When I have a question on medical stuff, one of the first people I ask is my sister. If I need a referral to a lawyer in Edmonton or Calgary, I’ll still call my mom.
The advice you receive from your family, friends, and coworkers can be good advice. We know that we can trust them, and they want the best for us.
Financial matters can be a very private subject for some families, and so it can be hard to seek an outsider’s help. Especially if part of your concerns are framed with remorse or vulnerability, engaging your friend or family member can add value to that relationship. And sometimes it’s just a bit more direct than that. Sometimes the real or perceived cost of professional advice is enough for us to prefer the console of friends and families.
But unless your friend is an experienced professional in their field, when you take their advice, you might only getting half of the
For example, you might have heard that it’s a good idea to take CPP early, or that you shouldn’t buy RRSPs if you are self-employed. I’ve said these things myself, on occasion, and in the right circumstances.
But when you’re only working with half of the, it’s hard to quantify the overall impact that the advice is going to have, and whether the net effect is even positive at all.
That’s important, because well-recognized studies have been able to quantify the value of professional advice.
One such study revealed that investors who work with an advisor for 15 years or more accumulate 2.7 times more savings in comparison with investors working without advice. The people working with advisors didn’t have higher incomes, and they didn’t start with more savings than their non-advisor counterparts. Yet at the end of 15 years, they had almost three times as much.
Working with advice helps to create this discrepancy in two major ways. The first is that the guidance and coaching of an advisor helps an investor to see their finances as a priority. How can you know what to eat unless someone explained to you what nutrition your body needs? The same is true with savings. How can you know how much you are supposed to save if nobody has ever shown you why you should care?
The second, and often more important, way is by showing investors how to plug the leaks in their financial boat. Making more money is valuable, for sure, but losing less money is just as important. And it’s the losing less part that’s often in the half left out. Which means that if you’re only getting only half of the, you can actually make things worse. A lot worse.
Earlier I mentioned that I’ve been known to recommend taking CPP early. Let’s break down this example a bit. If a person is taking CPP early, but is still choosing to continue to work, that would mean adding the CPP income to their tax base, in what is likely their highest income-earning years. In addition, CPP has penalties for taking income early to the tune of 0.6% per month before age 65. Thus, for the strategy to make sense there would need to be both a minimum required rate of return on the captured CPP income to offset that penalty, and a deduction offset for the additional taxes. There are many strong and compelling reasons to take CPP early. But that’s just half of the. In order to know whether taking CPP early makes sense for you, you also need to have a plan for what to do with it after.
Quantifying this, a 60 year old investor entitled to $6,500 per year of CPP at age 65 who earns $50,000 now while they’re working and expects to earn $30,000 when they stop working at 65, will be short over $67,000 in assets over their lifetime (to age 95) if they took their CPP early. And to most, not losing $67,000 is worth a lot more to your lifestyle goals than the cost of paying for the other half.
The other example was whether self-employed individuals should invest in RRSPs. This choice is a very specifically personal one. Knowing whether it’s right for you will require balancing the potential losses of creditor protection, small business tax rates, and CPP income and disability benefits, against the potential gains of investment control, income control, and cash-flow, all the while trying to deal with ever-changing dividend tax and dividend tax credit rates.
The first half often involves increasing your cash flow and how to keep more of what you earn. And that normally develops into a choice of dividends vs salary. The other half is about plugging the leaks. Leaks such as trouble securing credit, qualifying for disability insurance, or protecting oneself from creditors. And just like our CPP example, there’s also the issue of ending up with less income in the long run if the increased cash flow isn’t reinvested into productive assets or used to pay off debt. Knowing which option is right for you, the consequences of the decision, and knowing how to make it count, is the half worth paying for.
A good rule of thumb for compensation paid to an advisor’s firm is 1% of managed assets per year, with the advisor receiving the majority of that. If your family member or friend is not a recognized professional in their field, when you rely on their advice, as good as their intentions may be, you could only be getting half of the. Sure, forgoing the other half saves you a 1% advisory fee, but is saving that fee worth 2.7 times your savings?
If you have any questions on the different methods of advisor compensation, or for more information on how professional financial advice could make a difference to your long-term goals, speak with a Certified Financial Planner today.
Written by Meagan S. Balaneski, CFP, R.F.P.
Meagan S. Balaneski, CFP, R.F.P CERTIFIED FINANCIAL PLANNER® Advantage Insurance & Investment Advisors Investment Funds Representative Manulife Securities Investment Services Inc.
The opinions expressed are those of Meagan S. Balaneski and may not necessarily reflect the views of Manulife Securities Investment Services Inc.