It's Your Money  

What's in a name?

What exactly is a financial adviser? I have no idea, so the average consumer must be even more confused.

The financial advice industry doesn't have a set standards for job titles (outside of Quebec) and many people holding themselves out as advisers are not really offering any advice at all. 

A quick online scan of local financial advisory providers will show all sorts of creative and misleading titles such as adviser, wealth manager, vice-president, etc., and most of these titles have been randomly chosen to sound official.

The “financial adviser” title is the most confusing of all since it simply has no definition, yet it is widely used.

Furthermore, many who are holding themselves out to be providers of advice are just sales people selling a few specific insurance or investment products.

So what is the average consumer supposed to do to find the right advice? The best first step is to become better informed.

You should first determine what level of education somebody has. In order to sell life insurance products including investments such as segregated funds, all you need to do is pass a 45-minute open-book exam.

Similarly, to sell investments and be considered an investment adviser or stock broker, a quick securities related exam is all that’s required.

Ultimately, the barrier to entry in this industry is incredibly low.

The above minimum requirements are a far cry from the multiple courses, exams and years that it takes to earn a proper advisory designation like the Certified Financial Planner (CFP) or Chartered Investment Manager (CIM) designations.

People who have taken the time and shown the skills and knowledge required to attain one of these high-level designations are in the position to provide a much higher level of advice.

Herein lies one of the major issues consumers face. Many who have only done the bare minimum are still using job titles that suggest they have a much more extensive level of training and knowledge.

In Quebec, you can only hold yourself out to be a “Planificateur Financier” (financial planner) if you’ve completed the university level programs and passed the IQPF examinations.

But outside of that province, there is no such job title restriction, and anyone can call themselves a financial planner or adviser.

The Canadian consumer also faces a barrage of “credentials” that follow many advice providers’ names. Some of those little letters represent significant training and hurdles to obtain while others are a few days of effort at most.

Some designations require the holder to meet annual continuing education requirements and live up to certain codes of ethics while others do not.

The Investment Industry Regulatory Organization has an online glossary that lists 67 different designations and what they all require.

I would say that 67 separate designations are far too many for the average consumer to wade through. At the core of our industry, there are only three designations that matter.

  • A CIM® designation shows advanced training in investment management.
  • A CLU® designation shows advanced training for life insurance.
  • A CFP® designation shows advanced training in financial planning and is generally considered the “top” designation that a financial advice provider can attain. 

All three designations require multiple years of previous work experience, significant courses, annual continuing education, adherence to a code of ethics and numerous examinations to complete.

Aside from a Chartered Financial Analyst (CFA) designation (that’s mostly utilized in the portfolio management world), all the other designations floating around out there can pretty much be ignored.

Sure, some other designations have a bit of merit to them, but they cause more confusion than anything else. 

I look forward to the day when we have job title restrictions across Canada and a consumer can easily distinguish between an investment or insurance sales person and someone who is truly a financial planning professional.

In the meantime though, it’s up to you the consumer to figure out who is whom.


Giving the right way

Fewer Canadians are making charitable donations. From 2004 to 2013, the total amount of donations made by Canadians increased from $10.4 billion a year to $12.8 billion.

Since that time, however, donation numbers have been dropping to a low of around $9 billion in 2015 (the most recent year that I could find final figures for).

Even more concerning is the number of Canadians making donations. One study I saw showed that the actual number of donors has been declining for 25 years now.

These declining figures pose some significant risks for the many charities and non-profits that rely on donations to do their good work.

People make charitable donations for many reasons. The main ones are a strong belief in the organization or cause, a strong value for social responsibility and, of course, to pay less tax.

Many Canadians are struggling to make ends meet and are having a tough time finding any extra money to donate.   

But donating money doesn’t always have to be “in the moment” as you can give to a charity at one of two times — while you are living or after you pass away. If you elect to give to a charity when you pass on, there are some important issues to consider. 

Here are some of the different ways to structure your planned giving:

Cash – Specifying a set amount in your will to donate is pretty straightforward.  However, it’s important to note that if you set out a specific amount and then leave the remainder to your children, they may be left with far less (or nothing) if your estate is smaller than you’ve expected. 

Source – You can designate the money remaining in a bank account or the proceeds from the sale of your car.  You may also elect to put a limit on this amount – the balance of your bank account, but not to exceed $15,000.  This is often the cleanest and easiest way to make a charitable gift after death. 

Percentage of estate – Although most commonly used, this approach is often not recommended for most individuals. Proper tax planning is difficult as you don’t know what this amount will be. Designating a percentage also means that the recipient is entitled to a full accounting of your estate and is given access to far more information than most people feel comfortable with. 

Investment shares – Although not widely enough known, you can elect to donate shares of a mutual fund, segregated fund or stock directly to a charity. By doing so, your estate will not have to pay any capital gains tax on the growth of these investments and you will get the full tax deduction. This translates into less income tax for you and more money for the charity!

Life Insurance – Utilizing life insurance policies for planned giving is an excellent way to multiply your generous gift considerably. Through advanced estate planning, you can eliminate substantial taxes that are due and provide extra funds to both a charity of your choice and your family or loved ones. 

Some strategies have the charity named as the beneficiary of the policy while others prepare for the transfer of the policy’s ownership to the charity while you’re still alive. 

The first scenario allows you to maintain additional control over the policy while you’re alive, but the latter allows for earlier utilization of the tax credits. Everyone’s situation is different, and these strategies must be considered carefully. 

