Case study: New portfolio for high-earning spouses-to-be

Couple profile

Mauricio Robustelli, 33, and Bev McPhee, 32,* just got engaged and plan to marry in a year. Both are high earners and want to overhaul their portfolios, one of which is with a robo-advisor.

* This is a hypothetical scenario. Any resemblance to real persons or circumstances is coincidental.

The experts

David Bluteau: Senior vice-president, Bluteau DeVenney Caseley Group | National Bank Financial Wealth Management in Halifax, N.S.

Darren Caseley: Investment and wealth advisor, Bluteau DeVenney Caseley Group | National Bank Financial Wealth Management in Halifax, N.S.

The situation

Mauricio used to work at a technology firm, earning about $85,000 a year. Two years ago, he took a chance by leaving his job to start his own company, specializing in mobile apps.

Last month, an industry giant bought one of his apps for $5 million. He expects the transaction to close in about two months. He’ll reinvest half the proceeds in his business, and add the rest to his investment portfolio.

Mauricio started DIY investing about five years ago. He had a rudimentary ETF portfolio: half in an S&P/TSX ETF, and the other half in an S&P 500 ETF. Last year, he switched to a robo-advisor, but the stubborn, risk-taking entrepreneur didn’t alter much. He insisted on staying 100% in equities, adding only European and other developed market exposures through an EAFE ETF, which invests in Europe, Australia, Asia and the Far East.

Bev’s a family physician with her own practice, which launched two years ago. Although she’s a high earner, business startup costs have left little for investments. She has $60,000 in balanced mutual funds through an independent advisor.

The couple wants to bring their assets together and transfer them to a fee-only advisor. Bev’s more level-headed than Mauricio when it comes to risk — she knows they should have a strong equity component, but understands Mauricio’s 100% allocation is untenable.

The solution

David Bluteau and Darren Caseley, both advisors at National Bank Financial in Halifax, N.S., suggest a 65% equity, 35% fixed-income mix that includes active, passive and hedged vehicles. The advisors target a minimum of 50% outside of Canada. A young couple with Mauricio and Bev’s assets, earning potential and time horizon might typically have a higher equity allocation. “But physicians tend to be more risk averse,” notes Caseley, and Bev fits this profile, so a 65%/35% mix is more psychologically palatable.

Asset transfer

Bluteau and Caseley would do an in-kind transfer of Mauricio and Bev’s assets, which are all currently in RRSPs.

“But we need to be careful about DSCs [deferred sales charges] on Bev’s mutual funds,” says Bluteau.

She’s held them long enough that there would be only a 0.5% penalty for exiting. Bluteau says it’s worth taking the penalty, especially since her MERs far exceed the 1% to 1.15% fee she and Mauricio will pay after the switch.

It would be different if it were earlier in the DSC schedule. “I’m not a big fan of her taking a 5% hit,” says Bluteau. Instead, he would redeem all the units currently beyond the penalty stage, and redeem the remaining units when the penalty drops to a nominal amount. Fortunately, Bev’s mutual fund holdings represent only a small portion of the couple’s investable net worth.

Mauricio’s current ETF holdings overlap with Bluteau and Caseley’s recommendations, so it’ll be a straightforward transfer.

Fees and insurance

Mauricio and Bev will have fees between 1% and 1.15%, covering asset allocation and financial planning. They may also need insurance coverage, which has a separate fee structure.

Since Mauricio and Bev are both self-employed, they should consider disability and critical illness insurance. “Most people don’t want to talk about it,” says Bluteau. “Mauricio may say, ‘My wife’s a doctor, we don’t need [the coverage].’ But she won’t be working every day if he gets cancer.”

The financial impact could be even worse if Bev gets sick, since Mauricio’s in a volatile industry.

Bluteau and Caseley add it’s early for estate planning, but the couple’s wills should be updated. And once they have children — as they plan to do — they may be candidates for life insurance.

Couple acceptance

Bev manages to rein in Mauricio’s appetite for excessive risk, and they accept the 65%/35% split. She also convinces him to get disability and critical illness insurance. As a physician, she’s seen many lives turned upside down by unforeseen health emergencies, so she’s not willing to take chances. Redeeming her mutual fund holdings is an easy decision — the 0.5% she loses from DSC penalties is offset by lower advisory fees.

The main challenge is tempering Mauricio’s risk-taking. While it’s helped his app business succeed, he seems convinced he can’t lose. Bluteau and Caseley have an ally in Bev, but they’re careful not to take sides with one spouse. The experts lay out their case for the 65%/35% split, and leave it to Bev and Mauricio to work out their differences.