Financial planner without a plan

Q: I am a consultant and I am 62 years old. My wife is retired and is 60. I am intending on retiring this May. In the past we had bad experiences with financial planners and two years ago switched everything over to the bank and have used the services of one of their planners of which we feel is more competent than the past planners. I have a corporation for my consulting job which presently has $100,000 in cash and $312,000 in investments. My wife and I both draw dividends from the company each year. Presently we are drawing $40,000 each. The company investments are bank products (a high yield fund and a monthly income bond fund). We have a combined RRSP worth $600,000. Our RRSP investments consist of all mutual funds, such as a balanced fund, a conservative portfolio and a North American value fund. When I reach 65, I will get the max for CPP and my wife will receive about 60%. Our plan is to draw money ($40,000 apiece) from the company for the next few years (in combination of my CPP and OAS when we hit 65) and then draw from our RRSPs (no other retirement income). Our target is to live on $60,000-$70,000 a year. We have no mortgage to pay and our house is worth $500,000 so we are thinking the money from the sale of the house when we die is a healthy inheritance to be split up between our three children. Are we on the right path for investments or do we need a makeover? Also I believe we have enough of a nest egg to provide us for the rest of our lives, please confirm if you agree.—George

A: You may think you’re working with a financial planner, George, but you’re really not at all. You’re working with a mutual fund representative who is able to sell you mutual funds offered by your bank only—which is really just a small subsection of the mutual funds available in the Canadian marketplace. And mutual funds are just a small subsection of the investments available in the global marketplace.

Your bank rep may be a Certified Financial Planner (CFP) by training, but not in practice. They certainly aren’t providing you with financial planning. It’s terrible to think that you have worked with multiple so-called “financial planners” and with retirement nearly upon you, you don’t yet have a retirement plan.

I grit my teeth when I need to tell people what I do for a living, because when I say “financial planner,” they assume I sell mutual funds and insurance. It’s hard to explain that I actually help people plan their finances, because so few financial planners actually do that. It’s a novel concept. I should just tell people I’m a writer. Or a father.

So where do I start, George?

Firstly, I wonder if your bank rep has taken the time to explain the difference between actively managed and passively managed mutual funds? It’s an important distinction, because active and passive represent two different schools of thought.

Your bank offers an actively managed Canadian equity fund that has managers who try to buy and sell and wheel and deal and beat the Toronto Stock Exchange. It has an embedded fee (management expense ratio or MER) of 2.05% to pay for all those overhead costs. It has lagged the average Canadian equity fund by 0.13% annualized over the past 10 years and lagged the TSX’s total return by 1.46% annualized over that time. Ouch.

Your bank also offers a passive index mutual fund that has lower fees and effectively buys all of the stocks on the TSX rather than spending money and manpower on research to figure out which ones to buy and sell. The annual fee is only 0.72%, so much lower than the active Canadian equity mutual fund they offer. And interestingly, the 10-year annualized performance has been 0.83% better. I wonder if it has anything to do with the 1.33% lower fees?

And has your bank rep told you that there are Canadian equity exchange-traded funds (ETFs) with annual fees of only 0.05%? A financial planner would help explain these things whereas a mutual fund salesperson would only sell you their products.

Your “planner” is probably getting paid about 0.5% of your $912,000 in investments—or $4,560 per year. If they haven’t asked you about retirement or helped with your retirement planning, I’m afraid they’re being paid an awful lot to do very little for you, other than helping you under perform the benchmark.

With nearly $1 million to invest, it seems inappropriate for you to be investing at the bank branch level. You probably should have been referred to the bank’s wealth management arm, where they could offer you more robust investment options than mutual funds at half the cost.

» How to find the perfect financial planner

And beyond that, with nearly $1 million to invest, you have a lot of non-bank investment firms that are likely to be more lean and more nimble and if you really want to invest your money with an investment professional in an active manner, a private investment firm may be worth considering, George.

That’s my rant on your investments. Investment buyers have to beware, because your bank rep is not a fiduciary and is not necessarily looking out for your best interests.

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Generally, I think your retirement cash flow looks good. I used your numbers along with some of my standard assumptions and figure your will likely draw your investments to zero by about your age 92 based on a 5% annualized investment return and assuming the maximum end of your budget range—$70,000 in annual spending, indexed at 2% annually.

Your incomes are projected to be in the lowest marginal tax bracket throughout retirement based on your suggested sequencing of withdrawals and your pension entitlement.

I think that one key to your retirement cash flow planning is going to be ensuring your budget takes into account some of the unforeseen expenses that pop up each year or every few years and that your estimated spending is in line with your actual spending, George. If $70,000 is actually $80,000 or you haven’t taken into account car purchases, home repairs, children’s weddings, etc. then things may be a bit tighter.

I think your biggest risk in retirement may be paying too much in fees for a sub-par investment return. At a 4% net annual return instead of 5%, your investments would be depleted 5 years earlier—by about age 87.

So when you’re working with a financial planner, you should make sure they’re actually planning your finances. And when it comes to your investments, make sure you’re getting the whole story so that you’re getting value for your investment dollar.

Ask a Planner: Leave your question for Jason Heath »

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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