Questions for my Fin. Advisor

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
par4
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Questions for my Fin. Advisor

Post by par4 »

I have a Financial Advisor for my personal investments but I do manage my small Co. Portfolio on my own. I have had this advisor for the past six years and have been very satisfied with the results. We have a small competition going and it varies who wins from year to year. This year I won by very little but when I received my personal tax information from TD I was amazed at the amount of Capital Gains recorded. I called him to question it but he just repeated ‘that this year had not been as good as previous ones’ and something about “rebalancing”. I mentioned to him about the tax consequences of the huge CG but he was not concerned. I decided to wait until my return was complete before I requested a meeting.

My return is now completed showing Capital Gains of 32M (Actually 64M) and Investment Inc. 15M . My portfolio has decreased 14M for the year. (allowing for currency changes) My only withdrawals have been 15M personal and 9M in his fees. This is a totally new Tax Bracket for me :(
It has been quite a shock as I not only owe considerable tax but I have lost my Age Exemption, suffered Claw-back and probably a penalty for unpaid installments. (paid some but not as req,.)
I have a meeting this week with said advisor and he has requested I put my questions in writing before meeting with him so he can be dutifully prepared!
What should my questions be – other than what happened to the 94M minus the 24M? I suspect this new enhanced account statement CRM2 may have some of the answers but in the meant I must pay the Tax Man!
Incidentally, at our initial meeting 6 years ago, it was agreed there would be no Mutual Fund Investments.
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Re: Questions for my Fin. Advisor

Post by gobsmack »

You are playing in a totally different league then me by a very long shot so I am not sure if what I am going to say is relevant.

Maybe you should start by reviewing all the statements and transactions in the account so that you can understand what caused the massive capital gains. Maybe your advisor got spooked by the rout in the beginning of 2016 and decided to sell everything? If that is the case, did he manage to find a good entry point to get back in the market (likely not given that portfolio value is down)? I would be paying attention to what the ACB looks like now for each position. I would also be looking for any superficial losses that prevented you from reducing the capital gains tax. As much as it sucks to pay the tax though, you still made 64M in capital gains and this is a reason for celebration. The tax would have to have been collected at some point in the future anyway (upon your death at the latest).

You are concerned about the tax but I find his fees a much bigger reason for concern. Your portfolio generated 15M in income (without the capital gains) and your advisor has collected 9M in fees. That seems incredibly expensive to me. The tax is hopefully an anomaly this year but his fees are going to be collected every single year. I think I would be a lot more concerned about that.

Edit: Given that you already took the hit in the capital gains tax, maybe you have an opportunity here to organize your exit from Canada? I think the capital gains tax is the most painful aspect of loosing tax residency in Canada. But if you already took the hit, you may have an opportunity here to move your funds to another jurisdiction. (I was reading M = 10^6)
Last edited by gobsmack on 23 Apr 2017 09:18, edited 1 time in total.
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Re: Questions for my Fin. Advisor

Post by adrian2 »

gobsmack wrote: 23 Apr 2017 07:02 You are playing in a totally different league then me by a very long shot so I am not sure if what I am going to say is relevant.
I'm guessing M is shorthand for thousands, not millions.
In bank speak, MM is millions, MMM is billions and so on.
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Re: Questions for my Fin. Advisor

Post by kcowan »

I don't understand the math but it is early Sunday morning!
Gross portfolio gain: $64M in capital and $15M in income. = $79M
Less withdrawals: $15M plus $9M plus taxes = $24m plus tax
Net gain: $14M
Implied taxes: $79M-$24M-X=$14M so x= $41M
So realized exchange gains and tax rate really nailed you.
You should discuss the adverse impact of realized exchange gains as well as his fee.
$14m for you and $9M for him is not OK.

(all in thousands of course)
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Re: Questions for my Fin. Advisor

Post by gobsmack »

adrian2 wrote: 23 Apr 2017 08:27
gobsmack wrote: 23 Apr 2017 07:02 You are playing in a totally different league then me by a very long shot so I am not sure if what I am going to say is relevant.
I'm guessing M is shorthand for thousands, not millions.
In bank speak, MM is millions, MMM is billions and so on.
oops... my bad. I was reading M = 10^6 . I should have realized my mistake given that he mentions a different tax bracket.

For a minute, I thought Johnny Depp had joined the forum :lol:
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Re: Questions for my Fin. Advisor

Post by AltaRed »

First point. You will not be penalized for under payment of installment payments. As long as you meet CRA's requests, there is no penalty. However, with the large cap gains taxes now to be paid, it will mean your Sept and Dec installment payment requests will be a lot larger than you will have paid last month and what you will pay in June. [Installment payment requests by CRA for Sept/Dec 2017 and Mar/June 2018 are based on what your tax bill is this month for the year 2016].

