What are your investment objectives? What is your time horizon to meet them? How much risk are you comfortable taking, and how much risk is appropriate to reach your goals? All of these questions and more can be discussed and answered in the process of creating your personal Investment Policy Statement, or IPS for short.
The ins and outs of an IPS were examined in a recent episode of Take Control of Your Wealth, a podcast produced by Christie Matwee MSc, MBA, CFA and Shawnalynn Perron MBA, CIM, FEA, who are both Portfolio Managers at Cumberland Private Wealth Management Inc.
Here are some of the key points which they discussed:
An IPS is typically a written document that clearly communicates your financial needs and risk tolerance, and defines the strategic mix of equities and fixed income that will help you achieve your goals. It’s like a road map that helps you and your Portfolio Manager define the goals, preferences and restrictions that should guide your investment strategy.
An IPS is commonly used within the private client, high net worth, charity and institutional space, but it can be a tool for anyone to lay the foundation for a sound investment strategy and help stay on track over time.
For an institutional investor, it might be an investment manager, a consultant or even the institution itself. But for individuals, an IPS is often written in close collaboration with their Portfolio Manager.
If you don’t have an investment policy statement and you’re wondering why nobody’s prepared one for you, it may be a result of the way your portfolio is managed and your particular relationship with your manager. An IPS is typically prepared when your Portfolio Manager is making investment decisions for you on a discretionary basis.
At Cumberland, we are discretionary portfolio managers. That means we are held to the highest standards and have a fiduciary duty to act in our clients’ best interest. An IPS is essential to help us understand, articulate and agree upon what those interests are for each client.
Broadly speaking, the key components of an IPS are your Investor Profile, Investment Objectives, and Investment Constraints. In other words: who are you, what are you trying to achieve, and what are the appropriate risks or restrictions that need to be considered when it comes to managing your portfolio?
When we define your Investor Profile and Investment Objectives, we want to understand everything about your current situation and future goals.
For example, we’ll document your age, marital status, dependents, employment situation, assets, debt, income, whether you earned the money from employment or inherited it, or maybe from selling a business or real estate.
We’ll also delve into whether you are looking to fund retirement, create a family legacy to pass on to future generations, preserve capital to pay off a mortgage, or generate income to live on, or perhaps you have everything you need and just want to preserve your purchasing power and keep up with inflation.
From this understanding, we can take into consideration not only the need for return to achieve your goals, but also the risk involved in doing so, keeping in mind that aiming for higher return typically comes with higher risk.
So, if there are conflicting objectives – such as maximizing returns and minimizing risk at the same time – we need to decide which is most important and find an appropriate balance between the two aims.
We’ll also take into account any specific constraints you may have, which always includes the time horizon to achieve your goals, and usually includes other issues such as liquidity needs, tax considerations, legal or regulatory requirements and any other unique circumstances.
To summarize, your Investment Policy Statement is like the foundation and frame of your house. It provides the structure and shapes the portfolio for exactly your needs and risk tolerance. You can’t just start with the asset mix – it’s important to think through what you’re really trying to accomplish to ensure that the portfolio ultimately achieves its goals.
Your IPS can also be referred to when you’re tempted to adjust your asset mix based on short-term considerations such as market volatility. A good Portfolio Manager will help you refer back to your IPS and remember why you’re invested the way that you are, which can make it much easier to stay on track over time and feel comfortable.
For more than a decade, advisors and financial planners across the country have been pushing clients to open and invest in one of the greatest tax strategies Canadians have at their disposal, the Tax-Free Savings Account (TFSA).
Many have followed this advice, but a recent study conducted by Pollara showed that 31% of Canadians plan to use their TFSA as an emergency fund. While the TFSA is well-suited for this purpose, we want to outline why you should consider making the TFSA a part of your larger wealth management strategy.
This question comes up often, but for most of our clients, the answer is to take advantage of the benefits of both types of investment accounts.
When you make an RRSP contribution, it’s usually tax-deductible in the current year. However, both your original contribution and any gains you’ve earned will be fully taxable when you withdraw them in the future. The idea is that you’ll be in a lower tax bracket once you retire, and therefore will benefit from having deferred the taxes until then.
