Imagine this scenario:
Someone in your family passes away with two adult children, and leaves their sister to act as executor. The sister cashes out a $1 million RRSP and gives the proceeds to the surviving son, and transfers ownership of a $1 million condo to the surviving daughter. Sounds fair, right?
Not quite. The son ended up owing about $500,000 in taxes on the money he received. And when his sister refused to share that cost, he sued his aunt. As executor, she was liable for settling the taxes before disbursing the money. On top of that, the aunt failed to obtain an indemnity or a release from both the niece and nephew, leaving her open to personal liability.
This true story shows how a lack of knowledge and understanding and therefore arguably the mismanagement of an estate, can compound the pain of losing a loved one. That’s what made our recent webinar on executorship relevant. It was presented by two of our trusted experts in the field – Hadielia Yassiri, Lead Family Continuity Advisor at Green Marker, and Jandy John, Director at Wyth Trust.
Although the topic of the executor is a very large one with many facets, here are some of the issues that were discussed:
Who to name as your executor. If your situation is fairly straightforward, a spouse can be a good choice. But the more complex your affairs are, the harder the job can become. Complicating factors include having business interests, owning overseas assets, being responsible for a trust that must continue, having a blended family or even the advanced age of the spouse and his or her ability to handle the situation in its entirety.
Combining executors and trustees. You can name one or more executors for your estate and one or more trustees for a trust that holds your assets. For example, you might wish to name your spouse as executor and make her/ him co-trustee with a child so the trust can hold and disperse assets to the child in a controlled manner rather than having them inherit everything immediately. These arrangements can give you some control and flexibility.
Duties of executors. An executor is often responsible for more than 250 different tasks – everything from cancelling the deceased’s health card to enumerating their hockey card collection. The executor must gather all of the assets and see that a value is established for each one, then deal with the legal documents and family, typically file two separate tax returns, and provide detailed accounting to the beneficiaries. And, as we saw in the real life case described above, an executor can be held liable for any missteps. If you have been named as an executor, you might want to weigh the pros and cons of being able to fully follow through on these duties, or perhaps even exercise your right to renounce the position. You may even call in some professional assistance.
Engaging a corporate executor. When you hire a corporate executor, you are putting an experienced professional in charge. They can neutralize some of the most common causes of conflict among beneficiaries by not allowing their decisions to be clouded by emotion or sentiment about mom’s ring for example, and by providing impeccable reporting. They also take the burden of any financial loss if mistakes are made.
Deciding who to name as an executor and how to plan your legacy is a huge topic and the role comes with serious duties and responsibilities. Deciding how to handle given matters if you have been named an executor is another one. Both can have a material impact on your financial and emotional well-being, as well as impact those you care about. At Cumberland, we are here to help our clients navigate these issues and more, and to work with the experts and teams through our comprehensive approach to wealth management.
Contact us to request a replay of the webinar.
Retirement planning is an inevitable stage in everyone’s life. What determines whether you will be in a stable financial state during that period is how you have been able to save and invest during your active days. It is never too early to start a retirement savings and investment fund that will ensure you spend your latter days in reasonable financial comfort. We all have life goals that require planning, but it is advisable you include retirement planning so as to achieve a desirable retirement goal. Just as it is never too early to start your retirement planning, it is also never too late to start one. If you are close to retirement, it is still possible to start a retirement plan.
Why Do You Need to Plan for Retirement, No Matter How Late?
There are different retirement plans that will suit your future goals. While some people will prefer to retire at the official retirement age, some will retire as early as 50 to 55 years of age. For someone close to retirement age, your retirement plan may be different from someone younger because of the age difference. It is important that you have a retirement plan that specifically suits your post-retirement needs, putting into consideration that you started your plan late. Some of the reasons why you need a retirement plan, regardless of your retirement age include:
If you desire to retire at an early age of 55 and you do not have a retirement plan late into your retirement age, don’t be discouraged that you are starting late. You can still enjoy your retirement days even though you start planning late.
Here are some steps you can take:
It is never too late to start. Do not avoid meeting a financial advisor regardless of your age. There are many options (many of which you might not know) that an advisor can assist you with. Our team at Cumberland would be happy to guide you.
Many people may worry as they get older about what will happen if they are no longer able to
manage their finances and personal property. It can be a good idea to be proactive in planning
ahead for a time when you may need help managing your affairs. One option available to Canadians
to address this financial planning concern is appointing a Power of Attorney.
