# Financial Advisers



## ssimps (Dec 8, 2009)

As is probably clear from many of my posts; I have a dislike for financial advisers because:


My experience is that they do not add much value.
They have a conflict of interest by definition (they need to make money from you, so they are likely to suggest the products that make them the most money).
You can learn as much (or more) objective investing information yourself.
If you become a DIY investor, you only have yourself to blame if your decisions loose $, and it is more rewarding when your choices make you $.

I was wondering what others think of the above. 

For example, I have heard of, but never worked with flat fee financial adviser. Does anyone have experience with this type of adviser and are they likely any different than the grim picture I outline above? I think they would at least not have the conflict of interest issue.

It probably greatly comes down to the specific person you are working with. Unfortunately I have yet to have found a good one. ;(

Thanks.


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## bean438 (Jul 18, 2009)

I agree with all your points. After reading the Naked Investor, I am very convinced advisors add no value. 
I am sure there are a few (Hans Merkelbach) that act in a clients best interest. 
On one hand a good advisor deserves to be paid and since most people want something for nothing commisons kinda make sense. All fees are hidden so people don't know they are actually paying for something. But the same system is set up for abuse. 
If you don't want to DIY then simply DCA into a couch potato portfolio and youshould do better than most funds/advisors.


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## OptsyEagle (Nov 29, 2009)

Fee for service in most cases would most likely be worse. The reason is, that for most people, the reason they go to a financial advisor is to outperform some benchmark index and/or avoid major market declines and volitility. Receive higher returns for lower risk, etc.

Now a financial advisor will most likely be able to provide better performance than a completely uneducated (financially speaking) person, but they (or you) have no better ability to outperform an index, or time the stock market, then does flipping a bloody coin.

With the above paragraph in mind, how would a fee for service person provide this service any better? As for the conflict of interest, that is true, but with fee for service advisors, there is another conflict of interest to think about. You see, the first time you see a fee for service advisor, it may all sound rosy (not unlike your commission advisor I will bet). You get this nice print out of a projected financial plan, they make recommendations of which they have no conflict, that sound so wonderful to you. 6 months later, a year, 3 years, it doesn't matter, you will eventually find out that their projection is fairly worthless, since it is predicated on too many assumptions, of which later variations are a certainty (not their fault of course, but still a problem). Their investment recommendations are no better than flipping a coin (nor will yours be if you do it yourself) and therefore the conflict of interest becomes yours. Are you going to pay this bozo $500 or so, to sit down with him again to update a projection that has very little usefulness and let him flip his coin again at some better investments then the ones he suggested the last time you met?

There in lies the problem. It is not the financial advisors fault (although I am sure there are a lot of unethical ones, but hey, have you ever tried to buy a car lately?) it is the fact that the most important thing that clients want from financial experts, better performance, is the only thing they can never provide. 

Is the rest of the stuff worth paying for? Well the financial projections are not. Again, not their fault, but the fault of human beings not given an ability to see into the future. The only reason you should pay a financial advisor, whether fee for service or not, is if you have very little understanding of capital markets. If you invest, with very little training, the stock market will take a large part of your capital as you learn the ropes. It will also take about 10 years of your time to become fully knowledgable. If you do not want to spend, let's say 30% of your invested money and 10 years of mistakes, learning the ropes, then financial advisors are worth it (that is why they are so popular).

The question you want to ask is; will I be willing to fork over a cheque during each meeting, that doesn't seem to accomplish all that much at the time. That is why there are more commission advisors than fee for service, because most people, are not willing to do that.


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## ssimps (Dec 8, 2009)

OptsyEagle said:


> The only reason you should pay a financial advisor, whether fee for service or not, is if you have very little understanding of capital markets. If you invest, with very little training, the stock market will take a large part of your capital as you learn the ropes. It will also take about 10 years of your time to become fully knowledgable. If you do not want to spend, let's say 30% of your invested money and 10 years of mistakes, learning the ropes, then financial advisors are worth it (that is why they are so popular).


Good points overall, however I would argue that the above comment you made is not necessarily true. 

