Understanding Fees

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By iA Private Wealth, May 27, 2021

Many people invest because they believe it’s a good way to achieve their financial goals. They also know that getting professional financial advice can help them invest better.

If you’re working with a financial advisor (or considering it), you should understand how advisors are compensated. The topic of fees can be complicated, but we’ll stick to the basics.

There are three main forms of advisor compensation: a commission-based model, a fee-based model or by salary.

Commission-based. Advisors working in this structure receive compensation when their clients buy or sell an investment (e.g., mutual funds, exchange-traded funds or stocks). The commission they earn may depend on the investment type, the dollar value of a trade or other variables. Advisors may also receive ongoing compensation from fund companies in relation to the funds their clients hold (more on that later).

Fee-based. Advisors working in this structure earn a fee based on the value of assets they manage on a client’s behalf. Even if a client makes many trades and frequently uses certain advisory services, the fee charged remains a prearranged percentage (e.g., 1%) of the value of assets being managed. Sometimes the fee percentage declines as a client’s assets increase.

Salary. An advisor working for a bank or credit union will often earn an annual salary plus a performance-based bonus. Salaried advisors provide value to clients but may not hold the same industry licencing as commission- or fee-based advisors, which may narrow the range of services they can offer.

Some advisors are compensated through a mixed structure. For example, they may charge a flat fee for creating a financial plan and earn commission on trades they execute for your account.

Management expense ratio (MER)

If you invest in mutual funds, segregated funds or ETFs, you’ve likely heard about MERs. They’re calculated as a percentage (e.g., 2%) of fund assets and deducted from the value of your investment. MERs are used to compensate fund managers and dealers, and to pay related taxes.

Fund manager. This is the firm that operates the fund you invest in. They set the fund’s strategy and objectives, and employ portfolio managers who decide what (and when) to buy and sell, in order to help enhance fund returns and manage risk. They also provide administrative duties like recordkeeping, as well as legal, accounting, audit and custodial services. For these important duties, fund managers earn a portion of the MER.

Dealer. This is the firm where your advisor is registered. Dealers maintain account records, produce and deliver account statements, and provide the technology for online account access. Dealers also ensure their investment advisors meet all regulatory requirements. Part of a dealer’s MER allocation (also called a “trailer fee”) typically goes to the advisors responsible for client-oriented tasks like planning, portfolio construction and monitoring, and trade execution.

Taxes. A portion of the MER is used to cover federal and provincial taxes charged on fees and services related to the fund manager and dealer.

Client Relationship Model 2 (CRM2)

Implemented in 2017, an industrywide initiative known as CRM2 obliged dealers to provide clients with a personalized annual report that summarizes charges and compensation related to a client’s account. This report is designed to be transparent and is written in straightforward language. For a better understanding of fees (e.g., what you pay and where the fees go), check your personalized annual report.

To learn more about the costs of investing, speak with an iA Private Wealth Investment Advisor.

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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Talking Money with Aging Parents

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By iA Private Wealth, July 13, 2021

If you think about the money lessons you learned in childhood, your parents were likely involved much of the time. Maybe they opened your first bank account or helped you decide what to do with cash gifts you received on special occasions. Maybe you simply observed how your parents handled money.

It’s natural to learn financial lessons from parents, but what if the roles are reversed and you need to help your aging parents oversee their finances? It can be awkward for everyone involved, but there are ways to make it constructive.

Starting the conversation

How you initiate the talk depends on family dynamics. Perhaps you can be direct and dive right into a chat about finances. If you need a more subtle approach, find something that can help you transition into the conversation. Are your parents thinking of selling their home? Has one of them recently dealt with an illness? Maybe another elderly family member is struggling to manage their finances.

Regardless of how you get to the discussion stage, once you’re there remember to be respectful and compassionate. Money is highly personal and can be challenging for parents to open up about, especially if they’re used to being in control or feel embarrassed about needing help from their child.

However, it’s an important conversation because you want your parents to meet their regular expenses and enjoy a decent quality of life. If they encounter significant physical or mental health issues, they should be legally and financially prepared.

Key topics to discuss

Estate planning should be a top priority. Ensure your parents have an up-to-date will that stipulates how they want their financial assets and property distributed after they pass away. This can provide clarity to the family, as well as give your parents peace of mind that their wishes will be carried out.

It’s also good to have powers of attorney (POAs) in case your parents become incapacitated and need assistance managing their financial affairs or making personal care decisions. Wills and POAs are only valid if created while your parents are deemed mentally capable, so prepare documentation as soon as possible – before they display signs of incapacitation.

This discussion is also an opportunity to understand your parents’ cash flow situation. Take inventory of their income sources, from government benefits and workplace pensions to registered plans (e.g., RRIFs, TFSAs) and other investments. Then list their regular expenses for shelter, food, utilities, travel, hobbies and entertainment, medication, etc.

