Financial adviser confidential: The big money mistakes you should learn from

Portfolio manager Joss Biggins had a long-time client call him one day with good news: The client had fallen madly in love with a woman who lived across the country.

There was just one hitch. The client, a real estate agent in his 40s, wanted to sell his $1-million investment portfolio, including long-term retirement accounts, to buy a house with cash for the couple to live in. Markets were in a downturn, and his portfolio was already down roughly $200,000.

While Mr. Biggins told him it was a bad idea, the client proceeded anyway and he never heard from him again.

“The continuous mixing of emotional and financial decisions is something that leads clients astray,” said Mr. Biggins, an adviser at EthicInvest, under the banner of Vancouver-based Leede Financial. “Ultimately we should be more thoughtful in realizing that our financial decisions are emotional decisions as well.”

It’s one of many common missteps Canadian investors make, but also learn from. The Globe and Mail asked six financial advisers, including Mr. Biggins, to share the biggest money mistakes they’ve seen clients make over the years.

The horror stories are rarely because of budgeting errors or picking one ETF over another. Instead, they’re mistakes often driven by emotion, a lack of financial planning or a failure to discuss money altogether.

Mistake #1: Not diversifying

In February 2000, Clay Gillespie, financial adviser and portfolio manager at Vancouver-based RGF Integrated Wealth Management, met with a 78-year-old prospective client whose retirement portfolio was more than $1-million.

Three-quarters of her account was in Nortel while the rest was in blue chip securities that had risen much less than Nortel. At its peak, Nortel accounted for more than one-third of the total valuation of companies on the Toronto Stock Exchange.

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Mr. Gillespie advised her to sell at least half of her Nortel holdings. “For the rest of my life, I’ll remember this comment from her,” he said.

Mr. Gillespie recalled how she looked at him and said, “That’s the stupidest thing I’ve ever heard.”

She said, “It’s the only thing that made money in the last five years and you want me to sell it.”

Nortel’s stock later plummeted, and unless the prospective client sold shares on her own, Mr. Gillespie estimates her retirement portfolio would have fallen from more than $1-million to roughly $200,000.

Mistake #2: Tax savings that are too good to be true

Travis Koivula, senior wealth adviser at Island Savings Wealth Management and portfolio manager at Aviso Wealth in Victoria, recalled a visit from clients who participated in a charitable donation tax shelter before meeting him.

The clients attended a free lunch seminar that promised if they donated money to a certain charity, they would receive tax savings worth more than the amount donated.

“They were wanting to do the right thing … so they thought it was a win-win,” Mr. Koivula said. On paper it looked compelling, but the entire premise was dependent on the tax treatment holding up, he added.

Later, the Canada Revenue Agency challenged the arrangement, and the clients had to repay the tax savings, plus interest, costing around $30,000.

“There’s one simple question that I would always ask in these instances: Would I still do this if there was no tax benefit?” Mr. Koivula said. “If the answer is ‘no,’ then that’s a red flag.”

He recommends getting independent tax advice about charitable donation tax shelters from a professional without any skin in the game.

Mistake #3: A failure to plan

Tina Tehranchian, senior wealth adviser at CI Assante Wealth Management in Toronto, said one of the biggest mistakes clients make is failing to plan before major life events, such as transferring wealth or selling a business.

Some entrepreneurs, for example, will spend decades building a successful business but put little thought into monetizing it when it comes to retirement.

One such entrepreneur came to Ms. Tehranchian a year after selling his business for $40-million, hoping to reduce his tax bills.

“There was no strategy we could put in place to save him taxes because the event had already happened,” she said. “He should have talked with me, ideally, three to five years before selling his business.”

Mistake #4: A cottage crisis

One adviser, who asked to remain anonymous to preserve client confidentiality, pointed to a quintessential cottage mistake that families make. One family the adviser worked with had not clearly discussed or put into writing what would happen to the property after the parents died.

There was no ownership agreement, funding plan or decision how the cottage could be appraised – or who could even use it, the adviser said.

Emotions surfaced when the three siblings involved tried to decide what to do with the property. One wanted to keep the cottage, another lived far away and wanted to sell because they needed the money, and the third loved the cottage but couldn’t afford any taxes, repairs or maintenance.

The cottage became the perfect vehicle to battle out years of resentment within the family, the adviser said. By the time everything was settled, it had to be sold and hundreds of thousands of dollars were spent to cover legal fees and taxes, and the siblings’ relationships had fallen apart.

Mistake #5: Unprepared heirs

Bernardine Perreira, cross-border wealth adviser and associate portfolio manager at Perreira Wealth Advisory of Raymond James in Toronto, said one of the biggest mistakes she sees is people inheriting wealth without being prepared to manage it.

One family she worked with was referred to her after the father, a successful American entrepreneur married to a Canadian, died and left significant assets, including a U.S. retirement account, to his adult children.

“What became clear very quickly was that there had been very little discussion around money growing up,” Ms. Perreira said.

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One sibling was financially independent and viewed the inheritance as a long-term asset. The other was carrying debt, living paycheque to paycheque and had little experience managing money.

Although the latter sibling initially seemed receptive to advice, they soon began requesting large withdrawals, around $60,000 at a time, to pay for a new car or a luxury cruise. After repeated discussions, the sibling eventually hit a turning point, and agreed to receive a set amount of money each quarter.

“It wasn’t intelligence. It wasn’t entitlement and it wasn’t a lack of opportunity. It was a lack of preparation. No one had transferred the knowledge, the habits, the confidence needed to manage it,” Ms. Perreira said.

“The greatest risk to a successful wealth transfer isn’t just taxes or market volatility. It’s really silence.”