71 per cent of Canadian investors use professional advisors at some point while 39 per cent always invest through professional money managers, according to a recent survey from the Investment Funds Institute of Canada (IFIC).
The services they receive and the fees they pay vary but are determined mostly by what they want, how much money they have under investment, and how they want to spend it.
The biggest dividing line is between those who invest through advisors and those who invest through wealth managers.
There is no official dollar figure that separates them but as the terms implies, wealth managers are for those with wealth to manage.
If things go right, there comes a point in the life of a retirement investor when a strategy to accumulate wealth shifts to a strategy to preserve it.
Investment advisor versus wealth manager
The definition of ‘investment advisor’ is wide but they tend to focus on specific investments or a portfolio of investments that will grow over time.
A wealth manager also invests for gain but usually takes a more holistic approach that could include a team of specialists in areas including financial planning, accounting, legal matters, tax strategies and estate planning.
Other specialists could be consulted for wealth management clients with cross-border financial interest, as an example.
It’s important to check a wealth manager’s credentials to ensure they match your needs. It’s also important to keep your plan up to date as personal circumstances change.
Shifting to safety over returns
In most cases, wealth management still requires investments to keep growing. Shifting the priority from wealth accumulation to wealth management, however, requires a reduction in risk. As a result, return targets could also be lowered.
The process of lowering risk should be ongoing as the investor ages and the time to draw from savings nears but is accelerated as capital preservation becomes a larger priority.
Portfolios should always remain diversified but high-flying, speculative investments with the potential for big returns should give way to more conservative investments with lower but more certain returns.
Putting income over capital gains
In addition to a more conservative equity portfolio, wealth management calls for reliable income streams to ensure the cash is there when it’s needed.
As a general rule, experts recommend reducing the total portion of equities in a retirement portfolio over time and increasing the fixed income portion of the portfolio to act as a cushion if stock markets plunge.
While government bonds and guaranteed investment certificates (GICs) offer the ultimate in safety, low yields could make it impossible to hit return targets.
Riskier dividend stocks and other income investment products like real estate investment trusts (REITs) generally bring higher yields.
Keep in mind that income payouts from dividend stocks and REITs are at the discretion of the company, and the underlying investments rise and fall according to market forces.
Tax and estate planning
The shift from saving to withdrawing has huge tax implications. Registered retirement savings plan (RRSP) contributions and the gains they generate over time, for example, are fully taxed when they are withdrawn.
A good wealth manager will formulate a strategy to withdraw taxable income from a company pension, RRSP, Canada Pension Plan (CPP), or old age security (OAS), at the lowest possible marginal tax rate and top up any additional funds you may need from non-taxable sources like a tax free savings account (TFSA).
Wealth managers can also provide tax efficient will and trust services, or business succession plans.
Why the wealthy pay lower fees
Wealth advisors can charge a flat fee for services, collect commissions based on investments traded in a portfolio, or both.
Fees are often based on a percentage of the client’s total assets under management (AUM) and should fall as a portfolio grows and the total fee in dollars rises.
The typical fee for a high-net-worth client with over one million dollars is one per cent, but it is generally lower for clients with more money. That’s how wealthy clients pay less, and their advisors get more.