Do your parents have sufficient income to meet their expenses? What if health issues require moving to a long-term care facility or hiring professional care workers? If their budget cannot accommodate these expenses, do your parents qualify for government assistance? Can you and other family members help with funding or care requirements?

Also find out what insurance policies (if any) your parents have. You need to know the extent of coverage for life, health and/or long-term care insurance, as well as the premiums they pay to keep the policies in force.

Confirm that their tax returns have been filed and that there’s no tax outstanding. This will ensure your parents can receive the government benefits they’re entitled to beyond CPP and OAS, such as the Disability Tax Credit or Guaranteed Income Supplement.

Support is available

An Investment Advisor can help you assess your parents’ financial health and make recommendations to strengthen your parents’ financial circumstances, so they can approach the future with confidence and peace of mind.

Speak with an iA Private Wealth Investment Advisor to learn more about how to prepare for the money conversation with your aging parents.

Your Wealth Plan Requires a Team Effort

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By iA Private Wealth, June 29, 2021

When you think about your wealth plan, chances are you turn to your Investment Advisor when you have questions or need guidance. That’s understandable, since your advisor is a trusted financial professional who has helped to build and maintain your wealth plan and investment portfolio.

However, life is complicated and so are finances, which means there are times your advisor may wish to engage external resources* such as accountants, lawyers or insurance professionals. Whether you already work with them or they’re part of your advisor’s network of contacts, these professionals can bring a valuable perspective on your unique financial situation.

It’s common for people to compartmentalize their financial needs and seek assistance accordingly. For example, when you want to sell your business, you approach a lawyer to address the legal aspects of this transaction. When you want to minimize your tax obligations, you may turn to an accountant for strategies to implement. It might sound logical enough, but if each professional only sees a portion of your financial picture, you’re not benefiting from an efficient and harmonized action plan.

Assign a leader

While it may make sense to use the services of professionals in specific fields, it’s wise to appoint one of them as your “quarterback” who will coordinate your overall plan to ensure a holistic approach rather than working in isolation.

Typically, the quarterback is your advisor, given that advisors are highly involved in both everyday finances and long-term wealth planning. Advisors have a comprehensive view of your financial life and everything that feeds into it, plus they are integral to helping set and achieve your various goals. On the other hand, external resources are usually consulted on an as-needed basis.

Open the lines of communication

Since it’s important for each professional to be aware of what the others are doing on your behalf, transparent communication is key. Keeping everyone informed is critical as major life events take place (e.g., marriage, children, buying/selling a business, divorce, inheritance). For example, if you get divorced, your lawyer might be required to amend your will, your insurance needs could change and your personal budget may have to be reworked. Or, if a family member unexpectedly suffers a terminal illness, you have weighty estate and insurance issues to consider, and you may also face new financial challenges.

It doesn’t matter whether you take it upon yourself to spearhead communication efforts or leave it to your advisor. The main thing is to get everyone on the same page as soon as your circumstances change, to determine what actions must be taken.

If the professionals you rely on don’t know each other, it may be helpful for them to meet (virtually or in person) so they can discuss where each of them fits into your overall financial affairs. Even if they know each other, it’s valuable to bring them together to share information and insights, or to identify complex issues that may require coordinated planning and a group solution.

When you work with a team of professionals – with an emphasis on “team” – that has your best interests in mind, it means you can benefit from greater efficiencies and harmonized planning. It may also help uncover new opportunities to save or earn money, bringing you closer to achieving your financial objectives.

Get in touch with an iA Private Wealth Investment Advisor today to learn more about how a team-based approach can help you achieve all your financial goals.

Make the Most of Your Inheritance

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By iA Private Wealth, June 22, 2021

As baby boomers age, we’re seeing more wealth being transferred between generations than ever before. Maybe you’ve just received an inheritance and the money has been deposited into your account.

Now what?

The best next step is to consult with your Investment Advisor, who can suggest how to allocate your inheritance in a way that makes the most sense for your circumstances.

Addressing your financial goals

Before meeting with your advisor, give some thought to the following common goals so you can hold a productive conversation. Also think about your goal priorities so your advisor understands what’s most important to you.

