assistance programs for seniors and whether they will be able to offer the same level of assistance in the future.  This is a real concern given the rising costs of these programs, especially given increasing number of seniors as the population ages.

A baby born today in British Columbia has a life expectancy of 81.7 years according to Statistics Canada.  If you’re 65 years old this year, StatsCan suggests that your life expectancy is 85.7 years.  Both of these life expectancy numbers are at the highest levels they have ever been.  Although recent studies have suggested that babies born today may actually have a shorter life expectancy than their parents as a result of health issues such as increased obesity and diabetes.    

With financial planning, assumptions are made with respect to rates of return, inflation, income tax and life expectancy.  The younger a person is, the more challenging it is to project these assumptions.  Rates of returns have fluctuated significantly for both fixed income and equity markets over the years.  Federal and provincial governments can make future modification to various programs such as benefit payments, income taxes or credits that will have a direct impact on your retirement income.   One of the assumptions to consider in retirement financial planning is your life expectancy.  The chart below shows the required savings for different life expectancies and demonstrates how your life expectancy can make a material difference.

In all scenarios, the assumptions are identical where the rate of return is four per cent, inflation is two per cent, and income tax is at 30 per cent.   For illustration purposes, we will assume an individual requires $50,000 annually after tax.  The following table gives you a financial view of the capital required in a RRIF account at age 65 with the following different life expectancies:

Life Expectancy           Savings Required @ Age 65

            75                                $522,439

            80                                 $745,470

            85                                 $959,956

            90                                  $1,166,227

            95                                  $1,364,592

            100                                $1,555,361

Another variable is the type of accounts in which investors have saved funds.  If you have funds in a non-registered account or a Tax Free Savings Account then the numbers are lower than the table above.  Having a combination of accounts (non-registered, TFSA, and RRIF) at retirement provides you the benefit of smoothing taxable income and cash flows.

Building up sufficient financial resources before you retire takes away the reliance on government funded programs and the concern of running out of money.  Financial security is achieved when you have enough resources to dictate the quality of care you receive as you grow older.  Often at times in financial plans we factor in the assumption that the principal residence could be sold to fund assisted living arrangements.  I’ve never prepared a financial plan with the assumption that the government will be paying for a client’s long term care. 

I also advise my clients to understand the issue of incapacity and how to manage this should it arise.  When planning for the most likely outcome, many people will become incapacitated (mentally or physically) for a period of time before they die.   In some cases the period of incapacity can extend for a significant length of time.

I encourage clients to take appropriate steps to deal with the financial cost of incapacity and think about how their finances would be managed if they became incapacitated. 

While they are still able, clients should ensure all legal documents (will, power of attorney, representation agreement) are up to date.  Part of this process involves reviewing the beneficiaries on all accounts to ensure consistency with your estate plan. Simplify finances by closing extra bank accounts and consolidating investment accounts.  All government benefits such as OAS and CPP as well as pensions (RRIF and RPP) should be deposited into one account, which makes it easier to budget for excess or short-falls.  Most expense payments should be automated. 

If you lose capacity or interest, it is easier for your power of attorney to review one bank statement for transactions.  In many cases, a meeting with a client and the client’s legal power of attorney is necessary to set up a “financial” power of attorney.  This power of attorney allows a person the ability to request funds to be transferred from your investment account to your bank account, if funds are running low.  Clients can set up managed accounts where a portfolio manager can act on your behalf on a discretionary basis.  Financial mail can also be sent to the power of attorney.  When bank and investment accounts are consolidated, your power of attorney can easily review and monitor the accounts through monthly statements or online access.


Kevin Greenard, CA FMA CFP CIM, is an Associate Portfolio Manager and Associate Director with The Greenard Group at ScotiaMcLeod in Victoria.  His column appears every second week in the Times Colonist.  Call 250-389-2138 or visit greenardgroup.com



Portfolio manager can act for clients more quickly than traditional adviser

Over the years, I have had great discussions with people about financial decision-making. It is tough for most people to make decisions on something they don’t feel informed about. 

Even when you are informed, investment decisions can be challenging.

