Consolidation to single advisor has its benefits

It’s getting complicated these days to keep track of the various types of accounts and staying on top of limits for Tax Free Savings Accounts, Registered Retirement Savings Plans (RRSP) and other investments.

There are harsh penalties exist for those people who exceed maximum thresholds.  If you have more than one TFSA as an example, it is important that you tell the advisor at each institution you deal with what you have contributed.

Why do some people have their investments at multiple financial companies?  Was it the closest financial institution to make that last minute RRSP contribution?  Was it an inheritance that just seemed easier to keep at the same place?  Maybe it was a short-term advertised special on a TFSA that brought them into another institution.  It could be that you bought a proprietary product that could not be transferred after you purchased it.  There are many disadvantages for people not developing one good relationship with a financial advisor.

The following are a few benefits of consolidating your investments with one advisor:

Asset Mix

The most important component of investment performance is asset mix.  Consolidation can help you manage your asset mix and ensure that you have not duplicated your holdings and are therefore, not overexposed in one sector.   Unless your financial advisors have been given a copy of all of your investment portfolios, it will be difficult for them to get a clear picture of your total holdings.  Even if you were able to periodically provide a summary of each account to each advisor, as transactions occur you would still need to update every advisor with those changes.

Technology

Most firms provide access to view your investments online.  If you have accounts at different institutions, then you will need to get online access from each. It is not as easy to get a snapshot of your total situation when you have multiple accounts spread across multiple institutions.

Tax Receipts

If you hold non-registered investment accounts at several institutions, you will receive multiple tax receipts.  By consolidating your accounts, you will receive a limited number of reporting slips for income tax each year.  Reducing the number of tax receipts may also reduce the amount of time your accountant will spend completing your tax return.

Managing Cash Flow

Projected income reports from different institutions will be presented in various formats and at different points in time.  For you to obtain a complete picture of your financial situation, you will have to manually calculate the total income from your investments.  In situations where you have instructed your financial institution to pay income directly from an investment account to your banking account, it becomes more complicated to manage when there are multiple investment accounts.

Estate Planning

One of the steps in an estate plan is to deposit all physical share certificates and to reduce the number of investment accounts and bank accounts.  Having your investments in one location will certainly simplify estate planning and the administration of your estate.  It also assists the people helping you as you age.

Monitoring Performance

Some investors may be comparing the performance of one firm or advisor to another.  Investors should be careful when doing this to ensure they are really comparing apples to apples.  One investment account may have GICs while another may have 100 per cent equities, in which case we would expect returns to fluctuate during different market cycles.  It is easier to understand how all of your investments are performing when you receive one consolidated report from one advisor.

Conversion of Accounts

If you have multiple RRSP accounts and are turning 71 years old you may want to consider consolidating now and discussing your income needs.  It is easier to map out RRIF income payments when you have only one account.

Account Types

Fee-based accounts are usually suitable for a household that has total investment assets of $100,000 or more at one institution.  Consolidating allows these types of accounts to be an additional option.  As your account value grows, the fees as a percentage may decline in a fee based or managed account.

Service

In a perfect world all clients at all financial institutions are treated equal.  The reality is that the largest clients get better service.  By having $50,000 at six different institutions you are probably getting minimal service at each institution.  If you consolidated these accounts at one institution we would suspect that you would get significantly better service.

Other Benefits

When you have all registered and non-registered investments at one location it is easier for financial planning purposes.  Consolidation enables you to fund RRSP contributions through in-kind contributions.  Sometimes it is recommended to change the structure of your investments between accounts to improve the overall cash flow and tax efficiency standpoint – this can only be done if your accounts are at one financial firm.

Making sense of designations

Licensing and designations within the financial sector can be complicated.  Part of the reason for this is the minimum required level of knowledge required between the four main pillars – banks, trust companies, insurers and securities dealers.  Beyond the minimum required level of knowledge for licensing, there are extra designations that can help a financial advisor do their job.