  1. Pay down debt. Whether it’s reducing the balance on your credit card or line of credit, or pouring extra money into your mortgage payments, paying down debt is a practical use of your inheritance. Start with the debt that charges the highest interest rate, then the second-highest rate, and so on.
  2. Build your retirement savings. You can work towards retiring comfortably by contributing (subject to limits) to your RRSP or TFSA. If your workplace has a pension plan or share purchase plan that permits additional contributions – which the company often matches to some extent – consider taking advantage of it.
  3. Save for education. The cost of post-secondary education, especially if the student lives away from home, continues to rise. An investment vehicle like the RESP can help fund a child’s education and, when you add in any qualifying government matching and grants, you’ll be better positioned to save for future schooling.
  4. Create an emergency fund. A rule of thumb is to put aside at least three months of living expenses in case you lose your job, become seriously ill or face unexpected maintenance costs (e.g., your furnace stops working or vehicle breaks down).
  5. Invest. Putting a portion of the inheritance into your investment portfolio may be an effective strategy for growing long-term wealth. This is another area where your advisor – who knows your investment objectives, risk tolerance and time horizon – can add value.

If you decide to spend some of your inheritance on something that’s for pleasure and not related to your wealth plan, just be sensible about it and remain committed to your goals.

Importantly, there’s no inheritance tax in Canada, unlike many other countries. Taxation takes place at the estate level on the deceased’s final tax return, based on the value of assets that comprise the estate.

Educate heirs about wealth management

If you’ll be leaving an inheritance but are concerned your heirs might be irresponsible with their “windfall,” suggest that they learn about financial basics. Using an inheritance sensibly is a way to respect the person who provided it. Without the ability to handle money, they could squander their inheritance quickly.

In addition to any financial knowledge you pass along, your heirs can learn from courses and other educational means. It’s also good to introduce them to your advisor if they don’t have one, as advisors are familiar with intergenerational wealth transfers and working with families to build and preserve wealth.

If you recently received an inheritance or want to encourage your heirs to manage their inheritance wisely, an iA Private Wealth Investment Advisor can help.

CPP & RRIF Income: Thinking Outside the Box

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By Erin Gendron, May 20, 2021

Most new clients coming into our practice hold two very common assumptions about retirement income.

The first is that any time you can defer paying tax, you should, and that means holding off on converting your RRSP into a RRIF until the statutory deadline – the end of the year you turn 71. If this is not possible, you should minimize your RRIF payments to the greatest possible extent by relying on other sources of income.

The second is that as soon as you qualify for Canada Pension Plan (CPP) payments – age 60 – you should start taking them.

While this approach may be suitable for some, for many people – particularly those with significant savings and potential for longer-than-average life expectancy – acting on these assumptions would mean leaving a surprisingly large amount of retirement income on the table.

Bucking conventional wisdom

Instead of taking CPP payments early and RRIF income late, many would benefit from doing the exact opposite: delaying CPP until age 70 – or as close to age 70 as possible – and starting RRIF payments well in advance of the conversion deadline to meet cash flow needs.

When you take CPP before age 65, your benefits get cut by 0.6% a month, or 7.2% per year. This means that if you start taking CPP at age 60, you’ll see a total reduction of 36%. By contrast, if you start taking CPP after age 65, your benefits increase by 0.7% a month, or 8.4% a year, which means that delaying for as long as possible – to age 70 – boosts your CPP payments by a startling 42%.

A recent study put a dollar figure on this difference, explaining that “an average Canadian receiving the median CPP income who chooses to take benefits at age 60 rather than age 70 is forfeiting over $100,000 (in current dollars) worth of secure lifetime income.” Despite this, over the past decade most Canadians began taking CPP at age 60, with fewer than 1% holding off until age 70.

Let’s take a look at a hypothetical, but very typical, example to illustrate how this powerful insight can be integrated into a tailored, holistic retirement income plan.

Case Study: Bob & Judy

Long-time neighbours Bob and Judy both plan to retire at age 60 after decades of hard work and diligent saving. In addition to a $30,000 annual pension, they each have $500,000 in RRSP savings and both are eligible for $1,100 in monthly CPP payments at age 65. A $4,500 net monthly income ($54,000 annually) would allow them to live the retirement lifestyle they each envision for themselves.

Bob and Judy have nearly identical financial circumstances, apart from one very important detail: Judy has an Investment Advisor, while Bob does not.

CPP: Worth the wait

Bob begins taking his CPP benefits as soon as he retires. Like most people, he’s focused on the short term and concludes that since he’s eligible to have that extra money in his pocket, he may as well take it. He receives $704 per month ($8,448 annually), which is well below the $1,100 he would have received had he waited until age 65 and less than half of the $1,562 he would have pocketed had he waited until age 70.

Bob enjoys a very fulfilling retirement and passes away at the end of his eighty-seventh year. Overall, he collected $312,000 in CPP income (pre-tax) over his 27 years of retirement.

Judy takes a very different approach. At the suggestion of her advisor, who always encourages long-term thinking, she delays her CPP payments until age 70. For the income she needs until that time, she makes withdrawals from her retirement savings. Once Judy turns 70, she begins collecting $1,562 in monthly CPP benefits ($18,744 annually), which her advisor points out is 42% higher than what she would have received had she started taking CPP at age 65.

