Need your advice

[Mike2161]

Hi
I am absolutely new to this forum. I desperately need your advice. I'm 53 years old professional [physician] with practically no knowledge about the financial planning and hence have to rely on a financial advisor. I have incorporated my practice for the last four years or so. My gross income is 350 – 400 K, which gets deposited to my corporate account. From this I withdraw about 100 K as my annual salary. My wife does not work and we have two kids 21 and 14 years of age. Now here comes the role of my financial advisor. Over the last about four years, he somehow convinced me about his planning for me.
Personal investment –
This advisor advised me that as I come in the higher tax bracket, I should try to save as much as possible on the tax by taking investment loan. He told me that interest on the investment loan would be tax deductible and this will be one advantage. On top of that the investment would grow and he told me that by and large he would be able to get the returns at minimum 10% and it could be even 15 to 20%. Accordingly, I took huge investment loan [about 640 K] and for this I pay approximately $20,000 annually as interest. The investment for this loan amount is as follows –
1. 400,000 – Manulife. [Minilab dividend growth, Manulife fidelity Canadian, Manulife growth opportunities. Manulife Canadian investment GIF]
2. 100,000 – Canada life various funds.
3. 140,000 – global Maxfin - fidelity – 508

The market value of all these funds is very low. [Loss of approximately 60,000]


Corporate funds investment –

1. He has purchased for me universal life insurance for about 1.9 million. He has advised me to invest about 100,000 in the insurance investment fund every year. He says that even with the conservative growth plan these funds will grow at the rate of 6%. I was told that when I retire at the age of 65, he would issue a line of credit against this amount and this way there would be tax savings. So far I have invested about 260,000 as the insurance investment fund.

2. For the last many years, he has been telling me that the Corporation retained funds are sitting idle and I should think of investing it. I was avoiding it until last year when I allowed him to invest $200,000. This he invested in Manulife. This fund is down by 28,000 as of May 12, 2012.

When I saw my corporate fund down by 28,000, I got the shock of my life. I started getting a terrible feeling that I was in deep trouble.

I want to come out of this but do not understand how. I'm feeling like in the middle of an ocean without any support. At this point of time I started exploring on the Internet when I came across this forum. I went through some of the posts and realized that there are very knowledgeable people around. I would appreciate your advice and am extremely thankful to you for that. Some of the postings here suggested that fee for service types of advisors are always better than the commission-based advisors. I was thinking of taking that route, but again only after the advice on this forum. I would also appreciate if you would recommend some fee for service type of advisors.
Sorry for the long mail and thanks a lot in advance for your advice.

Mike 2161

[Spudd]

Wow. I'm not one of the really smart people on the forum but I wanted to answer this to make sure it gets bumped up so the smart people will see it.

My advice would be to see a fee-only advisor (expect to pay a few hundred dollars for their advice) and get their help in unraveling all this. I think your situation is very complicated given the corporation and life insurance wrinkles, so I would suggest a professional rather than an internet forum.

[the-royal-mail]

I agree with spudd. Sounds like a typical advisor.

Their goal is to get people signed up to various "investments" in order to maximize fee income. Remember that your poor returns do not matter - they collect fees no matter what.

I really don't imagine you have the time to get into self-directed investing or even spend much time posting on Internet forums like this. Assuming that is correct, I would also echo the suggestion to speak to a fee-only advisor. Don't make any more appointments with the bank. Those are not financial advisors but mutual fund salesmen.

[bigdogslife]

I agree with spudd. Sounds like a typical advisor.

Their goal is to get people signed up to various "investments" in order to maximize fee income. Remember that your poor returns do not matter - they collect fees no matter what.

I really don't imagine you have the time to get into self-directed investing or even spend much time posting on Internet forums like this. Assuming that is correct, I would also echo the suggestion to speak to a fee-only advisor. Don't make any more appointments with the bank. Those are not financial advisors but mutual fund salesmen.

---------------

I've been lurking for quite some time and greatly appreciate the board. I'm a self-employed business person who has gone through similar considerations and ups and downs as the OP in the past. I'll second the recommendation and make it more forceful. You must get your ACCOUNTANT and LAWYER involved to assist you. I am a very strong beliver in that team being the ones to truly rely on in complex situations of all kinds, but particularly the kind you are in now.

Your cashflow, liabilities, legal scenario, and future considerations are much more complex than most folks'. You are in the 1% in this regard for sure.

