I recently go the single longest email question I have ever got from a reader. It's so long in fact I've had to break it off into two parts and do a bit of summary on it.
Colleen a reader from Ontario got a bit of windfall of some money. She ended up investing with Financial Planner in Spring 2006 and is now has a large amount of money in DSC (Deferred Sales Charge) type funds. So if she pulls them out early she gets hit with a large charge to get out of under performing funds. That's the bad news. The good news is she has taken this lesson is learning about investing herself and getting educated. As such she has two questions. Today we will have a look at the following question.
Q: Given recent creation of a Military Reserves Pension Plan, we have the opportunity to buy back all my husband's previous military service. For his twelve years or so of service, the buyback cost is in the ballpark of $70,000. The Financial Planner says to make sure we invest the money in our RRSP's first (through him of course) since we have the room and then transfer it to the military RPP. Reason being, we could take full advantage of deferring tax on that money through an RRSP. Now my understanding is that my own pension contributions through work defer taxes the same way. That is, whether in an RPP or RRSP, the contributions have the same tax advantages.
My concern is that this advisor has some financial incentive for himself in mind.
A: You are correct. When you put money into a pension plan your money has the same treatment as an RRSP for deferring taxes. So I would be questioning any advise this Planner is giving you as he seems to want to line his pocket with your money. If you feel the pension plan can offer a good rate of a return with low fees, then go for it.
Otherwise you might want to stick with a RRSP, but this time invest the money with someone else. You could start with a simple Couch Potatoe type portfolio made up with index funds from you local bank (shop around for who has the lowest fees (MER) on their funds) if you think you will be contributing on a monthly basis.
Either way I would stop giving your planner any more money and then have a hard look at the fee structure for the DSC and decide what would it cost you to get out of these funds sooner than later and take your money elsewhere. Often the emotional pain of living with those DSC funds can be an incentive to take your losses and move on to better things. After all if your funds are not doing well how much more money will you lose hanging onto them waiting for your DSC to drop.
I hope that helps. Any other ideas from other reader's would be welcome. I'll get to Colleen's second question about investing for her kids next week.
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7 comments:
Just two quick comments:
1. The military pension plan question is very tax-driven; consult your accountant and not your investment advisor about this matter for a full answer and/or confirmation. The accountant may charge you for their time but its worth it relative to tax savings received.
2. If you complain enough, investment advisors will waiver part or all of your DSC; It worked for me a while ago. If the advisor thinks you are not going to stay as a client, they will not waive obviously.
One other thing about DSC to keep in mind is that they normally allow you to withdraw 10% per calender year without any DSC fees. She should do this immediately - just switch the 10% to the front-end version if that's more convenient. Even if she does this now and withdraws all of it this year she will still reduce the DSC fees by 10%.
Mike
I just stumbled upon this blog. I've been a financial advisor for almost 20 years. It really worries me that someone like yourself, without expertise, credentials, and expereince, is giving out financial advice. Now before you get the wrong impression, Im' not your typical advisor, and have all sorts of problems with my industry. I'm that extreme rarity - an honest financial advisor (the main reason I'm not a big producer).
I agree with some of the advice you gave, and disagree with. And whiel it's true there ar a lot of sc*mbag, greedy advisors in my business, there are many more who really do put the needs of the clients first. So to assume that this person's advisor is merely trying to "line his/her pockets", I think is an assumption you are making far too quickly without knowing that individual.
I have no problem with the advice of using a DIVERSIFIED portfolio of ETFs and/or low-fee index funds. However, the proof is overwhelming that left on their own the vast majority of investors will make huge mistakes. It's a very difficult thing to manage your own money (emotionally and psychologically). *IF* you can do it, then that's terrific, but I'm telling you that most people cannot. There's a reason people sell low and buy high. ;)
Your about the DSC is terrible. Absoltuely no way that this person should incur a %5-%6 hit just to get out of the DSC. What the person should do is move their 10% "free" amount, allowed each year. And then wait for the DSC to drop way down, before considering moving the balance. Most schedules are for 6 years.
But please don't confuse the investments with the fees! Most fund families have MANY different funds under one roof. Switching between them incurs no fees, and doesn't effect the DSC schedule. Also, if the client wants to move into a different family of funds, the DSC paid on the way out can be reimbursed (up to 5%) on the purchase side. (However, that would reset the DSC schedule yet again, so I advise against it unless they are with a fund company that has very few offerings).
Bottom line: Focus on the performance of the portfolio - not the DSC fees. Free up that 10% each year.
thicken,
DSC charges cannot be "waived". It is against securities laws. Advisors and RRs are not allowed to give money back to clients. Strictly forbidden.
Perhaps you meant a DSC reimbursement? For example, if you sell your mutual funds from company A and buy mutual funds with company B with the redemption proceeds, then (and only then) are we allowed to reimburse you part or all of your DSC (depending on a few factors).
There are different DSC schedules (regular, low load, low load2) - so maybe that's what you meant?
But teh DSC itself is non-negotiable. It is set by the mutual fund companies, in the prospectus. It is in stone.
Thicken,
Thanks for your comment number 1.
Mike,
Very good point about DSC fees. I've never had any before, so I wasn't aware of that fact.
Anon,
Let me clear things up for you. I don't give advise. I get emails from reader's wanting a second opinion so I offer my personal suggestions on the topic in question. I know and my reader's know I'm not a financial advisor.
Now we have that out of the way I will congratulate you on being a great person that your honest in your industry.
As for the planner in question, if you had the entire three page email trust me that you would also likely agree the planner is lining their pockets.
As for the DSC fees thanks for another opinion. Yet what if the fund your in is consistently under performing the index by 1%. Over six years you would end up in the same position as paying the DSC fees anyway. That was my point.
Thanks for stopping by and feel free to add comments to any other posts you feel like. I always welcome other points of view even if I don't totally agree with them.
CD
To be honest, I am not sure what the mechanics were; all I know is that I was not charged the DSC fees; I suspect it was a reimbursement since I moved from fund to fund. Thanks for the clarification.
Anon - the reason that investors will ask a financial blogger who they don't really know for investment advice is because they know that the blogger doesn't have any conflicts of interest unlike every single professional investment advisor.
You don't have to be an investment advisor to give free advice.
Mike
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