Although many people would like to give more money to their favourite charities while they’re still alive, the reality of bills and other living expenses often makes it very hard to do so. 

Planned giving through your estate is a great alternative to give back to your community and leave a lasting legacy behind.        

Is your retirement plan risky?

Is your home your retirement plan? If so, you should really consider the risks that come along with this plan.

Given today’s high house prices and the fact that a large part of Canadian’s monthly budgets are being eaten up by mortgage payments, it’s understandable how they’ve come to this decision. 

A recent study found that 49 per cent of Canadians plan to sell their home to fund their retirement income needs and an astounding 45 per cent of pre-retired homeowners aged 45+ are relying on rising home prices to meet their retirement requirements.

Of the above 45 per cent mentioned, almost all stated that they have no investment savings other than their house. 

Your home may in fact be able to provide you with some retirement income, but you need to consider a few things:

Household debt:

Funding your retirement with your home assumes that your house is paid off by the time you retire.

The latest numbers I could find show that one in four Canadian retirees still have debt in retirement and many are still making mortgage payments once they stop working. If this is the case, your home may be an additional financial burden when you retire and not the asset that you’d hoped it to be. 

Ability to access money:

While you’re at work and struggling to save, the idea of selling your home once you retire sounds OK. But when the time finally arrives, many retirees don’t want to leave their home.

A “home equity line of credit” or “reverse mortgage” type product may help access some cash, but both carry some significant downsides and costs.

For those who are willing to sell, many find that the cost of moving and “downsizing” to a new home doesn’t free up as much equity as they thought.   

Housing market timing:

Whether you’re ready to admit it, the housing market is in fact cooling down across most of the country. Here in the Okanagan, inventory is way up and the sales volume is steadily dropping.

Higher interest rates, tougher mortgage rules, non-resident buyers’ taxes and lower affordability are all factors that will remain for some time. This current situation is not unique either, the housing market will always go through cycles with highs and lows.

If you happen to be ready to retire during a low, it may be a lot harder than planned to access your home’s equity. 

Living expenses may increase:

Many empty nesters are assuming that they’ll be able to downsize once the kids move out and that extra home equity will be ready for their income needs. Health-related issues may not make this possible either.

Your smaller and cheaper housing plans may be overshadowed by higher health care costs and even expensive assisted living arrangements which can quickly eat up all the home equity that you’ve built up.

A well-constructed retirement plan is all about balance and contingencies for the “what ifs” that are bound to occur at some point.

If your own plan (or lack thereof) consists mostly or entirely around the equity in your home, it may be time to diversify.

Time, not timing, is key

Let me tell you the story about Fred, the world’s worst investor.

He quite possibly has the worst market timing of any investor in the world. But even with the worst timing possible, Fred has likely done better than many of you.

When Fred entered the workforce in 1970, he decided that he was going to put away $2,000 per year and that he would increase his contribution amount by another $2,000/year each decade until he retires (so $4,000/year in the 80s, $6,000/year in the 90s, etc).

The first couple of years, Fred put aside the $2,000 in his bank account and then at the end of 1972, he took the $6,000 he had accumulated and put the full amount in an S&P 500 index fund.

Over the course of the next two years, the stock market dropped nearly 50 per cent and Fred saw half his investments “disappear," at least on paper.

The one thing Fred had going for him was that he decided to stick to his plan and not sell what was left after such a big drop.

Fear had, however, made Fred much more leery about the stock markets now so for the next 15 years, he just let the $2,000 (and after 1980, $4,000) per year build up in his bank account.

In August 1987, after watching many years of steady growth in the markets, he finally decided to put the $46,000 that had built up into the S&P 500 index fund as well. Shortly thereafter, the next big market crash saw his account value drop by 34 per cent

Although poor Fred had again invested right at the peak, he stuck to his investment plan and did not sell his index fund. He again became very fearful about the markets and let his new investments build in his bank account.

In December 1999, he had built up another $68,000 and finally decided to make another purchase. Fred put this money into his index fund right before the tech bubble burst. This time, the market took a 50 per cent downturn that lasted until 2002.

After investing at three of the worst possible times, he decided to give it one more go. In Oct 2007, Fred put the $64,000 that had accumulated since his last purchase to work and shortly thereafter saw another 50 per cent crash occur.

Fred finally decided to retire in 2013 after 43 years on the job. Every penny he’d invested over these years had never been moved out of the same S&P 500 index that he first started buying in 1972.

He had managed to only put money in at the worst possible times of the preceding four decades yet fortunately he’d stuck to his plan and not allowed fear to sway him off course.

After investing a total of $184,000, Fred’s account at retirement sat at $1.1 million.

Although Fred quite possibly had the worst market timing ever, his diligent savings plan and unwavering commitment to his goals allowed him to earn great returns over the course of his career and have a significant retirement nest egg built in the process.

Had Fred dollar cost averaged into the market each year instead of waiting to buy at specific points, his portfolio would have been a full $2.3 million when he retired.

So, what can you learn from Fred?

Long-term investing is about staying the course and sticking to your plan. Short-term dips and losses are part of investing and the psychological pain that you may have to endure will pay off in the end.

How you react to those losses will be one of the biggest determinants of your investment performance.

I don’t know when the next market crash is going to occur, but I can tell you that it is not too far away now. You just need to remember that it’s time in the market, not timing the market, which will lead to long term growth.    

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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