When you work with a financial advisor, you have another person to discuss your options with. In the traditional approach, an advisor will present you with some investment recommendations or options.  You still have to make a decision with respect to either confirming the recommendation and saying “yes” or “no,” or choosing among the options presented. As an example, an advisor may give you low-, medium-, and high-risk options for new purchases. An advisor should provide recommendations that are suitable to your investment objectives and risk tolerance.

Another option for clients have is to have a managed account, sometimes referred to as a discretionary account.  With this type of account, clients do not have to make decisions. The challenge is that very few financial advisors have the appropriate licence to even offer this option.   To offer it, advisors need to have have either the Associate Portfolio Manager or Portfolio Manager title.

When setting up the managed accounts, one of the required documents is an Investment Policy Statement (IPS). The IPS outlines the parameters in which the Portfolio Manager can use his or her discretion. As an example, you could have in the IPS that you wish to have a minimum of 40 per cent in fixed income, such as bonds and GICs.

Portfolio Managers are held to a higher duty of care, often referred to as a fiduciary responsibility. Portfolio Managers have to spend a significant time to obtain an understanding of your specific needs and risk tolerance. These discussions should be consistent with how the IPS is set up. Any time you have a material change in your circumstances then the IPS should be updated. At least every two years, if not more frequently, the IPS should be reviewed.

The nice part of having a managed account with an up to date IPS is that your advisor is able to make the decisions on your behalf. You can be free to work hard and earn income without having to commit time to researching investments. You can spend time travelling and doing the activities you enjoy. Many of my clients are intelligent people who are fully capable of doing the investments themselves but see the value in paying a small fee. The fee is tax deductible for non-registered accounts and all administrative matters for taxation, etc. are taken care of. A good advisor adds significantly more value than the fees they charge. This is especially true if you value your time.

Many aging couples have one additional factor to consider. In many cases one person has made all the financial decisions for the household. If that person passes away first, it is often a very stressful burden that you are passing onto the surviving spouse. I’ve had couples come in to meet me primarily as a contingency plan. The one spouse that is independently handling the finances should provide the surviving spouse some direction of who to go see in the event of incapacity or death. In my opinion, the contingency plan should involve a portfolio manager that can use his or her discretion to make financial decisions.

In years past it was easier to deal with aging clients. Clients could simply put funds entirely in bonds and GICs and obtain a sufficient income flow. With near historic low interest rates, this income flow has largely dried up for seniors. When investors talk about income today, higher income options exist with many blue chip equities. Of course, dividend income is more tax efficient than interest income as well. A portfolio manager can add significant value for clients that are aging and require investments outside of GICs.

Try picturing a traditional financial advisor with a few hundred clients. A traditional financial advisor has to phone and verbally confirm each trade before it can be entered. The markets in British Columbia open at 6:30 AM and close at 1:00 PM. An advisor books meetings with clients often weeks in advance. On Tuesday morning an advisor wakes up and some bad news comes out about a stock that all your clients own. That same advisor has 5 meetings in the morning and has only a few small openings to make calls that day. It can take days for an advisor to phone all clients assuming they are all home and answer the phone and have time to talk.

A Portfolio Manager who can use his or her discretion can make one block trade (the sum of all of his clients’ shares in a company) and exit the position in seconds.

Sometimes making quick decisions in the financial markets to take advantage of opportunities is necessary. Hands down, a Portfolio Manager can react quicker than a traditional advisor who has to confirm each trade verbally with each client.

Fee-based accounts benefit investors in the long run

A fee-based account is a tranparent way of paying your financial advisor.  The fee is charged based on the market value of the assets being managed, and it is distinctly different than a transactional account, where commissions are charged for every buy-and-sell transaction. 

When clients open up a fee-based account, they sign a fee-based agreement that establishes the agreed upon fee, how the fees are calculated, when the fees will be charged and the accounts involved.   

There are a number of benefits for clients in moving to a fee-based account. 

Working on a “fee for service” basis, rather than a commission or transactional fee basis, means the best interests of the client are more aligned with those of the advisor. If fees are based on the market value of the account, then the only way an advisor will be compensated further is if they can grow your account in value.  If your account declines in value, then so does the compensation paid to your advisor.  

Another benefit of a fee-based account is the additional services clients receive from their financial advisor.  Financial professionals today are rarely called stock brokers because the services offered extend well beyond buying and selling stocks. Financial planning meetings cover many topics such as tax and insurance as well as education, retirement and estate planning. 