You have likely heard of some of them, including:

  • Certified Financial Planner (CFP)
  • Chartered Financial Analyst (CFA)
  • Fellow of the Canadian Securities Institute (FCSI)
  • Canadian Investment Management (CIM)
  • Chartered Life Underwriter (CLU)
  • Chartered Financial Consultant (CH.F.C.)
  • Certified General Accountant (CGA)
  • Certified Management Accountant (CMA)
  • Chartered Accountant (CA)
  • Certified Investment Management Analyst (CIMA)

This is by no means a complete list but it gives you an idea that there are many potential designations.  Not all designations should be treated as equal, but there are a few tips in evaluating the education level of a financial advisor.

Acronyms: One of the quickest ways to get a snapshot of an advisors education is to ask for a business card.  Designations are often abbreviated on business cards, so ask what they mean and inquire about your advisor’s educational background.

Certificates: Most financial advisors also demonstrate their achievements by displaying their certificates in their offices, including post secondary education and other professional designations.  Make them a discussion point during your meeting.

Websites: You can research professional designations on the internet. Each of the main designations would have a respective organization with a website outlining details about the program.  At the same time you will be able to confirm whether your advisor is in good standing with their organizations.

Time Commitment: Perhaps the most important component when looking at the various designations is the time commitment involved to obtain.  Some of the more recent designations may sound impressive by the name, but if these can be earned in a couple of days then we feel only a minimal amount of weight should be placed on these letters.  Often at times these types of short educational programs should be considered a course rather then a designation in our opinion.

Ongoing Education: The more designations an advisor has, the more likely that person has to continue taking courses to maintain specific licensing requirements.  This ongoing education is often referred to as professional or continuing education.  As an example, the Financial Planners Standards Council requires 30 hours of continuing education every year for Certified Financial Planners (CFP).  Regardless of your designations, IIROC (Investment Industry Regulatory Organization of Canada) requires all licensed advisors to have 30 hours of professional development continuing education every 3 years.

Code of Conduct: Once an individual has earned certain designations they must agree to the applicable code of ethics and rules of professional conduct.   A good example of this is the CFA Institute’s Code of Ethics and Standards of Professional Conduct.   The following is a summary:

  • Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
  • Place the integrity of the investment profession and the interests of clients above their own personal interests.
  • Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
  • Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
  • Promote the integrity of and uphold the rules governing capital markets.
  • Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Years of Experience: It is important to note that an advisor’s years of experience is essential.  Those who have been through many investment cycles have great depth of market knowledge.  Investors should consider both experience and credentials when seeking the right combination of advisory services.

Be diligent before hiring your financial advisor

In recent years we have seen some high-profile cases where a few financial advisors have defrauded investors who have entrusted them to manage their money.  Regulatory bodies have published information sheets, along with radio campaigns to help protect the public.

In the majority of cases, the people who are hitting the media are not even financial advisors – they are pretenders.  In the cases  actual financial advisors, most have not worked for large companies which closely oversee employee actions and have compliance departments to help monitor advisor practices.

We feel you protect yourself by working with a large institution.  Large institutions have branch managers that monitor the activities of all employees.   In the auditing world, an area that can prevent fraud is through the segregation of duties.  Large firms have compliance departments that monitor all trading activity.  They also have a reputation to protect.

In our opinion, there is greater risk if you are approached by an individual either by phone or in-person.   The risk increases if the person is using high pressure tactics or is promising high investment returns.  You can reduce your chances of fraud significantly if you initiate contact with the advisor, slow the process down, and ask the right questions.

The following are some questions that can help in your due diligence process of finding the right financial advisor.

Experience, education

  • What is your educational background?
  • What professional designations do you have?
  • How long have you been in the financial services industry?
  • When do you plan to retire?
  • Are you licensed as a securities dealer?
  • Are you licensed as a mutual fund dealer?
  • Are you licensed to sell insurance products?

Service overview

  • How many clients do you have?
  • Do you have a minimum account size?
  • How often do you contact your clients?
  • Do you have support staff?
  • What are the types of services you provide?
  • What makes your service offering unique?
  • Do you work with other professionals, such as lawyers and accountants?

Investment process

  • What is your investment selection process?
  • Do you sell proprietary products?
  • What type of products do you primarily sell (i.e. individual equities, mutual funds, bonds)?
  • Are there any restrictions on the types of investments you may offer?
  • How liquid are the investments you are recommending?
  • How do you monitor the investments?

