My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, April 2, 2018

Duplication of Investments

In August of 2011, I wrote a blog post about common investment errors I had observed in my capacity as an accountant who works in the wealth maximization and wealth advisory area. One of these errors was the duplication of investments. I find that many people have this issue to some extent; it is just a question of quantum. Today I want to briefly expand on this topic.

The duplication or triplication of investments, which can sometimes be intertwined with diworsification, occurs when investors own the same or similar stocks, mutual funds or Exchange Traded Funds (“ETFs”) in multiple places.

A simple example is Bell Canada. You may own Bell in your own “play portfolio,” in a mutual fund you own, in your investment advisors private managed fund or indirectly in an ETF fund. The same duplication often also occurs with many of the Canadian banks and larger cap Canadian stocks, such as TransCanada, Thomson Reuters, Enbridge, etc. Unless you are diligent, or your advisor monitors this duplication or triplication, you may have increased your risk/return trade-off by over-weighting in one or several stocks. Some may argue this is really just a redundancy issue, that likely results in higher costs and is not really that significant a risk to your portfolio. Although, I would suggest that if the redundancy is in a more volatile group such as the resource sector, the portfolio risk could be significant.

The investing reality in Canada is that there are only so many stocks in the Canadian stock universe that investment managers can select. This limitation plays a large part in this issue. Duplication can also result within a family unit. If your spouse or partner invests separately, they may be creating redundancies and additional costs, whereas if you invested as a family unit much of this duplication could be eliminated.

Asset Allocation

I think most of us are aware of the concept of asset allocation, which is essentially allocating/diversifying an investment portfolio across major asset classes (stocks, fixed income, foreign stocks, small caps, REITs, etc.). Typically, an effective asset allocation will also consider diversification across countries, which is important given Canada’s limited stock access as discussed above. Your asset allocation should be undertaken in context of your Investment Policy Statement which accounts for your risk tolerance, objectives and trading restraints (such as no stocks that sell arms or tobacco).

When you allocate and diversify your investments, you can typically, to some extent, minimize market risk and volatility. Where you have duplication, you are at cross-purposes with your asset allocation strategy, since you have doubled or tripled up on an asset class. Your goal is diversification with minimal investment duplication.

Tax Efficiency

When I meet or talk with investment managers (the better ones do this on their own volition) on my client’s behalf, I always ensure they have reviewed the tax efficiency of my client’s portfolio. This would include considering the type of income earned, typically interest, dividends, capital gains and would also likely account for their return of capital investments like REITs. This discussion is then tied back to whether an account is a registered account such as an RRSP, a tax-free account like a TFSA or a taxable non-registered account. I wrote about this in these blog posts on tax efficient investing, Part 1 and Part 2.

Where there is duplication, this tax-efficiency can be lost, especially where there are multiple advisors and there is no overall communication. This can be especially costly when tax-loss selling is undertaken in the fall and your advisors are at cross-purposes or thinking they are doing good by selling stocks underwater. You may end up with an excess of capital losses or not enough capital losses, and they all sell the same stock to trigger a loss, even if it is a good long-term investment.

Some Considerations to Avoid Duplication

If you use several investment managers, consider having one oversee the group to ensure each manager is investing in what they know best and there is minimal duplication and proper asset allocation. If you have significant wealth, you may want to or hire an independent person to quarterback the process such as your accountant or a fee for service financial planner.

You may also want to consider consolidating your investment assets. This can be done by reducing the number of investment managers you use (if you have several) or if you manage your own money, review the details of the funds and stocks you own and see if there is duplication of investments or a way to reduce your overall costs.

At the end of the day, your goal is to simplify the tracking of your investments, ensure you have managed your risk and have diversified your portfolio to minimize duplication.

The above in not intended to provide investment advice. Please speak to your investment advisor. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

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