My Accountant/Legal team has been invaluable in keeping everything in this area aligned with my vision. I can then make sound business decisions in tune with my goals and tell the "financial people" what to do. Many talk about the Accounting/Legal dream team being a core to their success. I have practical proof that this is true and the OP really, really needs it now. Respectfully....BDL

[bigdogslife]

Lurking for some time and loving the board. I've been through similar ups and downs as the OP, as a professional and business owner.

I strongly recommend that he gets his team of accountants and lawyers involved in this. This team must be strong. It has been invaluable to me. Many say this, I strongly personally endorse it.

After you get the real advice you need, you can tell "financial people' to execute on what you want. The problem is, as a physician with an incorporated practice in a regulated environment, your cash flow, legal, liability, capital and risk issues are very complex and will get worse over time if you do not sort them out.

thanks BDL

[Spidey]

IMO you are getting absolutely horrible advice and your portfolio is a classic example of one that benefits the financial planner instead of the client. Here are just a few of the problems:

- Your planner has your investments in extremely expensive investment products (high MER mutual funds)
- Universal life is almost always a poorer choice than term-life insurance. Universal life combines insurance with a savings component. This bundling is accompanied with high fees that go into the planners pocket. Keep it simple - you wouldn't bundle car or home insurance with a savings product. Just get life insurance (term insurance) and invest your money separately.
- Leveraging is a high-risk strategy. Advising such a large investment loan to buy such poor quality products is IMO verging on misconduct and again designed to pad the pocket of the adviser.

With your net-worth you should be receiving much better quality advice than this. With your assets, a good adviser would have likely suggested more "direct" holdings (eg. ETFs or some of the larger stock holdings within these mutual fund) to avoid high fees. For example, here are the 10 largest holding in the Manulife asset allocation fund:

Fidelity Conv Securities Inv Trust 4.57%
TD Bank 4.49%
Suncor Energy 3.03%
Cenovus Energy 2.77%
Bank of Nova Scotia 2.67%
Enbridge Inc. 2.48%
Baytex Energy Corp. 1.92%
Bank of Montreal 1.74%
Goldcorp Inc. 1.55%
Shoppers Drug Mart 1.44%

Why not own stocks like these directly and avoid the considerably large 2.74% MER? (This may not sound like much but research has shown that these levels of MERs are devastating to portfolio performance.) Or an alternative would be something like Vanguard ETFs with MERS ranging from 0.09% -0.5%. A fee-only planner may be the best way to go, but regardless considering what is at stake it is important that you increase your investment knowledge. I would suggest reading "The Four Pillars of Investing" by William Bernstein. Bernstein also has several other excellent books on investing. (By the way, Bernstein is also a physician.)

[MoneyGal]

Spidey -- one quick note that for physicians (or anyone with a professional corporation), the tax advantages of permanent life insurance are usually the reason for purchasing UL or WL, not the pure insurance. There are some compelling (tax) reasons to hold permanent life insurance inside a professional corporation which have nothing to do with the actual insurance.

[Four Pillars]

This is what is wrong with the investment industry - the OP got hosed.

I would suggest not dealing with that advisor anymore - they are not acting in your best interest at all.

As suggested, find a fee-only advisor or look for a managed advisor who will look after things for an annual percentage (ie 1.5%), you will be far better off.

[sagsal]

Check the Financial Facelift articles in the Globe and Post

I worked with Derek Moran and he is great at unraveling this sort of thing - he is fee only and doesn't sell products

There are others

Stay away from people selling products if you don't understand the products - investing is only complicated by those trying to make money off of everyone - it is not complicated at the end of the day

[0xCC]

Stay away from people selling products if you don't understand the products - investing is only complicated by those trying to make money off of everyone - it is not complicated at the end of the day

This is the key. If you don't understand what you are being asked to invest in and why it makes sense for your situation then don't make the investment. It is the advisor's job to make sure you understand what you are invested in and if they can't do that then they don't deserve the commissions they would get out of your investment. I think that the Universal Life policy falls very squarely into this category. The commissions on those policies tend to be higher than on other products so there is incentive for the advisor to get clients into them. They may make sense for some situations but they can be complicated (I don't totally understand them) and I think the client needs to be crystal clear on how they fit into their overall financial plan.

The leveraging also fits into this category but I think that leveraging is a little bit easier to understand. What advisors don't tend to point out though is that leveraging is an amplification mechanism, not a return improvement mechanism. When you get into leveraging you will just amplify what your returns would have been if you didn't leverage. So gains are larger but losses are larger also. This is espeically something to think about when investing in mutual funds which have difficulty beating their benchmark over the long term (all the while sending nicely amplified fees to the mutual fund managers and the advisor).