Compensation

  • How is the firm compensated?
  • What are the fees to sell and buy the investments you recommend?
  • What portion of the fee paid to the firm is paid to you as the advisor?
  • Do you offer fee-based options?
  • Do you offer managed accounts?
  • Do you offer commission only accounts?

References

  • Do you have clients willing to speak with me about your services?
  • Do you have professionals that may be willing to speak with me about your services?
  • Have you ever had a complaint filed against you with the BC Securities Commission, IIROC or any other professional or regulatory body?
  • Have you ever been disciplined by a professional or regulatory body?

We recommend that individuals looking for a financial advisor visit at least three different financial institutions.  The more time that you spend at this stage the more likely you will find an advisor that is most suitable for you.  We suggest that you present a similar list of questions to each advisor you meet with.  By obtaining answers to these questions from at least three advisors, you can make a better comparison.

A fraudster is not going to tell you the truth.  Regardless of the answers you receive in the above process it is important that you spend the time to verify them as best you can.  The chances of fraud are extremely remote but the above process is not wasted time because it will also assist you in the decision process of selecting the right financial advisor.

Experience, training key for advisors

Over the years, firms have changed titles for their employees.   Broker, financial advisor, financial planner, investment executive, wealth advisor, and portfolio manager are a few you’ve probably heard.

But titles don’t always help people understand exactly what the person does – and it certainly doesn’t help in determining experience levels.  A person with two months experience may have the same title as someone with 30 years of experience.  Some people may translate age or greying hair to experience.  But the only way to really know is to ask the person how many years they have been in the industry, something that can be confirmed through the regulatory bodies.  This basic information will help you determine how many market cycles your advisor has helped manage clients through, if any.

We have included a few discussion points to consider when looking at different experience levels.  In order to do these calculations you will have to obtain the following:  years in the industry, assets managed, and expected retirement date of your advisor.

Years to Asset Ratio

In order to calculate this ratio we will assume that an advisor should increase investments managed by $5 million a year (assuming a practice is built up without buying another advisor’s clients).   In the early years (first ten years), the $5 million will be primarily through gathering new clients.  In the middle ten years the $5 million/year is gathered mostly through new clients and performance.  In the mature years (final ten years) the $5 million/year is gathered through some new clients and performance.

Assume that an advisor has been in the industry for 20 years.  At a minimum you could expect one advisor to be managing $100 million.  Assets managed = years x $5 million.  This can also be looked at in a ratio form as follows:  Assets Managed divided by (years x $5 million):1.

If an advisor is managing $100 million after 20 years then the ratio is 1:1.  If an advisor is managing $150 million then the ratio is 1.5:1 (exceeding expectations).  Does the ratio exceed 1:1?  When the ratio is significantly above 1:1, the common reasons are that clients are happy and not leaving, the advisor is receiving more referrals/new clients, and performance of investments.   If an advisor is managing only $30 million after 20 years then the ratio would be .3:1. In this situation we would recommend asking some specific questions regarding client retention and performance.

Capacity Ratio

Behind every successful advisor is a strong support individual or team. The above advisor with a Years to Asset Ratio of 1.5:1 appears to be more successful then the advisor with a ratio of 0.3:1.  Every successful advisor reaches a point where they either have to stop taking new clients or add support/team members to continue the same level of service.

In our opinion, the following provides an outline for people to evaluate whether or not an advisor has the capacity to take on new clients and to continue providing a high level service.  In the early to middle years of an advisor’s career, a general guideline may be one direct support staff for every $75 million managed.   In the middle stage, a general guideline may be one direct support staff for every $100 million managed.  In the mature stage, a general guideline may be one direct support staff for every $125 million managed.

Retirement Factor

With every year of experience an advisor becomes one year closer to retirement.  An advisor may have experience and capacity but may be within five years of retirement.  We feel it is worth asking the “retirement” question if it is on your mind.  There is a happy medium between finding an advisor with experience and also one that is not already mapping out their own retirement plan.  When an advisor retires, they often sell their book of business to another person to ensure continued service.  It is extremely important at this stage that you continue to get the best service you deserve and not to settle for only the person who has purchased your account.