Financial professionals today spend a significant amount of time understanding each client’s needs and integrating this into an increasingly complex tax and regulatory environment. 

As a result, the amount billed for fee-based accounts is referred to as an “investment council fee” for income tax purposes.  The main benefit is the fees relating to non-registered accounts can be deducted on your income tax return as a carrying charge.  If your fee is one per cent before tax, and your marginal income tax bracket is 30 per cent, your fees have a net cost to you of only 0.70 per cent.   

Fees are typically charged quarterly. As an example, Jane Wilson opened a new fee-based account and invested $750,000 on Jan. 1 with an annual fee of one per cent.  She will have no fees charged for three months. Around the middle of April, the first quarterly fees would be charged at $1,875 ($750,000 x 0.25 per cent).  Wilson’s fees are one-quarter of one percent after each quarterly period. 

Other methods of compensating that are not fee-based often have commission charges upward as high as five percent on the first day of buying the investments. For an advisor to be successful with a fee-based business, he or she needs to establish good long term relationships. 

The periodic payment of fees better aligns the interests of clients and financial professionals.  When explained to clients, most would prefer to spread out the fees over time as services are provided versus paying a large amount on the first day.  

One question we are asked is how the quarterly fees are actually paid.  To illustrate we will use Don Spalding, who has three investment accounts totaling $750,000 – $500,000 in a non-registered account, $200,000 in his RRSP account, and the remaining $50,000 is in a Tax Free Savings Account. 

There are a few different options for how Spalding can cover the quarterly fees. 

The first option is to have the fees charged to each of the respective accounts.  Wilson had only one account and the fee of $1,875 was simply charged to that one account.  Mr. Spalding has three accounts and each account is charged the respective amount based on one-quarter of one percent of the market value of each account. 

The first quarterly amount for Spalding is $1,250 for the non-registered account, $500 for the RRSP, and $125 for the TFSA.  He has the option of keeping cash in each account to cover the fees, depositing cash quarterly or selling investments. 

With fee-based accounts, Spalding has the option to instruct us to designate the billing of the fees to come out of one account.  Don could instruct us to pay the fees for his RRSP and TFSA accounts from the non-registered account.  This enables him to maximize the amount he maintains in his registered accounts keeping it tax sheltered. 

The payment of fees from a designated account enables an advisor to fully invest the non-designated accounts and to utilize compounding growth strategies such as the dividend reinvestment plan.  Fee-based accounts can assist with income splitting as the higher income spouse can pay the account fees of the lower income spouse.

Liquidity is another benefit of fee-based accounts.  As there is no cost to buy investments, the same applies to changing or selling investments.  If you require money for any reason, there is no commissions payable for selling or rebalancing your investments.  Rebalancing can include reducing a position that has performed well, dollar cost averaging on a position that has underperformed, adjusting sector exposure, modifying asset mix, and changing the geography of your investments. 

Another benefit of fee-based is the ability to link additional family members to the platform.  Clients with children and grandchildren often would like introduce them to the benefits of full service brokerage, but do not individually have the capital to be able to open accounts on their own.  This could include parents wishing to assist adult children in opening and funding Tax Free Savings Accounts and grandparents who wish to open Registered Education Savings Plans for their grandchildren.  Fee-based accounts that are linked can make wealth transfer strategies within the family group of accounts significantly easier.

Models underscore risks and rewards

A model portfolio is a basket of holdings – cash, fixed income and equities – an advisor combines to achieve an investment objective or risk tolerance level.

Not every adviser uses a model portfolio approach.

The ones that do will often have more than one model portfolio to reflect the appropriate investment objectives and risk tolerance of each person. Objectives are usually classified as income, long-term growth, and short-term growth. Risk tolerance may be as simple as low, medium and high. Investment objectives and risk tolerance help establish which model portfolio is most suitable.

Our model portfolio approach includes three different broad options – income, income and growth, and growth. The best way to illustrate this is to use the situations of three individuals. John, Wendy and Alex each have $500,000 to invest and fall into a different model portfolio. The chart below summarizes the asset mix and number of equity holdings within each model.



