What is the role of an Investment Advisor?

Before we get started today, I wanted to remind everyone that the RSP deadline date for 2023 contributions is February 29 as we are in a leap year. If you need support calculating the optimal RSP contributions for tax purposes, please let us know and we will be happy to help.

I’ve decided to keep my market update short and sweet given the investment themes that were running through markets in November & December have rolled over to January. These themes are the direction interest rates, the economy avoiding a downturn, and the potential of artificial intelligence. The market narrative has been fairly simple:

Interest rate cuts = Lower bond yields = Higher stock multiples

As you may recollect, this is the exact opposite of the narrative that took hold in 2022 & for much of 2023. It is therefore no surprise that stocks bounced when the market switched from interest rate hikes to interest rate cuts.

To provide some evidence of how prevalent this narrative is, the charts below map out the borrowing costs for both the US Treasury and the Government of Canada and compare them to interest rate expectations. The top two charts show the 2-year borrowing costs in dark blue, the golden line represents expectations for interest rates. The charts clearly show the more cuts that are priced in, the lower the 2-year yield is and vice versa. This is reasonable and natural that short-term borrowing costs are heavily influenced by interest rate expectations.

What I find more fascinating is that the 10-year borrowing costs have also been heavily impacted by near-term interest rate expectations. The 10-year borrowing rate is usually influenced by many things, and near-term interest rate expectations are just one factor. Right now, the bond market cares about one thing and one thing only…the number of interest rate cuts.

If you feel as if interest rates are the only thing that have been spoken about for the last 2-years, I’m afraid to tell you that this isn’t going to change. Presuming the job market remains well balanced, the expectations for interest rates are the only measures that will matter. This puts the Federal Reserve and the Bank of Canada in an interesting spot because they are still concerned about inflation and don’t want a repeat of the 1970’s when inflation came roaring back. Jay Powell wants to be known as the Paul Volcker of the 21st century…not Arthur Burns. There will be more on this story I can guarantee it.

That’s it for my market update because I felt the need to do something different during the first newsletter of 2024. The idea came to me while I was scrolling through our local community Facebook page to see if there were any events over the holiday season that my parents would enjoy. I stopped on a group chat because someone had asked whether they were the only people upset with a particular wealth management business that specializes in working with physicians. Their question led to a barrage of answers from medical professionals who live locally and who all suggested to save costs by using a DIY style online platform. There was one chap who was on team advisor but 1 in 20 is a terrible batting average.

I had no idea so many medical professionals were in the area but more importantly, I was surprised that the role of an investment advisor wasn’t understood. After having what felt like an existential crisis, I started writing what I believe the role & value of an investment advisor to be. If 19 out of 20 medical professionals - who I know would benefit greatly from working with a good investment advisor team – do not know what we do, something is up! I hope that none of this is news to you either…let’s connect if you feel you are missing something from our service.

Let’s start with the title…yes, we provide investment advice. I pride myself having worked as an investment analyst and portfolio manager in both London & Toronto, achieving the gold standard Charter Financial Analyst designation. However, through my team at RBC Dominion Securities, we do so much more than provide investment advice. Gone are the days of dialing for commissions, tempting individuals to buy and sell stocks & bonds for a small fee. Instead, I manage a Wealth Management business where investment advisory happens to be one cog in a significant wheel. Cue the big RBC wheel below...

 A colleague and good friend Brent Stoddart gave me an analogy while we were walking to pick up our morning tea from Tim’s the other day. He said, “investment advisors are just like a GPS for client’s financial journey”. The more we discussed the reference the more it made sense.

When you embark on a journey, the GPS minimizes the risk of getting lost, saves valuable time and may suggest an option you didn’t know existed. If you do find that you get knocked off course, the GPS will recalibrate your current circumstances, build a new plan, and present the options to you. It’s also not just about getting from A to B, the GPS can optimize the journey for changing rules of the road, tolls, weather conditions and personal circumstances (my wife’s bathroom breaks). I personally know every way to Calgary airport to pick up my parents, but I still use the GPS, every time. It gives peace of mind and ensures I get to the destination in the most efficient manner.

Working with an advisor is very similar to having a GPS. We learn your goals, build a customized plan that is tax efficient, and take the journey with you to keep you on track. It is a basic analogy, but it is very fitting. Do you need a GPS? Some people like to do without, but most like to have the peace of mind that someone is looking out for them at every fork in the road!

I will expand on this by providing examples of what it looks like in practice. It all starts with a comprehensive process. Many of you have started the process, others will be new to it. The process ensures that we truly understand what you are looking to achieve and provides a clear plan of how we can get there in the most tax efficient way possible.

I’m going to talk about my business owner process because the medical professionals keep haunting my thoughts and they often have professional corporations which provide several options. The six-step process is as follows:

i)              Discovery

ii)             Corporate Structure

iii)            Estate Plan

iv)            Financial Plan

v)             Investment Proposal

vi)            Review

Discovery meeting – this is exactly as you might think, a meeting to uncover goals & objectives that you would like to achieve over the short-term and long-term. We get to understand your core values and what money means to you. We also take a look at your current standings i.e. assets, liabilities, incomes & expenses. It is important for us to see where you are on your financial journey.