Are you being assigned to another advisor with a lower level of experience then what you have been use to?   It can be an incredibly overwhelming experience for a new advisor who has purchased a book of business to manage all the “new” relationships, especially during difficult times.

With an aging advisor workforce, more and more will be retiring.   Not all advisors work full time and then stop on a retirement date.  Some transition out slowly although this is difficult in our opinion in the financial industry.  Staying current and reacting accordingly involves full time attention.

If you are roughly the same age as your advisor, chances are you will have adequate time to research your options for a new advisor.  People should be looking for an advisor that can assist them as they age and to ensure that all planning is complete before incapacitation becomes a concern.   This is even more important with couples when only one individual has either managed the money directly or been solely working with an advisor.

Rating your portfolio’s performance

One of the easiest ways to monitor overall performance of your investments is to record and compare the total market value of your initial investments, to the total market value at the end of each month thereafter.  Note it on a sheet of paper, or creating a spreadsheet on your computer.  Either way this provides a rough framework in which to monitor your investments.

An overall understanding of why a monthly amount changed is essential.  You should note what the relevant benchmarks are closest to your portfolio.  If it holds primarily Canadian equities then the S&P/TSX Composite Index may be your comparison.  If you also record the value of the relevant indices at each month end, then it is easy to calculate a percentage change to the Index, and compare this against your portfolio.

From a more detailed level you may want to record and compare the month end values for each account.  You should factor in transfers from a non-registered account to fund a TFSA or RRSP contribution.  Within each investment account you could to see what has moved up or down.  For specific holdings that have moved by more than 10 per cent in one month you should find out why.

One of the reasons you have a financial advisor is for them to provide you with reports that are not easy to generate yourself.  If you are working with a financial advisor you should periodically receive a performance report.  This report is not the same as your monthly or quarterly statements that are sent to you automatically.  A performance report essentially calculates your rate of return for a specified period, such as one year.  It should provide a summary of cash in-flows and out-flows.  Cash in-flows would be deposits and income generated from the investments.  Cash out-flows would be primarily withdrawals and fees.   Buys, sells, and market value changes of existing investments should be factored into the report as well.

One of the benefits of consolidation and working with one financial firm for a long time period is that it simplifies your ability to do performance reporting on your investments.

There can be many complicating components that make performance reporting more difficult including:  special holdings with no publicly available market value, values that came from old legacy computer systems, multiple transfers between financial firms, share certificates deposited where the owner does not know the original cost, transfers from an estate account in-kind, and frequent deposits and withdrawals from an account.  The above items may make reporting from inception (when you began investing) to the present more difficult.

Every performance report should be compared to relevant benchmarks.  As most Canadians have at least some Canadian stocks we have listed the returns for the TSX/S&P Composite Index for the last decade:

2001

-13.9%

2002

-14.0%

2003     

24.3%

2004     

12.5%

2005

21.9%

2006

14.5%

2007

7.2%

2008

-35.0%

2009

31.0%

2010

14.4%

A performance report is effectively a report card on your financial advisor.  As an example, in 2008 when the equity markets dropped 35 per cent, it could be viewed as a success if your equity investments declined only 12 per cent.

On the other hand, in 2009, if your equities only rebounded 15 per cent then you significantly underperformed in that year.  This is assuming the equity component of your portfolio is taking the same amount of risk as the index.

A component that may impact performance is whether or not you were actively involved in choosing your investments, or if you took 100 per cent of your financial advisor’s recommendations.  In some cases, investments are transferred in that a client likes and wishes to hold onto even though they are not part of the advisor’s current recommendations.

Unsolicited selling when you were advised not to sell, unsolicited buys not recommended by your advisor, and solicited buys and sells that you declined should all be factored in when looking at the final numbers.  The term unsolicited means that you phoned your advisor up with a trade to be executed.  All of these types of trades should be marked “unsolicited” on the trade confirmations you receive.

Another factor to consider when assessing performance is whether an advisor has taken over a portfolio that may be significantly different from their own model portfolio.

As an example, a client may transfer in Deferred Sales Charge (DSC) mutual funds with large redemption fees to an advisor who purchases individual securities.  In some cases we would recommend to hold the DSC funds to the maturity date (or to a specific date where the fees are lower) to eliminate or reduce the redemption charges.   When this occurs it may take some time to manage out of current holdings and into an advisor’s model portfolio.