  • John was referred by his accountant. He is 60, recently retired and withdrew the commuted value from his pension plan, valued at $500,000. In listening to John’s investment objectives and risk tolerance, it was clear the income model portfolio was the most appropriate for his needs. He did not have a lot of experience with investing and was nervous about investing too much in the stock market. He also wanted to immediately withdraw a monthly amount from the account to live on. The income model portfolio would have an optimal asset mix of 60 per cent fixed income and 40 per cent equities. The fixed income would have a larger short-term component to meet his cash flow needs. Within the equity portion, the number of individual companies John would acquire is 20 and the targeted position size is $10,000 per company. These 20 equities would all be large blue-chip equities, diversified by sector, and that pay dividend income. We were able to give John an estimated income report for the income model portfolio along with a discussion regarding risk and reward.
  • Wendy recently received an insurance payout of $500,000 from an accident she was in three years ago. She is 50 and planning to work for the next 10 to 15 years. It was apparent the income and growth portfolio was most suitable. Given that Wendy was moderately comfortable with assuming risk, her portfolio would have 40 per cent in fixed income and 60 per cent in equities. The number of individual companies Wendy would own is 25 and the targeted position size is $12,000 per company. These would be large companies that have both growth and income components. Wendy did not require immediate income, so we set up the dividend reinvestment plan on the equities she will be holding longer term.
  • Alex sold his shares in a private technology company and netted $500,000 after tax. He’s 40 and looking for tax-efficient growth and is comfortable assuming more risk to achieve greater long-term rewards. The growth portfolio is the most suitable for Alex and has only 20 per cent in fixed income and 80 per cent in equities. The number of individual companies Alex would own is 30 and the targeted position size is $13,333 per company.

Model portfolios help new clients understand the total investment costs, income, sector weighting, and structure like the number of holdings and position size.

Without these models it can be difficult for people new investors to visualize how their money can work best for them. The ranges shown above are important as it allows customization for each client.

If an investor wishes to invest in something that is not within the model portfolio, it is still be possible. We establish ranges outside of the optimal position size. For example, if a person transfers in a large position from an employer they may purposely want to overweight that name and have a greater position size than the optimal amount.

Another example is a person who has large gains on some stocks and wishes to continue overweighting them.

Some investors may wish to purchase investments that are not within a model portfolio. The ranges above usually provide flexibility to do this. A person may phone us for an unsolicited trade to purchase small companies or emerging markets which may not be part of any model. Or a person who chooses to overweight a particular sector which can also increase the risk of a portfolio.
Models help set the parameters for the portfolio within reasonable ranges while still allowing customization for each client. It assists an advisor in establishing a methodology to manage and explain risk and reward. By comparing all three models, new clients can work with advisors to select the portfolio that they feel best reflects their wishes.

Weighing the benefits of managed accounts

A managed account is a broad term that has been used in the financial services industry to describe a certain type of investment account where the portfolio manager has the discretion to make changes to your portfolio without verbal confirmation.

There are different names and types of managed accounts which may be confusing for investors when looking at options between financial firms.

To assist you in understanding the basics of managed accounts we will divide the broad category into two subcategories: individual managed accounts and group managed accounts.

Both individually managed and group managed are fee-based type accounts, as opposed to transactional accounts where commissions are charged on activity. Individually managed accounts must be fee-based and generally have a minimum asset balance of $250,000.

Before we get into the differences between individual and group accounts we should also note that strict regulatory and education requirements are necessary for individuals in the financial service industry to be able to offer managed accounts. The designation “Portfolio Manager” is typically awarded to individuals who are able to open managed accounts. Financial firms may also stipulate certain criteria prior to allowing their employees to provide discretionary advice or portfolio management services. Examples of additional criteria that may be required by financial institutions include a clean compliance record, minimum amount of assets being managed, good character, and significant experience in the industry.

For purposes of this article, the term “Advisor” is different from “Portfolio Manager.” A portfolio manager may have the ability to offer individually managed accounts on a discretionary basis, whereas an advisor does not. An advisor must obtain verbal authorization for each trade that they are recommending. A client must provide approval by signing the appropriate forms in order for the portfolio manager to manage their accounts on a discretionary basis.

