“Hey Sara, I have a Question!!!”

This podcast is designed to inform, educate and enlighten because Sara DOES make sense.

In previous episodes, we’ve covered off everything from divorce to timing the market to what kind of insurance is needed and necessary.

In this episode of Sara Makes Sense, Sara answers real questions about real issues from her real listeners. 

Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode

Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough (00:01):

Yeah, <laugh>, I'm completely not ready. So let's do this thing. 

Sara McCullough (00:13):

That's not a stupid question. I don't mind answering that again. You didn't call earlier because you didn't even know what to ask. Those are things I say to clients on a regular basis. There really aren't any stupid questions. If you need answers, it's because you need to make decisions and you need to make the best decision that you can. And if you're still not certain, and you still feel like you have questions, then keep going. And your advisor should also be asking you questions. I don't want to assume I know everything about you, even when I've known you for a long time. It's my job to ask questions, it's my job, to make sure that I'm answering all of your questions so that you can make decisions. And so we're very, very interested in our own questions, even when we don't quite know how to phrase them, even when we stumble around. We're also really interested in other people's questions. We do care about what other people are doing and how they're doing it and what they're doing with their money. Sometimes clients directly ask me that, what do your other clients do? Sometimes clients ask me, what are you doing with your money? 

Sara McCullough (01:43):

We all have questions. And sometimes we really love questions and we need answers. I'm Sara McCullough, and in today's episode of Sara Makes Sense, I'm not just asking the questions, I'm also answering the questions. So today's episode of Sara Makes Sense is the question and answer episode. I've asked and received a number of commonly asked questions from other advisors. And in this episode, you're going to hear my sound guy, Doug, ask me these questions. Hi, Doug. 

Doug (02:30):

Hello. First time caller. Long time listener. <laugh> 

Sara McCullough (02:34):

I always say hi to Doug. You just never hear it. <laugh> that's right. My listeners never hear it. All right, Doug. So, where are we starting today with our questions? 

Doug (02:44):

Well, kind of picking up on where you, you, I think you ended off in the last episode, um, you never said the word prenup that I heard in the episode, but you mentioned marriage contracts, cohabitation agreements, eh, prenup. That's kind of what it's boiling down to. What are the benefits and pitfalls of prenuptial agreements? Are they worth it? Um, particularly when a divorce ultimately occurs in the end, and you touched on a lot of this last episode, but, uh, just to recap for this week's episode, mm-hmm 

Sara McCullough (03:17):

<affirmative> I do think they're worth it for a number of reasons. About 80% of the work that I do across the board with all of my families in a year, my non separation families and my separation families. Really comes down to what we often think of as money basics. So income versus expenses, money in money out, I don't understand how this works. And so that causes stress in a relationship. When you have a prenup agreement or a marriage contractor or a cohabitation agreement, it's, it's stressful. It's hard on both parties, don't get me wrong. There's tears in my office over these ones. Um, almost harder than there's tears over the separation. Um, because this is really at a very, very happy time in your life. You feel like your partners maybe holding back or not willing to share or, um, you know, really saying I don't trust you, right. 

Sara McCullough (04:20):

I don't, I don't trust that if we were to separate that you would respect me, or I think you would try to take this from me or my children. Often people who are looking for an agreement like this already have children. So they're caught between protecting each other and wanting to protect their children. I absolutely believe it's worth it because then each person knows what's possible. And nobody's surprised later on. I've worked with families where, um, when there's a difference in income and therefore a difference in assets coming into the relationship, lawyers would say, well, that's what we've gotta look at. Right? So if it breaks up, you wanna come out with what you went in with, and this one's higher than the other one, so let's protect that. Yes, that's important. For this couple, the trickier part of the conversation is when they both retire, he has more income than she does. 