A checklist to reach your goals

Have you discussed your goals with a financial advisor?   You should because the advisor relationship should focus on more than just investments.

Communicating goals with your financial advisor is essential as it helps to establish recommended savings levels and investment suitability.  Every person has a different set of goals and priorities.

If you have never formally written these on paper, then below we have a few steps to help:  .

Step 1 – Create a list of goals, using these examples as a guideline:

  • Reducing portfolio risk
  • Enhancing portfolio returns
  • Ensuring adequate insurance for family
  • Minimizing taxes
  • Planning for child or grandchild’s post secondary education
  • Creating a financial plan
  • Better management of cash flows
  • Buying a home
  • Increasing annual income (i.e. new job, working more)
  • Balancing work and leisure (i.e. working less or smarter)
  • Saving for a major purchase (i.e. boat, vehicle, home renovation)
  • Creating liquidity
  • Managing and paying down debt
  • Not worrying about money
  • Establishing an emergency reserve
  • Retirement savings
  • Retiring comfortably
  • Helping family or community
  • Planned donation strategies
  • Maximizing the value of your estate
  • Selling or buying a business

In order for this exercise to be valuable, your goals must be realistic.  This list should focus primarily on those items requiring financial resources.

Step 2 – It is nearly impossible to work on all of your goals at once.  From the list you create, rank each goal in order, from most to least important.  Beside each goal, write any comments that you feel are important in helping your advisor understand your total situation.  The second step can often be a more difficult exercise for many.

Step 3 – Most of your financial goals should be measurable.  By putting specific dollar amounts on your goals you will be able to monitor your progress.  As an example, if your goal is to be mortgage free in five years then your plan may involve setting aside the funds necessary to make extra principal payments each year.

Step 4 –What is your most urgent concern regarding your financial affairs?   From the list above, you should break your goals into short term (1 to 5 years), medium term (6 to 10 years), and long term (more than 10 years).   Depending on your time horizon, short term for you may be 1–2 years, medium term 3-5, and long term may be greater than 5 years.

Step 5 – Once the above steps are completed you should have a clearer understanding of your goals.  Are your goals reasonable?  It is now time to share the work completed above with your advisor, provided he/she provides financial planning advice.  Those advisors who do, should be in a position to comment regarding your goals.  The more “goals” you have the more important it is to create a financial plan.  Whether you have a formal plan or verbal discussions, we recommend outlining specific “actionable” steps.

Step 6 – Updating and monitoring your goals.  You should review the progress you are making towards your financial goals at least annually.  Keep in mind that your goals will be in various stages of development in the future, and that significant life events can often impact your financial goals.   It is important to make your plan flexible and open to change.

We feel that completing this process will mean that you have started immediate action.  This will make your goals more real to you, and increase the likelihood of them being reached.

Ten benefits of consolidation

Why do some people have their investments at multiple financial companies?  Was it the closest financial institution to make that last minute RRSP contribution?  Was it an inheritance that just seemed easier to keep at the same place?  Maybe it was a short-term advertised special that brought them into another institution.  It could be that you bought a proprietary product that could not be transferred after you purchased it.  There are many disadvantages for people not developing one good relationship with a financial advisor.

The following are a few benefits of consolidating your investments with one advisor:

Asset Mix

The most important component of investment performance is asset mix.  Consolidation can help you manage your asset mix and ensure that you have not duplicated your holdings and are therefore, not overexposed in one sector.   Unless your financial advisors have been given a copy of all of your investment portfolios, it will be difficult for them to get a clear picture of your total holdings.  Even if you were able to periodically provide a summary of each account to each advisor, as transactions occur you would still need to update every advisor with those changes.

Technology

Most firms provide access to view your investments online.  If you have accounts at different institutions, then you will need to get online access from each. It is unlikely that you will be able to transfer funds between these institutions online.

Tax Receipts

If you hold non-registered investment accounts at several institutions, you will receive multiple tax receipts.  By consolidating your accounts, you will receive a limited number of reporting slips for income tax each year.  Reducing the number of tax receipts may also reduce the amount of time your accountant will spend completing your tax return.

