Alternative options to pay for investment advice
By Pamela Mundell, CFP, CLU, CHS | May 2019
Now is the time to consider tax planning tips for next year. Many investors are unaware of alternative options available to pay for investment advice and also save money on fees.
Change the way you pay for investment advice and reap the benefits of lower costs and fees that can be deducted on your income tax return. Everyone likes to save money especially if that translates into lower costs for your investments and a way to deduct at least a portion of the fee you pay. If you own mutual funds you may be able to change the fee structure and deduct the fee you do pay for investment advice. Have you considered F series mutual funds? Mutual funds have an embedded management expense ratio (MER) which is the fee you pay to the portfolio manager, plus the expenses of the investment fund, plus the fee you pay to your financial advisor’s dealer firm for advice. These fees are embedded into the cost of the mutual fund and are paid directly from the mutual fund.
Why consider mutual funds?
Mutual funds give an investor the ability to obtain the services of a portfolio manager who will make and execute daily investment decisions on your behalf. Your financial advisor may provide investment advice, tax planning advice, retirement income planning advice and may also prepare a financial plan for you.
Consider Edward and Julia
Edward and Julia are recently retired and have saved and invested all of their working years. Edward belongs to an employer sponsored pension plan, plus both Edward and Julia collect Canada Pension Plan (CPP) benefits and also Old Age Security (OAS). Julia does not belong to an employer sponsored pension plan, but has saved for her retirement with a Spousal Registered Retirement Savings Plan (Spousal RRSP) and also a Registered Retirement Savings Plan (RRSP). Both the Spousal RRSP and the RRSP belong to Julia. Contributions into the Spousal plan provide a RRSP tax deduction receipt for Edward and contributions into the RRSP provide a tax deduction receipt to Julia. In addition, both Edward and Julia have invested in their Tax-Free Savings Account (TFSA) each year. Both TFSAs hold GICs with different terms and staggered maturity dates. Julia’s mother has recently passed away and Julia has received $220,000 from her mother’s estate.
Julia has invested in mutual funds in her RRSP for many years and understands her investments well. She has over $200,000 in her RRSP and another $125,000 in her Spousal RRSP. She will be investing another$220,000 in a separate account in her name. Her financial advisor suggests F series mutual funds.
Consider F series
F series mutual funds strip a portion of the embedded MER fee, specifically the one per cent fee that is paid directly to the financial advisor’s dealer firm out of the embedded MER. This one per cent fee is now paid directly from Julia’s investment account. This is an expense that can be deducted from Julia’s income tax return. The one per cent fee is $2,200 for the full year and this deduction saves Julia some income tax. This is a deduction for investments that are not registered, so the fee for her RRSP or also her Spousal RRSP, would not be eligible as a deduction.
Preferred pricing – assets over $500,000
Julia now has $545,000 in investable assets and her financial advisor suggests she uses F series for both her RRSP and Spousal RRSP. A portion of the embedded MER will be stripped out and paid directly to the financial advisor’s dealer firm, but because her assets are over $500,000, her advisor offers a reduced fee and drops the one per cent to three-quarters-of-a per cent. In addition to Julia being able to deduct the three-quarters-of-a per cent fee for her open investment account, which holds proceeds from her mother’s estate, she also saves one-quarter-of-a per cent on her RRSP and Spousal RRSP assets.
The take away
Julia has reduced the fee she pays direct to her financial advisor’s dealer firm from $5,450 per year to$4,087.50 per year. The portion that is attributed to her open investment account, specifically $1,650, is also a tax deduction for Julia. These savings will continue each year as long as Julia has mutual fund investments.
Consult with a trusted financial advisor and tax professional before you make any changes to your investments. Make sure you understand the implications that a change of fee structure will bring. Are there any fees or taxable dispositions? Please refer to CRA bulletin IT-238 for greater clarity regarding fees paid to investment counsel.
Pam Mundell is the sole principle of Pam Mundell Financial Planning Services in Kingston, Ontario. She is a Certified Financial Planner (CFP) and a Chartered Life Underwriter (CLU) plus also a Certified Health Insurance Specialist (CHS). You can reach her for questions or comments at firstname.lastname@example.org.
NOTE TO READERS: THE VIEWS OF THE AUTHOR DO NOT NECESSARILY REFLECT THOSE OF COYLE MEDIA GROUP. THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE, OR A SOLICITATION TO BUY SERVICES. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.