It's Your Money  

Robo-advisors lack human touch when it comes to financial advice

Automated financial advice

Robo-advisors promise to build your wealth with low fees. But what do robo-advisors actually do? And how do they compare to a human financial planners?

Let’s take a look at what robo-advisors are, what they do, how they differ from human financial planners and how each of them approach holistic financial planning.

How do rob-advisors work?

Robo-advisors are financial companies that use software systems to offer investment options, which are based on the investor’s personal information/investment goals, and the company’s mathematical algorithms.

Once the investor has answered a set of questions, they are presented with a selection of ready-made investment portfolios that are basically a collection of Exchange Traded Funds (ETFs). These portfolios are designed to fit a certain generic “type” of investor, rather than any one individual.

The onus is therefore on the investor to choose which portfolios are best for them. Investors then provide a lump sum of money to start up their account with their chosen portfolio and can then add money to it either sporadically or with regular payments.

Robo-advisors’ chief selling point is that they have low fees. Their management fees are typically below one percentage point of your portfolio’s value.

For this, you get a portfolio of ETFs that can be a mix of equity (usually shares) and fixed income securities (typically bonds). Some also offer to rebalance your portfolio if the market changes and have agents available to answer your questions.

Robo-advisors lack an in-depth look at your personal finances or a robust financial plan. Neither do they offer help to improve your overall financial situation (for example, to maximize your cash flow or reduce debt). They only cover one aspect of financial planning: investments.

What does a human financial planner do?

Qualified financial planners are far more than just investment advisors. They’re typically well trained and experienced, with many being certified financial planner professionals.

They bring a holistic approach to your personal finances. This means that they look at every aspect of your financial wellbeing and also provide a wide range of financial help:

• Choosing and managing the right investments for you

• Managing cash flow

• Planning for major expenses

• Saving for retirement

• Sharing your wealth, with donations and a legacy

• Ensuring you are prepared for the unexpected

• Helping small business owners succeed

• Minimizing your taxes

Financial planners get to know you and your family, so they can help you to achieve your financial and life goals. They act like an overall project manager, helping you take control of your finances and become empowered to adapt to changing circumstances.

They’re also proactive. They’re constantly monitoring the markets and your portfolio, to determine if and when it needs to be rebalanced. Other services a good financial advisor will provide include:

• Advising you on the most tax-efficient ways to hold and draw from investments.

• Suggesting sustainable investing options that align with your priorities and values.

• Helping you to keep your budget and savings plan on track.

• Suggesting the kinds of insurance that will help protect you and your family and help ensure your financial plan doesn’t become derailed.

• Alter your portfolio and plan when major events arise or are imminent.

• Provide guidance and assurance, particularly during volatile markets.

• Protect your wealth and minimize risk.

• Help you to retire when you want to, on your terms.

Financial planners help to reduce your financial stress and keep your financial goals on track. They’re with you for the long haul: they’ll get to know your financial situation inside-out and understand your financial hopes and dreams.

They’ll use that knowledge and their expertise to create a financial plan specifically designed for your unique circumstances. Planners also have access to a wide range of complementary products and solutions from multiple companies (such as insurance and mortgages), so they can suggest the best options that fit in with your financial plan.

And they’ll help you get through your major life events, often over decades.

Human professional planners can help you retire wealthier and be happier:

According to research by CIRANO, investors with a financial planner get better long-term returns. After four years of working with a planner, investors have on average 1.8 times more money than someone who doesn’t have a planner. After 15 years, that figure rises to 2.3 times more money than someone without a planner.

Not only will professional financial planners typically help you to retire much wealthier, they’ll also help you to feel happier about your finances. Almost two-thirds of investors with a financial planner feel financially secure, compared to only 30% of people who don’t work with one.

Having said all of that, not all financial planners are equal and it is up to you to find one that actually provides all of the services mentioned above. Be sure to ask a lot of questions when evaluating a potential planner and make sure they’re providing a full financial plan for you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Tax issues to think about before the end of 2022

Year-end tax planning

With the end of the year fast approaching, Canadian taxpayers will want to consider all the tax planning opportunities available to them.

Which year-end planning strategies apply to you will depend upon your specific circumstances and objectives. While you can make an RRSP contribution in the first 60 days of 2023 that can be used as a deduction on your 2022 tax return, most tax-related strategies must be implemented by Dec. 31, 2022.

Overall, the key to effective planning is being well-prepared. In this week’s column, I’ll discuss key opportunities and strategies to consider:

Investment planning opportunities

If you have non-registered investments with unrealized capital losses, you may want to consider a strategy referred to as "tax loss selling.” Realized capital losses must first be applied against net capital gains realized this year. If those capital losses exceed the current year recognized capital gains, they can be carried back to offset net capital gains realized in any of the three previous years (or forward indefinitely).

