Q. Can you help me decide whether we should move our RRSPs away from our advisor and build a DIY portfolio with ETFs? Together, my husband and I have just over $1 million in our registered accounts. I am 68 and still working. I get Canada Pension Plan benefits, but my Old Age Security is clawed back. My husband is 57 and plans to contribute to his RRSPs for another five to six years until retirement. Our RRSPs are all in segregated funds with a guaranteed return. However, we pay very high fees and have not seen the gains we think we should see.
A. There are a lot of questions here, Sarah, so let’s break things down and address the most important issues one at a time.
The first thing to consider is whether you should fire your current advisor and, based on the details you’ve provided, the answer is probably yes. With over $1 million in assets, you should be able to find a good full-service advisor who provides both portfolio management and financial planning at a reasonable fee. But it sounds like you’re not getting the service you deserve.
You mentioned that all of your RRSPs are in segregated funds and that these have a “guaranteed return.” This needs to be understood in context because the guarantees are generally far less valuable than they seem. (It’s possible that your advisor explained segregated funds thoroughly and you misunderstood, but in my experience, people who sell these products rarely describe them adequately. If they did, no one would buy them.)
A segregated fund is actually a type of insurance product. There are some built-in guarantees that could provide benefits in the event of a devastating bear market or premature death. Others promise a certain level of cash flow in retirement, which is not the same as a “guaranteed return.” The insurance features built into segregated funds are not worthless, but they are simply not worth the price you pay for them.
How big is that price tag? Fees in the range of 3% to 4% are not unusual. Sarah, if you and your husband have invested $1 million in these products, you are likely paying more than $30,000 annually in fees, which is far too much, and it helps explain why you have not seen significant gains. Your advisor is putting his or her own interests ahead of yours, so it is time to find a better option.
And that leads to the second question: Should you build a portfolio of ETFs and manage it on your own? That would certainly be the cheapest option, but it’s one that should be considered very carefully. If neither you nor your husband has ever managed your own investments, putting yourself in charge of a $1-million ETF portfolio might be overwhelming.
It’s also important to recognize that with retirement looming, you would benefit from a thorough financial plan. You and your husband will need to determine the most tax-efficient way to draw down your portfolio once you stop working, and you’ll need to coordinate this with your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. Mistakes can be costly.
For example, you mentioned you are still working at age 68, and that your OAS is being clawed back. A good financial planner would have recommended you defer OAS (and probably CPP as well) until you have stopped working. This would have allowed you to receive a significantly larger benefit in retirement. That kind of advice would have been worth paying for.
Based on the details you’ve shared, Sarah, I would suggest looking for a full-service advisor who can manage your portfolio using low-cost products and provide the retirement planning you and your husband will need. You should be able to obtain these services for about one-third of the cost you’re paying now.
If you do opt for a DIY portfolio, I recommend you consider using a fee-only financial planner to build a solid retirement plan that complements your investment strategy.
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