When you make a TFSA contribution, it’s not tax-deductible, but your future withdrawals are not taxed – including any dividends, interest or capital gains that you may have earned. That means you can grow your investments for as long as you want and withdraw funds whenever you need them with zero tax consequences.
Generally speaking, the RRSP is great for long-term, tax-deferred retirement savings, and the TFSA is a flexible way to invest for short- and long-term goals while avoiding taxes. They work very well together.
The first thing you want to do with a TFSA is make the most of your available contribution room. To illustrate the reason why, let’s look at a case study.
John is a 50-year-old entrepreneur who has built up a sizable RRSP. However, he has never opened a TFSA. That means he has been accumulating unused TFSA contribution room since 2009, and now has a total available limit of $75,500.
If John made the full $75,500 contribution this year, contributed $6,000 (the current maximum) in every subsequent year until age 80, and achieved a 6% annual return, he’d be on track for some pretty impressive results:
|John’s Age||Projected TFSA Value|
By age 90, John would have accumulated well over $1.6 million, tax-free. If his spouse followed the same strategy, his family could have about $3.3 million tax-free set aside.
Now imagine John wants to provide some financial assistance to his 18-year old daughter – say to buy her first home several years down the road. Why not take advantage of her tax-free investing potential too? He could gift her $6,000 per year which she could invest in her own TFSA. If she achieved the same 6% annual return as John, she would have over $100,000 tax-free put away before she turned 30.
Now what happens to John’s TFSA after he passes away?
If he elected his spouse as his Successor Holder, they could inherit his TFSA without tax, and it could continue to remain invested and earn income on a tax-free basis. This is an extremely valuable feature of TFSAs that is not available with regular investment accounts.
Alternatively, if he intended to have his daughter inherit his assets, he could name her as his Beneficiary, and she would receive the proceeds of his TFSA tax-free. Because the TFSA would not pass through his estate, the delays and costs associated with a legal process known as probate would be avoided. These fees vary by province, but in John’s case, would likely amount to tens of thousands of dollars.
While it is true that your TFSA can make a great emergency fund, it can also be a powerful way to accumulate tax-free wealth for your retirement, your growing family and your future estate.
If you have unused TFSA contribution room or questions about whether you are maximizing the opportunities available to you, please speak with your Portfolio Manager.
Have you started to make plans for your future estate? Are your children aware of your plans, and prepared for their future financial responsibilities?
If not, you are not alone. Canadians will hand down about $1 trillion worth of assets to younger generations over the next 25 years, and at least half lack an up-to-date, signed Will.
For many, talking about a wealth transfer can be awkward, stressful, or daunting. Perhaps it’s because many find it difficult to discuss death and ultimately plan for it. Or, maybe it’s because we’ve all heard stories of conflicts arising among family members.
Regardless, failing to properly plan for what happens to your assets can end up doing exactly the things you would rather avoid – adding fees, increasing taxes and worst of all, creating conflict.
Here are some strategies to improve the odds of a positive outcome for your family:
Open communication may not be comfortable at first, but it will help your children understand the choices being made and eliminate any surprises in the reading of your Will, which will already be a highly stressful time. It also allows your children to express their interests and concerns, which may affect your decision-making.
Discussing topics such as trusts, investments and taxes will also strengthen your heirs’ financial knowledge, which can improve their confidence and ability to manage their inherited wealth more prudently.
If you intend to transfer financial assets to younger generations, consider getting them used to working with a professional wealth manager now. Odds are, they are already very comfortable with technology, so a digital platform for investing might resonate more than traditional means.
Our Portfolio Advisor Tool (PAT) is often found to be a great solution for children and grandchildren. It enables them to manage their investments in a similar fashion to the online banking tools they already use, except with professional portfolio management to guide their investments and access to one-on-one education when they need it.
When your heirs have an opportunity to invest in an environment where they are already comfortable, it will likely increase their engagement, boost their understanding of wealth management, and can ultimately increase the odds of a successful estate transfer.
You want an estate plan that fulfills your intentions effectively. The right plan will help you realize your legacy while minimizing taxes and probate fees, maximizing the positive impact you have on the people and causes you care about the most.
At Cumberland, we can collaborate with you and your tax and legal experts to put your plan in place. Here are a few of the strategies and associated benefits you might consider:
Gifting Assets While Alive
This lets you see the benefits of your gifts while you are alive and can result in lower probate fees and tax upon death, especially if your heirs are in a lower tax bracket.
