I recently had a client in my office for whom I did a full financial plan. The cool thing about financial planning is that you cover several aspects of personal finance. One of them is estate planning. Most people underestimate the numerous tasks related to estate planning and wrongly identify a close (and trustworthy) person to be the sole liquidator. However, managing an estate is more complicated than simply writing a few checks! Fortunately, for those who can afford it, you can name a professional among your liquidators. I have listed the reasons why your estate should pay fees once you are dead to have someone manage your assets:

Time

Picture this: you are working 50 hours a week, you and your wife are stuck between work and picking up the kids at daycare, the older one is playing hockey 3 times a week and your younger daughter takes dance class on Saturday mornings. You get home one day and open your mail; there is a notice stating that you have been named liquidator for your (single and rich!) deceased uncle that lives in city far, far away. Do you really think you have time to get there, make a list of all assets, find the will, have it homologated, open an estate account, etc.? You would be relieved to see that there is another liquidator in the notice, a professional, perhaps an estate lawyer from his financial institution who will be there to assist you

Emotions

I think that I would not be able to be the only liquidator for my parents or my wife. It is a hard task when you have to go through a lot of emotions at the same time. You may not take the right decisions or think about everything. A professional can manage the estate considering tax implications and legal aspects.

Family

If you have brothers or sisters, taking care of your parents’ estate could create tension in the remaining family. One may have his own thoughts about how to best manage the investment portfolio or split the rental properties. A professional will be there to ensure a non-biased perspective and respect the will in its entirety. In this way, the decisions may be easier to accept by all family members. They have seen that the process is managed by a neutral party not related to the family.

Experience (legal aspects and tax efficiency)

Unless you are in the midst of a string of serious bad luck, you won’t be the liquidator too often in your life. You might not feel at ease with the legal aspects related to the liquidator’s tasks. It’s even worse if you are not a fan of personal finance to begin with! So, instead of getting stuck with such nightmare, you can ask a professional whose job is to liquidate estates. Even though there are fees charged, he will not only take the burden off your shoulders, he will probably provide sound advice. This will help the estate save money and pay for a part of the fees (if not totally).

One last piece of advice when choosing a professional liquidator is to pick 1 or 3 liquidators in your will. If you pick your brother and a professional and they don’t agree, no decisions will ever be taken regarding your estate. With an odd number, at least there can be a tie-breaker. Depending on the services offered, a professional liquidator usually charges in the neighbourhood of 2% of the estate assets. It may seem pretty high but it is not that much to buy piece of mind and professional advice during a difficult time in the lives of your family and friends.

Other post in this series:

Basics of Estate Planning Part 1

Basics of Estate Planning Part 2

Basics of Estate Planning Part 3

Basics of Estate Planning Part 4

Basics of Estate Planning Part 5

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Yesterday, I wrote an article about the different compensation structures for financial advisors. Another way to know if your financial advisor is working for you is the end result of his follow-up calls. When I call a client, I always make sure that there is an added value for the client. There are 3 major reasons why your financial advisor should call you:

#1 To Offer To Make More Money for You

The main purpose of having a financial advisor is to have someone looking for opportunities while you are working. There are tons of ways to make more money on different things. For example, your financial advisor can offer you:

- A better product for your investment strategy. As the financial industry evolves faster than our brains can understand, there are often better investment products on the market. One shouldn’t jump from one fund to another all the time. However, if you have reach the required amount to gain access to a better investment solution, your financial advisor should be the first one to call you and make sure you benefit from this opportunity.

- Tax strategies that decrease the tax bite. Sometimes, a simple transaction can help you earn a few thousand on your next tax refund.

- To offer a better rate on fixed income. By doing a CD ladder or offering a municipal bond instead of a certificate of deposit, you can earn a better yield without necessarily taking more risk.

#2 To Help You Save Money

This is probably the area where there is a lot of room to improve for many financial advisors. How many times do we realize as clients that we are paying too much for something? Wouldn’t it be nice to have someone suggest switching products before we realize what is going on?

There are plenty of ways to save money with financial services:

- Bank account fees

- MERs on investments

- Mortgage and other lending rates

- Appraisal and lawyers’ fees

- Account merging to reach minimum amounts required for more sophisticated solutions

#3 To Help You Save Time (time IS money, isn’t?)

When someone shows me a trick to save time and become more efficient, that person gets a lot of my attention! So if your financial advisor can help you save time by navigating through the sea of red tape in the financial world, this can mean a lot.

There are always “better” ways to do things. Your financial advisor should be aware of the most productive and effective way to do your financial business. By saving a few minutes or hours here and there, you will be able to do a lot more interesting things with your time.

So, if your financial advisor calls you to offer a new product or give you information, ask yourself: can make money, save money or save time with this phone call. If your advisor gives you good tips on a quarterly basis, you will continuously improve your financial situation ;-D

If he doesn’t do that, there is nothing stopping you from calling him and asking for more help

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I recently read an article by Financial Nuts where he got pushed by a financial advisor to buy life insurance. During their very first meeting, the advisor kept coming back to his need to buy life insurance while the client clearly stated he was not interested.