Like Bob, Judy enjoys a fulfilling retirement and passes away at the end of her eighty-seventh year. Over the course of her 27-year retirement, she collects $487,000 in CPP income (gross).

Bob’s lifetime loss for taking CPP early is $175,000 (the difference between Judy’s $487,000 and his $312,000). This loss becomes particularly important when we consider that Bob had a 45% chance of living to age 95, which would have significantly increased his cash-flow needs.

RRIFs, death & taxes

Judy had to rely on higher RRIF withdrawals to meet her income needs in her early retirement years, while Bob took more modest withdrawals to meet his after-tax income goal. What impact does this have over the long term?

Assuming equal rates of return, at age 70, Bob’s RRIF is valued at $444,000, while Judy’s is $336,000. Importantly, however, at age 70, Judy’s income needs are met with her increased CPP income, and as a result her RRIF withdrawals can be saved in her TFSA and non-registered account for future use.

Fast-forward to age 87, Bob’s RRIF is now worth $256,000. Approximately $137,000 in taxes will be payable on this amount by his estate, leaving a net estate value of $119,000.

At age 87, Judy’s RRIF is worth $222,000, while her TFSA and non-registered account have grown to $85,000, for a total of $307,000. Estate taxes of $117,000 leave a net estate value of $190,000, which is $71,000 more than what Bob was able to leave to his loved ones.

Final thoughts

As is often the case in life, the most common way of doing things isn’t necessarily the best way. And so it is with retirement income planning.

For many, delaying CPP and relying more on RRIF withdrawals during the early years of retirement can result in more income overall, a lower lifetime tax bill, and a larger bequest to loved ones and charities.

As with all aspects of wealth management, your best course is to speak with a specialist – an Investment Advisor with expertise in holistic financial planning – to learn which approach to retirement income is most appropriate for your personal financial circumstances.

Erin Gendron, CFP® is an Investment Advisor and Financial Planner at CrossPoint Financial, iA Private Wealth in Ottawa, Ontario. She can be reached at (613) 228-7777 or erin@crosspointfinancial.ca

Create a will and protect your beneficiaries

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By iA Private Wealth, May 17, 2021

Although financial advisors, lawyers and estate specialists always stress the importance of having a will, many people don’t bother. Common reasons include not wanting to think about death, not knowing how to create a will, not thinking it’s urgent (“I’m still young!”) and not believing they have enough assets.

However, since the onset of the global pandemic, there has been a notable increase in adults of all ages looking to create a will. People have become more concerned about the uncertainty of life and are comforted by the certainty that a will can offer.

What is a will?

As part of your estate plan, a will (also known as a last will and testament) is a legally recognized document that spells out your wishes regarding how you want your property and assets distributed after you die. You can also appoint the executor of your will, who is responsible for managing your estate affairs and carrying out your final wishes.

When you die intestate (i.e., without a will), the courts will decide how your assets are distributed. This process may be costly, time consuming and emotionally difficult for the beneficiaries – and ultimately may not align with your wishes.

If you’re married or divorced, have children or own a business, property, investments and other valuable assets, you need a will to protect and take care of your beneficiaries. Without the clarity that a will can provide, confusion and discord among family members may result.

Power of attorney

While an executor carries out your wishes after you die, you may also want to consider naming powers of attorney (POAs) to look after your interests when you’re still alive. POAs are legal documents that allow someone you designate (called an “attorney” but not necessarily a lawyer) to make decisions on your behalf should you become incapacitated and unable to act rationally on your own. Examples include decisions related to your finances and your physical or mental well-being. When you die, POAs are no longer valid and your will takes effect.

Beneficiary designations

Through your will, you can make beneficiary designations to keep certain funds from being included as part of your estate. This allows your beneficiaries to receive those funds without going through probate, which is a process where your estate assets are assessed by the court and will be subject to probate tax, leaving a smaller inheritance for your beneficiaries (and making them wait longer to receive it). If you fail to make beneficiary designations, these assets will form part of your estate and will enter the probate process.

You can make beneficiary designations on registered plans such as TFSAs, RRSPs and RRIFs, as well as other plan assets including segregated funds and life insurance policies. If you have a spouse and don’t want your RRIF or TFSA assets transferred as a lump sum to his or her account, you have the option to name your spouse as a successor annuitant (for RRIFs) or successor holder (for TFSAs) and keep your current plans intact. Common-law partners may also qualify for this successor provision.

Having a valid will is a crucial component of estate planning. An iA Private Wealth Investment Advisor can work with your legal counsel to create an estate plan that will ensure your final wishes are respected and executed, while helping your loved ones avoid potential stress and family conflict in the future.