Having a Current Will
A current Will ensures that you control how your assets are distributed, aligned with your wishes and your tax planning.
Joint Ownership (with right of survivorship)
Sharing ownership of assets with a spouse in this manner can potentially allow the transfer of assets without probate fees or taxes.
This type of trust is created while you are alive and can allow you to plan the timing and amount of assets distributed to your heirs, potentially with creditor protection and avoidance of probate fees.
This type of trust is created upon death and allows you to control the timing for distribution of assets to your beneficiaries, which may be helpful if you wish to manage their ability to spend the assets.
Estate planning is often a sensitive topic, but procrastinating can be a big mistake. By having the conversations now, getting your children started with money management, and putting a plan in place, you can set your family up for a healthier and wealthier future.
Imagine for a moment that you are a dentist, a skilled practitioner who prides yourself in exceptional dental services. Your practice extends beyond dental care. A clean, comfortable waiting area, a friendly receptionist, strategies for calming nervous patients, accessibility help for elderly or patients with mobility issues, maybe a toybox for children.
And even when a patient is in the chair, dentists are often the first-line medical professionals alerted to underlying health problems, from stress and anxiety, to eating disorders, to cancer. This goes far beyond oral health to caring for an individual’s overall wellbeing. It’s not dental care. It’s dental caring.
Quite often, financial advisors are seen as a commodity. And there are many that act accordingly. They may have a duty of care, but they lack a duty of caring.
Boilerplate advice, boilerplate investments, one-size fits all. Just save your millions and retire. The media doesn’t help the cause of good financial advice, because caring financial advice doesn’t make the news. What makes the news is fraud, high-pressure sales tactics, and hidden fees.
And our own industry hasn’t helped with investment return ads that nurture an audience of performance addicts – with financial needs and goals either non-existent or taking a back seat.
Here’s an example. I recently had a client come to me who had had three financial plans done previously by three different advisors. The issue? These financial plans were done upfront as a sales tool and were never referred to or updated later. It was a means to an end, and nothing more.
No wonder my client was frustrated. While someone may have been monitoring the tactical part of his/ her portfolio of investments, no one was reviewing the strategic part – his life and financial goals – even though these were changing over time.
Just as you need and deserve a caring dental provider, you need and deserve a caring financial advisor. Someone who looks beyond your assets and future income potential and focuses directly on you and the life you’re living – and keeps looking on your behalf as your life changes.
That part is critical, because you’re sure to have financial needs that change and go beyond just saving for retirement. You may want to expand your business, or provide for a special-needs child, or buy or sell a vacation home, or plan for your future legacy, or any number of things.
The benefit of a caring advisor is the planning, advice and investment expertise they provide is aligned with your needs and goals – and it’s reviewed and updated to ensure that it stays aligned. From saving and investing for retirement, to taxes, to succession, to your estate – the expertise and planning is unique to you and will change as your needs evolve.
How can you tell if an advisor you meet – by design or by chance – is a caring advisor? Like any relationship, trust your intuition.
What will caring advisors do? They will probe – by asking questions and listening. It’s not just because they’re polite. It’s because they need to know what you want to do in life with your money, your life situation, your personal and business goals, your fears and challenges.
They will try to open you up to get to the root of “you.”
What will an uncaring advisor do? They will talk, not listen. They will tell you what they can do for you before they even ask what you need and what you hope to accomplish. And your financial plan will sit on their computer gathering digital dust, even as your needs change.
If you’re looking to fast-track an intuitive assessment of an advisor, ask them this simple question: why are you a financial advisor? You’ll get a lot of different answers from different advisors, but the caring ones will shine through.
Wondering how your taxes might change or perhaps you are thinking about succession planning and how tax reform might impact your plan all due to the recently announced Federal deficit?
Listen to our Podcast featuring Sunit Paul, Partner & Senior Tax Advisor from BDO, to discuss some worthy strategies.
Read an insightful article ‘Suddenly Single: How to Plan for Female Clients’ in Enterprising Investor by Barbara Stewart, CFA, a researcher/ author on women and finance, formerly Partner and Portfolio Manager at Cumberland Private Wealth. Erin O’Brien, CPW Partner and Portfolio Manager shares her approach and strong value-add.