Above we noted the two broad types of managed accounts – individual and group. A portfolio manager is able to offer both individual and group accounts on a discretionary basis. The individual account is a customized portfolio where the portfolio manager is selecting the investments. Although an advisor is not able to offer individually managed accounts, they can offer group managed accounts through a third party. A simple example of this is a mutual fund which is run by a portfolio manager. A more complex example of this is the various wrap or customised managed accounts offered by third party managers. An advisor can recommend to their clients a third party group managed account.

The role of an advisor in a group managed account option is to pick the best third party manager and to assist you with your asset allocation. When looking at this option you must weigh the associated costs over other alternatives. The group managed account has set fees. With individually managed accounts the portfolio manager has the ability to both customize the portfolio and the fee structure.

Trust is an essential component that must exist in your relationship to grant a portfolio manager the discretion to manage your accounts.  Prior to any trades, the portfolio manager and investor create an Investment Policy Statement (IPS) to set the trade parameters for the investments. The IPS establishes an optimal asset mix and ranges to ensure that cash, fixed income, and equities are suitable for the investors risk tolerance and investment objectives.

Quicker Reaction Time: Having a managed account allows the portfolio manager to react quickly to market changes. If there is positive or negative news regarding a company then the portfolio manager can move clients in or out of a stock without having to contact each client individually. With markets being volatile this can help with reaction time. For an advisor to execute the movement in or out of a stock, it would involve contacting each client and obtaining verbal confirmation.

Strategic Adjustments: If a portfolio manager has numerous clients and would like to raise five per cent cash, this can be done very quickly with an individually managed account. It is more difficult for an advisor to do this quickly as verbal phone confirmation is required for each account in order to raise cash. Even with a group managed account, the advisor would have to contact each client to change the asset mix weighting.

Rebalancing Holdings: With managed accounts, clients have unlimited trades. This is important as it allows a portfolio manager to increase or decrease a holding without being concerned about going over a certain trade count. As an example, we will use a stock that has increased by 30 per cent since the original purchase date. Trimming the position by selling 30 per cent is easy for a portfolio manager as a single block trade can be done. This block trade is then allocated to each household at the same price. If an advisor wanted to do this same transaction, it would likely take a couple of days and over this period each client would have a different share price depending when the verbal confirmation was obtained.

Extended Holidays: If you are travelling around the world or going on a two month cruise then you probably want someone keeping an active eye on your investments. An advisor is not able to make changes without first verbally confirming the details of those trades with you. A portfolio manager is able to make adjustments within the IPS parameters, provided you have a managed account set up before your departure.

Not Accessible: If you work in a remote area (i.e. mining or oil and gas industry) then chances are you may be out of cell phone reach from time to time. In other situations your profession does not easily allow you to answer phone calls (i.e. a surgeon in an operating room). In other cases, a lack of interest may result in you not wishing to be involved. A managed account may be the right option for clients that are frequently difficult to reach to ensure opportunities are not missed – in these situations the portfolio manager can proactively react to changing market conditions.

If you completely trust your advisor and agree with the trades recommended in the past then a managed account may be right for you. Managed accounts greatly simplify the investing process for both you and the portfolio manager.

Many factors come into the calculation equation when determining when to convert your Registered Retirements “Savings” Account (RRSP) into a Registered Retirement “Income” Account.  An RRSP is used as a way for many Canadians to save for retirement and is essential for individuals without an incorporated business or a registered pension plan.

After all the years of saving, many people are still somewhat uncertain of when to begin drawing the savings out as regular income through a RRIF account.  Maximum deferral to age 72 can result in a shock in the rise in taxable income once RRIF minimum withdrawals begins.

To illustrate we will use Martin Hitchon, who turned 71 this year and is required to convert his RRSP account to a RRIF account before December 31 but is not required to take a payment in the first year.  Martin currently has $500,000 in his RRSP that will be rolled into his RRIF account.  Next year Martin is required to withdraw 7.48 per cent of the value of his account on December 31 of the year he turned 71.  The required annual minimum payment is stated as a percentage of the previous year end value.  These percentages increase slightly until age 94 where the maximum rate of 20 per cent is reached.  Assuming Martin’s portfolio is at $500,000 at the end of the year, he will have a minimum payment equal to $37,400 that will be considered taxable.

