SHOULD I CONVERT MOTHER’S STOCK INVESTMENTS TO LOW-FEE ETFS?
Q My 63-year-old mother wants to retire soon and currently has all her investments with a bank’s wealth management department. We’re both realizing the wealth manager charges pretty high fees for what I believe can easily be achieved with low-cost exchange-traded funds (ETFS). Right now, her assets include lots of foreign income from individual stocks. Helping her do her taxes last year was a nightmare. Is there an easy way to get all her investment assets into ETFS? Or would the capital gains tax incurred wipe out any potential benefits? She would likely keep the new ETF portfolio going until her dying day, hopefully until at least age 90. — Youssef
A Banks tend to charge higher fees for wealth management services than other alternatives, often in the range of 1.5 per cent to two per cent or even higher. The rationale compared to lower-cost options such as ETFS is that once you involve a dedicated adviser, that increases costs since they provide value-added services — or at least they should.
In some cases, banks will offer more than just investment management and you typically can’t negotiate your fee to break these services out separately. Some banks can provide add-on services such as tax, retirement and estate planning, which you may not feel you need or prefer not to pay for them as part of your investment management fees. Ironically, many of these same firms also own self-directed brokerages that offer ETFS with near-zero fees, including their own proprietary ETFS.
The ETF universe is broad, with management expense ratios (MERS) starting near zero to more than one per cent for factor or active products. The options are plentiful and it may require some research to understand which type of ETFS would work best for your mother. Do-it-yourself investing can be overwhelming when there are so many investment options, but it is also easier than ever to get diversified market exposure with “single ticker” products.
Like mutual funds, several ETF dealers offer all-in-one products that provide a diversified basket of stocks and bonds that match up with different investor profiles, such as conservative, balanced or growth. These funds take much of the decision making out of the process, automatically rebalance and have MERS of less than 0.25 per cent. Some brokerages have begun to offer free commissions on buying certain ETF families.
Using ETFS should make it easier to file your mother’s tax returns since they may not require additional foreign asset reporting if the ETFS are listed on a Canadian stock exchange. A taxpayer needs to file a T1135 Foreign Income Verification Statement if they own foreign assets such as stocks with a value of more than $100,000 during the year.
Canadian ETFS that own foreign assets may also be easier to report because they do not require foreign-exchange calculations. Many self-directed brokerages allow you to access your tax slips through your client login, and you may also be able to generate your own capital gain and loss report to help consolidate your non-registered tax reporting.
If opening a self-directed brokerage account seems like a daunting first step away from the adviser channel, you could also look at robo-advisers. Robos have been operating in Canada for the past 10 years or so and have proven to be an effective option for those who want something in between a self-directed trading account and a full-service adviser.
One difference between DIY and robo-investing is that you complete a client investor profile with robos before any dollars are invested, just like a traditional investment house. The difference here is that you will likely have to answer a series of behavioural finance questions to help the robo-advisor determine an appropriate risk profile.
Robo-advisers are different from self-directed accounts in that they are registered with securities regulators as advice givers, so they must provide a higher standard of care.
Self-directed brokerages have no such burden to bear, and you can buy virtually any listed security via a brokerage if you are willing to sign various disclosures documents. There are no protections against risky investment choices.
Capital gains tax can be a significant consideration for your mother’s situation. I would review the tax implications of selling her investments as part of your planning. If she has any registered retirement savings plan contribution room, this could be used to offset some of her taxable income if the capital gain to sell is significant.
There is also the option of realizing gains over more than one year to multiply access to her lower tax brackets, rather than run up her income into high tax rates due to portfolio changes.
There are other considerations when it comes to transferring any accounts, including transfer fees and fees to implement any new strategies. If your mother has fee-based accounts at her current broker, they may not charge her additional trading fees to sell her investments.
On the other hand, they may charge a commission when they make trades if it is a transactional account. You may have the option to transfer the portfolio in kind to a brokerage account to have more control over the timing of trades so she can stay invested in the meantime.
There could be long-lasting fee savings that more than make up for the potential commission, transfer and tax costs incurred with transferring your investments. But the risk is giving up the ongoing guidance you are getting with the bank. The fee savings may not be worth it if your mother invests in inappropriate investments, sells in a panic when markets fall or makes other mistakes that DIY investors are at risk of making.