If tax loss selling is something you are considering, it’s important to be aware of a complicated set of tax rules that can potentially deny those capital losses. These rules are called the “superficial loss rules” which I’ve written about before (email me if you need this info).

Lastly, if you are considering this approach, I also encourage you to speak with your accountant to ensure any losses you trigger can be claimed as intended.

If you are considering selling a non-registered investment that has an unrealized capital gain, you could delay the sale of the investment until the new year to defer the taxes on the capital gain one year. Although this may be beneficial from a tax perspective, you also need to consider your investment objectives in considering this option.

You may alternatively be considering making a charitable donation before the end of the year to take advantage of the charitable donation tax credit for 2022. If you have non-registered marketable securities (including mutual funds and stocks) with unrealized capital gains, you should consider using those investments to make an in-kind donation to the charity. You will receive a charitable donation tax receipt equal to the market value of the investment and the capital gain triggered by the donation will be exempt from tax.

From a registered account perspective, the planning considerations will vary based on the type of account and your specific situation. While not exhaustive, here are some examples of the issues that arise at the end of the year with each type of account:

• If you are considering making a TFSA withdrawal, a withdrawal before the end of 2022 would create additional TFSA contribution room in 2023 while a TFSA withdrawal in 2023 would not create additional TFSA contribution room until 2024. If you are planning a TFSA withdrawal in early 2023, consider whether it could be withdrawn before the end of 2022 instead.

• Do you have a child that turned 15 years of age in 2022 and have not yet opened a Registered Education Savings Plan (RESP)? Making an RESP contribution of at least $2,000 (but within the annual limit) before Dec. 31, 2022 would not only allow you to receive the Canada Education Savings Grant for this year, but also for an additional two years on contributions of up to $5,000 per year.

• If you are considering purchasing a home in 2023 or 2024 and using the Home Buyers’ Plan (HBP) to help fund the down-payment, you should delay the HBP withdrawal until 2023. This will extend the timeframe to purchase a qualifying home an additional year, compared to a withdrawal made before the end of 2022 (i.e. until Oct. 1, 2024 rather than Oct.1, 2023). This will also delay the timeframe in which you must start to repay the HBP withdrawals by a full year.

Income splitting opportunities

Income splitting can be one of the most effective ways to save tax for your family, now and in the future. Some examples include:

• If you are saving for retirement, consider a spousal RRSP. While the pension income splitting rules allow a spouse who is 65 years of age or older to allocate up to 50 per cent of their RRIF income to the other spouse, a spousal RRSP contribution will provide a tax deduction for you now and 100 per cent of the future retirement income is taxed in the hands of your spouse (assuming the spousal RRSP attribution rules are not triggered), regardless of age.

• Certain income splitting strategies can be implemented with adult children and/or your spouse or common-law partner, such as gifting money to a spouse or adult child to make contributions to their TFSA account.

• Another consideration is loaning funds at the prescribed rate to your spouse or adult child, directly or indirectly through a family trust, to invest in non-registered funds. While it began the year at one per cent, the current prescribed rate is three per cent with further increases possible in the new year.

Other strategies

There are many other strategies that could be suitable for you. Here are a few other areas that you may want to explore further with your certified financial planner:

• Charitable giving outside of donating securities described above

• Maximizing your tax credits and deductions

• Planning for disabled individuals

It’s important to plan ahead - Taking the time to review your tax situation before the end of the year can result in significant savings. For more information on this topic, please speak to your financial planner.

You can also email me if you’d like a free digital copy of the IG Wealth Management 2022 Year-End Tax Planning Checklist or the Year-End Tax Planning Checklist for Business Owners, to help assist you in your preparation and planning.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

How to tell if your savings will last in retirement

Funding your retirement

You’re faithfully investing for retirement but still wonder what your retirement paycheque will look like and how you’ll spend it.

There is no substitute for a complete financial plan that will take into account all of the variables your retirement will likely face (changing markets, inflation spikes, health issues and other unexpected events).

But before you create a detailed plan, you can take a self-snapshot to give yourself an idea.

The first step in determining how much you can spend is to understand these basics:

• Your fixed expenses - This includes costs of housing, food, medication, and other life essentials. Getting these numbers right – and being able to estimate changes in them over time – will help you clarify your spending during retirement.

• Your guaranteed income - This may come from government benefits, employer pensions and/or annuities. A basic tenet of retirement income planning is to try to ensure that your guaranteed income will cover your fixed expenses.

• Your life expectancy - Statistics show that life expectancies at age 65 continue to climb, and Canadians are expected to live beyond age 90 on average in the future.

Next, you need to determine a withdrawal method for your investments.

Depending on your situation, some or nearly all your retirement income may come from your investments.