The perfect RRSP strategy is to contribute in high income and upper tax bracket years, and to pull funds out when you’re in a lower tax bracket.  The sudden increase in income with RRIF minimums left until age 72 may result in many people being in a higher tax bracket.  Many people may be wondering if waiting until age 72 is the best decision, especially knowing that this income will be on top of CPP, OAS, and other income.   The purpose of a financial plan when you’re younger is to map out the required savings to reach your shorter term goals and projected retirement needs.  The plan may also include a protection strategy for your family.  As you approach retirement the focus often shifts to understanding where cash flows will come from and which pools of capital you should access first.

Our clients who have taxable income over $125,000 annually are typically advised to wait until age 71 to convert and to take the first payment at the end of the year in which they turn 72.  In setting up the RRIF for high income couples we elect to use the younger spouses age to obtain maximum deferral.   Once clients are in the top marginal tax bracket (43.7 per cent in BC) the best strategy is to defer the tax liability by continuing to tax shelter within the registered account.

When income is expected to be below $125,000 then the decision on whether to convert your RRSP early to a RRIF is not straight forward.  Once you convert to a RRIF you are then obligated to begin taking income out for all future years.  It is possible to convert from a RRIF back to an RRSP prior to age 71 if your circumstances change.  The following are the key items to discuss when we are talking with clients:

Watching Thresholds – The Guaranteed Income Supplement (GIS) and the allowances are not based on net worth.  Many high net worth individuals have equity in real estate, corporations, and trusts that result in personal net income being low.  The GIS and the allowance stop being paid at $39,600 and $30,576, respectively.  Pulling funds out of an RRIF early could result in you losing these benefits.  Pensioners with an individual net income above $69,562 will have a portion of their Old Age Security payments clawed back if RRIF income is taken early.  The full OAS pension will have to be repaid if net income is $112,966 or above.   Projecting your income in the future will help in mapping out a strategy factoring in these thresholds.

Ratio of Non-Registered to Registered – Ideally as you enter retirement you have savings in both non-registered and registered accounts.  The non-registered savings are already after tax dollars and can be accessed with less tax consequences then registered funds.  This is especially important as you factor in potential lump sum needs in the future (i.e. new car, roof repair).  The greater the funds you already have in non-registered funds the easier it is to manage emergencies and to smooth out your income during retirement while at the same time fulfilling your cash flow needs.  If you have limited non-registered funds then earlier withdrawals may make sense.

Liquid Assets – High net worth is often locked up in real estate or assets that are not easily converted into cash.  Often at times the number one deciding factor in whether to pull funds out of a RRIF early is a result of cash flow needs and access to liquid funds.

Tax Free Savings Account (TFSA) – People without TFSA or non-registered accounts should consider pulling $5,000 out of their registered accounts annually to fund the Tax Free Savings Account.  Growth in a TFSA can be tax sheltered while at the same time building up a reserve of funds for you to access if an emergency arises.

Pension Income Amount – Beginning at age 65, investors without any other qualifying pension income are able to effectively withdrawal $2,000 annually from their RRIF account tax free.  This is because the income would be offset by what is referred to as the pension income amount.  Couples can withdrawal $4,000 annually with no taxes.

Pension Splitting – With the introduction of pension splitting the strategy for many couples has changed.  Up to fifty per cent of eligible pension income can be shifted from the high income spouse to the lower income spouse.  RRIF withdrawals beginning at age 65 qualifies as eligible pension income.

Couples – RRIF accounts are 100 per cent taxable upon death.   Nearly half of a RRIF balance of a single individual could go to taxes.   Couples have significant less risk of paying a large tax bill as they have the ability to elect a tax free roll-over a RRIF to the surviving spouse provided their spouse is named as a beneficiary.  This becomes trickier with second/third marriages with children from previous relationships/marriages.  The tax on the RRIF would be deferred when a spouse is named until the second passing and would likely be depleted slowly over time at more favourable marginal tax rates.

Other Estate Factors – Various other estate factors can result in different strategies for your RRIF account.  Some people may leave a RRIF account to a charity which would offset the large tax liability.   Insurance (i.e. joint last to die) is often a useful tool to cover the tax liability for a RRIF’s deemed disposition upon death.  Understanding your own health and family genetics is a factor that should be considered in the timing of when to withdrawal funds from your RRIF.