If a person knows nothing about investing, then they should do a staggered Couch Potato strategy with their $ with low MER funds / ETFs while they learn. This takes basically no learning and there are several resources available for free on how to do it. No paid adviser needed, and relatively low long term risk. In fact, I doubt any adviser (except maybe a pay per use one) would ever even suggest the CP strategy because they will not make high bank fund MERs and will basically be telling the client that their role as an adviser is not actually needed.


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## bean438 (Jul 18, 2009)

Most will agree that return wise most planners can do no better than an index. 
Investment wise I do not need a planner/advisor. 

Where I feel they could possibly provide value is in tax/estate planning. 

Perhaps you are over insured, or maybye you hold GICs outside a registered account. 
Maybe you will be in the same tax bracket when you retire and the RSP might not be such a good idea. 

Planning a non registered account with capital gains instead of an RSP may be better?

An investment loan with interest payments equal to that the RSP deduction would give you the same deduction. 

Invest the same way you would in a RSP. 

This I believe would be of value. 

To simply sell me a buch of funds based on my "age minus 100" should be in equities,etc and I might add expensive to own and most likely to underperform is of no value. 

Max out the RSP/TFSA put it into a couch portfolio and there you go.


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## HaroldCrump (Jun 10, 2009)

ssimps said:


> If a person knows nothing about investing, then they should do a staggered Couch Potato strategy with their $ with low MER funds / ETFs while they learn.


Ah, but if a person _knows nothing about investing_, he/she would not know about couch potato strategy, ETFs, etc. either.
It's the three levels of learning & ignorance:
1. You don't know what you don't know
2. You know what you don't know
3. You know what you need to know

Most people (myself included) came to know about indexed investing (couch potato, etc.) _after_ being burnt by mutual funds and/or financial advisors.


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## ssimps (Dec 8, 2009)

HaroldCrump said:


> Most people (myself included) came to know about indexed investing (couch potato, etc.) _after_ being burnt by mutual funds and/or financial advisors.


Me too.


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## ssimps (Dec 8, 2009)

bean438 said:


> Where I feel they could possibly provide value is in tax/estate planning.
> 
> Perhaps you are over insured, or maybye you hold GICs outside a registered account.
> Maybe you will be in the same tax bracket when you retire and the RSP might not be such a good idea.
> ...


That sounds mostly like an accountant to me; which I do think have a purpose in my life now and, from my experience, are charge per hour type arrangement.

Some are probably more of a mix (accountant and planner), so we maybe saying the same thing, just using different terms.


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## MoneyGal (Apr 24, 2009)

It's hard to find a good mix. An accountant is unlikely to review your insurance coverage, and you are unlikely to discuss (as a routine matter) your whole financial picture with an accountant, just what he or she needs to do your taxes. (Presuming you are an "ordinary" Canadian, with no trusts, exceptional family situations, or a corporation.) 

The CFP designation is intended to provide a minimum competency profile in the areas of risk management, investment management, tax planning, and more; but so long as most investment advisors/"financial planners" are compensated for placing product, what most clients will get is product recommendations. Not tax planning advice; not rebalancing; not an investment policy statement; not "financial planning" in any larger picture.


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## steve41 (Apr 18, 2009)

*Two categories of planning*

Keep in mind that it is important to differentiate Investment Advice from Financial Planning advice. Investment advice requires a lot of time, energy, insight and (sometimes) luck.

Financial planning involves the cash flow aspects.... salary, when you plan to retire, spending levels, how much to save/withdraw, taxes, insurance, non investment events and entities such as real estate, loans, pensions, entitlements...

Investment planning is the "what" to invest in part of investing, financial (cash flow) planning is the "how much" and "when" part of the puzzle. Unlike, investment planning, cash flow planning is well within the individuals' ability to DIY.

For instance, could you imagine your financial advisor sitting down on his own and what-iffing your personal parameters such as retirement age, how much you plan to leave as an estate, whether or not you should sell the family cottage in 10 years, pay off your line of credit next year or let it ride? No way... not mine anyway.