But getting back to your portfolio, it is obvious the advisor has re-balanced your portfolio (presumably to your asset allocation mix framework you have in place with your advisor) without due respect and thought about the consequences of cap gains taxes. 2016 was an especially good year for equity gains and I suspect a lot of equity got sold to re-balance in the underperforming 'bond' portion of your portfolio. I still don't know however how you could end up the year with a portfolio that is 'down' in value.

You do need to have a meeting of the minds with him and make sure he does not keep doing this in the future without your pre-agreed input about the consequences of such cap gains on your age exemption, clawback, etc. Indeed, I would call him out on that being irresponsible behaviour. It is up to you whether you continue to let him have discretionary management (trading) rights without your pre-approval, or to change that model to requiring your pre-approval.

A good financial advisor would have at least called you with an overview of what he was planning to do and the potential consequences before acting on it. That is what he is earning his fees for. Personally, I'd fire him, or read him the riot act, about doing that kind of thing without pre-approval again.

Lastly, it is hard to comment on fees without knowing the fee model under which you are working. Is it based on full service commissions, or a % of AUM model? With a significant portfolio, it doesn't take much to generate $9,000 in fees.
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Re: Questions for my Fin. Advisor

Post by Peculiar_Investor »

AltaRed wrote: 23 Apr 2017 10:47 You do need to have a meeting of the minds with him and make sure he does not keep doing this in the future without your pre-agreed input about the consequences of such cap gains on your age exemption, clawback, etc. Indeed, I would call him out on that being irresponsible behaviour. It is up to you whether you continue to let him have discretionary management (trading) rights without your pre-approval, or to change that model to requiring your pre-approval.

A good financial advisor would have at least called you with an overview of what he was planning to do and the potential consequences before acting on it. That is what he is earning his fees for. Personally, I'd fire him, or read him the riot act, about doing that kind of thing without pre-approval again.
I have a different perspective. If indeed this is a discretionary management arrangement, then I would have expected the Investment Policy Statement (IPS) would have clearly stated any tax considerations/consequences.

Assuming the IPS specifies a risk profile and target asset allocations, then prudently capturing appropriate capital gains and maintaining the specified asset allocation is appropriate behaviour, even if it might have "negative" tax consequences to things like age exemptions/clawbacks.

For example, imagine if the portfolio was invested in Valeant and the advisor prudently sold early before the slaughter, generating capital gains. Isn't that appropriate and expected behavior?
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Re: Questions for my Fin. Advisor

Post by AltaRed »

You are right IF the IPS had tax consequences/considerations in it but I've seen a number of these things before in a prior life (albeit I've never had a discretionary management arrangement), and they were devoid of anything with tax implications. Which if not, does give the advisor free rein.

Regardless, a good financial advisor would have contacted the OP and discussed the consequences of making the transactions before doing them. It is simply a matter of courtesy and respect. It is the OP's comments
I called him to question it but he just repeated ‘that this year had not been as good as previous ones’ and something about “rebalancing”. I mentioned to him about the tax consequences of the huge CG but he was not concerned
that bother me. Not converned about the impact of huge CG?

At the very least, it is time to have a talk with that advisor and make some different arrangements.
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Re: Questions for my Fin. Advisor

Post by Peculiar_Investor »

AltaRed wrote: 23 Apr 2017 11:20 Regardless, a good financial advisor would have contacted the OP and discussed the consequences of making the transactions before doing them. It is simply a matter of courtesy and respect.
I don't know why you, or the OP, would expect this in the case of a discretionary management arrangement. The manager's job is to prudently invest the money and generate returns according to the agreed upon investment policy statement. If there are gaps in the OP's expectation vs what's happened, they should be addressed via the meeting and updating the IPS.

Sorry, based on what's been posted so far, I don't see anything wrong.
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Re: Questions for my Fin. Advisor

Post by DavidR »

kcowan wrote: 23 Apr 2017 08:50 I don't understand the math but it is early Sunday morning!
Gross portfolio gain: $64M in capital and $15M in income. = $79M
Less withdrawals: $15M plus $9M ...
OP needs to consider 'unrealized' capital gains - most of the capital gains realized in 2016 may have been included in the portfolio value at the beginning of the year.
And CAD was particularly weak vs USD at end of 2015 compared to rates in the spring/summer of 2016.
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Re: Questions for my Fin. Advisor

Post by AltaRed »

Peculiar_Investor wrote: 23 Apr 2017 11:33 Sorry, based on what's been posted so far, I don't see anything wrong.
It does depend on what is stated in the, most likely, KYC form. We don't have those details but I still don't give the FA a free pass. The OP obviously has had an 'acceptable' relationship with her FA in the past so I would have thought communication would have been a part of that.

