I am involved in wealth management for some of my clients as their wealth quarterback, co-ordinating their various professional advisors to ensure they have a comprehensive wealth plan. In that capacity, as well as in my day to day capacity, I see several common issues arise in relation to my clients’ investments whether they have professional management or manage their own investments. Here is a short list of some of the issues that I see on a consistent basis.
Duplication of investments
Duplication or triplication of investments, which can sometimes be interpreted as diworsification is where investors own the same or similar mutual funds, ETF’s or stocks in multiple places. A simple example is Bell Canada. An investor may own Bell in their own “play portfolio,” they may also own it in a mutual fund, they may own it in a dividend fund and they may own it again indirectly in an index fund. The same will often hold true for all the major Canadian banks. Unless one is diligent, or their advisor is monitoring this duplication or triplication, the investor has actually increased their risk/return trade off by overweighting in one or several stocks.
This is simply ensuring that fixed income investments such as GIC’s and bonds have different maturity dates. For example, you should have a bond or GIC maturing in 2011, 2012, 2013, 2014, 2015 and so on, out to a date you feel comfortable with. However, many clients have multiple bonds and GIC’s come due the same year or group of years. The risk of course is that interest rates will spike creating a favourable environment for reinvesting at a high rate and you will have no fixed income instruments coming due for reinvestment. Alternatively, rates may drop and you have all your fixed income instruments coming due for reinvestment locking you in at a low rate of return. With the current low interest rate environment, you may wish to shorten your ladder, however, that ladder should still have maturity dates spread out evenly over the condensed ladder period.
Utilization of Capital Gains and Capital Losses
Most advisors and investors are very cognizant of ensuring they sell stocks with unrealized capital losses in years when they have substantial gains. However, many investors get busy with Christmas shopping or business and often miss tax loss selling. Even more irritating is that I still occasionally see clients paying tax on capital gains as their advisors have not reviewed the issue with them and crystalized their capital losses.
Taxable vs. Non-Taxable Accounts
There are differing opinions on whether it is best to hold equities and income producing investments in your RRSP or regular trading account. The answer depends on an individual’s situation, however, the key is to review the tax impact of each account. For example, if you are earning significant interest income in your trading account and paying 46% income tax each year, should some or all of that income be earned in your RRSP? Would holding equities in your RRSP be best, or do you have substantial capital losses you can utilize on a personal basis? There is not necessarily a one-size-fits-all answer, but this issue must be examined on a yearly basis.
Tax Shelter Junkies
I have written about this several times, but it bears repeating, I have observed several people who are what I consider "tax shelter junkies" and continuously buy flow-through shares or other tax shelters, year after year. I have no issue with these shelters, however, you must ensure the risk allocation for these type investments fits with your asset allocation.
Beneficiary of Accounts
This is not really an investment error, but is related to investment accounts. Where you have a life change, you should always review who you have designated as beneficiary of your accounts and insurance policies. I have seen several cases of ex-spouses named as the beneficiary of RRSP’s and insurance polices.