Power of Attorney (POA) is a legal document that gives one or more persons the authority to
manage your finances on your behalf. Once a person is appointed POA, they have the same
decision-making abilities over your finances and property as you do. This includes bank accounts,
investments, bills, real estate, among others. It’s important to understand that this does not
mean they now own the property, only that they can make decisions regarding it. POA is limited,
however, and they do not have the authority to make or change your will, change beneficiaries, or
appoint a new POA. You can outline how the power of attorney can act.
For example, you can limit them to having decision making abilities over only one piece of property.
It is possible to appoint more than one person as power of attorney. The acting POA’s can be
required to make decisions together, or have the ability to act separately. This is something that
is outlined in the power of attorney document. Unless you become mentally incapable, you still
maintain the same control over your finances and property.
There are two types of power of attorney when dealing with finances and property:
General Power of Attorney
General POA gives someone the authority to make decisions over some or all of your property
on your behalf. General POA only has this authority when you are mentally capable of managing
your own affairs. POA ends immediately if you become incapable. Power of Attorney can come
into effect when you assign them or on a specified date.
Enduring/Continuing Power of Attorney
Enduring POA allows for the appointed attorney to have decision making power over your
property when you are mentally incapable.
The person you assign as power of attorney should be someone you trust completely. This person
could be a spouse, sibling, child, or other friend/relative. The minimum legal age for a POA varies
from province to province. It is recommended to assign a substitute POA in the event your first
choice is unable or unwilling to assume the role. It is important to note that in some provinces, POA’s
are entitled to be paid unless otherwise specified in the document. Power of Attorneys must be able
to manage your money in your best interest and keep detailed records on the decisions they make
on your behalf. Below are a few questions to ask yourself about the person you are considering
• Does this individual have experience managing money and property? Do they do a good job
of managing their own affairs?
• Do you know this person well enough to feel that you can trust them?
• Do they have any personal issues that may interfere with their ability to act in your best
• Does the individual understand what will be expected of them as your attorney?
• Does this person have the time to manage your money or property as well as their own?
• Is this person nearby and readily available to assume this role? Having someone that lives
far away from you may cause issues.
• Has this person willingly accepted their appointment as attorney?
• Makes it clear to family and friends who will be responsible for your money.
• POA’s must manage your money for your benefit and can be required to account how they
• Your Power of Attorney document can be as general or specific as you want giving you great
flexibility over what assets your attorney would have control of.
• The ability to have multiple attorneys can limit the possibility of someone taking advantage of
• Can lead to mismanagement of your money if your POA turns out to be untrustworthy.
• Sometimes people limit the abilities of the POA to the point that it makes it difficult for the
POA to fully take care of your finances.
• Appointing two or more POA’s can come with certain challenges. If the POA’s are required to
act jointly then it is possible that they will not agree on certain decisions.
• If your Power of Attorney is not up to date, it is possible that the person you appointed may
be currently unsuitable for the role.
Appointing a Power of Attorney can be a good option for many people and gives them the peace of
mind that someone will be able to help them with their money if there is ever a need for it. When
appointing a Power of Attorney, it is important to work with a lawyer who can fully explain the legal
document to both you and your attorney. You should never feel pressured by a relative or friend to
sign a Power of Attorney.
It is also important to note that a Power of Attorney for Property is not the same document as a
Power of Attorney for Personal Care. A POA for property will have no authority to make decisions
regarding your personal care. These are two separate legal appointments, and they are not
For further information, please contact a Cumberland* Portfolio Manager, who can assist by
connecting you with just the right expert advisor.
Most of us know that having a will is important, but statistics show that what we know about wills and the action we take with wills are very different. According to a survey conducted by a leading Canadian bank in 2013, more than half of Canadians die without a will. If you die without a will in Canada, it is referred to as dying in intestacy. When you die intestate, it is up to government legislation to handle your affairs. Below are some points that should be seriously considered before deciding against a will and how you could expect the estate will be distributed according to the current rules of intestacy.
Anyone who has assets, debts, or dependents should have a will. This seems obvious. Most everyone wants their family to be looked after when they die. By not leaving a legal will behind, your family may not be cared for appropriately. Death takes a huge emotional toll on a family and not leaving a valid will can make things much worse.
Below are some considerations for your estate if you do not have an up to date will. While this list is by no means exhaustive, these points should be carefully considered before deciding against a will:
If an individual chooses not to leave a will behind, then the estate is distributed according to regulations set forward by provincial legislation. Every province has its own legislation for their intestate rules. It is important to be familiar with the rules in your province. The distribution is dependent on a variety or marital/family situations. Typically, each scenario unfolds as follows:
In situations where the deceased has a surviving spouse but no children, the entire estate is passed to the spouse.