The OP has asked for what questions to ask and that is difficult without knowing whether the portfolio is low, mid, high 6 digit (I am guessing circa mid-6 digit given $15k in Investment Income) and what the equity/FI ratio was, and whether individual holdings or ETFs or mutual funds.

DavidR is right in there could have been huge unrealized gains in the specific assets sold, so that is likely independent of portfolio value changes. In other words, for the OP, she could have very significant cap gains realized and still have an annual decline in portfolio value. But that in itself should have been part of the FA's jugement in terms of what was sold. I'd suggest the OP ask from what assets the majority of the cap gains were generated from and why that was necessary?

Again DavidR is correct in that much of the 'loss' in portfolio value could be the difference in the loonie between Jan 1 and Dec 31, e.g. circa 72 cents Jan 1 vs circa 75 cents Dec 31. The OP should ask how much of the portfolio change was due to forex.

I don't know the breakdown of the $9k in fees are either. Is that the CRM2 number? How much of each are commissions? Or % of AUM fees? OR mutual fund trailing commissions? Note: If this is a % of AUM account, there should be no mutual fund trailing commissions since these should then be F series funds. The OP hasn't disclosed the types of assets nor the fee arrangement. The OP needs to ask if she does not know.

Lastly, the OP needs to discuss whether her KYC needs to be modified so that she is not surprised at year end. I still maintain a 'heads up' phone call from the FA would have been in order. While I am not in the business, I advise my ex on her portfolio. I would have never advised on anything that would have caused a large cap gain (especially) without first advising her of the consequences.
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Re: Questions for my Fin. Advisor

Post by ockham »

IMHO, any FA worth keeping would advise after, even if not before, of a large CG. Simple courtesy.
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Re: Questions for my Fin. Advisor

Post by Peculiar_Investor »

par4 wrote: 23 Apr 2017 01:45 We have a small competition going and it varies who wins from year to year.
So the goal seems to be generate positive investment returns. Capital gains are to be expected, no? Does the OP want to handcuff the manager by limiting the amount of capital gains to be generated in any given year? Am I missing something here?
Peculiar_Investor wrote: 23 Apr 2017 11:06 For example, imagine if the portfolio was invested in Valeant and the advisor prudently sold early before the slaughter, generating capital gains. Isn't that appropriate and expected behavior?
Imagine the conversation if the discretionary manager didn't prudently sell something like Valeant because there would be capital gains consequences.

FWIW, I'm a trustee in a couple of family trusts that involve third party discretionary management arrangements. In each case, there is comprehensive investment policy statement, including a section on tax considerations. Discretionary management is exactly that, you hand over control and let the manager to the managing, according to the IPS.

I can attest to the fact that year over year the capital gains are not smooth and consistent and vary considerably.

For ETF investors, the same situation arises. As an example, look at the capital gains distribution history of iShares Core S&P/TSX Capped Composite Index ETF | XIC and they are very lumpy. Does Blackrock have an obligation to their investors to avoid the consequences of "huge" capital gains?

At the end of the day most of us look at things through the lens of being do-it-yourself investors who can, and like to, control the timing and sizes of capital gains (and losses).

I think the lesson that can be learned here is the OP has tax considerations that they consider important. Those should be part of the agreement with the discretionary manager, plain and simple. From where I sit, it would seem that the OP would potentially like to earn less in order to maintain their entitlements and avoid clawbacks that result from doing well with their investments.
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Re: Questions for my Fin. Advisor

Post by AltaRed »

Peculiar_Investor wrote: 23 Apr 2017 13:15 I think the lesson that can be learned here is the OP has tax considerations that they consider important. Those should be part of the agreement with the discretionary manager, plain and simple. From where I sit, it would seem that the OP would potentially like to earn less in order to maintain their entitlements and avoid clawbacks that result from doing well with their investments.
I agree with your first 2 sentences but I think your last sentence is a little unfair. I'd suggest the OP wants to "optimize investment return performance while managing annual realized cap gains to moderate taxable income from excessive clawback". While seemingly tieing the FA's hands, it merely says taxable income impacts need to be considered, e.g. discussed before taking action. Could you live with that statement in the IPS/KYC statement? :wink:
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Re: Questions for my Fin. Advisor

Post by Peculiar_Investor »

