One of our goals is to simplify our clients’ lives — at least simplify the component of their lives spent around paperwork and administration. Every year changes occur with respect to investments and regulations — many of these changes have an impact on your Total Wealth Plan and tax situation. We immediately begin to help our clients to simplify their life by consolidating accounts.
Straggling accounts
When we meet with new clients, we typically request a copy of all their investment account statements. In some situations, investment accounts have been opened at multiple financial institutions. The following are some common reasons we have encountered from individuals who are looking to consolidate their accounts:
• They were not happy with the first institution and they opened a different account at another financial institution.
• We have heard of people racing into a financial institution to make that last-minute RRSP contribution on time.
• Their inheritance just seemed easier to keep at the same place.
• A short-term advertised special on a term deposit within a TFSA brought them into another institution.
• The investor has a self-directed account that they lost interest in managing.
• Locked-in accounts at past employers is a common occurrence.
• We have also had clients that purchased a proprietary product that could not be transferred after they purchased it.
• Some accounts have an investment that is relatively illiquid (i.e. annual redemption rights).
• Some may have to wait until the investment matures (i.e. purchase of a multi-year GIC at the bank).
Regardless of the reason for the straggling accounts, we diarize all the components of each account. We find the best solution to have the funds consolidated at the liquidity event, maturity of the investment, submission of the forms for the periodic redemption, etc.
Once a client provides a copy of their statements, we will let them know all their options. One of those options may be having to sell the investment to have it consolidated. For more information, refer to our article Pushing proprietary products.
Registered accounts
Most clients today may have several types of registered accounts including: Registered Retirement Savings Plan (RRSP), Locked-In Retirement Account (LIRA), Registered Retirement Income Fund (RRIF), Registered Education Savings Plan (RESP), Registered Disability Savings Plan (RDSP), and Tax-Free Savings Account (TFSA). They may also have non-registered accounts such as a cash account — either Joint With Right of Survivorship (JTWROS) or Individual, an in-trust for account, or a corporate account.
Registered accounts all have specified limits that you must stay within; the tracking of the limits is complicated enough even if all your accounts are held at one institution. The probability of making an over-contribution is greatly enhanced when you have the same type of account at multiple financial institutions.
It makes advising a client particularly challenging on the amounts to contribute or withdraw from accounts when other information from different institutions is not known.
Foreign Income Verification Statement (T-1135)
There are harsh penalties for individuals who do not correctly file the Foreign Income Verification Statement (T-1135) with the Canada Revenue Agency (CRA). The form can be rather time consuming to complete if you have multiple accounts at different institutions.
Annually, we forward our clients their Foreign Income Verification Statement that contains information about their foreign holdings and income to report on T-1135.
If all of their non-registered investments are held within this one account, they can simply provide this statement to their accountant with minimal effort for reporting. If they have multiple non-registered accounts, then clients or accountants will have to develop a system to integrate all of the totals for the foreign investments at each firm to come up with the required figures.
Over-contribution penalties
There is no restriction with respect to the number of TFSA and RRSP accounts you open. If you open a TFSA with a financial firm, I would suspect they would be contacting you annually to make your contribution for the year. If you inadvertently say yes to more than one institution, then it would be easy to over-contribute to your TFSA.
If you over-contribute to a TFSA, or any registered plan, then you may be subject to a tax penalty equal to one per cent per month of the over-contributed amount. If you have more than one TFSA as an example, it is important that you tell the advisor at each institution you deal with what you have contributed.
Statement of Securities Transactions (T5008)
Years ago, financial firms did not have to report dispositions to CRA. Now, each disposition in a non-registered account is reported on a Statement of Securities Transactions (T5008) form. These forms are not necessarily sent to clients in the mail but can be accessed on My Account with CRA online.
We always caution clients who do their own tax return to carefully review the auto-fill function that transfers the T5008 information automatically to your return. The information transferred in form T5008 is just the proceeds amount and does not include the adjusted book value. It is important to also input the adjusted book value manually.
We send our clients a tax package that includes a Realized Gain (Loss) Report, which contains both the adjusted book value and the proceeds. We encourage clients to refer to the information on the Realized Gain (Loss) Report and use the T5008 slips to verify the completeness and accuracy of the proceeds.
Average cost
In Canada, we must use average cost when calculating realized gains (losses). Tracking the average cost of the investment assets can be straightforward if all of your investments are at one institution.
If David bought 100 shares in 2015 of ABC Company at $70/share and another 100 shares in 2018 at $100/share. David would own 200 shares with a combined adjusted cost base of $17,000 (or $85 “average cost” per share). If David sold 100 shares then the adjusted cost base per share is $85 and would be reflected correctly on the realized gain (loss) report if both blocks of shares were purchased at Institution A.
Let’s say Diane bought 100 shares in 2015 of ABC Company at $70/share at Institution B. In 2018 Diane buys another 100 shares of ABC Company for $100/share at Institution C. Neither Institution B or C would know about the other purchase and both Realized Gain (Loss) Reports would be incorrect when Diane goes to sell her shares of ABC Company in the future.
Individuals who have more than one cash account must ensure holdings are not duplicated. If they are duplicated, then care must be taken to adjust the book values on dispositions as you cannot rely on the Realized Gain (Loss) Reports for tax purposes.
