Case Study – Investment Concerns – Mortgage

My Mortgage Blog

Case Study – Investment Concerns

Manny asked me to review his investments due to concerns with the performance of his portfolio over the last few years and specifically since the start of 2020.  Manny is a close friend, but the issues are typical of what I see from most new clients and prospects which is why I wanted to share –

After a comprehensive review, we determined the average management expense ratio (MER) was 2.35% per year, which meant that Manny was paying over $12,925 in fees each year on his $550,000 investment portfolio.

Manny explained that he was not getting tax advice or tax preparation services, or financial planning. For this $12,925 annual fee, his current advisor focused on selecting mutual funds to beat the market.  Problem was that the mutual funds the advisor selected were not beating the market, primarily a result of the fees and focus on Canadian equities dominated by banks and energy companies.

The fees alone would almost certainly guaranteed Manny would continue to experience subpar returns, which is what I would expect for anyone who is on schedule to pay about $130,000 or 23.5% of his portfolio in fees over the next 10 years.

My suggestions –

Save Fees – Immediately move the portfolio to diversified portfolio of Vanguard ETF, with MER’s average 0.16%, and save $12,045 in fees.

Save Interest and Taxes – Execute the Smith Manoeuvre, to make a portion of his mortgage interest tax deductible going forward, while taking advantage of current rates to refinance below 2% (resulting in interest savings of ~$3000/year, net of penalties, and tax savings of ~$2,000/year)

Reduce Risk – Since over 60% of his existing portfolio was invested in under performing Canadian equities, we diversified his investments across the broadest possible range of Canadian, US, International stocks and bonds.  Diversification reduced the risk of his concentrated exposure to single market and will provide more stable returns over time.

We added a Home Equity Line of Credit to his mortgage so that Manny can be prepared for emergencies or take advantage of investment opportunities that may present over the coming years, like many clients, Manny is planning to pick up an investment property sometime over the next few years.

There is nothing I like more than helping clients take control of their finances and save thousands of dollars in investment fees, taxes, and mortgage interest each year!!

Let me know when I can help.

Kevin Bell, CFA

Kevin@kevinbell.ca

416-769-1440