AltaRed wrote: 23 Apr 2017 13:38 I agree with your first 2 sentences but I think your last sentence is a little unfair.
Maybe it wasn't the best choice of wording and hopefully doesn't offend the OP. Tax efficiency and tax planning is an important part of the investment landscape. But once again don't let the tax tail wag the dog. To this untrained eye in the world of clawbacks and other senior 'benefits' (not there yet) that seems like it might be the case here.
AltaRed wrote: 23 Apr 2017 13:38 While seemingly tieing the FA's hands, it merely says taxable income impacts need to be considered, e.g. discussed before taking action. Could you live with that statement in the IPS/KYC statement?
Not for me to decide, that's between the OP and their advisor, but as I keep pointing out, something addressing tax considerations should be part of the IPS.

Back to the OP's bigger concerns
par4 wrote: 23 Apr 2017 01:45 What should my questions be – other than what happened to the 94M minus the 24M?
Clearly whatever reporting has been provided doesn't give the investor an understanding of what's happened in 2016. CRM2 has probably changed the format of the reporting so it is critical that the OP understand the report(s) they've been given.
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Re: Questions for my Fin. Advisor

Post by par4 »

I sent a reply and thank you at 9.45 this A.M. but I can't find the posting or what has happened to it. I was in the middle of sending it when 2 new posts came in so I saved it in drafts and read the 2 new posts. Came back to it,downloaded the draft and added more info . then submitted it
any idea what has happened or where I can find it? -
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Re: Questions for my Fin. Advisor

Post by Peculiar_Investor »

par4 wrote: 23 Apr 2017 15:20 any idea what has happened or where I can find it?
Have you checked in your User Control Panel->Manage drafts?

When dealing with drafts there are two options,
  • Load draft where the draft is loaded into posting area so you may finish your post. Your draft will be deleted after submitting this post.
  • View/edit where you can view, edit and delete your saved drafts. In this mode, if you click the Save button, it just updates the draft and doesn't post it to the topic.
Is it possible that when you came back to it you used View/edit and then Save, thus keeping it available in your drafts?
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Re: Questions for my Fin. Advisor

Post by par4 »

Thank you all for your responses. Some of you are early risers aren't you! Just a few clarifications - I was involved in Tax preparation for many years. Many times I have said to a client "Well you did make money so don't feel badly about sharing some of it with the govt." As you can see this is not true in my case.
Looking back on my statements - there were no bonds involved but there are mutual funds.

The reason for the installment penalty is that I didn't pay the req. installments as I took a big hit with gains in my Co. in 2015 and that was reflected in a high Mgt.salary on my personal. I knew this was not going to happen in 2016.

After 5 years I did agree to the discretionary policy because I was not always available to Ok every move. In Nov. when I match my 'buys and sells' to see where I stand with CG's I called him to ask why I was not receiving his orders. He answered "they don't send these out any more but he would take care of the CG Statement" I accepted this as he would also take care of currency changes in the US stocks.

Incidentally, this 'method' was still carried on in Jan. and Feb. of this year but I have put a stop to it now!
The sad part for me is that my daughter has the same difficulty as I recommended my advisor to her. :(
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Re: Questions for my Fin. Advisor

Post by par4 »

Thank you Peculiar Investor, as you see I was able to recover it!!
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Re: Questions for my Fin. Advisor

Post by Peculiar_Investor »

You are welcome, glad you were able to find it.

Now onto the harder part. It definitely sounds like there is a disconnect between what you want/need from your financial advisor and what they are providing. From the sounds of it some things have changed at the advisor's end in the past year that does not meet your approval or needs. I think that why the advisor probably wants your questions in writing. I think you are doing the right thing in pondering the changes and the relationship to ensure your advisor is working in a manner that continues to keep you very satisfied with both the results and just as important, the process. I wish you luck.
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Re: Questions for my Fin. Advisor

Post by kcowan »

This reminds me of when my Dad relied on his two trusted sons about claiming the capital value of his cottage up to $150k tax "free" without actually selling it. We assured him that this was a once only opportunity to avoid future capital gains.

Because we were both under 65, we had no idea about all the clawbacks he would face. Even his City of Toronto property tax deferral was not allowed! He was disappointed in his sons for bad advice. After all, the benefit of this adjustment all accrued to us not him. Yet he paid much more the next year for the privilege.

So I would grant the advisor some slack because he likely had no knowledge of the full impact to his client.