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## bean438 (Jul 18, 2009)

Most CFPs are not planners just salespeople 
I would choose an accountant with a tax specialty not one who simply counts beans for a tax return.

A whole plan including age, familly, tax considerations, cash flow etc is what I would place a value on. 

Most advisors simply know how to sell.


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## MoneyGal (Apr 24, 2009)

Hmmm. I'm not sure I'd agree that cash flow management (defined to include retirement timing) is "well within" the DIY capacities of most individuals. 

I think I probably have it the other way 'round: I'm a couch potato investor, and taking care of my portfolio is not complex or time-consuming. 

However -- timing my retirement? That involves, for example, understanding the sequence of returns risk, wealth projections taking withdrawals into account, plus longevity and inflation risk. Decumulation portfolios are actually quite different than accumulation portfolios, and the stakes are much higher at retirement than before.


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## OptsyEagle (Nov 29, 2009)

_"Good points overall, however I would argue that the above comment you made is not necessarily true. 

If a person knows nothing about investing, then they should do a staggered Couch Potato strategy with their $ with low MER funds / ETFs while they learn." _

Unfortuneately the experience I refer to has nothing to do with learning all about the various investment choices. It is more about understanding how the stock market works, that past performance has absolulely nothing to do with future performance, market sentiment and more importantly your own risk tolerance and personality.

You will make all the fundamental mistakes that everyone makes, as you learn these things. The couch potatoe does not immune you from yourself. 

After about 10 years and 1/3 of your wealth, you may finally start to understand yourself enough to start making money, but even that is not guaranteed. What investment you make will have no consequence to this.

I know there are many examples of people who make a lot of money almost right away. There are also examples of people flipping a coin 5 times in a row and calling it correctly. For those so called successful investors, all I can say, is it may take 15 years and about 40% of their wealth, seeing how they got improper feedback so early on in their quest for knowledge.

Good luck.


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## Berubeland (Sep 6, 2009)

I have a friend who went to a investment advisor. He shared with me that he was physically sick because he was freaked out about making a decision. 

I don't need an advisor, he does. 

IMHO almost everyone who is on this board got their start with a Financial Advisor so at least for starting people off they are invaluable. As we went forward we became unhappy with the performance of these funds, however at least for our initial forays they were helpful.


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## humble_pie (Jun 7, 2009)

even among the princes & cardinals of the trade - the true investment counsel, who are mostly CFAs - it is difficult to find a good fit. First-rate individual personalized attention usually begins around $10M. From $2-10M the clients, even the clients of investment counsel, are generally pooled & advice is off-the-rack.

and the rest of us are nowhere in this picture.

so a gigantic and ever-growing category of middle-class investors is not being well-served & has not been well-served for many years, imo. Has our MoneyGal not posted recently that a mutual fund license can be obtained with nothing more than grade school math ... 

the only solution as i see it is to introduce the study of finance in the high schools. With only the limited objective of getting teens to understand that the sector is an unavoidable part of life. That it's complex, challenging, easier than algebra, can be treacherous, requires a lifetime of learning, has a huge potential payoff, and deserves as much time & attention as buying & looking after a car.

it would be nice if people could grow up armoured with the same kind of knowledge that helps them not to buy a lemon of a car or a lemon of a house.

my neighbourhood bank branch is a small, crowded, popular place where staff works in glass-fronted cubicles and everybody knows your name. It's heartening to see the number of young working people sitting in appointments with the 2 or 3 investment advisors at this branch. My hope is always that these young people graduate soon from mutual funds & GICs, unfold their wings & move up. I know it's fashionable in this forum to scoff at bank investment reps, but in my view they are fine contacts for a novice investor. It's pretty much guaranteed that they will not destroy or maraud a young person's first investment account & often they can find or provide helpful learning tools.


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## Shayne (Apr 3, 2009)

My attitude is that self education is the key to a healthy financial future. No one cares about your finances more than you do!


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## steve41 (Apr 18, 2009)

> Hmmm. I'm not sure I'd agree that cash flow management (defined to include retirement timing) is "well within" the DIY capacities of most individuals.