Corporate Structure – here we review your existing corporate structure to make sure it is fit for purpose. We are also looking to see if there are ways in which we can make your current structure more efficient, from a tax or liability perspective. We will also review shareholder agreements and any business succession plans to ensure they are in good order. We will ask for an introduction to existing accountants and lawyers to work as a team for tax strategies and filing requirements. We believe we are more efficient working as a team than in silos.

Estate Plan – The review of corporate structure will typically lead into a discussion about your estate plan to ensure that your wishes are taken care of and there are no nasty surprises to your chosen beneficiaries. We will discuss legacy and planning for the next generation. These conversations may also touch on charitable giving, family trusts, financial literacy and insurance. We can stress test your insurance coverage to make sure it is sufficient. We’re not afraid to tell you that you have enough coverage.

Financial Plan – We then build out a financial roadmap using our financial modelling software and present it to you. Your financial plan details whether you are on track to meet your objectives and the required rate of return to get there. We will review this information with you to see if any changes need to be made. We can model several scenarios to see how changes in variables will impact your financial plan. Examples include retirement age, savings rate and expenses. The plan will serve as the central document to keep us accountable and on track. It will evolve with changes in personal circumstances that can be modelled, reviewed, and discussed.

Investment Proposal – Only after we have discovered and agreed the best plan for you & your corporation will we develop a custom investment portfolio. We discuss the most tax efficient way to invest within your corporation and personal accounts, as these differ and make a huge difference to your net worth over time. This is the #1 mistake we see by business owners who don’t have the time or knowledge to invest tax efficiently. I have a separate presentation for anyone with a private or professional corporation who wants to see the total tax savings of investing efficiently. Hint: they are a LOT bigger than you think.

Review – Your financial journey is constantly evolving, as are financial markets and the tax landscape. As a team we ensure that you are on the right track to achieve your long-term goals, while saving as much tax as possible. Your team includes a number of RBC Wealth Management subject matter experts (tax lawyers, accountants, estate lawyers) along with your team. We adapt and evolve with you, your family & your business to give you peace of mind that your financial journey is efficiently mapped out.

The coolest part of this whole thing is that a fully customized, top-to-bottom plan at RBC Dominion Securities is available to everyone. It may not be completed in that order and the second stage may be dropped if you are not a business owner…but this is what investment advisors can (& should!) do for the families & business owners they work with.

I find it unfortunate that many (including TV adverts) start the conversation with fees and returns. The highest rate of return and lowest fee sounds great, but how do you that you are on track to achieve your long-term goals? A comprehensive wealth plan tells you this.

How can you be sure you are investing in the most tax efficient manner? Your investment advisor can work directly with your accountant to ensure you implement the best tax strategies for you.

How do you know which investments suit which accounts? Your advisor can direct compound growth investments in one direction and interest or dividend paying securities in another to save tax.

If you are deciding whether to focus on saving or debt reduction, is there a way to model this? Yes, using financial planning software.

Planning on buying a second home or a new car? Is there a way to review whether this is affordable and how it could impact your retirement? You bet, the financial plan can do this for you.

How do you decide between borrowing money at a fixed rate or a variable rate? An advisor with bond experience can lay out the facts to help you understand how many interest rates hikes/cuts are priced into the fixed rate.

Should you buy GICs when interest rates are high? Maybe, an investment advisor can explain the different tax impacts of buying bonds versus GICs to help you make your decision.

I think you get the picture. Self-directed platforms are great if you have the time for investment research, security selection, reviewing your optimal asset allocation, building a financial plan and developing tax strategies in an ever-changing landscape. I wonder how much extra tax is paid because a customized financial plan and tax strategy isn’t implemented. The idea of paying more tax than is necessary makes my stomach turn.

The rant is over but I thought it was important to share all the ways in which we help. Whether you are accumulating assets before retirement, decumulating assets and enjoying retirement… or still working in retirement, there is tax planning to be done and custom investment portfolios to be designed. We are here to help you get the most out of your savings!

Wishing you a wonderful February and normal market review will resume next month.

Many thanks,

Chris

Securities or investment strategies mentioned in this newsletter may not be suitable for all investors or portfolios. The information contained in this newsletter is not intended as a recommendation directed to a particular investor or class of investors and is not intended as a recommendation in view of the particular circumstances of a specific investor, class of investors or a specific portfolio. You should not take any action with respect to any securities or investment strategy mentioned in this newsletter without first consulting your own investment advisor in order to ascertain whether the securities or investment strategy mentioned are suitable in your particular circumstances. This information is not a substitute for obtaining professional advice from your Investment Advisor. The commentary, opinions and conclusions, if any, included in this newsletter represent the personal and subjective view of the investment advisor [named above] who is not employed as an analyst and do not purport to represent the views of RBC Dominion Securities Inc.

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