This does raise the issue that advisors need to be trained on the impact of their portfolio actions after tax on their over 65 clients. I must admit that I was surprised the first time I discovered that the age exemption got clawed back based on gross revenue. I had no idea about the municipal property tax deferral, living in BC and renting.
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Re: Questions for my Fin. Advisor

Post by cannew »

I'd look at your portfolio and ask what might have been your situation if NO changes would have been made. Just held and reinvested any dividends, with no rebalancing. Last year was quite good in the Cdn and especially US market. I think you might be surprised by the results. Then the question is why pay $9k to an advisor.
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Re: Questions for my Fin. Advisor

Post by DanH »

I've read through most of the comments and I can offer a little insight from my own experience. I'll start with a stroll down memory lane...

I met with many people in late 1999 and through 2000 who had made a lot of money in technology stocks/funds. My advice at the time was to sell their technology funds to become more diversified. Most were unwilling to do it because of the tax bill that would result. The risk to my employer at the time of advising people to trigger a big tax bill for a move that might take longer than expected to pay off was not something I was going to push really hard on. I was clear and firm in my advice (verbally and in writing); and if clients resisted I pushed back (but not too hard). I'd left that employer shortly after the market bottomed but I heard subsequently that one of those clients I met with was blaming the firm for being stuck with a bunch of sucky technology funds that were hammered. :shock:

With that context it's important to understand that you can't make such decisions with an extreme viewpoint. You don't want to rebalance too frequently because you'll give rise to a few different types of costs that are likely to erode long term returns. But not rebalancing at all is just not a good fit for the vast majority of clients. So what actually happens should strike a balance between these two extremes. We've spent a good deal of time just thinking, discussing and analyzing this issue; and come up with what we think is a good balance.

But that means that at times a rebalance will be needed and if you've made money you'll pay some taxes. We will look at the costs of rebalancing before implementing but if it's a standard rebalancing (i.e. where the asset mix is significantly out of line) then we will generally implement the rebalance. That said we always try to give clients a heads up even though we're not required to (i.e. we have discretion). Where we are replacing a specific piece of a portfolio that is separate from a rebalance (e.g. replacing the Canadian equity segment for example) we take a much more customized approach when figuring out how to execute the change. If big taxable gains are expected from the change, we'll look at any avenue available to make the change as efficient as we can.

Tax costs of making a change include the time value factor (i.e. best to defer tax bill as much as possible), clawbacks or loss of credits. Triggering income taxes sooner rather than later is usually more a timing issue than an outright unrecoverable cost.
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Re: Questions for my Fin. Advisor

Post by par4 »

It appears now that my FA and I will be parting company. :( Five years ago when I engaged him I made it quite clear I wanted NO Mutual Funds. He agreed and I filled out KYC form. The first 3 years everything was copasetic and he made some very nice gains and adjustments. Then the Mutual Funds appeared in my portfolio and as a result some very high Tax bills as I stated in my previous comments. This is not only due to CG but also to high rates of foreign income which becomes Interest on my Tax return. This in turn is DRIP'd back to the Mutual fund! I guess the bottom line is that there is little increase in my portfolio when the cost of I Tax is taken in to account. Being a personal account I found the Dividends much more tax efficient. Maybe someone can sort this out for me!
My abhorrence of MF's may be partly emotional but I have lost money with 2 previous advisors who used them. Presently my portfolio sits at 49% FI and 29% Equity (all Mutual funds) except for 22% left in what I call Blue Chip! I have been advised by my FA that unless I am prepared to go along with his decision , I should look for another advisor.
Any comments?
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Re: Questions for my Fin. Advisor

Post by AltaRed »

Whether you use mutual funds, ETFs or individual foreign stocks.... foreign assets will always generate Other Income (taxed same as interest) and have withholding taxes (in a non-reg and TFSA). Only the withholding taxes in a non-reg account are recoverable in whole or in part via the Foreign Tax Credit.

As for whether your portfolio has increased in value or not, isn't related all that much to the presence of foreign income and withholding taxes. You can get a lot of foreign income and pay withholding taxes while at the same time the portfolio remains stagnant or even decreases.... even if you have more DRIP'd units....if the NAV of the MFs go down. The same would happen with ETFs and/or individual stocks...but to a lesser degree because MERs are not nearly as high on ETFs as they are on mutual funds.

If your KYC form said no MFs and/or your instructions to your FA said no MFs, then there should be no MFS in your account. If those are true facts, then he has been stealthily increasing his revenue stream at your expense. And I am guessing he likely has put you in DSC funds. Since he has given you an ultimatum, I'd definitely find yourself another advisor, and when you do, you might consider moving to a Couch Potato ETF portfolio. The new advisor may not like the lack of fees and commissions, but it is your money after all. You might even consider a % of AUM advisor provided that advisor stays with low cost individual assets or ETFs.
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