When the deceased leaves behind both a spouse and one or more child, in most provinces, the notion of preferential shares come into play. Preferential shares dictate that a certain amount of the net estate is directed first towards the spouse. Depending on the province in which you reside, the amount of the preferential share could range from $50,000 to $200,000.
If the value of the estate is less than the dollar amount set out by the province, then the spouse receives the estate in its entirety. If the value of the estate exceeds the dollar amount set out by the province, then the preferential shares come into play. The spouse receives the preferential share amount and then the remainder of the estate is divided between the spouse and children.
Beyond Preferential Shares
The net value of the estate that exceeds the preferential share amount is shared between the surviving spouse and children. This distribution is defined by provincial jurisdiction. Where there is just a spouse and one child, most provinces distribute one half of the residual estate to the child and one half to the spouse. If the child has predeceased the parents, then their share is distributed down to their children (if they had any). This distribution is based on degrees of kinship and is referred to as per stirpes.
Where there is a surviving spouse and more than one child, the distribution differs by province. Generally one-half to one-third goes to the spouse, with the remainder being divided up equally among the children. In most provinces the children’s shares are distributed per stirpes. If there is no surviving spouse, then the estate is shared equally by the children.
*Provinces that do not recognize preferential shares include New Brunswick, Newfoundland, and PEI.
If the deceased leaves behind no spouse or children, then the estate is distributed to other heirs. In all provinces, except Quebec, if an individual dies without a spouse or children, the estate is passed to their parents in equal shares. If the individual is predeceased by their parents, then the estate passes equally to any brothers or sisters. If there are no surviving siblings, then the estate is then passed down to any nieces or nephews. In the case that there are no nieces or nephews, then the estate is distributed equally among the deceased’s next of kin.
If a person dies without any heirs, then each province has legislation that dictates the estate passing to the Crown in a process known as escheat.
Not having a will is risky business and there is virtually no benefit that comes from neglecting to have one created. The processes that go with dying intestate are complicated and may cause your family more grief than necessary when trying to cope with your death. A will is perhaps the most important part of any financial plan. No matter what stage of life you are in, it is never a bad time to contact Cumberland’s team of in-house investment professionals and third party experts to start developing a well thought out estate plan.
Death and money are traditionally taboo topics. Yet, when we avoid discussing them, we may also fail to adequately plan for them, and that can lead to confusion, conflicts, stress and financial loss.
Recently, trust and estate lawyers Margaret O’Sullivan and Stephanie Battista presented our clients with two valuable wealth planning lessons that can help prevent such negative outcomes. They shared stories based on real life situations drawn from their years of experience assisting affluent families, including clear steps we can all take to protect ourselves and our loved ones.
Leanne* was a schoolteacher in her mid-40s with a teenage daughter. Her husband, Tim,* owned a successful IT business and took care of most of the household finances. When Tim passed away suddenly, Leanne was thrown into complete chaos. Not only were most of the family’s financial records hidden behind passwords on Tim’s computer, but his company’s payroll also was due in about a week, and she had no idea where to begin.
In hindsight, Leanne’s situation would have been much better with a personal contingency plan in place. Such a plan would have let her know who to contact, what cash and other assets the family owned, where they were located, and how to access them. She would have had all the names, passwords, account numbers and procedures she needed when Tim was no longer able to take care of the couple’s affairs.
Your personal contingency plan can be as simple as a document with the “who, what, where and how” for your family when they need it. Think about bank accounts, investment accounts, insurance policies, titles to real estate, and details about holding companies and trusts. Please contact us if you’d like a starter template that you can help you address all of this.
Catherine* was the executor of her father’s will, which stated that his assets would be shared equally between her and her late brother, Andrew.* However, since Andrew was separated – but not divorced – from his spouse of 20 years prior, Andrew’s spouse was still legally entitled to his half of the estate assets.
Fortunately, the law pertaining to separated-but-not-divorced spouses is set to change in January 2022 to avoid such extreme situations, but the lesson still stands. It is essential to keep wills and powers of attorney up to date to ensure that your wishes are carried out the way you intended.
A good guideline is to review these documents every 3-5 years, or when there is a change in your circumstances, such as:
For example, if you drew up your personal will early in your career and you now own a holding company with significant assets, you may need a dual will plan to protect your corporate assets from a 1.5% probate tax if you were to pass away.
Another common situation is giving money to a child to purchase a home. Is this an advance on their inheritance? Do you need to equalize it to be fair to your other children? Whenever there’s money in motion among your family members, you might want to consider how this can impact your estate plan.
A growing trend among Canadians is to purchase properties abroad. Whether the property is in the US, Costa Rica, France or Mexico, you should be aware that even something as simple as opening a bank account outside of your home country may require an update to your will in order to avoid potential issues down the road.
