The RaeLipksie Partnership team highlights the the advantages of discretionary investment management for Canadian investors.

Q: What are the benefits of asset “location” versus asset allocation?

A: Asset Allocation deals with the all-important decision as to an investor’s mix, or balance, between different asset categories such as stocks, bonds, cash, real estate or alternatives.

Asset location is the next step that determines where those various categories and subcategories of asset types are positioned within a client’s various accounts. Typically, a client’s overall portfolio will be composed of a variety of different account types – cash account, RRSP or RIF accounts, TFSA accounts, and often corporate accounts. From a tax efficiency perspective, it can be advantageous to “locate” different asset categories among these different accounts.

Q: How can discretionary asset management provide for tax efficient portfolios?

A: Unlike mutual funds or even ETF holdings (Exchange Traded Funds) where a client’s holdings are grouped together, thereby providing very little in the way of tac management flexibility, under a discretionary arrangement the portfolio generally consists of individual securities which provides significantly greater flexibility in managing tax strategies.

These strategies can be as straightforward as an annual review of realized gains/losses in taxable accounts with a goal of minimizing those taxes through to more complex corporate tax arrangements, derived in partnership with the client’s tax specialists.

Q: How do I manage “risk buckets” within a balanced portfolio?

A: A client’s overall asset allocation positioning is the primary driver of risk within a balanced portfolio. However, when constructing that portfolio, the investment manager has discretion as to how the consolidated portfolio is constructed. It might make sense to have the client’s TFSA account(s) positioned 100% in equities, for example, even if their overall portfolio equity allocation is less. That more aggressive allocation can take advantage of the properties of a TFSA account, while a more conservative positioning in a RIF account, where current income needs must be met, could be helpful. This type of approach is very manageable within a discretionary arrangement.

Q: What are the advantages, and potential disadvantages, of different types of taxable income (dividends vs. interest income vs capital gains)?

A: Different types of taxable income attract differing tax rates and tax calculations. Those rates and calculations can also change over time and under different tax regimes. It is preferable, for example, to receive Canadian dividend income within a taxable cash account and to receive higher taxed interest income within a tax-sheltered registered account. Knowing how to position a portfolio to optimize its tax efficiency can provide real benefits to clients.

Q: How can a customized tax strategy optimize my portfolio?

A: A discretionary portfolio manager works in conjunction with the client’s other professional partners to optimize their overall investment strategy. When clients hold other assets outside of their discretionary investment portfolio – whether that be real estate holdings, other direct investments or corporate assets – the client’s team of independent professionals coordinate their efforts and expertise to ensure an optimal structure that takes all the client’s assets into consideration.

Q: What is the “cart and the horse” analogy and how can it affect my investment strategy?

A: Much of this discussion has centered on the tax implications of managing a client’s assets. While tax efficiency is a desirable goal, it’s important to ensure that tax strategies do not displace sound, long-term investment strategy – thus the analogy of not “putting the cart before the horse”.


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