“Good financial planners out there disguised as mortgage brokers”??? Are there also accountants and lawyers cleverly disguised as mortgage brokers? Is this just on Halloween or all year round? :)

Pardon my attempt at humour, Sandy, but the term “financial planner” is already far over-used. It’s hard to get exact stats, but probably at least 97% of people that call themselves a financial planner are actually just a mutual fund salesperson or an insurance salesperson.

The issue is that this makes it difficult for the public to understand how to get real advice.

Next week is “Financial Planning Week” – an annual part of the Financial Planners Standards Council’s (FPSC) attempt to advance the profession. Here is part of the agenda to give you an idea of some of the issues: https://www.fpsc.ca/sites/default/files/documents/Symposium_Agenda.pdf .

The difference is that a real financial planner will prepare a comprehensive, written plan that plans the finances for your life goals, including all major financial areas of your life. The written plan should include your retirement plan, education savings plan, tax optimizing plan (before and after retirement), cash flow, effective debt structuring, insurance & estate plan – and finally an investment plan.

Being properly licensed for any products you recommend is more than just a “personal choice”. A professional does not seek to get around licensing and compliance rules.

Accountants also have some issues with the public understanding them, since anyone can claim to be an accountant. However, a qualified accountant should have an accounting degree – either a CA, CMA or CGA – and have qualifying experience and professionalism.

Similarly, the minimum standard for a “proficient” financial planner should be:

- a CFP designation
- being licensed for any products they recommend
- doing the work of a financial planner, by preparing comprehensive written financial plans
- professionalism (not salesmanship)
- dedicated to his clients.

Ed

Ed:
Good comments! We have also spent significant time researching PMs. There’s a lot of data to sort through and you’ve shared much information here – thx for that.

Today, the great majority of TDMP clients are invested in mutual funds and generally speaking we are big fans. We simply ensure that an experienced, properly licensed mutual fund advisor is on every file, and that seems to work just fine.

But I have concerns related to the scalability of the mutual fund model going forward – and I can’t help wondering if there is a better way. I like the concept of having our very own “all star” Portfolio Manager whose sole purpose in life is to create an investment policy statement specifically for the TDMP clients, and then actively manage all these accounts to that very specific investment mandate.

The advantage would be that when events happen around the world that create volatility – or when interest rates rise, decisions could be made to adjust all client portfolios with a single click…In theory, this should be a better way to pro-actively manage a very large number of client accounts. But it’s not easy …and then there are all these other issues you point out – e.g. tax. I’ll keep you posted on our progress and appreciate your feedback.

When it comes to financial planners and licensing, the most important thing, IMO, is that the financial planner is proficient and dedicated to his clients. Licensing is a matter of personal choice and in my experience it doesn’t really correlate to proficiency. For example, there are some really good financial planners out there disguised as mortgage brokers. For their own reasons, they have elected to license as a mortgage professional and choose to fulfill the investment advisory role in the manner you describe in your post (i.e. by referral to PMs – effectively outsourcing the investment advice). For them, this works! As long as the financial planner is well-educated, dedicated and proficient, one could argue that outsourcing investment decisions to a properly qualified “all star” PM might prove to be a better practice at the end of the day…

-Sandy

The advantages of the “Portfolio Managers” you quoted is mainly marketing and mostly not actually true.

You are referring to Portfolio Managers in a “Separately Managed Account” (SMA), instead of using a mutual fund. They are often used by higher net worth investors (HNW), but some are accepting smaller accounts now. However, similar to most HNW products, it is 98% marketing.

The strangest claim is that tax costs are lower. This is despite the fact that most investors with these SMAs are paying far higher capital gains tax than mutual fund investors.

This is especially true with corporate class mutual funds which often have little or no tax for many years, while investing directly with SMAs results in tax most years.

Here’s some insight into the marketing that I find funny. These SMAs are marketed by snob appeal with the claim that you do “not mix your cost base with the masses”. Your account is separate from other investors. This sounds good at first and appeals to HNW people – even though it is actually a huge DISadvantage. :)

The reason is that mutual funds have a “capital gains refund mechanism” (CGRM) that results in far lower capital gains – and this results from the big advantage of mixing your cost base with the masses.

An illustration will make this concept clear. Let’s say you invest in a mutual fund that goes up 10% every year for 20 years. Let’s say that the fund manager sells half the holdings every year and has taxable capital gains in the fund every year. Let’s also say that half the investors in that fund sell every year and new investors buy.

The result is that the investors that hold the fund for 20 years may have zero capital gains tax. Why? The fund gets a credit for the capital gains claimed by the investors that sold.