Your Cumberland Portfolio Manager can help you identify these wealth planning opportunities, review them with you and confidently recommend the right estate, tax and legal experts to help you address your given situation. Often times, a significant change in your circumstances will also trigger the need to review of your investment portfolio. When these moments occur, we are here to assist you. It’s all part of our commitment to help grow and protect your wealth for future generations.
*Not their real names
Canada is home to more than one million small and medium-sized businesses*. These businesses are of vital importance to our economy, to our communities and to the people who own them.
At Cumberland**, we are often asked to help business owners and successful professionals plan for retirement. When this happens, we find it is often worthwhile to pair our wealth management expertise with the insight of dedicated tax planners.
Recently, our clients were treated to a presentation by Peter Routly, CPA, CA, TEP and Jeff Noble, DMC, FEA from accounting firm BDO Canada, where they specialize in helping high net worth individuals and families maximize their wealth through strategic tax planning.
Among the many insights they shared were three potential real life stories involving scenarios that you may find relevant and relatable.
Mary earns about $500,000 per year, which would place her well into the top tax bracket. To help manage this, she has established a professional corporation which allows her to lower her tax rate.
Since she does not have a pension plan and will not be able to sell her practice to fund her retirement, she needs to find a tax-efficient way to maximize her savings. One potential strategy is to create an Individual Pension Plan or IPP, which can be likened to a supercharged RRSP. An IPP would allow Mary to make significantly higher tax-deductible contributions than a regular RRSP, and essentially create her own pension plan.
She is also looking at establishing a discretionary family trust, funded through a loan, to hold some of her and her husband’s investments. This will effectively allow them to cover their university-aged daughter’s living expenses on a tax-free basis.
Bob owns a successful manufacturing business that generates about $1 million of annual net income after paying himself a salary of $200,000. As he approaches retirement, he has many tax planning options to consider, including the implications of selling the business or transferring ownership to his son.
He is also exploring the option of setting up a Retirement Compensation Agreement or RCA. An RCA would permit his company to make tax-deductible contributions to a fund from which Bob will make withdrawals once he retires.
At that time, if he decides to spend significant time at his property in a low-tax jurisdiction in the Caribbean, Bob may be able to keep his Canadian home and citizenship but draw his retirement income at a significantly lower tax rate.
Chris and his two co-founders are about to sell their tech startup to a venture capital firm for $30 million. With his $10 million share, he is looking at two tax planning strategies.
The first is to create a discretionary family trust, funded through a loan, that will allow him to split his investment income with his wife and three children. Since his family members have no other income, they can potentially draw household income of more than $150,000 per year on a tax-fee basis.
The second is to place $1 million in a life insurance policy with an investment component that can grow significantly on a tax-free basis over the next several decades, and ultimately leave his children with a significant tax-free inheritance.
These are just three possible life stories, and there are nearly limitless variations based on your personal goals, business situation, family status, and how aggressively you wish to pursue your tax strategy.
One thing for sure is that, as a client of Cumberland**, you can look forward to expert retirement planning and proven wealth management combined with the integration of advice from some of the country’s very best tax planners.
The global pandemic has altered many perspectives on the working world – from recognizing our dependency on essential workers and appreciating the struggles of small businesses to honouring the sacrifices of healthcare staff and adapting to the realities of schooling and working from home.
During this time, we’ve heard from a number of people who have decided to rethink their relationship with their financial advisor. This is unsurprising, as periods of unusual stress or uncertainty often reveal who is really looking out for us.
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 toy box for children.
And even when a patient is in the chair, you and your staff act as first-line medical professionals, alerting patients 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.
When it comes to financial advice, financial advisors may have a duty of care, but they lack a duty of caring. Quite often, they are seen as a commodity, and there are many who act accordingly.
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.
Our industry hasn’t helped much, 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 portfolio (his 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.
During times of unusual stress or uncertainty, whether it’s due to economic challenges, a global health emergency, or unforeseen events in your own life, the guidance and communication you receive from a caring advisor will be even more frequent, proactive and personalized – not less.
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.
As a Canadian, there are few luxuries more appreciated than having a warm place to escape the winter. Whether that means a condo in Palm Beach or Naples, a bungalow in Oahu, or a ranch in Austin, owning real estate in the US can come with a few financial complexities that you should know about.
At Cumberland, financial planning around US assets is part of what we do for our clients. Often, this involves collaborating with estate, tax and trust experts to ensure that your strategy is sound.
