Case Study: Asset Allocation

Ryan is a lawyer in the City of Toronto who was called to the bar in 1995.  Ryan opened a RRSP at TD Bank as soon as he began working.  He started with a small monthly contribution and over the years increased the amount and now currently makes the maximum contribution each year.  Ryan has noticed through conversations with his close friends that all his successful friends had left the bank and were utilizing more sophisticated experts.  Ryan had been receiving our newsletter for about six months and decided to contact us for some advice.

We met with Ryan and reviewed his completed self-assessment questionnaire which led to the identification of two main issues:

1. Was Ryan’s portfolio properly allocated; and
2. Was a RRSP the best option for Ryan’s retirement planning

Asset Allocation

A review of Ryan’s portfolio exposed several allocation issues:

• Portfolio was 100% equities
• High geographic concentration
• High asset class concentration
• Very little hedge for poor market conditions
• Some of the equities investments were too risky based from a risk adjusted return basis (the relative risk of two investments with similar returns

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Was a RRSP the best option?

A review of his retirement goals and needs exposed several issues:

• Given his high income the relatively insignificant short term tax advantage is not worth the large tax bill in retirement
• RRSP will not be enough to cover his retirement needs
• Having recently incorporated some of the advantages of a RRSP were lost

Solution:

A complete rebalancing of Ryan’s investment portfolio was undertaken.  Ryan was still young enough to have a high concentration of equities however we recommended a 70% equities 30% fixed income to hedge against poor markets.  It was agreed that there would be a gradual shift to more fixed income as he aged so that as he approached retirement poor market conditions would have little effect on his retirement.  We also moved some of his non-registered investments into corporate class series of funds for tax efficiency and deferral.  Finally a more diverse asset class portfolio was created to give him exposure to areas he had not previously considered.

Given that Ryan had incorporated his practice and was a high income earner the benefits of a RRSP were greatly reduced in his case.  The maximum deduction made only a very small dent to his tax bill.  As well it was not prudent to take money out of a low tax environment (corporation) into personal income to put it back into the RRSP (which would be subject to high tax at retirement).  Instead Ryan’s professional corporation purchased a whole life insurance policy (corporation as owner and beneficiary) which could accommodate large contributions and provide retirement income (if required) on a much more tax efficient basis.