In the above example, the taxable gains every year would all be allocated to the investors that sold each year.

If you invested with the same fund manager in his private SMA as a HNW investor, you would probably be claiming taxable capital gains on your tax return every single year! :)

See? The CGRM is a huge advantage from mixing your cost base with the masses.

Despite this, the marketers of PMs still claim lower taxes as an advantage. They tried this on me, but since I am an accountant that understands fund accounting, I can see through the marketing.

“Not mixing your cost base with the masses” has snob appeal – but means you pay more tax. We find nearly all investment products marketed to HNW investors are pure snob appeal with little or no advantage – and often are a disadvantage.

In fact, I have found most of the people recommending SMAs are unlicensed. They either lost their license or were never licensed. A license is required to recommend mutual funds, but not for private Portfolio Managers using SMAs (because it is only a referral and the PM handles all the suitability issues.)

For example, a mortgage broker with zero investment or financial planning education or licensing can be paid a referral fee as a “financial planner” by the PM. By referring to private PMs, an unlicensed mortgage broker can be paid for the investments in an amount similar to what qualified financial planners make.

There is an advantage of being able to deduct the fund manager’s fee every year, but this applies only to non-registered accounts and the advantage is much less than you may think. In a mutual fund, you also get a deduction but it is applied against the taxable half of capital gains. In other words, with a mutual fund, you get the same deduction but it is used to reduce future capital gains tax instead of being claimed each year.

In short, this deduction is really mainly a timing advantage, instead of an actual tax savings.

We researched a bunch of these PMs. You have to take them on a case by case basis. Quite a few PMs also manage mutual funds.

In general, we find they are among the better local guys, with most investing just in Canada or the US. It’s a bit like having the better players on our local Brampton hockey team, instead of having NHL superstars.

We find that the best stock pickers (All Star Fund Managers) usually are not just investing locally, are often not actually in Canada and have very high minimums (e.g. $10 milllion) on any direct accounts (if they do them at all).

In short, you have to be careful to separate marketing claims from fact.

Ed

I recently received Mr. Aitken’s book ‘Mortgage Freedom: Retire House Rich and Cash Rich’ (as a client of TDMP for the past 3 years) and can tell all who are interested, it is a well written book and spells everything out at a level that is understandable for anyone. As a very satisfied TDMP client, I am biased….but lets face it, so are most of the others who have been posting here. I believe that anyone who is looking to get involved in any strategy should search out advice not only from the professionals offering there services but from other clients…. The professionals are going to sell you on their serves, the clients are going to share their experiences…. Which do you think is most valuable when you’re first thinking of signing up?

Dan

TDMP.COM is a financial planning services company; our technology platform provides support to hundreds of financial advisors and mortgage brokers across the country. We offer various services to their customers for which we charge fees. As to whether it’s worth it, the simplest answer is that some people see the value in paying fees for services – and others do not. Generally speaking, sophisticated investors with a DIY attitude will not. But many mortgaged Canadian homeowners see the value of a well structured financial plan and will seek professional help to achieve their goals.

I wish to clarify that TDMP.COM has never recommended nor sold mutual funds. Our policy is to be neutral on the investment choices made by qualified investors in consultation with their licensed advisors – we are Switzerland…and we try not to judge. However, if we feel an investment or a client is not suitable for the TDMP program, we will refuse the business.

In 2008, investors in mutual funds suffered losses (regardless of what financial plan they were in) and distributions were cut by some fund companies in 2009. I can only attest to the overall experience of TDMP customers during that period. While those were anxious times, the fact is, that although distributions from investments were compressed, the cost of borrowing was compressed even further as the Prime Interest Rate dropped from 5.75% to 2.25% during the same period. Since the TDMP is primarily a cash flow strategy, investors were protected because cash flows remained positive. Also, it should be noted that the TDMP client portfolio is insured against margin calls. Mandatory Margin Call Insurance for leveraged investors has been TDMP policy since the day we opened our doors in 2006.

The result: No margin calls, no TDMP clients went cash flow negative, no leverage loan defaults, no mortgage defaults, no lawsuits. And in due course, the markets recover, the sun shines again – and all is well in a long term financial plan.

So what has changed in the last few years? Some financial planners are electing to refer their clients into Portfolio Managers – instead of picking mutual funds. It’s an interesting trend. We think this is good for customers in the following circumstances:
1. Where after tax costs are lower
2. Fees are tax deductible
3. Investment advice is better
4. Portfolios are less volatile
5. Results are more stable

TDMP.COM is a different company today than it was three years ago. As Jason points out, we provide a lot of support to real estate investors and business owners who want to drive business revenue through their own mortgage – converting it into a tax deductible investment loan. Today, homeowners with small amounts to invest can gain direct access to Portfolio Managers for advice that was previously only available to the very wealthy. Interest rates remain at historic lows and, as Nathan points out, uncertainty in capital markets will be viewed by some as an opportunity to increase investments when the price is right.

