The financial advisor for an elderly couple had been drawing down the minimum in their RRIF and LIF accounts without regard to their overall tax situation nor taking into consideration a large tax bill upon death.

I modelled out their sources of income and expenses through to age 92 and presented a scenario by which they could stay within their current tax bracket and reduce the tax obligation on their estate.

Additionally, the TFSA accounts were rebalanced to reduce taxes at the household and estate level.

Summary

• It is estimated that the investor had paid 39% of the profit generated in the RRSP in return for an annualised return of 8.32% through to 2021

• In 2021, 5 structured notes were purchased representing 62% of the portfolio

  • If the clients had purchased an ETF or equities representing the holdings of the structured notes, the return could be over 10.5% or 26.7% higher

  • As the structured note does not pay any dividends to the investor, the investor over a 7-year period would lose out on $28 of dividend income per $100 investment. This represents 28% which is similar to the 30% downside protection offered by the notes - so what value are the notes?

Background & Commentary

• High Net Worth investor, 2 professionals in family, no debt, 95% of family assets in real estate

• 62% of public equities portfolio across 5 structured notes:

1. 6 Canadian Banks notes

2. 2 Canadian Insurance notes

3. 2 Canadian Pipeline notes

4. 2 Canadian Utilities notes

5. 1 SP TSX 60 Index note

• Assuming a modest 4% dividend yield across the structured notes is equivalent to 2.22% annual return on the entire portfolio.

• The structured notes offer a 70% maturity guarantee, which means for $100 invested, the investor is guaranteed $70 on maturity in 7 years or the market value, whichever is higher

• What if the investor had purchased the underlying equities?

  1. If you take a modest 4% dividend yield for the underlying equities in the structured note, and assume you collected the dividends for 7 years and did not reinvest them, the cumulative value would be $28, i.e. you would have 28% downside protection on your $100 investment

  2. At the end of 7 years, the structured note would only provide you with an additional maximum of $2 of downside protection in return for capping the upside return in return for forfeiting the dividends.

Background

An investor with a 2% fee-based account was found to have 2 identical funds under 2 different free structures in their account:

1. Series F5: for fee-based financial advisor clients

2. Series B: for commission-based financial advisor clients

Conclusion

1. The MER associated with Series B is $2.24 per $100 of investment value in the fund.

2. Total MER charged including 2% fee-based account management fee results in an effective MER of 4.24% on the Series B fund

3. Why did the advisor buy the same fund, thus doubling the exposure to the fund, and double-dipping on fees?

FIDELITY FUNDS

The majority of the mutual funds held are managed by Fidelity.

• 4 funds have poor returns, averaging 5.95% annually over the last 5 years.

• 2 other funds are less than a year old.

• MER on the 3 F Series funds is 1.12%

• MER on the 3 Commission based funds is 2.25%

These funds hold over 100 stocks each, why not just by the index and save the fees?

The investor is paying a managed account fee, above and beyond the fund fees, so why are commission based funds included?

Situation

The family has earned a Weighted Avg 5 year Return 10.27% across all accounts versus a benchmark 16.54%.

The family is not risk-averse, and at the current rate of growth, the portfolio will not return what is needed.

The family had no TFSA savings across both spousal accounts

Recommendation

Invest routinely in RRSPs, and take advantage of unused RRSP contribution room to both reduce taxes and generate funds for investment in the TFSAs

Remake the portfolio at a Household-level with a combination of equities and ETFs comprised of growth and dividends. By eliminating the mutual funds the MER reduction will add 1% annually.

Aspire to a 5-year target rate of return of 15% annually - focus on absolute return vs the market to meet the Household goal.