Donna and Doug have done well for themselves, paying off their cottage-country home and guest house and amassing a substantial investment portfolio. Yet they have a vague sense of disquiet. He is 62, she is 58.
"My husband and I are retired (forced early retirement)," Donna writes in an e-mail, "and while we think we are okay, we have some doubts about our financial adviser and whether or not we are sustainable for the next 30 years."
Their goal: "To create a sustainable living income to keep us going for our retired lives."
Their combined investment and rental income is $50,000 a year; they pay little or no tax. Their non-registered investments total $940,000, their tax-free savings accounts $50,000 and their registered retirement savings plans $190,000. Most of their money is in mutual funds.
"We have turned some of our investments into income-producing real estate (a guest house)," Donna writes. "Would it be prudent to purchase more real estate or leave the money in investments?" she asks. Should they keep all of their financial assets with one firm? How do they know they have a good adviser "who is best for us?" she asks.
We asked Warren MacKenzie, founder of Weigh House Investor Services of Toronto, to look at Donna and Doug's situation. Weigh House is an independent advisory firm that sells no financial products.
What the expert says
Doug and Donna have worked hard to build their investment portfolio, Mr. MacKenzie says. They have been with the same mutual fund adviser for 17 years and now pay more than $20,000 a year in fees.
"Over the past 17 years, the fees paid would be enough to buy a house in their area," the planner says. "There has been some growth, but most of the portfolio value can be attributed to their savings."
Donna and Doug are concerned because while they have enough money to enjoy a comfortable retirement, "they don't have enough to recover from big mistakes or to be able to maintain their lifestyle if their portfolio consistently underperforms," Mr. MacKenzie says.
They wonder whether their adviser is doing a good job. They shouldn't have to ask, he says. They're asking because they have never received a proper performance report.
A good adviser would take time to understand their goals and design an asset mix with no more risk than necessary to achieve them, Mr. MacKenzie says. He or she would help draw up an investment policy statement that explains how the portfolio is to be managed and how the adviser is to be held accountable.
A good adviser would follow a disciplined investment process – the process is more important than the investment products – and provide a performance report that shows the portfolio's rate of return compared to the proper benchmarks so that it is immediately obvious whether the adviser is adding value, the planner adds.
"Unfortunately for Doug and Donna, there is no investment policy statement and there is no evidence of any investment strategy except to maximize the adviser's fees," Mr. MacKenzie says. Their investment mix – 86 per cent equities and 14 per cent cash and fixed income – exposes them to more risk than is necessary to achieve their goals. As well, the report that they do receive does not show their rate of return or benchmarks.
Donna and Doug are "overdiversified" in a portfolio of deferred sales charge mutual funds with an average management expense ratio of 2.2 per cent a year.
"It is almost certain that over the long term they will underperform by the amount of the management fees," Mr. MacKenzie says. For the year ended April, 2014, their investments returned 8.6 per cent, compared with 13.6 per cent for the benchmark. This five percentage point underperformance cost them $50,000.
Now that their portfolio is substantial, they should switch to an investment counselling firm where they would get professional management, lower fees and better performance reporting, he says. They could start by checking the website www.portfoliomanagement.org/firms for information on firms in Ontario. "Then they should ask for and consider written investment proposals from at least three firms."
Once they find a good adviser, it would be best to have all their capital managed by this one firm, Mr. MacKenzie says. "With one adviser, the fees should be lower, rebalancing is easier, and reporting is consolidated and simpler."
Donna, 58, and Doug, 62
Getting the most from their substantial investment portfolio.
Consider switching to a professional investment counsellor to save high mutual fund fees, improve performance and get a better handle on how their portfolio is performing.
Financial security and an end to nagging doubts.
Monthly net income
Cash $5,000; term deposits $75,000; non-registered investments (mutual funds) $785,000; high-interest savings $75,000; TFSAs $50,000; her RRSP $90,000; his RRSP $100,000; residence $600,000; guest house $250,000. Total: $2.03-million
Housing expenses $550; guest-house expenses $190; transportation $410; groceries, clothing $650; gifts, charity $125; personal discretionary (dining, drinks, entertainment, pets, grooming, clubs) $585; life insurance $100; health, dental insurance $140; telecom, TV, Internet $350. Total: $3,100
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