The benefits of consolidating investment accounts

In the last 10 years, there have been a number of changes to investments and regulations. Many of these changes have an impact on your financial plan and tax situation. All firms have been spending significant amounts of capital to become compliant on the disclosure rules and upgrading technology and systems.

These systems are designed to generate reports which assist wealth advisers in managing clients’ accounts.

Most clients today may have several types of accounts, including Registered Retirement Savings Plans, Locked-In Retirement Account (LIRA), Joint-With Right of Survivorship Account (JTWROS or Individual / Cash Account), in-trust for account, corporate account, Registered Education Savings Plan, Registered Disability Savings Plan (RDSP), and Tax Free Savings Account (TFSA).

Registered accounts all have specified limits that you must stay within; the tracking of the limits is complicated enough even if all of your accounts are held at one institution.

When we meet with prospective clients, we notice that they may have their investments at multiple financial companies.

I am still puzzled as to why people want to complicate their life by having the same types of accounts noted above at multiple institutions. Is it because you were not happy with the first institution you opened accounts with? 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.

Whatever the reason, there are many disadvantages for people having multiple accounts at different institutions. We recommend developing one good relationship with a portfolio manager or wealth adviser to better manage risk, reduce the time for regulatory and tax obligations and to simplify your financial life. Below, we have mapped out some good reasons to consolidate your accounts with one institution.

Foreign Income Verification Statement (T-1135)

There are harsh penalties for individuals who do not correctly file the Foreign Income Verification Statement, T-1135 with the Canada Revenue Agency. The form can be rather time-consuming to complete if you have multiple accounts at different institutions.

On an annual basis, we forward our clients their Foreign Income Verification Statement that contains information about their foreign holdings and income to report on T-1135.

If all of their non-registered investments are held within this one account, they can simply provide this statement to their accountant with minimal effort for reporting.

If they have multiple non-registered accounts, then clients or accountants will have to develop a system to integrate all of the totals for the foreign investments at each firm to come up with the required figures.

Over-contribution Penalties

There is no restriction to the number of TFSA and RRSP accounts you open.

If you open a TFSA with a financial firm, I would suspect they would be contacting you annually to make your contribution for the year. If you inadvertently say yes to more than one institution, then it would be fairly easy to over-contribute to your TFSA.

If you over-contribute to a TFSA, or any registered plan, then you may be subject to a tax penalty equal to one per cent per month of the over-contributed amount. If you have more than one TFSA as an example, it is important that you tell the adviser at each institution what you have contributed.

T5008

Years ago, financial firms did not have to report dispositions to CRA. Now, each disposition in a non-registered account is reported on a T5008 form.

These forms are not necessarily sent to clients in the mail, but can be accessed on My Account with CRA online.

We always caution clients who do their own tax return to carefully review the auto-fill function that transfer the T5008 information automatically to your return. The information transferred in from T5008 is just the proceeds amount and do not include the adjusted book value. It is important to also input the adjusted book value manually.

We send our clients a tax package that includes a Realized Gain (Loss) Report, which contains both the adjusted book value and the proceeds. We encourage clients to refer to the information on the Realized Gain (Loss) Report and use the T5008 slips to verify completeness and accuracy of the proceeds.

Average Cost

In Canada, we have to use average cost. Tracking the average cost of the investment assets can be straight forward if all of your investments are at one institution.

If Darlene bought 100 shares in 2015 of ABC Company at $70/share and another 100 shares in 2018 at $100/share, she would own 200 shares with a combined adjusted cost base of $17,000 (or $85 “average cost” per share). If Darlene sold 100 shares then the adjusted cost base per share is $85 and would be reflected correctly on the realized gain (loss) report if both blocks of shares were purchased at Institution A.

Let’s say Bill bought 100 shares in 2015 of ABC Company at $70/share at Institution B. In 2018, Bill buys another 100 shares of ABC Company for $100/share at Institution C. Neither Institution B or C would know about the other purchase and both Realized Gain (Loss) Reports would be incorporate the average cost of the shares sold.

Individuals who have more than one cash account must ensure holdings are not duplicated. If they are duplicated, then care must be taken to adjust the book values on dispositions as you cannot rely on the Realized Gain (Loss) Reports for tax purposes. This is one of the reasons why financial firms put a disclaimer on reports as they cannot provide assurance that you do not own additional shares elsewhere.

Asset Mix

An 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 wealth advisers 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 financial firms provide access to view your investments online. If you have accounts at different institutions, 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.

Many firms provide paperless statements and confirmation slips. As time goes on, most people will gravitate to the benefits of paperless. You do not have to worry about your mail getting lost or delivered to your neighbor. You will get your statements quicker. You don’t have to worry about storing older statements or shredding them. You can easily forward information to your accountant in PDF form if required. You can be travelling, or in your home, and have the access to your investments. If you had one online platform this process is even easier.

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.

Tax information can also be set up to paperless at many firms. You can log onto the communication centre of the website and retrieve updates on when your information will be available.

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.

We like to have a detailed Investment Policy Statement which clearly states the required cash flow and from which investment accounts that cash flow is being derived.

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 adviser 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. It is easier to understand how all of your investments are performing when you receive one consolidated report from one adviser.

When you have all accounts consolidated with one financial institution it is easier to obtain a consolidated report.

Conversion of Accounts

If you have multiple RRSP accounts and are turning 71, you may want to consider consolidating now and discussing your income needs. If you have three RRSP accounts, you will have to open up three RRIF accounts. It is easier to consolidate all of the RRSP accounts before age 72 and open one RRIF account.

Mapping out whether to select the minimum RRIF amount or elect a greater payment when you have only one account is significantly easier.

Account Types

Fee-based accounts are usually suitable for a household that has total investment assets of $250,000 or more at one institution.If you have $100,000 at Institution A, $130,000 at Institution B, and $50,000 at Institution C then you would not be exposed to the fee-based option. Consolidating allows these types of accounts to be an additional option.

In addition, most financial firms have a declining fee schedule. As your account value grows, the fees as a percentage may decline.

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 $100,000 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.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.