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Written by Matthew J. Ardrey, B.A., CFP, FMA, CIM | Vice-President
August 31, 2015

pension concept on document folder

At last count, over 6 million Canadians are part of a registered pension plan. Unless you are one of the truly lucky few who have a defined benefit (DB) pension plan, you’re likely part of a defined contribution (DC) pension plan – which means you need to be a bit more proactive if you hope to reach your retirement goals.

A DB pension plan is what comes to mind when most people think of a pension. It pays you an income stream in retirement. A DC pension plan is more like an RRSP. You save to the plan, but do not know what the end result will be at retirement. Even though your plan may be a DC instead of a DB, with proper planning you can take advantage of this benefit and be a step ahead on the path to retirement.

Step One: Asset Mix

Your asset mix is the combination of equities, fixed income and cash that you hold in your account. What percentage you allocate to each area will have a significant impact on the long term performance of your portfolio and the volatility you experience while investing.

Generally speaking, when you are more than 10 years away from retirement, a growth mix of 75% equities and 25% fixed income is appropriate. Once you are closer than the 10-year mark, a shift to a balanced mix of 60% equities and 40% fixed income would be more suitable. In all cases, your equities should be diversified geographically with an equal allocation to Canada, the U.S. and international markets.

With many plans, if the participant does not choose these allocations, then they are placed into a default allocation, which may be vastly out of line with their retirement goals. Thus, not only is it an important decision to make, it is likely the most important decision you will make.

Finally, once you have set your asset mix, you need to review it at least annually to ensure it remains on target. Over time, market fluctuations can drive your mix off target. If it is more than 5% off target, then you should rebalance to your initial target. This enforces the discipline of buying low and selling high.

Step Two: Free Money

Many plans start with an automatic employer contribution and then have a second component where the employer will match the employee’s contributions up to a limit. This is one of the few opportunities in your life where you can get free money.

You would think that giving someone free money would be the best incentive, yet it is estimated that Canadians are leaving upwards of $3 billion on the table by not taking full advantage of their plans.

If you are matched dollar-for-dollar, it’s like getting an immediate 100% return on your investment. Comparatively, using a 5% compounded rate of return, it would take over 14 years for that same dollar to double.

You wouldn’t say no to someone who offered to pay half of your grocery bill, so why turn down an offer to fund half of your retirement savings?

Step Three: Investments – High Quality & Low Fees

Another advantage available through the DC pension plan that is not available for the average investor is the high quality of investment choices available. The average investor has to choose from thousands of mutual funds and ETFs. In the DC pension plan, a pension committee vets the choices for the employee. This often leads to investment opportunities with money managers that the employee may not otherwise have access to as well.

Being part of a large pension plan brings economies of scale. The money managers do not look at each individual employee as a client; rather, it is the entire pension plan that is their client. This allows them to offer their products at a much lower cost than if someone were to try to access them on their own.

With high quality pre-screened investments at lower than market investment costs, it makes sense to maximize your investments inside your DC pension plan before investing outside of it.

Having a pension to help you reach your retirement goals is an advantage you ignore at your own peril. Take some time to understand the benefits being offered to you today. Your future self will thank you.

Matthew Ardrey is a dedicated provider of creative and comprehensive solutions for high-net-worth private clients. Specializing in financial planning, tax planning and investment management, his proactive approach and big-picture thinking are signature to his style. A strategic thinker and clear communicator, Matthew is often sought by major media sources for his financial expertise.

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Events

“Both speakers were knowledgeable, entertaining and easy to follow.”

“I found the info on charity to offset taxes very interesting.”

“It gave me a broader perspective of some of the options available to me.”

These are just some of the comments made by our guests who attended T.E. Wealth’s Spring Speaker Series events held across Canada in May. Our topic, The Art of Charitable Giving, focused on endowments, starting a charitable foundation and other gift-giving options, followed by a presentation on how to build your art collection to optimize its desirability and worth.

Special thanks to our speakers: Nicola Elkins, Virginia Trieloff, DeWayne Osborne and Éric Devlin for lending their expertise, and to our valued guests who showed much enthusiasm and curiosity.

We’re currently reviewing feedback from the events held in each region to ascertain what our next Speaker Series topic will be. Stay tuned!

If you would like to join our event mailing list, please contact us at info@tewealth.com

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Newsletters

When MoneySense magazine first launched their Great TFSA Race in 2013, they wanted to see what Canadians had been able to do with the Tax Free Savings Account (TFSA) opportunity. Plenty, apparently, especially if you were willing to make a big bet when investing your contributions. By the time the 2014 Great TFSA Race rolled around, the magazine found a couple who had turned their combined $62,000 in contribution room into more than $1-million by putting it all in a single penny stock.* We certainly wouldn’t recommend taking this kind of risk, but the key with your TFSA is to emphasize growth. And thanks to an increase in the annual TFSA contribution limits to $10,000 starting this year, the TFSA has become a serious wealth creator – and completely tax-free!

