When cash flow needs are discussed and communicated in portfolio reviews with your Portfolio Manager, the investment portfolio can be structured accordingly and no further verbal discussion is required unless circumstances change. After these discussions, the cash flows for the next two years are clearly documented within the client’s Investment Policy Statement (IPS). Part of the cash flow discussion is planning which accounts the funds will come from. Within the chosen accounts, funds are ear-marked in either cash equivalents, or short term money market.
It is the unplanned withdrawals where we are contacted by clients requesting us to send additional funds not documented within the IPS that require verbal discussion. These unplanned withdrawals are typically the result of a life event, replacing cash flow from a lost job, repairing a car, house repairs, a new appliance, or helping an adult child. There are many unforeseen situations that call for unplanned withdrawals from a client’s portfolio.
At face value, the request to send a client funds from their portfolio sounds like a relatively simple request. However, there are many factors that the Portfolio Manager or Wealth Advisor should consider in deciding where the funds should come from such as what investment should be sold to raise the funds or which account the funds should come from. Below, we will outline a few of the options for where the funds should come from and in what scenario this would make sense.
Email and texts have become one of the standard forms of communications. People may feel that a request for funds or trade instruction sent by email (written record) is better than a verbal phone call (no written record). With trading and requests for funds, a phone call is always better than an email to ensure our clients understand all the consequences and options for a specific decision.
As a Portfolio Manager, we can use our discretion to do trades in an investment account that is within the parameters of the signed IPS. This discretion, however, does not extend to moving funds from one investment account to another (i.e. non-registered account to a TFSA). Nor does it extend to us moving funds from an investment account to a bank account.
Wealth Advisors cannot take trade instructions by email for various reasons. The following are a few of the reasons relating to trade instructions: time difference of instructions (i.e. time zones), advisor may not be available (in a meeting with clients, on vacation), inability to confirm that order instruction is provided by a duly authorized person, lack of confidentiality of client information, lack of receipt or untimely receipt of order instructions, difficulty in discussing details, e-mail delivery and server interruptions, or inability to confirm vague or incomplete instructions (i.e. type of order, account number, quantity of shares, timing) on a timely basis. Below we have elaborated on requests for funds as opposed to trading instructions.
Both Wealth Advisors and Portfolio Managers must obtain a verbal confirmation for any cash request or account transfer requests. This verbal confirmation can be done either in person or on the phone, but it does have to happen 100 per cent of the time — no exceptions. The following are the main reasons we require verbal confirmation.
A risk of accepting requests for funds via email is a practice known as “e-mail spoofing”. Email spoofing is the forgery of an e-mail header, or sender address, to make an email message appear to have originated from somewhere other than the actual source, thereby making it possible to send a message enhanced to look like it originated elsewhere. When this fraudulent activity is done, it is often impossible to differentiate between a real email.
Timeliness of action
Although an email may be sent immediately to your Portfolio Manager once you hit the send button, it does not mean that it will be immediately read. The Portfolio Manager could be in meetings, out of cell coverage, on vacation, etc. A phone call into the office during business hours will ensure your request is dealt with immediately. Any staff member on our team is able to take the verbal instructions of your request for funds.
Suitability with risk tolerance and investment objectives
Part of the discussion with clients when funds are requested deals with suitability and risk tolerance. If you require $100,000, what investments do you liquidate? A Portfolio Manager would be able to discuss with you the different options to raise the desired level of cash. In some cases, a client’s investment objectives and risk tolerance will need to be updated.
Updating to IPS
Whenever a client does a significant deposit or withdrawal, we would prepare an updated IPS. The total investments for the household would naturally decline equal to the amount of the withdrawal. All of the updates to an IPS must be discussed verbally with the client and the Portfolio Manager. This can be done in conjunction with the request for funds.
Change in beneficial ownership
Often at times the ownership and registered beneficiaries may be different between accounts. For example, you could have difference beneficiaries on your Tax Free Savings Account (TFSA) versus your Registered Retirement Income Fund (RRIF). If funds are to be used from a registered account then we want to make sure that the client understands the impact. Also, the non-registered account may be noted specifically in the clients’ respective wills. If the withdrawal is for a significant amount then a discussion regarding estate planning needs to occur.
If we have to sell investments to raise funds, then we will want to communicate with clients the consequences of making those decisions. When we sell investments in a non-registered account with significant capital gains it will likely result in a significant income tax liability at the end of the year. In some cases, triggering extra income may result in clients paying tax at higher marginal tax brackets and losing the Old Age Security (OAS) benefits (for clients 65 or older).