Yes, I should have have qualified that. What I meant to say was that this type of inclusive, tax-based, needs driven, cash flow planning is far beyond the capabilities of the average joe with time on his hands and an ability to wield a spreadsheet.

There are, however, programs out there which _can_ be invoked by DIY-ers and which can handle these complexities. (said he self-servingly)


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## ssimps (Dec 8, 2009)

Berubeland said:


> I have a friend who went to a investment advisor. He shared with me that he was physically sick because he was freaked out about making a decision.
> 
> I don't need an advisor, he does.
> 
> IMHO almost everyone who is on this board got their start with a Financial Advisor so at least for starting people off they are invaluable. As we went forward we became unhappy with the performance of these funds, however at least for our initial forays they were helpful.


Fair points, especially regarding that a financial advisers value greatly depends on where you are in life; never thought of that point much.

Your friend needs to see his doctor; there are medications that may help him greatly. Half serious suggestion.


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## ssimps (Dec 8, 2009)

humble_pie said:


> the only solution as i see it is to introduce the study of finance in the high schools. With only the limited objective of getting teens to understand that the sector is an unavoidable part of life. That it's complex, challenging, easier than algebra, can be treacherous, requires a lifetime of learning, has a huge potential payoff, and deserves as much time & attention as buying & looking after a car.
> 
> it would be nice if people could grow up armoured with the same kind of knowledge that helps them not to buy a lemon of a car or a lemon of a house.


This is a great idea and now that you raise it I am surprised that it is not at least an elective in high schools. It could help so many future savers. What a great idea.



Shayne said:


> My attitude is that self education is the key to a healthy financial future. No one cares about your finances more than you do!


100% agreed!


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## MoneyGal (Apr 24, 2009)

You may be interested to learn about this federal Task Force on Financial Literacy.


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## humble_pie (Jun 7, 2009)

(party's getting noisy, people raising their voices to talk over other people's heads, oh well, party's still good ...)

i posted recently that i thought business links could be dropped off in signatures now & then (in response to somebody who was vehemently opposed to them) because we all like to look in shop windows, and we all like to check out merchants' signs, whenever we're walking down a commercial street.

so steve mentioned that he keeps his advertising discreetly tucked away on his home page. So of course i looked. And yes, steve does have some unique and innovative software in the field of personal financial planning. So no, steve, i don't think you're being self-serving. I do think you have something genuinely appealing and valuable to sell, and i hope you will post this right here on the forum from time to time.

but please don't even think of telling us how you became a, well, you know, heh, how you became the m-word ...


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## steve41 (Apr 18, 2009)

I wish!


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## MoneyGal (Apr 24, 2009)

Oh man. "M-word"? ...???


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## humble_pie (Jun 7, 2009)

of course not you, dear lady.
nothing to do with you.
think again.
steve got it.


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## humble_pie (Jun 7, 2009)

seriously i am going to read that Task force on financial literacy, thank you for the info.

the quebec regulatory authorities also are involved with financial education of teens. Following a number of large-scale scandals in recent years. Mount real, mont royal, norbourg, earl jones. Total amounts stolen added up to well over half a billion dollars. All from innocent people.


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## Dr_V (Oct 27, 2009)

Every "family household" is, in effect, a business, with cash flow, assets, and liabilities. Understanding how to manage "the family household business" is important for ... well ... everyone, at least in my opinion.

I do not believe that financial planners or advisers should have any part in this management, because _no one_ other than yourself has as much interest (or risk) invested in your own finances. 

I feel that the mutual fund industry has largely managed to convince most Canadians that "investing is hard" and that "advisers are there to help", when, in fact, nothing is further from the truth. What I cannot fathom is why this kind of knowledge isn't taught as a *compulsory* course in high school. I hate to say it, but I think that learning how to manage your own money before you head out into the world is even more important than Calculus  ... (Blasphemous, I know...)


K.


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## MoneyGal (Apr 24, 2009)

OK, I'm going to go with "mensch."


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## Dr_V (Oct 27, 2009)

All of this talk reminds me of a forum I once read.

