By Dan Hallett on September 4, 2024
While do-it yourself investors are notorious for making big behavioural mistakes, there is a unique subset of very savvy investors. While they do not make the same costly mistakes of their less disciplined peers, they will face a significant challenge in their elderly years.
These investors have succeeded using a variety of approaches – from picking a concentrated list of individual stocks to the very broad diversification of traditional index investing. The problem: If the family DIY investor predeceases their spouse, often no other family member has the interest or knowledge to continue managing the investments in their absence.
When I have spoken with older DIY investors, many have said to me that they have told their spouse to, “call [name of chosen advisor] if anything happens to me”. While better than nothing, this is not a succession plan. The chosen advisor could retire, become disabled, or die prematurely. The firm of choice could be acquired and change for the worse. And no matter how well you think you know a particular advisor, you never really know until you are working with them in a client-advisor relationship.
If you are your family’s DIY investor, here are my suggestions.
Start your search before you need it
Many aging DIY investors agree with the benefit of engaging an advisor before that person or firm is needed. But they don’t know when to pull the trigger. When is a personal decision. If you’re healthy and have good longevity in your family, you may be able to wait until you’re well into your seventies. But if your health is compromised, you may want to start this process much sooner.
Taking action early – challenges and benefits
When you’ve done something yourself for decades, paying thousands (or tens of thousands) of dollars annually in advisory fees is not palatable when you are still very capable. But making the best decision, in my view, requires choosing and formally engaging a firm earlier than necessary. This will add certainty to the decision.
Having the time to make sure the reality meets (or exceeds) expectations will provide peace of mind. This gives you the opportunity to test the advisor in real time. Then you can experience and assess the advisor first-hand – i.e., discovery, demeanor, thought process, how advice is delivered and documented, thoughtfulness of how questions are addressed, quality of reporting/transparency, diligence regarding follow-up, etc. This also provides the opportunity for your spouse to get to know the advisor with you – and for the advisor to learn what is important to you and your family in terms of service and communication. Otherwise, your surviving spouse will be left to navigate this alone.
Start with registered accounts only
One strategy is to engage an advisor with only registered accounts. Ideally, the dollar total of these accounts should be comfortable for you and meaningful for the advisor. While using only part of your portfolio could result in a higher fee rate (i.e., percentage of the portfolio value), the total dollar fees will be less. And if it doesn’t work out, you can terminate the advisor and start again with no tax consequences if using only RRSP, RRIF, TFSA, or other registered accounts.
Assessing your chosen advisor
In recent years, I wrote a couple of articles on the topics of finding a professional advisor and how to tell if your advisor puts your interests first. More recently, Tom Bradley wrote a great piece aptly titled: Telling experts from imitators. These may be helpful in the process of finding your successor.
Below is a summary of this and other options for addressing this DIY succession challenge. Whatever you choose, make sure to do something to look after your spouse and family in your absence.
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Set up simple no-fuss portfolio |
Hire an advice-only planner |
Engage full-service wealth manager |
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Description |
This involves replacing all current investments with – ideally – one low-cost balanced investment fund. | Advice only planners charge for financial planning advice delivered verbally and via a written plan. | Full service refers to a single firm that can manage the investment portfolio and provide financial planning advice. |
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Pro |
Maximum simplicity and minimal decisions required | This option is appealing if you don’t need or want investment advice. | This is ideal since a financial plan provides important inputs and context to the design of investment portfolios. There is value in integrating these functions. |
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Con |
This may trigger a big capital gain, so spreading the gain over 2+ years will lengthen this process. Surviving spouse will still need to place trades to fund withdrawals. | An hourly fee model can disincentivize more frequent engagement (even where more ongoing advice is needed). | This option may be the most expensive; a turn off for sophisticated DIY investors – a cost-conscious group. |
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Tip |
Consider a mutual fund instead of an exchange traded fund. While a mutual fund may cost more, many novices are intimidated by entering the occasional ETF trade – a challenge easily overlooked by savvy DIY investors. | These advisors are typically not licensed to give individual investment advice so this may be the best option for planning if the portfolio has already been transitioned to a simple low maintenance structure. | Look for firms registered as Portfolio Managers that also offer planning advice. These firms are viewed as fiduciaries in the eyes of the law. |
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