Managing Cash Flow

Projected income reports from different institutions will be presented in various formats and at different points in time.  For you to obtain a complete picture of your financial situation, you will have to manually calculate the total income from your investments.  In situations where you have instructed your financial institution to pay income directly from an investment account to your banking account, it becomes more complicated to manage when there are multiple investment accounts.

Estate Planning

One of the steps in an estate plan is to deposit all physical share certificates and to reduce the number of investment accounts and bank accounts.  Having your investments in one location will certainly simplify estate planning and the administration of your estate.

Monitoring Performance

Some investors may be comparing the performance of one firm or advisor to another.  Investors should be careful when doing this to ensure they are really comparing apples to apples.  One investment account may have GICs while another may have 100 per cent equities, in which case we would expect returns to fluctuate during different market cycles.  It is easier to understand how all of your investments are performing when you receive one consolidated report from one advisor.

Conversion of Accounts

If you have multiple RRSP accounts and are turning 71 years old you may want to consider consolidating now and discussing your income needs.  It is easier to map out RRIF income payments when you have only one account.

Account Types

Fee-based accounts are usually suitable for a household that has total investment assets of $100,000 or more at one institution.  Consolidating allows these types of accounts to be an additional option.  As your account value grows, the fees as a percentage may decline in a fee based or managed account.

Service

In a perfect world, all clients at all financial institutions are treated equal.  The reality is that the largest clients get better service.  By having $50,000 at six different institutions you are probably getting minimal service at each institution.  If you consolidated these accounts at one institution we would suspect that you would get significantly better service.

Other Benefits

When individuals have all of their registered and non-registered investments at one location it is easier for financial planning purposes.  Consolidation enables you to fund RRSP contributions through in-kind contributions.  Sometimes it is recommended to swap investments between accounts to improve the overall structure from a cash flow and tax efficiency standpoint – this can only be done if your accounts are at one financial firm.

Note that consolidation takes time if investments are locked in at the different companies.  A plan should be created to consolidate investments on the respective maturity dates.

Notice of assessment useful in your overall plan

Canada Revenue Agency sends every taxpayer who has submitted a tax return a Notice of Assessment.  We encourage everyone to read the assessment thoroughly, including your accountant and financial advisor.

You may wonder why an investment advisor requests a copy of your assessment.  The bottom line is it is useful for planning purposes to reduce the household tax bill and to ensure you are managing your cash flows and paying the lest amount of tax possible.

Here’s some of the useful information we are ale to obtain from the assessment:

Income Levels

Individuals have several options to reduce their annual income tax liability.  Couples may have income splitting options not available to individuals.  Couples with children may save household tax by considering income-splitting strategies for all family members.  The annual Notice of Assessments for each family member helps monitor changing income levels over time.  Strategies and financial plans will change throughout time with income levels being a primary factor.

TFSA Deduction Statement

Your 2008 Notice of Assessment has a new section this year.  This section will be for your Tax Free Savings Account.  Included within this section will be your carry-forward amount of $5,000.  This year is easy as the 2009 room is $5,000.  For future years this schedule will be useful for your advisor to know how much room you have to contribute to the TFSA.

RRSP Deduction Statement

This statement is included on your assessment as a calculation of your RRSP deduction limit.  The start of this statement is last year’s RRSP deduction limit plus and minus some adjustments (relating to pensions, prior year earned income) to arrive at the limit for the current year.  The statement also includes all unused RRPS contributions.

Net Capital Losses

This amount is normally in the text of the assessment, which we noted above as being very important to read.  If you are unsure of the years in which you incurred the losses you may request these amounts from CRA or view them online yourself through My Account / ePass (free CRA service).  Net capital losses for individuals may be carried back three years and forward indefinitely.

Home Buyers

If you have participated in the RRSP homebuyers plan then you have to repay the amount back over 15 years.   Each year the repayment amount is approximately one-fifteenth of the total amount withdrawn until the full amount is repaid to your RRSPs.   Your assessment will tell you the required repayment each year.  If you do not make an RRSP contribution (and designate it as a home buyer repayment) then you will have to report that amount as taxable income.

