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Monitoring the client’s financial independence strategy

The creation of a financial independence strategy (otherwise known as a retirement plan) is just the beginning of the process of helping a client achieve their personal financial objectives. No matter how thorough or careful you are in the development of this plan, there will be circumstances that will impact the strategy both in a positive and negative manner. Some of these factors include:

  • inflation is higher or lower than anticipated;
  • actual rates of return achieved are higher or lower than projected;
  • the client’s goals and objectives evolve and change over their lifetime;
  • changes in legislation, government benefits, or tax rates;
  • changes in the client’s personal situation, such as marriage, divorce, birth of children, employment situation, etc.;
  • changes in the saving and spending patterns of the client impacting the current lifestyle, which will also have an impact on the retirement lifestyle required;
  • unexpected capital erosions or infusions.

These are just some of the things that can impact a strategy after it’s been put in place.


A financial independence strategy, or retirement plan, should be viewed as an ever-changing work in progress, not as a once in a lifetime event. Given that assumptions must be made just by the very nature of the analysis being done, it’s important that the client understand that, periodically, a full review of the strategy is needed. To the right is a diagram that illustrates the repetitive process required to create and then maintain a meaningful personal financial strategy. It shows that the process starts by defining the client’s goals and objectives, collecting information, performing an analysis, developing a financial strategy, preparing your recommendations and action plan checklist of the steps that have to be taken to implement the plan. The client then must make decisions for action so that implementation takes place and then the whole process starts over again. For some clients, it might be necessary to do a full review annually, while others may only need a full review every two to three years.

Monitoring your client’s asset allocation

Your client’s target asset allocation needs to be monitored to ensure it is maintained within reasonable ranges. This is true whether you are doing comprehensive financial planning for that client or are just focused on investment management. Most advisors today recognize the need for diversification across a variety of asset classes in order to provide a portfolio that is appropriate given their client’s risk profile. Once a target asset allocation has been identified (typically, through the use of an Investment Policy Statement), it’s necessary to monitor that asset mix to ensure it is maintained. Here’s an example:

An Example of a $100,000 Balanced Portfolio:
Allocation $ Allocation % Asset Class 1 Year Later New Allocation Repositioning Required After Rebalancing Allocation %
$10,000 10% Canadian cash $10,500 9.66% +380 10,880 10%
20,000 20% Canadian bond 21,600 19.85% +160 21,760 20%
10,000 10% International bond 10,400 9.56% +480 10,880 10%
25,000 25% Canadian equity 29,250 26.88% -2,050 27,200 25%
15.000 15% U.S. equity 16,650 15.30% -330 16,320 15%
20,000 20% International 20,400 18.75% +1,360 21,760 20%
$100,000 100% $108,800 100.00% $108,800 100%

The rebalancing of the portfolio can be accomplished in one of several ways. Consider these alternatives:

  • Individual investments – Select individual stocks, bonds, GICs, and other direct investments to implement the portfolio recommendations and manually rebalance the portfolio at periodic intervals to maintain its intended risk/reward profile.
  • Mutual funds or segregated funds portfolio – Select a portfolio of different mutual funds or segregated funds from a variety of different asset classes and manually rebalance the portfolio periodically.
  • Asset management service with auto-rebalancing – Identify an asset management service appropriate for your client’s situation. This might be a “fund of funds,” “balanced funds,” or asset class pools where your client’s money is invested and is automatically rebalanced whenever there are variances outside acceptable ranges.

It’s important to ensure that your client’s asset allocation stays within acceptable variances from their target. Otherwise, the investment strategy you have identified in your Investment Policy Statement is not being adhered to. Also, weightings in certain asset classes may become too high, thereby exposing your client to unacceptable risks, given their personal risk profile. Not monitoring this important aspect of your client’s situation could lead to serious questions about the quality of your oversight of the client’s portfolio, especially over the longer term.

Monitoring your client’s tax situation

While you might be able to do reviews relative to the client’s financial independence analysis every two or three years, in cases where you are doing cash and tax planning for a client, it’s important to recognize that this is not a one-time event, but an ongoing service that needs to be reviewed annually. Some important points to monitor include the following.

1. Deductions and credits – Ensure all the deductions and credits available to your client are used. Be diligent about not overlooking opportunities to take deductions or credits for something you would routinely do.