Unfortunately, I must admit that we hear this kind of story too often about pushy financial advisors. Times are rough for several of them and they try to make a few extra bucks by any means possible. Many are straying far from their valuable mission: to provide high quality financial advice!

However, I am also aware that we (financial advisors) can be insistent when we really see there is a weakness in our client’s financial situation. This is why we try (sometimes lacking in tact & sensitivity) to convince our client that he is making an important mistake by ignoring our advice. Some people think they know and master their personal finances and this is where they get it wrong and are too embarrassed to admit it; they just know enough about finance to hang themselves

When you meet with a financial advisor, the first question you should ask is how he is compensated. This way, you will be in a better position to know if he is pushy because he wants to make a sale or because it is really important for you to follow his sound financial advice personalized to your current situation.

Fee Based advisors

Technically, if you are looking for non-biased financial advice, these are the go-to-guys. Fee based advisors are usually certified financial planners with great experience. They set a first meeting where they will ask several questions about the 7 fields of financial planning.

Then, they will write a full financial plan with their observations regarding your actual financial situation and their recommendations attached. They won’t sell any products as their recommendations are formulated as solutions to potential financial weaknesses they have observed. You have no obligation to buy anything or to follow their recommendations.

Where is the catch? There is none… but you must be prepared to pay for the service, at the very least $1,000 for a financial plan. Depending on your personal situation (i.e. if you have more needs towards estate planning with the creation of family trusts or if you have a company), the bill can exceed several thousand. I guess this is the price to pay to get non-biased financial advice!

Beware: some of them will provide you with a complete financial plan and will also include products amongst their recommendations. Since most people were not ready to pay more than 1K for a financial plan, fee-based financial planners started to lower their fees and increase the amount of products within the proposed plan. It doesn’t mean you have to purchase from them as you paid for the plan and you can leave the office with it. Just be careful with their recommendations.

Commission Based advisors

You will find most brokers in this category. They are usually pros in one field (insurance, investments, or mortgages) but they offer all products as a global financial service. The life for young commission based advisors is pretty tough as they don’t eat if they don’t sell. This is why the average income of a new advisor is 25K in Canada (before expenses) and the turnover during the first year is 80%. They live according to one rule: the survival of the fittest.

This is why you are hear of so many pushy advisors; they want a pay check at the end of the month! Unfortunately, those are the ones responsible for the bad reputation financial advisors field in general. They think about their own good instead of managing their clients’ assets ethically.

Having said that, I know a lot of commission based advisors who put their clients first and provide high quality financial advice. Since it is the highest paying structure for a financial advisor, you will also find the cream of the crop. Since a top performer in a bank will barely reach 6 figures, a top performer on a commission structure can make more than 500K per year. No wonder young advisors dream . However, top financial advisors have built their business on strong relationships through sound financial advice for their clients!

Somewhere in between based advisors

You will find these advisors working for banks and other financial institutions (investment firms, insurance companies, etc.). This is actually my personal situation: I am an employee with a base salary. The bank gave me a book of their clients (they are not mine as opposed to commission based advisors) and my goal is to grow the business in the book. We get a bonus depending on the net growth of “our” book at the end of the year.

The base salary is big enough so one can live with it without any bonuses. This way, we should be less pushy. On the one hand, we offer our company products exclusively (which is not necessarily a bad thing, since most financial institutions have similar products!). On the other hand, I have seen many other advisors sitting on their base salary and become reactive to their clients instead of being proactive…

As you can see, there is no perfect and transparent compensation system. Each of them has its strengths and weaknesses and may lead to biased financial advice. However, by knowing upfront how your financial advisor is compensated, you will be in a better position to understand why he is insisting on one solution / product or not… we hope.

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We just entered August this week and you haven’t opened your TFSA account? What are you waiting for? The TFSA (Tax Free Savings Account) has been in place since the beginning of 2009, sponsored by the Canadian Government. While I had already described the program in a previous post, here are the major things to remember:

- You are allowed to invest $5,000 per year regardless of your income (must be 18 year old to participate).

- You are not restricted in the type of investment (CD’s, mutual funds, stocks, Canadian and International assets, etc.)

- All gains within the TFSA are, quite obviously: Tax Free.

- Contributions and withdrawals have no tax implications (therefore no tax deductions and payments are not tax deferred… simply tax free).