Lifelong Learning Plan

Participants who withdraw funds from their RRSP under the LLP must repay the amounts over a period of up to ten years.  If you do not make an RRSP contribution (and designate it as a lifelong learning plan repayment) then you will have to report that amount as taxable income.

Instalments

One of the services we provide for our clients who have to make instalment payments is to arrange to make these payments directly from your investment account.  This ensures the payments are taken care of and that interest and penalties will not apply.  Another option to fulfill instalment payments for people who have registered income accounts (i.e. RRIF) is to arrange quarterly payments to coincide with the instalment payments and withhold extra tax on these payments.

Notice of Changes

If CRA has reassessed your return or made changes they will outline these changes in your Notice of Assessment.  We encourage you to provide a copy to your tax preparer to ensure the changes made by CRA are correct.

If your investment advisor has tax knowledge, they may be registered as a representative with Canada Revenue Agency.  The easiest way to grant a representative (accountant or investment advisor) the ability to view your tax information online through a secure website is to sign a T1013 form.  Once CRA processes this form, your advisor may factor the above information in prior to making investment recommendations or creating tax minimization strategies.

 

Timeline shrinks entering risk zone

Stock markets are unpredictable and at times completely irrational – at least in the short term.  By short term we mean five years or less.  Investing can be a very frustrating experience for people seeking instant gratification or short-term results when markets decline.

Prior to any investing with our clients we ask a series of questions to obtain an understanding of risk tolerance, time horizon, and cash flow needs.  We have listed three of these questions below and outline the reasons why we ask these questions.

Question 1:  What is your investment time horizon in years?

A)    1 to 2 years

B)    3 to 5 years

C)    6 to 10 years

D)    More than 10 years

The main reason why we ask the above question relates to how conservative our recommendations will be.   If someone has a time horizon of one to two years our recommendations will focus on cash equivalents and bond type investments.  If someone says more than ten years, then a portfolio could have a balanced approach with a greater percentage in equities.  As time horizon decreases so should the percentage in equities.

An interesting exercise for investors is to go through and look up the worst one-year returns in the stock markets.  One would discover many negative one-year periods in the markets.  Significant one-year declines would have seriously impacted someone that was incurring too much risk based on their time horizon.  By looking at the worst ten-year historical period of returns in the Canadian stock market, investors would realize that these longer periods are actually positive.  History may provide some comfort for people who are holding high quality investments and feel they will recover over their time horizon.

Question 2:  As a percentage, what is your household’s annual income requirement from your investment portfolio?

A)    10 per cent

B)    7 – 9 per cent

C)    4 – 6 per cent

D)    1 – 3 per cent

E)     0 per cent

We receive a variety of responses when we ask this question.  Some people are fortunate not to need any income from their investments because of age or other sources, such as pensions or rental income.  Most retired people require some form of income from their investments.  If investment income is the only source of income it becomes important to balance capital preservation with income.  If income needs are five per cent or less then the portfolio should be heavily weighted towards bonds, GICs, and other lower risk investment options.

Question 3:  Will you need to liquidate a portion of your investment portfolio over the next five years?

A)    More than 20 per cent

B)     11 to 20 per cent

C)     zero to ten per cent

D)    No requirement

The reason we ask this question is to get an understanding of significant purchases that are planned.  This may be a personal residence, vacation home, vehicle, boat, motor home, travel costs, renovation, etc.   These one-time items should be itemized and timing should be noted.  We recommend keeping an amount equal to these costs liquid and secure.  This ensures that specific goals can be met and that short-term equity markets do not impact plans.  The remaining assets can then be looked at for a longer-term strategy.

The risk zone that all investors face is the period immediately before retirement.  As an example, this may be the five-year period before you begin living off of your investments.

A typical investor may have been focused on growth for 30 years or more.  As an investor enters the risk zone it is important to look at shifting your portfolio to provide a future income need and capital preservation.

Change financial institutions carefully

There are many reasons a person changes financial institutions, including – a financial advisor retires, investments have to be consolidated or changed for a number of reasons or the service is simply inadequate.

Whatever the reason it is important you understand the process and your options.

A transfer begins with signing paper forms. The rest of the process is primarily electronic.