For those of you who've been reading & contributing to money-management websites for a while, perhaps you'll recall the case of "Calvin", the friendly financial planner who used to post on Canadian Trader's forum back in ~2002. (This was before he shut down the forum and we all ended up moving to the Canadian Business forums...) 

Calvin, if I recall, would make a regular appearance, suggesting to anyone (and everyone) who posted that rather than learning how to invest in stocks/funds/etc., that they contact him or another qualified financial planner. Heh. You can imagine how well that went over on a do-it-yourself investing forum.


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## MoneyGal (Apr 24, 2009)

Hmmm. If only there were a way to _combine_ calculus and financial planning...


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## steve41 (Apr 18, 2009)

This stuff has been around well before computers came on the scene. My dear old Mom learned this stuff (annuity, mortgage, present value, sinking fund tables) back in the 1930s... in frigging Home Ec for goodness sakes.

Notice that the above-mentioned page is painfully free of the single word... 'tax'.

Tax is the reason that the calculation of a 'needs-based' plan is so tricky... the basis of a meaningful financial plan is to calculate back through the T1 algorithm... i.e. in reverse. Complicated by the fact that the RRSP is not the only form of investment. Nonreg capital, equities, TFSAs... each investment entity interacts with tax in hugely different ways. This requires a huge amount of recursive computer power. The only metric that an individual cares about is 'after tax income'.... You can fudge the numbers with a spreadsheet if you simplify the T1 using a single average tax rate, but to do it properly, the math (needs-driven) should use an accurate (T1-based) tax formulation.


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## Dr_V (Oct 27, 2009)

steve41 said:


> Tax is the reason that the calculation of a 'needs-based' plan is so tricky...


I'm a bit sceptical that the average Canadian requires a "needs-based" plan as you've described it. Tax is an important consideration but not a topic so beyond the average Canadian that they couldn't figure it out by working through the forms (or by buying uFile). Planning one's investment portfolio (through the years), as well as estate planning, require a bit of legwork and thought, but there are a lot of resources -- both in book form & online -- to help individuals with this task.



> Complicated by the fact that the RRSP is not the only form of investment. Nonreg capital, equities, TFSAs... each investment entity interacts with tax in hugely different ways.


Sure, there are lots of different forms of investments. But they aren't difficult to learn. I suspect that most people on this forum -- without any certification whatsoever -- have developed a pretty good handle for how TFSAs, RRSPs, and non-registered investments work.



> This requires a huge amount of recursive computer power.


What's "recursive computer power"?


K.


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## Berubeland (Sep 6, 2009)

Financial planning is not complicated.

Send less than you make and save the rest. 

This sucks because all of society wants you to buy a big house new car, diamond rings Starbucks and stylish clothes. 

If you are able to resist the urge to spend more money than you make your spouse will likely spend it for you. 

If you make it past that hurdle enough to accumulate a few coins more people will try to part you from your hard earned dough. Including financial advisor's, banks with their horrible fees and of course the tax man


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## steve41 (Apr 18, 2009)

The easiest explanation is that the tax (T1) formula is derived as a one way street.... you enter your income (T4, T5...) information in at the top, and your tax owed pops out at the bottom. It is a pretty simple arithmetic process... some people still do their taxes manually. It is only when tax enters the planning process that the calculation gets tricky. Planning is (generally) based on wanting to derive a certain lifestyle (consumption of beer & groceries) and the amount of that lifestyle (spending) is comprised of after tax income. 

In the simplest example, where you were retired and all you had was your RRSP, then determining how much to pull from your RRSP in order to deliver say $30000 after tax would require driving the tax algorithm in reverse.

If you had the patience, you would try various withdrawal amounts, calculating the tax paid and after a time you would come up with an accurate withdrawal amount which would deliver the $30K. Now throw other entities into the pot... CPP/OAS, nonregistered capital, loan interest deductability, dividend income... and try to come up with that same answer. You would be trial and erroring that RRSP withdrawal forever. You could do it however it would take a long time.

Computers will do that for you by repetitively changing the withdrawal amount and crunching the tax, until the result was achieved. This is what I call 'recursion'.

