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Conflicting Advice - and how to avoid it

In ‘Your Retirement Income Blueprint’, we encourage readers to consolidate their income-producing assets with one financial advisor. For a number of reasons, this will lead to more efficiency in the income plan, but it will also help to avoid plan-busting interference in the guise of ‘conflicting advice.’  

We believe it’s best to combine your assets with one financial advisor who can devise, execute and monitor your income plan over the long term. But conflicting advice can still creep in from the other directions.

Even if having only one financial planner, an individual may have other types of advisors – e.g. a lawyer, and an accountant. Every such advisor will have different knowledge, experience, strategies and biases, and some of their advice may overlap the respective areas of real expertise for the other advisors. The reality is that competition and ego may come into play when you have multiple advisors if they all want to be the quarterback. As the client, you respect the advice of each advisor but that advice in isolation may not be synergistic to your overall plan. When you combine a bit of this and a bit of that, and the left hand doesn’t know what the right hand is doing, you can end up with no plan at all!

A client called the other day and said, “My accountant says I should put $10,000 in my RSP.” The client didn’t know the rationale behind the accountant’s recommendation -- only that it had to do with the rush to file the corporate tax return. The client and I had previously talked about making additional contributions to his RSP and I recommended against it. He was very close to retirement and he already had all of his retirement savings in RRSPs. He had no non-registered assets and no TFSAs that we could use to structure a tax-efficient plan to meet cash flow needs. With nothing but CPP, OAS and fully-taxable RRIF income, it was already going to be very expensive to produce the spendable retirement income the client wanted.

The client’s current income did not yet fall into the highest marginal tax bracket and he would have to withdraw from his RRIF aggressively during retirement, so there wasn’t going to be the advantage of saving tax at high rates on the RRSP deposit and withdrawing at lower rates in the future. Furthermore, the client had minimal cash savings and some existing debt, and now he would have to take out another loan to make the $10,000 contribution. We were trying to get debt paid down as much as possible before retirement. If he was going to go further into debt at this point, I would rather see him pay the tax owing – about $4,000 -- on the $10,000 of income the accountant was trying to deduct, and then take the remainder and put it in his TFSA to generate future tax-free retirement income. Or just pay the tax and minimize the increase in debt.

I recently saw a tax accountant on BNN Television who said, ‘In general, I don’t recommend withdrawing from RRSPs/RRIFs any sooner than you have to’ – i.e. deferring RRIF income possibly until age 72. This is probably reflective of an accountant’s focus on immediate tax savings, which is a bias. We come across this often – biases in conflict. From our perspective as income planners, we are trying to devise strategies which will be efficient for the long-term and through the various stages of retirement.   We may think it more efficient for the client to withdraw from their registered money in measured doses over a number of years – starting as soon as they retire – so that we are able to control taxation now and in the future. Minimum withdrawal requirements for RRIFs which have been deferred can push up Net Income significantly at later ages and cause the unnecessary claw back of the Age Credit and possibly OAS; too much Net Income can lead to higher assessments for long term care facilities; and, a large balance remaining in RRIF accounts at the last passing is a gift for the Canada Revenue Agency! Your heirs may wish that you had spent more of this registered money during your lifetime and left some of the more tax-effective assets to the estate.

When more than one advisor is involved, the synergies you might expect from multiple disciplines giving their best advice might actually be counterproductive. As much as you would like your advisors to work together for your benefit, the reality is that different perspectives, understandings and strategies -- and the aforementioned ego issue -- may end up working against you. If you find yourself in this situation, ask each advisor to give you their rationale for their recommendations in writing so that you can share and evaluate the pros and cons of each approach. Maybe there is something about your situation that only one of the advisors knows and which may change the others’ thinking. In any case, the other advisors will probably appreciate the extra insight. You may have to pick one advisor’s advice over the others, but you should let them each know what you are doing so that they can make notes in their client files as to why you chose a certain strategy. In the process, you might be the go-between which helps them meet in the middle for the benefit of you, the client.