Canadian investors do not tend to hold physical certificates for the stocks and bonds they own.  They are mainly held in electronic form with the Canadian Depository for Securities, a reliable depository as it is subject to legislation and regulations under both federal and provincial jurisdictions.  Because it acts as the principal depository for securities traded between investment dealers, CDS is able to facilitate a quick transfer between institutions.

Investments are generally transferred either in-cash or in-kind.  In-cash means that all of your assets not currently held as cash are to be liquidated, sold or redeemed.  In order for your account to be transferred to the receiving institution in the form of cash.  It is important to note that if you have indicated an “in-cash” transfer of your account, all trades will be executed at market.  All trades will be placed on a best efforts basis subsequent to the receipt of the transfer form and may be subject to commission charges.  Care should be taken to understand all fees and tax consequences for choosing an in-cash transfer.

In-kind means that you want the assets in the account transferred, as is. If you hold investments and a cash balance, then the investments will be transferred as well as the cash balance in their current state, if the assets can be transferred.  The time required to transfer an account depends on the types of investments transferred.  Different types of investments may transfer at different times.  As an example, mutual funds may transfer on a different day than bonds or individual equities.  The types of investment products in your account will impact how long the transfer will take.  The following provides a general overview:

  • Stocks and bonds are generally transferred between 10 – 25 business days.  The Investment Dealers Association (IDA) has guidelines with respect to transfers between institutions.  Transfers from non-IDA member institutions may or may not observe similar guidelines.
  • Mutual funds from other financial institutions are generally transferred within 5 – 10 business days from the time all necessary documentation is received.
  • Guaranteed Income Certificates (GICs) and Term Deposits are generally not transferable “in kind” (as is) prior to its maturity.  Most GICs can be transferred in cash on their maturity.  There are some exceptions, you will need to check the terms and conditions with the institution which issued your GIC.
  • Proprietary investments are those sold only by the relinquishing institution.  Many of these investments may be nontransferable, non-redeemable or delay the transfer of your account.

An account transfer request may be rejected by the relinquishing institution for a number of reasons, such as, insufficient cash to cover fees, under-margined, outstanding short position or incorrect account designation.  If your transfer has been rejected for any reason by the relinquishing institution, they may return the transfer to the receiving institution unprocessed. When the reason for a rejection has been rectified, the transfer process will begin again and the relinquishing institution may then have 10 – 25 business days, from the date of receipt to process the transfer documents.

Many relinquishing institutions charge a fee, the cost of which may vary.  Normally this cost is approximately $125 plus tax per account and some receiving institutions or advisors may reimburse these fees.

Transfers of registered accounts should always be done through a transfer form.  Direct transfers of RRSP and RRIF accounts are allowed the Income Tax Act.  Canada Revenue Agency has a transfer form (T2033), but most financial firms have their own, which ensures your RRSP or RRIF is not deregistered and that you are not taxed on any withdrawals.  The receiving institution submits the transfer form, along with a copy of your last investment statement from the relinquishing institution.

Taxable accounts, including joint accounts, cash accounts, margin accounts and corporate accounts should generally be transferred in-kind.  This allows the receiving institution and advisor time to gather information relating to your investments, such as the tax consequence for any sells that you make.

Mutual funds within registered accounts or taxable accounts should generally be transferred in-kind.  This is especially important if the funds have been purchased on a deferred sales charge (DSC).  An in-cash transfer may result in the mutual fund company charging you fees to sell the funds.  Transferring the funds in-kind allows the receiving institution to obtain information from the fund company.  Typical information that is released to the advisor on record includes adjusted cost base, 10 per cent free portion (if applicable), matured units, final maturity date, and the deferred sales charge if the investment was redeemed.

Other important items to note:

  • Characteristics relating to your investments (deferred sales cost schedule, final maturity, adjusted cost base) remain the same once transferred
  • If your account holds individual equities, insurance type products. then you should ensure that the receiving institution and advisor are licensed to trade these types of investments
  • Partial transfers are permitted by specifically listing the securities you wish to transfer
  • Mixture of in-kind and in-cash transfers is also possible by attaching a schedule to the transfer form
  • Before a relinquishing institution may transfer a RRIF they are obligated to pay you the minimum annual payment if it has not already been paid during the year
  • Adjusted book costs for non-registered accounts should always be verified after the transfer