(take that to the final stage and instead find the exact schedule of RRSP/RRIF withdrawals which would deliver a constant after tax/after inflation lifestyle and have the RRSP _just_ run out on your 95th birthday say and you have a recursive nightmare. Spreadsheets simply can't handle this level of goal-seeking (recursion)

Here is a better explanation...

http://www.finiki.org/index.php?title=Cash_Flow_Financial_Planning_Software


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## bean438 (Jul 18, 2009)

Steve I took a look at your web site. Looks like exactly the kind of thing I would look for in an "advisor".

Is there a pop up screen that will suggest super high MER, DSC funds? 

Not sure if we can discuss this on here but what software do "planners" use, and how is your different?

Any planner I have talked to have "crunched my numbers" and oh my god if you dont invest with us, and leverage into mutual funds you will starve.

Beyond the actual investments, there are many considerations i.e tax brackets when working as opposed to when retired, and accordingly is the RSP "really" a good idea when say a non registered account may be better.
Have too much dividend income and kiss OAS by bye, etc.
What should we call this logistics or something? Financial component assembly?

An accountant that specializes in tax law would be an asset if you were to borrow to invest, specifically a Smith Manoeuvre to make sure that everything is structured properly (no mixing of borrowed funds with everyday cash, etc).

So maybe we could say the investments are the building blocks, but the blocks should be assembled so that some blocks dont take away from other blocks, and care must be taken so that the blocks are structured properly.

And sadly at the end of the day CRA will take those blocks away one way or the other.


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## ssimps (Dec 8, 2009)

bean438 said:


> Steve I took a look at your web site. Looks like exactly the kind of thing I would look for in an "advisor"......


Good one about the pop-up window bean438.

I also looked at your site steve and am too interested. 

I tried to download the trial version of the SW but it says that my OS is not supported. What OS versions are needed to run the demo SW; I guess Win7 64 bit is not? Is the issue Win7, or the 64 bit? I have access to various OSs so just need to know what one to use. Does it work using VMware and a different OS?

Very interested and very exciting to see planning SW made in Canada other than Quicken (which does not really plan IMO).

Let me know if you would prefer to take this offline too.

Thanks.


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## steve41 (Apr 18, 2009)

I am discovering that 64 bit versions of Vista and W7 won't run RRIFmetic whereas the 32 bit versions will. I have V32, and it seems to run OK.

I don't have the time or resources to run out and buy every new OS, print/lan driver etc that comes down the pike, plus I am too busy just feeding and watering the code (tax changes, new products, etc)

I understand that MS has introduced an XP partition within some of its Windows 7 configurations for the sole reason that there are a lot of legacy applications out there that users have to be able to run. Luckily, because the effort involved in migrating my behemoth code over to a newer development platform is just not in the cards. (if I were younger, maybe)

As for financial planners, they represent the bulk of my revenue, believe it or not. Personal/DIY users comprise maybe 20% of my revenue. Let's face it, a planner will have at least one or two anal clients who want to see the numbers in a tax-accurate form, and if the client is sufficiently HNW, he is going to want a tool such as this. They are not all sales-obsessed contrary to what you may believe.


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## steve41 (Apr 18, 2009)

One aspect of the tax-based, needs-driven model is not always apparent.... the subject's actual age at death. The confusion arises when you hear pundits spout that "RRSPs are a scam.... investing outside your RRSP is the only way to go".

The only true definition of the most effective financial plan is one in which the present value of all those future tax pmts (including the final tax on the estate) is minimized.

It is a pretty self evident definition except for one inconvenient truth... no one knows when you are going to die. Decisions about ...investing inside of outside your RRSP, taking early or late CPP, opting for term insurance or not, paying down your LOC sooner or later... are all mathematically determinable if you absolutely know your age at death.

We don't know this, and so answers to these questions all have to include an actuarial input. For instance you can run a plan diverting all your savings outside your rrsp and another where you max your rrsp.

When you analyse the two plans, one will be superior if you had died early and the other will be better if you make it out past a certain age. Tax, and tax over time is the governing factor.


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