There is no question in my mind that mortgaged homeowners that choose to invest by leveraging the equity in their homes, will do better over the next twenty years than those who do not. That’s why I wrote a book on the subject. TDMP.COM is just one of many options for those who need professional help in achieving their financial goals. Is TDMP worth it? I’d like to think so! :)

Sandy Aitken, B.Eng., AMP
Author: Mortgage Freedom: Retire House Rich and Cash Rich
President & CEO, TDMP.COM

Question: when is the worst time to sell?
Answer: when the market is fallen.

With the TDMP and other plans, one of the problems is a fund used to distribute money to pay down the mortgage faster is usually a balanced fund which goes down when markets go down…

In order to continue, the distributions once a year the fund company will look at the hit the fund took and cut the distribution for the following year. If the market is up no problem…if down, big problem!

So as an example 2008 the TSX year end returns for 2008 was -35% the Fidelity Canadian Balanced Fund was -20%. Add the distribtuions of 8% for the year and the real return maybe closer to -28%! In January of 2009 distributions would be cut meaning the client has to come up with more money out of pocket to support the loan, or now buy less new funds when the market is down.

For 2011, if the markets remain underwater more cuts to distribtuions can be expected for 2012.

I would suggest if one was to check this has happened, is to phone the fund companies that are suggested directly…see if distributions have been cut in the past, then you have your answer.

I don’t know for sure if Fraser ever started on his new book – but I suspect he didn’ get too far along as he focused his last few years transferring his business to his son, Rob, ensuring his legacy continues and guaranteeing a decent living for his loyal team at the same time.

I don’t agree that he went off the rails or changed his strategy per se. He simply ensured that he transferred his business to his family and his team and also, very cleverly, moved it into a less hostile regulatory environment at the same time – like he had a crystal ball or something…

Any way you cut it; brilliant, loyal and generous: that was Fraser!

As for convincing regulators of his views..that torch passes to us now. You up for it? Me too!

Rob McLister provides more insight in a touching memorial piece on his blog at: http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/09/remembering-fraser-smith.html

-Sandy

Wow, I’m very sorry to hear about Fraser. I had not even heard that he was sick.

I’ll miss him. I enjoyed every meeting & talk with him. He was always open and had that folksy way about him.

His idea was brilliant and his book was a classic. It was a bit of a tax rant, but that was Fraser. Do you know, Sandy, how far he got in his new book?

I did think he went off the rails a bit recently, changing his strategy and giving up his license. He was never able to completely convince regulators of his views.

You are right, Sandy. We all owe a lot to him.

Ed

Brian

I am an independent mortgage broker and have personally helped several hundred people setup and implement the TDMP. I would also like to add that at one time I was an employee of TDMP.COM and therefore I cannot help but offer a biased opinion. Nevertheless, here are my thoughts:

It seems there are several topics that are being discussed simultaneously which should probably be addressed separately including the decision to invest, either in the capital markets or in the real estate market and the benefit that comes from actively managing your investment cash flows for greater tax efficiency through a professional service such as the TDMP (as opposed to doing it yourself).

I am a licensed mortgage broker (not an investment advisor), however, I will point out that the TDMP does not require you to select any specific type of investment. Investment recommendations are made by the independent investment advisors in consultation with their clients. Some financial advisors like the steady cash flows associated with Return of Capital funds and others prefer dividend paying investments or interest income (e.g. real estate). TDMP supports all types of investment cash flow and will track and properly calculate the deductibility nature of investment loans when affected by return of capital.

There are advantages and disadvantages to any investment and it’s up to you and your financial advisor to select investments that are appropriate for you. What I can tell you is the TDMP provides an annual review as part of its service and my clients are pleased with the service from TDMP and are happy with the strategy as a long term retirement plan.

In any case, it appears that you are leaning toward investing in real estate, presumably a tenanted property that provides regular rental income. If this is the case, and you also have a non-deductible mortgage on your Principal Residence, there may be some significant tax and financial benefits that can be achieved using your rental cash flows to convert your Principal Residence mortgage into a tax deductible investment loan. The TDMP provides full administrative support for this strategy – so it might be worth looking into.