This is one of the reasons why financial firms put a disclaimer on reports as they cannot provide assurance that the report is correct for tax purposes — the financial firm does not know if you own additional shares elsewhere.
Asset mix
An important component of investment performance is asset mix. Consolidation can help you manage your asset mix and ensure that you have not duplicated your holdings and are, therefore, not overexposed in one sector.
Unless your Portfolio Manager has been given a copy of all your investment portfolios, it will be difficult for them to get a clear picture of your total holdings. Even if you were able to periodically provide a summary of each account to each Portfolio Manager, as transactions occur you would still need to update every Portfolio Manager with those changes.
Technology
Most financial firms provide access to view your investments online. If you have accounts at different institutions, then you will need to get online access from each institution. It is not as easy to get a snapshot of your total situation when you have multiple accounts spread across multiple institutions.
Many firms provide paperless statements and confirmation slips. As time goes on, most people will gravitate to the benefits of paperless:
• You do not have to worry about your mail getting lost or delivered to your neighbour;
• will get your statements quicker;
• don’t have to worry about storing older statements, or shredding them;
• can easily forward information to your accountant in PDF form, if required; and
• can be travelling, or in your home, and have easy access to your investments.
If you have one online platform this process is even easier.
Tax receipts
If you hold non-registered investment accounts at several institutions, you will receive multiple tax receipts. By consolidating your accounts, you will receive a limited number of reporting slips for income tax each year.
Reducing the number of tax receipts may also reduce the amount of time your accountant will spend completing your tax return. Tax information can also be set up to be paperless at many firms. You can log onto the communication centre of the website and retrieve updates on when your information will be available.
Projected income reports from different institutions will be presented in various formats and at different points in time.
For you to obtain a complete picture of your financial situation, you will have to manually calculate the total income from your investments. In situations where you have instructed your financial institution to pay income directly from an investment account to your bank account, it becomes more complicated to manage when there are multiple investment accounts.
We like to have a detailed Investment Policy Statement which clearly states the required cash flow and from which investment account(s) that cash flow is being derived.
Estate planning
One of the steps in an estate plan is to deposit all physical share certificates and to reduce the number of investment accounts and bank accounts. Having your investments in one location will certainly simplify estate planning and the administration of your estate. It also assists the people helping you as you age.
Monitoring performance
Some investors may be comparing the performance of one firm or Portfolio Manager to another. Investors should be careful when doing this to ensure they are really comparing apples to apples. One investment account may have GICs while another may have 100 per cent equities.
It is easier to understand how all your investments are performing when you receive one consolidated report from one Portfolio Manager. When you have all accounts consolidated with one financial institution, it is easier to obtain a consolidated report.
Conversion of accounts
If you have multiple RRSP accounts and are turning 71 years old, you may want to consider consolidating now and discussing your income needs.
If you have three RRSP accounts, you will have to open up three RRIF accounts. It is easier to consolidate all the RRSP accounts before age 72 and open only one RRIF account. Mapping out whether to select the minimum RRIF amount or elect a greater payment when you have only one account is significantly easier.
Account types
Fee-based accounts are usually suitable for a household that has total investment assets of $250,000 or more at one institution. If you have $100,000 at Institution A, $130,000 at Institution B, and $50,000 at Institution C, then you would not be exposed to the fee-based option.
By consolidating your assets, it can provide more investment options to you, such as fee-based accounts. In addition, most financial firms have a declining fee schedule. As your account value grows, the fees as a percentage may decline.
Service
In a perfect world, all clients at all financial institutions are treated equal. The reality is that the largest clients get better service.
By having $200,000 at six different institutions, you are probably getting minimal service at each institution. If you consolidate these accounts at one institution, we would suspect that you would get significantly better service.
Lower fees
Perhaps the biggest reason to consolidate your investments is to lower your fees. Most Portfolio Managers have a fee schedule that declines as the investment dollars increase.
For example, Mr. Wilson has an account with $279,000 and pays 2.3 per cent in embedded fees annually ($6,417). Mr. Wilson has a second fee-based account, at a second institution, with $430,000 where the fee is 1.75 per cent ($7,525). His spouse has an account at a third institution, with $650,000 where the fee is 1.50 per cent ($9,750).
In total, Mr. and Mrs. Wilson are paying $23,692 annually to have their money managed when you add up the total at all three institutions. If Mr. and Mrs. Wilson were to consolidate all accounts at one institution, the total investment dollars would be $1,359,000.
Households with accounts over $1 million typically benefit from reduced fees. If we assume the fee would drop to 1.00 per cent, on all three accounts, the annual fee would be $13,590 – a savings of $10,102 ($23,692 - $13,590) every year.
Other benefits
When you have all registered and non-registered investments at one location it is easier for financial planning purposes. Consolidation enables you to fund RRSP contributions through in-kind contributions. Sometimes it is recommended to change the structure of your investments between accounts to improve the overall cash flow and from a tax efficiency standpoint – this can only be done if your accounts are at one financial firm.
There are many advantages for people having investments consolidated at one institution. We recommend developing one good relationship with a Portfolio Manager to better manage risk, reduce the time for regulatory and tax obligations, and to simplify your financial life.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email greenard.group@scotiawealth.com or visit greenardgroup.com.