One such expert is Hadielia Yassiri of Green Marker Wealth Continuity Advisory, who recently presented a webinar for our clients. If you’re wondering whether you could fall into a US tax trap, here are three red flags she recommends looking out for.
If you have a “substantial presence” in the US, you could be considered a US resident for tax purposes. That means you may be forced to pay the IRS tax on your worldwide income.
The Substantial Presence Test is a formula based on your time spent in the US. Add all the days you’ve spent in the US in the current calendar year, 1/3 of the days in the last calendar year, and 1/6 of the days from the year before that. If the total is 183 days or more, you could be considered a US resident for tax purposes.
There are two potential solutions, depending on the specifics of your situation. One might be the Closer Connection Exception, which requires you to prove that you have closer ties to Canada. The other might be to apply for an exemption under the Canada-US tax treaty.
As we all know, the US is a different jurisdiction than Canada with its own set of rules.
Joint property rules are different. For example, in the US, if a couple owns a property in joint name and one partner becomes incapacitated due to illness, the healthy partner may be blocked from selling or refinancing the property until either their spouse passes away or they spend tens of thousands of dollars in state court applying to act as their spouse’s attorney.
Capital gains taxes are also different. If you sell your US property at a gain, you will have to pay capital gains tax in the US and report the sale in Canada as well. You will be paying additional Canadian capital gains tax but your US tax liability can be claimed as a foreign credit against your Canadian taxes so you can avoid double taxation. You may also be subject to US withholding based on the total sale price of the property under the Foreign Investment in Real Property Tax Act (FIRPTA).
And, of course, the US is famously more litigious than Canada. If you rent out your US property and somebody slips and falls by your pool, they could sue you for millions, and that litigation could follow you all the way back home.
In short, if you own US real estate, it is wise to review your planning around income tax, capital gains tax, estate tax, incapacity and creditor protection to make sure you won’t be facing any surprises.
If you pass away while meeting the current US estate tax threshold of owning US assets worth more than US $60,000 and a worldwide estate greater than US $11,580,000, you could be subject to US federal estate taxes and state probate. These taxes may be significant – for example, the combined estate and probate taxes on a property in Florida can be as much as 44%.
In 2017, the threshold for triggering US estate taxes was raised from the previous level of about US $5.8 million, and it is now widely believed that it could again return to that lower level. If you are in the danger zone, it makes sense to review how you are using vehicles such as corporations and trusts to potentially reduce the impact of US taxes on your worldwide estate.
Despite the relative complexity of owning US property, most would agree it’s still worth the effort. As a client of Cumberland, we will facilitate the planning and advice you need to help minimize the risks and maximize the pleasure of those balmy winter days.
Remember that BIG fish you caught when you were five and came back to tell the story?
Some of my fondest memories were made at our family cottage on Lake of the Woods in Ontario. We would spend a couple of weeks out there every summer with my dad’s parents and cousins fishing, jumping off the boat house, learning to water ski and hiking through the old gold mine with grandma leading the way (it was her short-cut back to the cottage).
While it’s a joy to reflect on these memories, there are some future implications to owning a cottage that can be less pleasant if you are not careful. Indeed, if it is your dream to pass your family cottage down to future generations, thoughtful planning needs to take place.
Cottages are often one of the most valuable assets in a family – both in monetary and sentimental terms. This may be why they tend to become one of the more contentious aspects of estate planning.
Some may argue that it’s best to put sentiment aside and simply sell the cottage. With this approach, you can avoid financial complications like unfunded tax liabilities, and practical complexities like deciding how the heirs should share the use of the cottage. You can simply divide the after-tax sale proceeds among your beneficiaries as you see fit.
If this is your choice, it is advisable to clearly communicate your intentions well in advance. Disputes are more likely to arise if news of selling the cottage comes as a surprise to anyone. This is particularly true if the cottage is being sold or gifted to just one family member. It’s better to discuss your decision now than to have it create conflict later.
Alternatively, you may feel that it is preferable to keep the property in the family in order to preserve tradition and enable future generations to continue creating fond summer memories.
If this is your decision, communication is again essential, particularly if the cottage will become a shared asset among more than one household. Collectively deciding how the property will be owned, used and maintained will be vital to the cohesion of the family going forward.
Here are some financial planning considerations to discuss with your advisor:
Drafting a shared asset agreement or establishing a trust are two ways you might handle at least some of these considerations. These legal structures can help you plan for tax implications and establish the rights and responsibilities of your beneficiaries.
Deciding how to handle the family cottage requires thoughtful conversations and practical education around the available options. If you’ve been thinking about addressing this important issue, your Cumberland Portfolio Manager is someone who can help facilitate the process for you.
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.