Its amazing how quickly and how much our world has changed in the last 2 years. Everything from increased political sensitivity, to the pandemic,to micro and macro economic structures being strained.People are saying, “ We are all in this together”, however the simple fact is, everyone has such different circumstances. This is the same when it comes to financial planning. Everyone has such different situations and goals. With that in mind, the Covid Pandemic I believe has and should change how Advisors and clients look and plan their financial futures. There are 3 aspects I will touch on. I believe the majority of financial institutions won’t promote or discuss these aspects because eventhough these stratgies make financial sense for the client these same strategies may make more work for the Advisor or may not make the best returns/revenue for the Advisor.
1. Flexibility – Our world changes fast. We have come to realize how much is out of our control. With some aspects, we can control our finances to a certain degree (spending, savings, etc) but we can’t always control the economy, or lockdowns. Flexibility can come down to;
a. the accessability of your invested funds,
b. liquidity of invested funds
c. fee structure and how the Advisor receives compensation for their service/advice
A client should have approx. 85-90% of their investible assets in liquid investments. Having assets that are liquid right away (24-48 hours) provides not only flexibility in terms of unforeseen circumstances, it can also allow to use these funds for a potential opportunity (investment, home purchase, etc). Some investments, even held in an RSP or TFSA’s can be held in an illiquid state with an unknown time frame for exit. These types of investments can work and be profitable, but the time risk and the illiquidity risk might not be worth it, especially in uncertain times.
Fees can also come into play when we are discussing flexibility. Advisors and institutions like to set up investment accounts with a Deferred Sales ChargeFee (DSC). These fees pay the advisor or institution an upfront commission, while still charging an on going Management Expense Ratio (MER) . The DSC starts as soon as the money is invested and usually starts at 6% in the first year on a decreasing sale for 5-6 years. This mean if the client wants to move or access their funds, they would pay a penalty to do so, while the advisor made their money with little to no risk upfront. The industry has changed some of its policies around DSC and full disclosure on them, however, not all companies and advisors are adhering to these policies. One way to check if your investments are set up this way is to check your statements. Beside the fund you are invested in would have the letters , DSC. If this is the case and you aren’t aware of your investments being setup like that, don’t fret too much, you still have options. It might be time for a second opinion on your investment holdings. All advisors have the choice of not charging clients these fees. If you are wanting a more flexible portfolio and more transparency on fees, there are options out there for you.
2. Reallocating Cash Flow – You may have read other financial blogs/reports talking about how much of your after tax income you should be putting away and saving. Traditionally its been said to invest 20% ofyour income. This isn’t possible for everyone, especially in circumstances where there is a loss in a job, or increasing cost of living. Savings is a habit though, and a good savings account or investment account can help get through a job loss or a short term time away from work, or even something like a nice vagabonding trip to find yourself. Now while some experts have said invest 20% of your income, they also want you to invest it with them, or the bank or institution they work with. They have a vested interest for you to place your money with them, so they can collect their feesand revenue. While some of these experts do provide value, I believe they are often missing the boat in generating the best return and value to the client, mainly because of their limited range of what they can offer you, the investor. With what we have seen over the past couple years there are better ways to allocate your savings. Here are my thoughts;
A) Invest in Your Ongoing Education/Professional Development – 5% of your income should be allocated towards continuing education. That could be a course or upgrading you take that gives you araise at work or spending money towards reading or audio books that can help you gain knowledge of any area. The return on investment for these funds would be incredible. A course you would need to get a raise at work could cost 5k. The resulting raise could be 5k a year. Project that out over 20 years and you have and Return on investment thatis 100% return in just two years. As for reading and gaining more knowledge in so many areas, it rounds us out as people and can add other valuable tools that could allow for someone to start their own business, moveup on the corporate ladder (increase pay), etc. We need to spend more time, energy and money investing in our greatest asset, which is ourselves.
B) Invest in Your Health and Wellness– 2-3% should be allocated to your physical and mental health. This doesn’t necessarily mean go out and get a gym membership and never use it. It means to make your health a priority. There are many benefits to this. Mental health being one of them. Numerous studies show being active leads to endorphin release, which reduces stress. The health benefits can include; a stronger immune system, more physical and mental endurance, better interpersonal interactions. There are long term financial benefits as well when you eat, drink and exercise in the right way. Most people sacrifice their health to chase a dollar while they are working, and then are using that hard earned money later in life to try to buy back their health. Its never too late to start making health a priority. I personally have decided to re focus on my health and it has made a world of difference for me.
3. Diversifying Income – It has been engrained in us early on when talking about investing, how important it is to diversify assets . One’s portfolio should be wellrounded and invested in many different areas, what is less talked about is non-correlating assets (another conversation for a different day), but what few advisors are talking about with clients is diversifying income. We have seen how important this can be with something like a Pandemic. Many people have either lost their sole source of income (short or long term) or much reduced income based on programs available. Moonlighting used to be something that was taboo decades ago. I believe its something that should be part of everyone’s plan to generate income and assets for themselves and their family. With the age of the internet, there are many different ways to add another income stream, a lot of them require minimal time, but do require strategies and finding something that fits your and your families lifestyle is important. If you are interested in looking at options and how they could fit into your plan, we can discuss what these could look like and how they could be an integral part of mitigating income risk and increasing overall income and saving potential.
The above principals mentioned are not only for planning in a pandemic, but also when things get back to normalcy. Like everything, financial planning and advisors go through evolutionary periods. Life changes and those that can adapt the best and quickest usually find themselves in a better position now and in the future.
If you would like to discuss these thoughts and how they could be implemented into your financial planning or strategy, don’t hesitate to reach out to discuss.
No better time than now to make a change!
Chris Boyle
CEO and Advisor
Legacy Financial Group LTD.
cboyle@legacyfg.ca
780 966 5084