2. Deferrals – It is normally better to defer payment of tax whenever possible. The most common example of this is an RRSP. The chart below shows why it is so popular.

The Power of Tax Deferral
Investment Option Dollars Invested Each Year Tax Recovery (40% MTR) After Tax Investment Cost Cumulative Value After 25 Years @ 8% Growth Annual Retirement Income Provided
RRSP Investment $10,000 $4,000 $6,000 $789,544 $63,164
Non-RRSP Investment $ 6,000 Nil. $6,000 $291,964 $23,357

In considering this example, even if you took all of your money out of the RRSP after 25 years (which would not be very prudent) and paid tax at the top marginal rate, you would still have far more capital from the RRSP than in the non-RRSP. This is the power of tax deferral.

Another way to look at this is to consider the retirement income you could derive from the capital you had accumulated. Using this example, the annual taxable income from the non-RRSP portfolio would be $23,357 while the income from the RRSP capital would be $63,164 (assuming 8% returns in each situation). This simply means that the pre-tax income from the RRSP is nearly triple the non-RRSP.

3. Diminish – As illustrated below, merely changing the type of income can diminish tax.

For Each $1,000 of Income You’ll Keep the Following, Depending on the Source
Province Salary or Pension Income Interest Income Canadian Dividends Capital Gains
Alberta $610 $610 $759 $805
British Columbia $563 $563 $684 $781
Manitoba $536 $536 $649 $768
New Brunswick $532 $532 $676 $766
Newfoundland $514 $514 $681 $757
Nova Scotia & PEI $527 $527 $681 $763
Ontario $536 $536 $687 $768
Saskatchewan $555 $555 $710 $777
Quebec $518 $518 $672 $759

Based on top tax rates as of January 01, 2003

4. Divide—Because of our marginal tax system that taxes higher incomes at higher rates, dividing income among various family members can result in significant tax savings. The chart below illustrates the tax savings realized if a couple planned their retirement income to be evenly split.

table name
Retirement Income Taxes if 100% to One Spouse Taxes if 50% to Each Spouse Tax Savings  % Tax Savings
$30,000 2,744 1,650 $1,094 39%
$40,000 5,790 3,855 1,935 33%
$50,000 8,905 $6,060 2,845 32%
$60,000 12,191 8,265 3,926 32%
$75,000 18,555 12,800 5,755 31%
$100,000 29,407 20,587 8,820 30%
$150,000 52,612 39,886 12,726 24%
$200,000 75,817 61,590 14,227 18%

Monitoring your client’s insurance needs

The creation of a strategy in the event of death or disability is highly reliant on many factors. It’s for this reason that periodic reviews must be done to ensure that coverage that’s in place continues to be appropriate, both in amount and type. Most of the factors that can change as identified above under “monitoring your client’s financial independence strategy” also apply to the analysis on death or disability. However, there are some additional factors that also come into play. These include the:

  • rate at which debt is being reduced;
  • changes in group coverage as a result of a change of employment; and
  • cash flow position of the client, which can impact their ability to maintain existing coverage.

Sometimes a change to a less expensive type of coverage may be required to ensure that adequate coverage is maintained during a cash flow crisis.

Mechanism to facilitate monitoring

When it comes to monitoring all of the above areas, it’s important to have a mechanism that:

1. prepares the client to expect your actions relative to monitoring various aspects of their situation;

2. sets target dates for each activity to ensure that it takes place.

The ideal tool to accomplish both of these objectives is to include action items in your action plan checklist that schedules these activities.

Action Plan Checklist
When Who What Date Complete
May/04 John Roger Louise Review an Action Plan Update – Summary review of your Personal Financial Strategy and Death and Disability Strategy to ensure you are still on track to achieve your personal financial objectives. Update the Action Plan.
Sept/03 John Roger Louise Cash and Tax Management Review – Annual review of your cash and tax planning issues to ensure tax is minimized.
Dec/03 John Roger Louise Portfolio Reviews – We will conduct semi-annual meetings to review your portfolio results. These meetings will coincide with the release of your June and December performance reports.
John Roger Louise Portfolio Rebalancing – A review of your portfolio will be done annually to ensure your asset allocation is maintained within your target range.