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A View From Here November 2016

November 1, 2016 • Print This Article

The Business of a Financial Plan

In 1987, a change in legislation allowed Canadian banks entry into the investment industry and, within three years, the largest independent brokerage firms in Canada were swallowed up by each of the big six. Financial advisory is complimentary to the existing savings and lending business and banks had the financial and marketing wherewithal to expand these services in a way that had never been previously achieved in Canada. Preceding this seismic shift was the deregulation of commission fees that over the proceeding decades evolved the traditional commission-based fee structure to recurring revenue model by way of an imbedded or flat fee. Compliance departments grew in size and stockbrokers, rebranded as Investment or Financial Advisors adopted the new 'preferred' standard alongside a shift from investment selection to more of an asset gathering one. This has resulted into more consumer choices as discount/online brokerage, wealth management and more recently, unproven and cheaper alternatives such as ETF's and Robo-Advisors have come into focus.

With a new emphasis on building scale, Investment Advisors moved the crucial investment process to third party managers such as mutual funds and 'in-house' products so they could focus on service and the procurement of more client assets. In an effort to capitalize on the full share of their client's wallet, firms employed financial planners, insurance and other auxiliary products constructed and marketed for their clients. Imagine for a second how McDonalds would create financial products. Interestingly, most clients do not ask for track records when deciding to purchase these offerings. Questions such as; what has been the long-term performance and Is the investment professional invested in the same things rarely come up...,but they should. It might make for a more informed decision.

We are so busy in our day-to-day lives and many hire financial advisors to help with the process. Setting up a solid financial plan is the easy part; it is the long-term performance within that plan which is the most important thing. In my experience, this is unlikely to come from a solution offered by an institution where actuaries create financial products. That's why so many see long-term results that most often mirror returns achieved in the safest of investments such as T-bills or GICs. Financial advisory is a business and it is in the business of generating fee's that can appeal to the lowest denominator of risk.

Setting Up A Financial Plan Is Easy

There are very simple steps to setting a solid financial plan. They are:

  1. An RRSP: Registered Retirement Savings Plan. Government allows contributions to be deducted from annual income taxation up to $25,370 for 2016 (it changes every year) and the funds grow tax-free. At age 71, the account converts to a Retirement Income Fund (RRIF) and a minimum annual withdrawal requirement of at least 5.5% is taxed at the individual's current bracket. The idea is that we will be at a lower tax rate in retirement than during working years. Unused contributions from previous years can be a powerful tax savings at some point because it accumulates. Think of the RRSP as life insurance... that is to say, money that you will use in your life - not your death. Interestingly, I have found accounts that have moved into a RRIF continue to build wealth tax-free within the plan.
  2. TFSA: Tax Free Savings Account. This investment account allows Canadians 18 and over to contribute up to $5,500 annually ($46,500 cumulatively since it was first introduced in 2009) into a tax-free investment account. Think of it as Switzerland...no tax whatsoever for growth, income and withdrawals. Even better, you can take out any amount you want and put it back in the following year. This might be an even more impactful financial planning tool than an RRSP.
  3. Insurance: I don't think of insurance is an investment but rather a preventative measure providing financial relief in the event of a tragedy. As we get older, it gets more expensive to purchase or to even cash in.
  4. Home Equity: In Canada the growth in value in our principal residence is tax-free. Having to pay no tax on that gain is significant.
  5. RESP: Registered Education Savings Plan: This plan for a child's post secondary education allows annual contributions of up to $2,500/child (or one-time $50k) and the government will kick in an additional $500. The account is allowed to grow tax-free until withdrawal when the child enters post-secondary education where it's taxed to the child, who is likely to be in a low bracket. Having my daughter in first Year University, it is great to have this expensive element of her education subsidized.

There are certain cases where the need for a more sophisticated plan might exist, but it usually involves situations of significant wealth. In this circumstance, there is need for more than an in-house financial planner but instead, dedicated professionals that have built a practice around these specific services.

Then It's All About Long-Term Performance

There is no question in my mind that the most important part of a financial plan is the long-term investment results. If we do our best to set aside funds into an RRSP, TFSA, and RESP and build tax-free wealth through equity in our homes, we are ahead of the game. But the ultimate and most important component is to build wealth in those plans. I believe financial advisory for the most part, has evolved to a compliant structure that ends up straying not too far from either side of going nowhere. Think McDonalds....

CRM II: Performance and Fee Document To Be Mailed on January 1st.

Beginning in January 2017, investment firms have been mandated to supply clients with an annual document showing returns and fees (with January 1, 2016 as its starting date). This has many financial advisors hoping that this year finishes strong but with so many people who don't understand how to read their statements in the first place, I suspect that this will have a smaller effect than most advisors anticipate.

In the end, there are two things we need to know; it is Easy to set up a financial plan (10%) and two, and most importantly - the need for long-term performance (90%).

Our long-term results suggest that we are on the right path. I certainly hope it continues because as you know, I hold the exact same investments as you do.

Thanks for taking a look,

And as always...
All good things,

Adam Hennick

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

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