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By David Miller, CFP, RFP
Special to the Financial Independence Hub
As we say goodbye to a tumultuous 2018 and hello to 2019, it is time for you to review your investment portfolio strategy to ensure it is set up for success in the New Year and for the long-term.
Below are some questions you should ask yourself as you review your investment portfolio:
- Is your portfolio suitable for your personal situation?
- What is your overall investment strategy and has it changed given the level of volatility you likely have experienced?
- Did you receive individualized investment advice from a qualified professional?
- Is that qualified professional a portfolio manager or a salesperson?
- Do you or your advisor look at the whole picture when it comes to managing your money?
- Are your investments held in a ‘cookie cutter’ investment portfolio?
To ensure your portfolio is suitable, reliable, and catered to your situation, a customized investment portfolio, built by a portfolio manager, may be what you need.
The trend towards a ‘Model Portfolio’
Computers and the use of algorithms have made it easier for banks, institutions and, more recently, Robo-advisors to automate the investment process for the masses. Model portfolios are now common place because of the economies of scale; it’s just cheaper and easier to do. For some people this approach might help save on fees, but for someone with more unique financial planning and investment needs, a cookie-cutter portfolio just doesn’t cut it. You need a portfolio that is customized to your situation.
Why Custom Portfolio Management?
Let’s look at high-income earner John. John has saved faithfully through his big bank over the years, and along with his defined contribution pension/stock plan through his work, he has maximized his RRSP and TFSA. He has no debt and there are very few places he can now allocate his savings without having to worry about the tax implications. He’s in the prime of his earning years and has 10+ years until he’d like to retire.
John is increasingly aware of the high fees his bank is having him pay. He’s seen the advertising on the importance of keeping his fees low *there seems to be a race to the bottom for investment fees1*. He’s looked at the Robo-options and even at managing his own investments, but he’s not sure and a little stuck. It’s not his expertise.
Here are five big reasons why John may want a tailor-made portfolio:Asset Allocation
- Holistic approach: Without reviewing all your assets and liabilities and gaining a full understanding of your personal situation and goals, you could have a flawed investment plan.
- Tactical asset allocation: Your investment plan should have a strategy in place for taking advantage of a downturn in the markets. Without one, you’re potentially losing out on additional returns when the market rebounds and long-term success.
- Risk Tilt: Two portfolios created with the same allocation of equity to fixed income can be created with much different risk parameters depending on what type of equity or fixed income is used in the portfolio. A portfolio therefore can be tilted one way or the other on the risk scale without changing the overall exposure significantly.
Tax Planning
- Tax efficiency: You want to hold certain investments in certain accounts to minimize tax. To a bank, a Robo-advisor or a large institution, this is a secondary concern but could end up saving you hundreds if not thousands of dollars in taxable income every year.
- Taxable income events: A mutual fund manager, portfolio model or Robo-advisor won’t be able to know your annual taxable income and may trigger capital gains within your taxable portfolio that could increase your taxable income, and taxes payable at a time when you don’t necessarily want that to happen.
Income and Retirement Planning
- Your ‘cookie cutter’ portfolio may not be set up to provide you with a tax efficient income stream or a buffer between growth and safety of capital. As you approach retirement, this becomes a more important issue as every dollar you save will count.
- Decumulation of investments in retirement has been quoted as “The nastiest, hardest problem in finance” – Nobel Laureate William Sharpe. A retirement plan should be customized to your situation and so should the corresponding investment and withdrawal strategy.
Specialty Investments
- As the economic, political and investment environments change, and new investment options are coming up all the time to help meet the demand, the argument for having a custom portfolio is greater than it has been in the past.
Conflicts of Interest
- Conflicts of interest can lead to potentially poor performance and additional risk2.
- Model portfolios often use funds that are built by the bank or investment institution’s in-house asset management team. This creates a potential conflict of interest where the fund has an incentive or bias towards owning the company’s stock.
What should you do today?
In today’s volatile investment world, there is an institutional race towards cheap, mass produced investment products, pushed by an army of salespeople who front themselves as investment advisors. It’s time to ask yourself: “Is this the right approach for me and my family?”
If John were to choose to stay at his bank for his investments, he runs the risk of continuing to deal with a salesperson, not someone who is truly looking out for his situation, thereby looking after the corporation’s interests and not necessarily his.
There is an urgent need for John to start exploring all options to ensure he has an investment solution that makes sense for his tax, income and retirement needs. While it is hard to quantify just how much this could be worth over the short and long term for someone like John, it becomes clear when you look at all the options that working directly with an independent portfolio manager who is also a professional financial planner is his best option.
If you’d like to know more and understand how a custom portfolio combined with comprehensive financial planning can benefit your personal situation, connect with RT Mosaic today.
David Miller 403-457-3285 david.miller@rtmosaic.com
Sources:
2 https://ca.finance.yahoo.com/news/swedroe-conflicts-interest-banks-140000919.html
David Miller, BFS, CFP®, R.F.P., CIM®, is RT Mosaic’s dedicated financial planner and research analyst, providing expert planning, advice, research and support. Along with an honors degree from Mount Royal University’s Bachelor of Financial Services Applied program in 2005, David is a Certified Financial Planner® Professional (2007), Chartered Investment Manager® (2014) and Registered Financial Planner (2017). David has been providing advice to high net worth and affluent individuals and families for over 10 years. He left a major bank in 2016 to help fulfill his drive to provide client centered advice. David prides himself on providing Canadians with the ability to make informed financial decisions with increased financial literacy and support.
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