The decision to become an investor should be made independently and on the merits of the investment. Whatever you may choose to invest in (stock markets, real estate or your own small business), you can think of the TDMP as a managed service or a “plug-in” that allows you to achieve greater efficiency from your investment cash flows without having to worry about the details.

Yes, I can understand. I lot of people were burned in the tech bubble. It can be difficult to get back on the horse.

I met a couple in about 10 years ago that were burned in the 1987 crash, and then had never invested in equity investments again. They missed the huge bull market in the 90s. I told them that they had lost far more NOT being in equities in the 90s than they lost in 1987.

It is worth investing in the stock market investments, though. That is the asset class with the highest long term returns. The last 30 years have been among the best ever for real estate, but the stock market still had 6 times the growth as real estate.

The key to investing in equities is to think long term. Investment decisions that seem very difficult can be obvious when you think long term. For example, the worst-ever 25-year return for the S&P500 was back in the 1800s and was 5%/year. That would mean you would more than triple your money. Not great for 25 years, but not bad for a worst-case scenario.

Getting advice or being in a “full service”situation may help you get back in.

My guess is that TDMP investments help up reasonably well in the recent downturn. They generally restrict themselves to mutual funds that pay the highest ROC monthly distribution, most of which are balanced funds.

Their “accelerator” does not accelerate anything, though. We modeled all 7 versions of the Smith Manoeuvre. The one used by TDMP is the “Smith/Snyder”, which involved taking a large loan to buy a mutual fund that pays a high monthly ROC payment. This payment actually reduces the long term benefit of the SM, however, and is one of the “4 Meaningless Transaction”.

Just so you understand, if the fund pays a $1,000 monthly distribution, they normally suggest you pay this down on your mortgage. Doing this, however, converts $1,000 of your investment loan to NON-deductible. It does not reduce your debt or your NON-deductible debt any faster than the regular SM.

After 12 years (typically), you have paid off your mortgage and replaced it with a NON-deductible investment loan. Then you have to start all over again paying off your new NON-deductible debt.

The problems with it are:

1. All this does nothing at all, but it makes it look like your mortgage is being paid down faster.
2. You have to calculate how much of your investment loan is still tax deductible each year (a complex calcuation).
3. By restricting themselves to funds paying high monthly ROC distributions, they ignore almost all of the best investments available.

In general, we would advise to avoid any distributions when you borrow to invest. The main investment focus should be on the risk/return of the investments, but it is also good to try to be as close as you can to 100% tax-efficient.

Ed

I’m an independent Financial Advisor in the GTA. I have over 100 clients engaged in the TDMP program since 2006 and I highly recommend TDMP because they provide excellent service to my clients.

TDMP is a long term plan, so “day to day” market conditions don’t really figure into it.

In my view, today’s low borrowing costs combined with market uncertainty (i.e. discounted/cheaper entry point) make it an excellent time to consider entering a plan like the TDMP.

Nathan H. Parkhouse, CFP, CIM, FMA, FCSI
Financial Advisor

I think Real Estate is excellent in many ways, however I think the smart money is waiting for the market to fall. I was talking to a friend of mine and he was proud that his 25 year old son was able to register… to buy a small townhouse for more money than I paid for my house which is 3-4 times the size back in 1995!

At that time, no line ups just cash and I was moved in less than 30 days.
No HST costs, low property taxes.

As interest rates moved down (about 8-10% back in 1995) people could borrow more money and the prices (real estate moved up).

If this economy stalls (debt with US, Europe, etc.) no jobs created or lost, even low interest rates will not keep real estate from going down.

I could be wrong but what really hit me was a client who is making excellent money bought a cottage this year because “real estate always goes up.”

Real estate bottomed out in Dec. 1995 (in Ontario). so he was only about 25 years old at the time…which means anyone under 40 really has not seen a real estate cash or correction of 20-40%. In these cases, it can take 10 years to recover.

If you can wait, I believe prices will be better in 2-3 years.

Brian

What has worked for me is real estate, so I was looking at a rental property approach for a TDMP accelerator or portion of a wealth portfolio. Anyone have thoughts on that?

I think you know the answer. Tough times!

Plus as a bonus, T3 & T5’s will need to be added to the taxable income for the tax year.

Losing money (on paper), paying taxes (for real) you should not have to hurts.

The big problem not talked about is risk management. No increase of life insurance, disability, etc. to offset the increased debt load if one’s health changes…which can happen anytime … usually when the market is down!

Brian

Since it is tax time again are you geting T’3 slips from the mutual fund companies?

I talked to a TDMP client and they are being charged $300 for two tax returns!
The tax firm was of course recommended to them by TDMP.