Actually, the only bad thing about the Tax Free Savings Account is the size of the contribution at first. It’s fun to save $5,000 with all growth free of taxes but what can you really do with such small amounts? If you buy a certificate of deposit, the interest earned will be insignificant (especially considering the current low interest rate environment!). With a 5 year rate at 3.5%, you would actually earn $175 per year of interest. Meaning, you actually save an astonishing $70 a year with a 40% marginal tax rate. That’s it; you could retire 5 years earlier with this new strategy… NOT! The good news is that amount will increase over time (the $5,000 yearly limit will be eventually be adjusted to match the inflation rate). In the meantime; here’s what I would do with my TFSA:

#1 Holding liquidity in your TFSA

As you already know, I am not a big fan of emergency funds. I prefer the use of a line of credit instead of “freezing” 5K to 10K. Since personal finance has no absolute, if you feel more comfortable seeing a monthly statement showing you have an emergency fund, the TFSA is definitely an answer to your need.

Liquid and secured assets will generate interest income. And interest income is fully taxable at your marginal tax rate. So if you want to protect your emergency fund from inflation, consider investing in a TFSA so the interest income remains tax free. Since you can withdraw this amount at any time, this fulfills all the requirements for a good emergency fund.

Since interest rates are pretty low right now, I would be tempted to look at mortgage-based mutual funds to allow for better investment returns. They usually offer a 3 to 5% expected investment yield and show small to no negative fluctuations. Currently many of them may, within a 12 month period, show a negative return. However, this should not exceed 3 to 4%. What is 4% of $5,000? $200. You should be able to support a temporary loss of $200 even in a case of an emergency. On the other hand, if chances of using your emergency funds are low over the next 2-3 years your investment yield will be far better than regular certificates of deposit.

#2 Following an index

If you do not need your money right away and you want the potential for even better returns, you are running out of options. With $5,000, you would be limited when looking at stocks, buying 2 – 3 stocks (of 100 shares each). In fact, you could barely buy a basket of Canadian bank stock!

On the other side, you could easily find an ETF or an index mutual fund that replicates the market. I like them since they get you the best from the market (growth!) without cutting returns with astronomical management fees. Depending on the amount you want to place, index mutual funds may become your best option at the beginning.

Since there are no transactions fees (no commission on the buy or sell side of the product) and relatively low MERs (usually around 0.50%), it may be the best solution for a $500 to $5,000 investment. You can also contribute to it with a systematic investment plan as well (which you wouldn’t want to do with ETFs as they charge a commission for each transaction). Unfortunately, you will also have to live with the fluctuation of both types of products. When the market is down 35%… your investment will reflect it as well…

Do you have any other investments you would like to include in your TFSA?

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Picture this: You are young and pretty and you meet your perfect match (she is young and pretty ). You get along pretty well, you both work, make money and after a while, you decide to live together. Life is great, you get married, buy your first house and… oh my god; she gets pregnant! You are living the perfect love, get a second child, and buy a bigger house: your life is perfect! And then, one day, you discover that your life is far from being perfect; you guys realize that you don’t love each other anymore. You both decide to split and keep going with you life. But wait! You were making 75K/year and she was making 25K… Somebody is going to get fooled…..

Myth #1 You have to give 50% of your pay cheque to your ex-wife

A few decades ago, divorce measures were made to punish people because they were breaking their engagement. Therefore, several people stayed together simply because they couldn’t afford to divorce. However, we are far from this situation in the 21^st century. If you don’t live with your spouse anymore, she can ask you alimony but it might be refuted as well.

The alimony to the ex-spouse has been created in order to protect the spouse with the lowest income to keep a certain lifestyle. However, if she is making enough money to live a decent live and pay her bills, you won’t have to pay for alimony! So in the case where you make 75K and she makes 25K, you might have to pay a small one but definitely not 30K per year!

Myth #2 You have to give the other 50% of your pay cheque to your ex-wife as child alimony

Then again, we all heard nightmare stories about that poor guy who lost his wife, his house, his car and finally his job during a deep depression where he had to give every single penny earned to his ex-wife as alimony.

There is actually a chart where you can determine how much you will have to pay in child alimony. The chart first determine the family income (each person take out the first 10K before calculation) and then consider the number of children.

This will give you the amount necessary for the kids to keep their lifestyle. Then, that number is prorated according to the importance of your income in the family income (in our situation 75%). Technically, you would have to pay 75% of the amount in the chart.

However, you have the possibility to prorate this amount according to the number of days that you take care of the children. Therefore, if you take care of them 50% of the time, you will be able to drop this number by 50%. Then, if you pay for daycare, private school, etc. you have the possibility to take off those amounts from the alimony.

Keep in mind that the money send to the spouse as children alimony is disposable as the spouse’s wishes (yeah, that sucks!).

Myth #3 Once the alimony is set, you can’t change it

The alimony can be reviewed in court every year. This is quite a pain but you can request a revision if you financial situation has changed and you can’t afford to pay the alimony anymore. On the other side, if you are making a bigger income, there is nothing stopping your ex-wife to ask you for more money

If you get to this point, I would suggest that you try as much as possible to get along with an agreement between you and your ex-spouse. Getting lawyers and court into your story might not be a good solutions for everyone.

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