Last updated: January 23 2008

When the Bears Emerge, Return to Portfolio Planning

Doug NelsonBy Doug Nelson

What an interesting couple of weeks in the financial markets. . .this is when financial planners really earn their stripes! If you haven t been on the phone with your clients, you should be. It s time to revisit and reassure and to discuss some tax, retirement and portfolio planning principles. Here are some of my favorites:


  • Benchmarks. Consider the following in measuring all other investment and planning concepts: a) annuitize all assets for life, based on 100% to the last survivor and b) discuss the amount of money your clients wish to pass on to their kids c) calculate the premium for a joint last survivor life insurance policy for this amount. This is your benchmark because it achieves two things: 100% security for a lifetime of income and 100% security of money to the kids. All other investment alternatives should be compared against this basic benchmark so as to determine just how much portfolio risk needs to be taken to achieve better lifetime results.
  • Taxes Count. To compliment tax planning provisions, investment product selection is important. Reduce taxable income today consider the use of a T-SWP product that pays out return of capital. Or consider the use of a prescribed annuity as a way to provide significant, tax free annual income.
  • Discuss Risk and Return. Always measure both the risk and the return characteristics of a portfolio. Fully disclose these characteristics to the client. Example: Use 3 standard deviations to discuss volatility, look at the frequency in which a portfolio will produce a 1 year negative return as well as the historical range between the worst and the best performance years of the portfolio and / or benchmark. How the client reacts to this information will tell you if you have them in the right risk / return category.
  • Manage Risk and Return. Preferred Shares do have some volatility and one needs to be wise in their selection, however, a 5% preferred share from a major Canadian bank is roughly equivalent, on an after-tax basis, to a 7% GIC. If you could provide your client with a 7% GIC today, would you?
  • Manage the Product Selection. Avoid products that have above average fees, are complex and hard to understand, are ill-lliquid and / or ones where you may not receive the full benefit of their value for 10, 20 or 30 years.
  • Balance with Simplicity. To create a balance between growth investments and income investments, consider using a 10 year prescribed annuity in combination with a growth oriented investment with the same 10 year time horizon.
  • Cut the Fees. By eliminating management fees from your fixed income investments the yield on those investments will significantly increase. For example, if a bond fund currently yields 4% and the management fee is 1.5% (for a net return of 2.5%), by eliminating the management fees you can increase the net yield by 60% (= 1.5 / 2.5).
  • Fix Up Cost Savings. To reduce the management fees on your fixed income investments consider eliminating the use of all balanced funds. Balanced funds charge an equity equivalent management fee (e.g. 2%) even though 20% to 50% may be in fixed income investments. Alternatively, if the client owned GIC's and one or more equity mutual funds (or a bond ladder, or a basket of preferred shares) the after fee rate of return on the fixed income investments would make a huge leap.
  • Exchange the Fees . To reduce the management fees on your equity holdings consider the use of exchange traded funds. For example, to own the TSX 60 index (a basket of the 60 largest companies in Canada, to which most mutual fund managers would also own) costs the client only 0.18% per year. This is 1 / 13th the cost of the typical mutual fund. Then, charge the client a separate advice related fee for portfolio design, portfolio monitoring and tax work.
  • Show Your Expertise. Take the Financial Literacy as well as the Portfolio Construction courses in The Knowledge Bureau s New Retirement Income Specialist Designation program....word has it they are really good!

Douglas Nelson is the author of The Knowledge Bureau s Advising Family Businesses course. He is a regular speaker on the subject of the Six Step Succession Mapping Process and How To Be In Sync With Your Entrepreneurial Clients. Doug is an independent financial planner who has survived first hand the family business succession experience and provides regular consulting services to both entrepreneurial families and their advisors. Doug attained his Master Financial Advisor (MFA) designation from The Knowledge Bureau in 2007.