Determine how much you can withdraw each year, to try to ensure your nest egg lasts as long as you do:

• One option is to choose a withdrawal rate in your first year of your retirement (four per cent is the current rate that actuaries advise will provide 30 years of income) to determine a dollar amount that you then adjust upwards by the inflation rate each year. This method does not adjust for market returns.

• A second strategy is to base your annual spending on a percentage of your portfolio’s value at the end of the previous year, regardless of its total value. This method is for those who can handle year-to-year variability, because your annual income is tied directly to market performance.

• Using a hybrid approach, you can take out a percentage of your portfolio’s balance from the previous year (e.g., 4 per cent), and use that as your income for the year, unless market returns bring the value of your portfolio above or below ceiling and floor amounts you have predetermined. If that’s the case, you would use the ceiling or floor amount as your income for that year.

When looking at retirement income strategies, it’s important to understand how specific strategies can impact your cash flow and tax burden. A professional financial planner can help to create a withdrawal strategy that is right for your financial situation.

If the numbers don’t line up, consider reducing your spending now.

When you run the above numbers and find that the amount you can realistically spend each year is not enough to cover your needs, you don’t necessarily need to give up hope.

If you subscribe to a “less is more” philosophy now, you will have more money to put toward retirement, and you’ll need less money when you get there. More and more people, young and old, are living with less to stop “stuff” from ruling their lives.

In many books and blogs out there, converted minimalists describe the social, economic, and personal advantages of cutting back. People who scale down to the essentials report feeling more satisfied and happier. They also usually become wealthier, because spending less increases their chances of staying out of debt and saving more.

But either way the numbers you run play out, it’s important to remember that a proper financial plan will take into account many more variables than what I’ve described above. If you want to have real confidence in your retirement, you owe it to your future self to get a full financial plan in place today.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Ottawa planning changes aimed at helping Canadians' pocketbooks

Federal finance plans

On Nov. 2, the federal government provided an economic statement containing several measures that will be of interest to many Canadians.

For this week’s column, I put together a summary of the key highlights of the statement:

Elimination of interest on federal student and apprenticeship loans

The federal government (government) proposes to make all Canada Student Loans and Canada Apprentice Loans permanently interest-free beginning on April 1, 2023, including those loans currently being repaid.

Extension of the residential property flipping rule to assignment sales

For properties sold on, or after, Jan. 1, 2023, the spring 2022 federal budget proposed to introduce a new deeming rule to ensure profits from residential real estate “flipping” would be fully taxable. Profits arising from the disposition of residential properties, including rental properties, that are owned for less than 12 months, would be deemed to be business income. The government proposes to extend this new deeming rule to profits from an assignment sale, if rights to purchase the property were assigned after being owned for less than 12 months.

Advance payment of the Canada Workers Benefit

The Canada Workers Benefit (CWB) is a refundable tax credit received by lower income workers when filing their income tax return after the end of the tax year. The government proposes to issue payments of the CWB in quarterly amounts starting in July 2023, in advance of filing their income tax return, to workers who qualified in the previous year.

Clean Technology Investment Tax Credit

The government proposes to introduce a refundable Clean Technology Investment Tax Credit (CTITC) equal to 20 or 30 per cent (subject to meeting certain labour conditions) of the capital cost of eligible clean technology equipment.The CTITC would be available in respect of property that is acquired and available for use on or after the day that the 2023 federal budget is released. The CTITC will be gradually phased out by the end of 2034.

There was also an update on previously proposed measures and announcements for individuals.

Following the 2022 fall economic statement, the government intends to table legislation in Parliament to implement the following previously announced measures:

Create the Tax-Free First Home Savings Account, which would give prospective first-time home buyers the ability to save up to $40,000 tax-free. Contributions to this plan would be tax-deductible, and withdrawals to purchase a first home, including investment income, would be non-taxable.

Double the First-Time Home Buyers' Tax Credit from $5,000 to $10,000, which would provide up to $1,500 in direct support to eligible first-time home buyers, starting in 2022.

Introduce a refundable Multigenerational Home Renovation Tax Credit, which would provide up to $7,500 in support for constructing a secondary suite for a family member who is a senior or an adult with a disability, starting Jan. 1, 2023. The value of the credit would be 15% of the lesser of eligible expenses or $50,000.

Please note that this list is not exhaustive and other measures from the update may also impact your financial plan. Please reach out to your financial planning professional if you have questions on how they will affect you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional vice-president (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (the national professional body for financial planning) in 2014 and spent seven years on the board, including his final two as board chair. More recently, he was appointed to the Financial Planning Standards Board (FPSB) which is the international professional body for this industry with a three-year term beginning in April 2023.

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy-to-understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the national and global boards focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns or if you’d like a referral to a qualified CFP professional in your area by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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