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When they married a couple of years ago, Bellicia and Jorge each had a small investment portfolio. Now they'd like to start afresh - and with good reason.

The mutual funds in Jorge's registered retirement savings plan have lagged for the past several years, yet he's paying a management expense ratio of 2.5 per cent a year. If he cashes them in before seven years, he will pay a penalty of 7 per cent, or $1,700, in the form of a deferred sales charge.

Bellicia thinks their best option is to open a self-directed investment account at a discount brokerage firm and buy a portfolio of exchange-traded funds.

"Should we bite the bullet and pay the penalty?" she asks in an e-mail. Or should they focus instead on paying down the mortgage on their Cambridge, Ont., home?

Bellicia, who is 33, works as a teacher. Jorge, 34, is a civil servant. In addition to their family house, they have a duplex, which they rent out, and Jorge also has a small roofing business. Both have defined-benefit pension plans indexed to inflation that would pay them a total of $77,500 annually in today's dollars if they were to stay in their current jobs until they reach age 55, at which time they would have 30 years of service. One of their retirement goals is to have the financial freedom to help build schools in underdeveloped countries.

We asked Gordon Stockman, principal of Efficient Wealth Management Inc. of Toronto, to look at Jorge and Bellicia's situation.

What the Expert Says

Jorge and Bellicia live well within their means and are generous with their donations, Mr. Stockman notes. At the rate they are going, they will have their house fully paid for within 10 years.

Their cash flow statements show they have $2,200 a month after taxes to save and invest or pay down debt.

Because of their rental and business income, "they are always flirting with the highest marginal tax bracket," the planner says. "Splitting the business and rental incomes by having Bellicia get involved in both will help keep them below the highest bracket for the near future," he says.

Mr. Stockman recommends they contribute to their RRSPs only to the extent necessary to keep them in the middle tax bracket. Then they should focus on paying down their non-tax-deductible debt, starting with the highest-cost debt first. Indeed, paying off debt will give them a return that could well surpass what they could earn on their investments.

As for their high-cost funds, Jorge and Bellicia are paying for financial advice that they do not appear to be getting, Mr. Stockman says. "Demand a good, complete financial plan of your financial planner."

If they decide to sell the funds and start afresh, they could seek out a fee-only financial planner - but they must be prepared to pay for that person's advice. "The average fee-only planner is charging $200 to $250 an hour," he says, although some offer discounts to smaller investors.

If they decide to manage their own investments, they could buy index funds or exchange-traded funds from a discount broker bearing an MER of 0.5 per cent or less (compared to 2.5 per cent for their current funds), Mr. Stockman says. With the lower built-in cost, they will recoup the early redemption fee on Jorge's mutual funds in the third year.

"It is about getting a fresh start on a long future."

Bellicia and Jorge could consolidate and transfer their existing holdings into five accounts at their discount broker: two self-directed RRSPs; two self-directed TFSAs; and a spousal RRSP for Bellicia. They should put their $20,000 in emergency funds into their TFSAs, keeping the money in a savings account for liquidity.

For their longer-term portfolio, the planner suggests they start with a selection of ETFs allocated among Canadian, U.S. and international equities (75 per cent), with the remaining 25 per cent in real return, corporate and high-yield bonds or a bond ETF.

Client Situation

The People:

Bellicia, 33, and Jorge, 34

The Problem:

Whether to start fresh with a self-directed brokerage account or hang on to high-cost mutual funds.

The Plan:

Establish balance among investing, debt reduction and charitable giving.

The Payoff:

Being able to retire at age 55 with pensions, no debt and money to help build schools.

Monthly income:



House $282,000; rental property $180,000; RRSPs - Jorge $45,000, Bellicia's $20,000; REITs $11,000; cash $20,000. Total: $558,000

Monthly disbursements:

Mortgage $1,500; rental property mortgage $1,100; property maintenance $350; loan interest $200; property taxes $420; utilities $200; telecom, cable $250; insurance $250; employer pensions: Jorge $660, Bellicia $500; food $600; clothing/personal items $150; charity $800; gifts $220; travel $500; entertainment $600; auto expenses $575; insurance $85; miscellaneous $150; gym membership $90; emergencies $100. Total: $9,300.


Mortgage on house $148,000; rental property mortgage $107,000; line of credit $55,000; investment loan $9,000; business loan $15,000; car loan $4,000. Total: $338,000.

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