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Media & Press

via The Globe and Mail | August 27, 2015

Sign up for a comprehensive financial plan with Jason Pereira and you’ll need deep pockets. The entire process takes about a year and includes five meetings covering five separate plan components. The cost: $5,000. Mr. Pereira is an award-winning financial planner at investment dealer Woodgate Financial/IPC in Toronto.

He recently claimed top prize for the Americas in the 2015 Global Financial Planning Awards sponsored by PlanPlus Inc. of Lindsay, Ont. He also holds the respected Chartered Financial Analyst (CFA) designation and is a regular contributor to The Globe and Mail’s Financial Facelift feature.

Once you have your financial plan, you’ll be free to buy and sell with whichever investment adviser you prefer, Mr. Pereira says. If you decide to have Woodgate/IPC manage your money, quarterly reviews and follow-up plans will be included in the annual fee. Alas, you’ll need at least $1-million of investable assets to get in the door.

Is financial planning the preserve of the wealthy? What, exactly, do financial planners do?

“The average person thinks financial planning is investing,” says Matthew Ardrey, vice-president of T.E. Wealth in Toronto, a fee-only financial planning firm with a separate investment counsel arm. Investing is part of financial planning but not all of it, he says. Mr. Ardrey, who deals mainly with well-off clients, is also a regular contributor to Financial Facelift.

Starting next July, “average” investors will have a better understanding of what they are really paying for financial advice thanks to the second phase of the client relationship model, or CRM2, an initiative of the Ontario Securities Commission.

For the financial services industry, the challenge ahead is clear: how to give people the advice they need at a price they can afford, says Keith Costello, president of the Canadian Institute of Financial Planning. Standards throughout the industry must be raised, Mr. Costello says.

In Ontario, a review of the industry has already begun. The Ontario Ministry of Finance has set up an expert committee to explore whether new rules are needed to govern people who offer financial advice. The committee is chaired by Malcolm Heins, a lawyer and former head of the Law Society of Upper Canada. It is expected to make recommendations to the ministry late this year or early next year.

The first item they are seeking comment on: Is the provision of financial advice different from financial planning?

“Who is doing what and what should they call themselves?” are among the questions the committee is grappling with, Mr. Heins says. “Dealing with that confusion is going to be part of our task.”

A simple solution would be to make financial planning a professional designation – like lawyers or accountants – perhaps using Chartered Financial Analysts (CFAs) as a model, industry players say. Only people who were properly educated and governed would be able to call themselves financial planners.

“I’m a CFP. You shouldn’t take financial planning advice from anyone who doesn’t have those letters after their name,” Mr. Ardrey of T.E. Wealth says. CFP refers to Certified Financial Planner. But anyone can call themselves a “financial planner.”

“It’s now a Wild West throughout Canada,” says Neil Gross, executive director of FAIR Canada, an investor rights group. Sales people use whatever designations they choose, the level of proficiency varies widely and the public is poorly protected, Mr. Gross adds. “We need a system that brings some order to the chaos. Hopefully that is what will come as a result of this round of consultations.”

Another problem is that the financial services industry has marketed financial planning as a free add-on to product sales, Mr. Gross says. “This is unfortunate because it tends to minimize the importance of financial planning.” Mr. Ardrey agrees: “That’s an issue. It devalues the advice of real financial planners.”

What is financial planning?

It could begin with a chat during which the planner asks you about your goals and aspirations. You will be asked to fill out long and detailed forms, after which you may meet for another chat. The planner will draw up statements of income and expenses to see whether you are running a surplus or deficit, and a statement of assets and liabilities to gauge your net worth. They will cover budgeting, savings, insurance, wills, tax and estate planning and investments. At the end, you’ll receive the plan in writing.

To put the recommendations into action, the planner may refer you to the required specialists: a lawyer, an accountant, a trust company, an insurance agent and an investment counsel. The giving of investment advice flows from the financial plan.

“I shouldn’t be investing their money until I know what their financial plan looks like,” says Mr. Pereira. A proper financial plan will cost, he says. “Financial plans should not be the free toaster of the industry.”

All advisers who are licensed to sell securities or insurance are required to do some financial planning, says Ed Skwarek, vice-president of regulatory and public affairs for Advocis, an association of financial advisers and planners. A minority holds a financial planning designation. He’d like to bring sales people from brokerage firms, mutual fund providers and insurance companies all under one regulatory tent. (Fee-only financial planners could be exempt.)

Then the regulators could set common standards. “You have to do something to raise the standards. We need to provide a solution for the average consumer,” Mr. Skwarek says. “If not for them, why are we doing it?” he says of the expert committee’s review.

Adds Mr. Costello: “Whatever we do, we have to find a model that reduces the cost of advice and ups the standards. There’s so much money in the industry, there has to be a way to balance things out so people can get advice at a lower cost.”

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