Non-registered account can often be used
In previous articles, we have referred to the non-registered account as the funnel account. We encourage our clients to build up a non-registered account to cover both planned and unplanned cash flow needs. Within this account we would have already set aside up to two years of funds to be held in a short-term, low-risk investment. These funds would be used to cover any monthly payments so that the remaining funds could be used for longer term investments. This allows us to not be forced to sell an investment at the wrong point in the market cycle to cover planned withdrawals. Depending on market conditions, it may make sense to use some of these wedge funds for an unplanned withdrawal.
For example, if a client is taking $5,000 per month from the portfolio, we have up to $120,000 set aside in the wedge to cover these payments. If the client calls in requesting an additional $30,000 for an unplanned withdrawal, then it could make sense to take the funds from this wedge as there would still ample funds left in the wedge to cover the planned withdrawals for many months ahead. If the request for funds is a larger lump sum then we would need to consider some other options.
When deciding where to take funds from, one option could be to make an early RRIF payment. In many cases, our clients have set their minimum RRIF payment to happen annually on Dec.15 of each year. Assuming that there is no cash flow need from the RRIF account, setting the payment to come out annually on Dec. 15 allows flexibility in how, when, and what those payments will be used for.
If the clients have a non-registered account, then this payment would typically go to their non-registered account and either help build up their existing wedge or fund current or future TFSA contributions. If you have not taken your minimum RRIF payment for the year then this payment could be used to fund your unplanned withdrawal. If you have already taken your RRIF payment for the year, or are taking monthly payments equal to the annual minimum payment, then it still could make sense to pull out more from your RRIF to fund your unplanned withdrawal. As noted above, it is important to factor in the tax consequences.
In some cases, we may recommend pulling funds from your RRSP.
On Nov. 22, 2019, we wrote an article What to Consider When Looking at Registered Account Withdrawals. In this article we discussed a 65-year-old client with projected income as follows: OAS at $7,289.52 ($607.46 x 12), CPP $7,972.92 ($664.41 x 12), and Registered Pension Plan (RPP) $38,136 ($3,178 x 12). The total taxable income for the current years is projected to be $53,398. The OAS repayment threshold amount begins at $77,580.
This client is well below the threshold and will get the entire OAS ($77,580 - $53,398 = $24,182). If this same client has an RRSP projected to be greater than $447,806 at age 72, then the client may be subject to OAS repayment in the future. If the client waits until age 72 to pull any registered funds out then the minimum amount required is 5.4 per cent of the $447,806, or $24,182. In this scenario, it would make sense to pull funds from your RRSP. I
t should be noted that any funds pulled from an RRSP have taxes held at source. So, if you require $15,000 in your pocket (Net) then you will have to withdraw $18,750 (gross) from your RRSP ($15,000 + $3,750 withholding tax = $18,750). The withholding tax rates for RRSP withdrawals are below:
Withdrawal amount withholding tax rate (B.C.):
- Up to $5,000 — 10 per cent
- $5,001 to $15,000 — 20 per cent
- $15,000 or more — 30 per cent
In our view, the TFSA is also an option to access funds, especially if our client’s taxable income is already at elevated levels. The TFSA is an ideal savings account to hold long-term investments and one of the last places to look at for withdrawing funds. An exception to this rule would be if the withdrawal is for a short-term need with plans to deposit the funds shortly after. We have to ensure the client is aware that they will have to possibly wait until the next calendar year to replenish the account.
Corporate account withdrawal
Many of our business clients have corporate accounts. Often there are dividends to pay out, or a credit balance in the shareholder loan account that can be utilized. We will typically communicate with our clients’ accountant to see what the best option is when integrated with planned wages and dividends.
On occasion, a client will require funds for only a short period of time. As an example, they bought a new home before they sold their existing home. In these types of situations we often will arrange for our clients to meet with a personal banker to help with bridge financing, lines of credit, or other lending options. Looking at financing versus liquidating investments can bridge the gap while avoiding unfavourable tax consequences.
Email is still useful
Although we cannot act on an email, we always appreciate the communication to give us a heads up of what you will need. An example of a good use of email would be, “Hello Kevin, we will need $50,000 from our investment account, we are helping our son, and this requires funds, time frame is 6 days, I’m free tomorrow after 10 am and I can be reached on my cell phone at 123-456-7890 to discuss and give you the verbal confirmation.” This type of e-mail works well as it gives us a framework for the amount of funds needed, when you require the funds, the phone number to call, and the best time of day to phone you to obtain the required verbal authorization.
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. greenardgroup.com