I had a conversation with a prospective client the other day, someone unhappy with her current advisor. The conversation was not centred around the state of the markets or their portfolio, it was about contact. She just did not feel that her advisor was staying in touch.
The discussion at a certain point turned to fees. Turns out that she is very cost conscious and has a diversified basket of global index funds or ETF's, which mimic various indexes (the S&P 500 for example) around the world. It is a good strategy, because, historically, few portfolio managers are able to beat the indexes (approx. 30% or less). This means that paying a portfolio manager 2% or more (most mutual funds) vs. the fee for an index fund which is a fraction of the cost (approx 0.5% depending on the index) is not worth it.
Problem for her, she paid an up-front transaction fee for the advisor to buy the fund, 1%, based on the advisor's asset allocation model. When the advisor wants to earn another bit of commission, he "updates" the asset allocation model and will call the client to do so. But that's the only time he calls.
This same prospect told me that it was difficult to understand the "wealth management model". Why pay the fees?
It really depends on what you are trying to accomplish:
If you are a do-it-yourself person and feel that you have all the tools that you need to accomplish your financial goals, then by all means.
It reminds me of the house that sat on the corner of our street that had the "for sale by owner" sign out front for about 2 years. After giving up on that method the owner tried the "old fashioned" but more costly method of hiring a real estate agent and it was sold in a month.
As a professional "Wealth Management Consultant", I will charge you for our services, depending on the size of your portfolio and the complexity of your financial affairs, somewhere between .75% and 1.5% (of your invested assets, annually). In most cases add between .50% and 1.0% for an experienced portfolio manager who have proven to me that they have the ability to beat "the indexes" (some of whom will add a performance fee when they do) . In most cases and on average, clients pay 1.5%-1.75% all in.
What do they get?
Stewardship: a consultative, comprehensive and coordinated plan that we create (according to their goals), implement and monitor for as long as they and their family (we work with multi-generational families) are happy with what we provide.
Contact: regular emails, phone calls, monthly webcasts (multiple wealth topics), quarterly or at least semi-annual face to face meetings to discuss progress and any necessary adjustments that need to be considered.
We earn our fees and you have the right to question them at every meeting. If we aren't earning them, we'll adjust them.
visit our website: www.jstomenson.ca
or contact me at jstomenson@wellwest.ca
Thursday, April 30, 2009
Thursday, April 16, 2009
IPP vs. RRSP...Business Owners...take note!!
An Individual Pension Plan (IPP) is a registered defined benefit plan that typically has only one or two members.
An IPP is a pool of assets set up to fund a retirement income to a single beneficiary (employee). In most cases the plan is set up for the principal in an owner-operated business or partnership but plans may also be used for key employees.
1. Every 3 years an actuarial evaluation is completed to determine the funding requirements for the following 3 years.
2. Each year a contribution is made by the company on behalf of the employee, in an amount established by the actuarial evaluation. The contribution is tax deductible to the company.
3. If the employee/beneficiary retires before reaching age 65 they may also benefit from terminal funding. Terminal funding allows for additional lump sum contributions to be made to add indexing, bridge benefits or various other options to the pension plan. This could result in over $100,000 in additional tax deductible expenses in the year of retirement.
4. Upon retirement, the beneficiary employee has three options:
- The beneficiary employee may withdraw the prescribed annual pension amount from the plan. The plan sponsor remains responsible for ensuring that the IPP can meet its obligations
- Alternatively, the beneficiary employee may “commute” their pension. Commuting the pension is a process where a lump sum related to the cost of providing the future pension is withdrawn from the pension plan and paid to the employee. The employee then becomes responsible for managing their own retirement income.
- The final option is the purchase of a life annuity with the value of the funds.
5. Unlike most conventional defined benefit plans, payments do not necessarily end with the death of the pensioner’s spouse. If assets remain in the pension plan at the time of the employee’s death, the remaining value will be used to pay a survivor pension to the spouse. Upon the spouse’s death the remaining assets transfer to the employee’s estate. In short, all of the assets accumulated in the plan are paid out for the benefit of the employee.
The Benefits of an IPP :
Avoiding the damage of a bear market
IPP members have an edge over RRSP investors in the event of weak investment performance. Under pension legislation, if a pension plan has fewer assets than will be required to meet its income obligation the company can increase tax deductible contributions to the plan to increase the asset base. RRSP investors can only envy this ability.
Creditor protection
As a registered pension plan, the IPP is creditor protected, providing an additional benefit to small business owners and incorporated professionals.
Individual Pensions are a complicated product and you should always seek professional advice prior to initiating a plan. But if you meet the following criteria, the benefits certainly make it an option worth investigating!
Age 40 or above
Employee/owner of corporation engage in active business
Corporation has surplus income and cashflow
Have a T-4 Income of $100,000
We can help. Call us. Visit our website : www.jstomenson.ca
An IPP is a pool of assets set up to fund a retirement income to a single beneficiary (employee). In most cases the plan is set up for the principal in an owner-operated business or partnership but plans may also be used for key employees.
1. Every 3 years an actuarial evaluation is completed to determine the funding requirements for the following 3 years.
2. Each year a contribution is made by the company on behalf of the employee, in an amount established by the actuarial evaluation. The contribution is tax deductible to the company.
3. If the employee/beneficiary retires before reaching age 65 they may also benefit from terminal funding. Terminal funding allows for additional lump sum contributions to be made to add indexing, bridge benefits or various other options to the pension plan. This could result in over $100,000 in additional tax deductible expenses in the year of retirement.
4. Upon retirement, the beneficiary employee has three options:
- The beneficiary employee may withdraw the prescribed annual pension amount from the plan. The plan sponsor remains responsible for ensuring that the IPP can meet its obligations
- Alternatively, the beneficiary employee may “commute” their pension. Commuting the pension is a process where a lump sum related to the cost of providing the future pension is withdrawn from the pension plan and paid to the employee. The employee then becomes responsible for managing their own retirement income.
- The final option is the purchase of a life annuity with the value of the funds.
5. Unlike most conventional defined benefit plans, payments do not necessarily end with the death of the pensioner’s spouse. If assets remain in the pension plan at the time of the employee’s death, the remaining value will be used to pay a survivor pension to the spouse. Upon the spouse’s death the remaining assets transfer to the employee’s estate. In short, all of the assets accumulated in the plan are paid out for the benefit of the employee.
The Benefits of an IPP :
Avoiding the damage of a bear market
IPP members have an edge over RRSP investors in the event of weak investment performance. Under pension legislation, if a pension plan has fewer assets than will be required to meet its income obligation the company can increase tax deductible contributions to the plan to increase the asset base. RRSP investors can only envy this ability.
Creditor protection
As a registered pension plan, the IPP is creditor protected, providing an additional benefit to small business owners and incorporated professionals.
Individual Pensions are a complicated product and you should always seek professional advice prior to initiating a plan. But if you meet the following criteria, the benefits certainly make it an option worth investigating!
Age 40 or above
Employee/owner of corporation engage in active business
Corporation has surplus income and cashflow
Have a T-4 Income of $100,000
We can help. Call us. Visit our website : www.jstomenson.ca
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