Tacita Capital manages the investment portfolios of many successful lawyers and their professional corporations. When reviewing their incoming portfolios, we often see deficiencies that undermine their prospects of getting the most out of their capital.
Unlike business owners or corporate executives, lawyers in private practice can’t count on sale proceeds or stock options to bolster their retirement funds. When they retire from practicing law, the nest egg they have built up to that point is it. There are no do-overs. Effective management of their capital is vital.
If you practice law and are counting on your portfolio to fund your lifestyle on retirement, have you avoided these common shortfalls?
Is your investment management fragmented and uncoordinated?
Many lawyers employ several investment advisors, each following a different strategy. Their advisors are usually focussed on short-term results as opposed to delivering a longer-term target return developed by a proper financial plan. The strategies of several advisors are rarely coordinated. They are often working at cross-purposes – duplicating certain investments while underweighting others, thus increasing risk and missing opportunities.
Undue concentration risk and inadequate diversification are common features of fragmented investment management. Both can lead to sub-optimal portfolio results. When multiple advisors are stirring the pot, effective investment tax management is usually ignored. Using multiple advisors can also result in unnecessarily high investment management fees since graduated fee reductions associated with a consolidated portfolio are missed.
Are you confident you will have enough capital to retire comfortably?
Many lawyers blindly trust their advisors to deliver a portfolio that will fully fund their retirement and estate planning goals without having a clear idea of how much capital they will need. Hope without a plan is not a strategy.
Lifespans continue to increase, as do living, travel and medical expenses. No one relishes the prospect of making dramatic cuts in their lifestyle because they underestimated their capital requirements.
Determining “your number” requires:
- determining the target pre- and post-tax rate of return needed to fund your future lifestyle;
- designing a portfolio that pursues your target rate of return in the most tax-efficient manner, while meeting your tolerance for risk; and
- stress-testing your portfolio using Monte Carlo projections to confirm it will fund your retirement goals even in challenging economic and inflationary circumstances.
Are you paying unnecessary investment taxes and failing to maximize tax deferral?
Taxes are typically the single largest expense of affluent Canadians. However, many investment advisors focus on pre-tax returns and do little to minimize unnecessary tax drag. Many advisors don’t even request or review their clients’ tax returns, which are an essential input into proper investment tax planning. Effective investment tax management builds wealth faster as it accelerates compounding. Sadly, many lawyers do not take full advantage of the opportunities to reduce taxes.
The hallmarks of a tax effective portfolio include:
- a strategic asset mix designed with regard to expected after-tax returns;
- the assessment and selection of individual investments based on their expected returns after tax;
- the allocation of investments among household members (e.g. you, your spouse, children, and corporation) with a view to reducing the household tax burden;
- the use of alternative investment strategies to reduce the reliance on tax-inefficient bonds; and
- tax efficient rebalancing and strategic harvesting of capital gains and losses.
When it comes time to wind down your practice, you’ll want to stage the order of withdrawals from your household’s investment accounts in a manner that avoids unnecessary taxes and maximizes tax deferral.
Are you missing opportunities to build capital effectively through your professional corporation?
Certain investment assets are best held corporately as opposed to personally or in a family trust. Yet, many advisors fail to strategically allocate investments between personal and corporate accounts.
If you have a professional corporation, you’ll want to ensure that you are capitalizing on its unique corporate tax attributes. In addition to its tax deferral benefit (compared with earning professional income directly), a professional corporation offers certain unique tax-effective investment opportunities.
In addition, now that the capital gains inclusion rate for corporations is 66 2/3% (as of June 25th, 2024 individuals enjoy a 50% inclusion rate on the first $250,000 of capital gains realized annually), investment allocation and capital gains tax management is even more important, as is active management of tax loss harvesting.
Is your investment plan on autopilot?
Many lawyers meet with their advisor annually to discuss short term results and little else. They leave it up their advisor to choose the strategy, sometimes ending up in a “one size fits all” proprietary program.
Your investment management needs to be dynamic. You’ll want to capitalize on new opportunities as they become available, and as economic conditions, capital markets, expected inflation, and tax laws change. Deviations in your portfolio’s performance during market corrections need to be closely monitored to ensure they are within an acceptable range given your long-term funding goals.
Any increases in your anticipated spending (or any unexpected reductions in income) or changes in your liquidity needs also need to be quickly incorporated into your plan.
Is your advisor coordinating your cashflow management with your accountant?
Cash flow planning is an essential element of an investment plan. A comprehensive approach to cash management encompasses salary/dividend analyses, dividend declarations, capital dividend elections, and tracking refundable tax and carry-forward balances – all of which are key roles of an accountant. Capital gain and tax loss harvesting as well as charitable donations must also be integrated into this picture.
Your advisor should have a solid working relationship with your accountant to ensure an optimal approach.
Is your portfolio integrated into your broader wealth management?
A comprehensive wealth plan incorporates estate and insurance planning, and tax-effective philanthropic strategies. Your investment plan should be tailored to support your family trust arrangements and donation strategies. It should also complement any estate freezes or other tax and estate planning strategies your accountant and estate lawyer may recommend.
The cash value of your insurance – which is often overlooked, should also be considered in the asset mix of your investment plan.
Get started.
If you are a lawyer and are interested in ridding your portfolio of one or more of the above deficiencies, or if you need assistance in building an effective investment plan for your family’s capital, we invite you to contact Garnet Anderson at 416-960-9962 or email us at info@tacitacapital.com
By: Joanne Swystun LL.B. & Harmish Naik MBA, CFP®, CFA