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Q Can you help me decide if we should transfer our RRSP from our advisor and build a DIY portfolio with ETFs? My husband and I have just over $1 million in our registered accounts. I am 68 years old and still working. I receive benefits from the Canada Pension Plan, but my pension security has been withdrawn. My husband is 57 years old and plans to contribute to his RRSP plans for the next five to six years until he retires. All our RRSPs are segregated funds with a guaranteed return. However, we pay very high fees and have not seen the benefits we think we should see.
– Sarah
AND. There are a lot of questions here, Sarah, so let’s break things down and discuss the most important issues one at a time.
The first thing to consider is whether you should fire your current advisor, and based on the details you provided, the answer is probably yes. With over $1 million in assets, you should be able to find a good full-service advisor who provides both portfolio management and financial planning at a reasonable fee. But it looks like you are not getting the service you deserve.
You mentioned that all of your RRSPs are in segregated funds and that they have a “guaranteed return.” This must be understood in context, as warranties are generally much less valuable than they appear. (It’s possible that your advisor explained the breakdown of funds carefully and you misunderstood, but in my experience, people selling these products rarely describe them properly. If they did, no one would buy them.)
A segregated fund is actually a type of insurance product. There are some built-in guarantees that can provide benefits in the event of a devastating bear market or premature death. Others promise a certain level of cash flow in retirement, which is not the same as a “guaranteed return.” The insurance features built into segregated funds are not worthless, but they are simply not worth the price you pay for them.
How much is this price? Fees in the 3% to 4% range are not uncommon. Sarah, if you and your husband invested $1 million in these products, you’re probably paying over $30,000 a year, which is way too much and helps explain why you haven’t seen significant gains. Your advisor is putting his or her own interests ahead of yours, so it’s time to find a better option.
And this leads to the second question: Is it worth building an ETF portfolio and managing it yourself? This would certainly be the cheapest option, but it should be considered very carefully. If neither you nor your husband have ever managed their own investments, tasking yourself with managing a $1 million ETF portfolio can be overwhelming.
It’s also important to be aware that with retirement approaching, a detailed financial plan will be useful. You and your husband will need to determine the most tax-efficient way to use your portfolio after you retire, and coordinate this with your Canada Pension Plan (CPP) benefits and Old Age Security (OAS). Mistakes can be costly.
For example, you mentioned that you are still working at age 68 and that your OAS is being withdrawn. A good financial advisor would recommend deferring OAS (and probably CPP as well) until you stop working. This would allow you to receive a much larger benefit in retirement. It would be worth paying for this advice.
Based on the details you provided, Sarah, I suggest you look for a full-service advisor who can manage your portfolio using low-cost products and provide you with the retirement plan you and your husband will need. You should be able to get these services for about a third of the cost you pay today.
If you decide to go with a DIY portfolio, I recommend you consider using a fee-only financial advisor to build a solid retirement plan that complements your investing strategy.
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