Sara McCullough (05:24):

If they have a lifestyle together, how are they doing that? They can't equally pay for the vacations they wanna take. They can't equally pay for the upkeep on the house. Well, if they don't know that now, what's it gonna look like 10 years from now? When they make a decision and she can't meet her half of the bills, what does she do with her kids? How do you see what I mean? Like all of that's gonna be going on under the surface when, if they would've discussed it up front, you can make decisions ahead of being in the moment. So I absolutely believe that they are valuable where they can get, um, tricky is sometimes somebody relies on them too much and they forget. So in a separation situation where there's been a prenup or a contract, sometimes somebody will come into the con the separation conversation saying, well, I'm not paying this because we have a prenup. And sometimes I say, but you're gonna have to talk to your lawyer because that specific thing that you just said to me, isn't covered by the prenup. You can't opt out of that. Right? So, so sometimes we, we think we have the thing and we extend it to cover more things than it actually covers. And so that's where, again, it can be a shock for the client that they still have to engage in part of a separation conversation when they really weren't ready to. 

Doug (07:01):

<laugh>. I, I, I was watching a Seinfeld episode just last night. It's, it's the one where George is scheming ways to get out of his engagement to Susan. Right. And I think it's Kramer suggests a prenup. Nope. Say you want her to sign a prenup? She'll get ticked off. She'll break off, right? Yes. So he, he does and she burst out laughing. I make more money than you. Sure. So, so my question is, do you see, uh, I'm sensing you probably still see more males asking females to sign a prenup, but is that starting to change? Is society starting to move in a direction where, where a higher percentage of women are making sufficient money to consider asking their new partner to sign a prenup? 

Sara McCullough (07:56):

I, and again, this is very anecdotal. Um, yes. And so it's not always, even just the, the income. Often remember an equal number of men and women if we're just talking about those two genders. And so we're talking about that type of relationship. If they're going into a second relationship, they've each come out of a first one, right. So we're dead equal there. So if a woman has already divided assets and you are looking at repartnering, right, that's not necessarily about an income difference. It's sometimes about, I want this for my kids. Right. And the other piece that kind of equals out, because there still is income disparity, the headlines still tell me men on average earn more than women. Yeah. But where we're seeing in equalization is an equal, you know, a more equal number of men and women have come out of relationships and are then looking at repartnering. 

Sara McCullough (09:10):

The other thing that's starting to happen is, um, and I don't know if you've heard about it, but there it's, it's often known as the generational wealth transfer. So as boomers get older and pass away, their assets are going to their children. So the other reason you might look at an agreement is that you are inheriting or your career is tied to a family business that you don't necessarily have high income, but you need to protect the business. Do you see? So if you've got a business with your siblings and you don't protect that, and your relationship breaks up, you have to deal with the value of your share of that business. Well, what if the business doesn't have the cash flow to pay out your ex? mm-hmm 

Doug (10:03):

<affirmative> mm-hmm 

Sara McCullough (10:03):

<affirmative> then what? Like that's, that's not only your income, that's your siblings income. So it's, it's I think a combination of all of those things that I don't necessarily see, um, a gender difference in, in who needs them. Uh, sometimes there's a bit of a gender difference in who's comfortable asking for them. 

Doug (10:29):

Which way? 

Sara McCullough (10:30):

Well, nobody likes asking. Um, I know specifically connected to investments, women take smarter risks than men. Men take bigger risks. Mm-hmm <affirmative>, They're not smarter risks. So if we extend that logic, joining finances with somebody is a risk. Women overall take smarter risks. 

Doug (10:59):

So women are more likely to ask for the prenup, all things being equal is what anecdotally is what I think I hear you saying. 

Sara McCullough (11:07):

I, I think there's a desire there, whether they say it out loud or not is again a whole different gender conversation. Right. But I think there's a desire there, and there's a desire to know what does this look like, right. And who am I protecting? And I'm feeling vulnerable. So how do I solve that? And again, I, I think the conversation, I think both people, both parties, men, or women, you kind of feel put in a corner, right. Men feel like jerks for asking Uhhuh 

Doug (11:37):

<affirmative> 

Sara McCullough (11:38):

Women feel bitchy for asking. 

Doug (11:44):

Yeah. Yeah.  

Speaker 3 (11:46):

Right. It's, it's a tough, it's a tough situation and, and it is a, a situation where language gets, gets harsh and, and conversations are, are tricky. 

Doug (11:56):

So speaking of investments, um, I prefer to have the majority of my savings in a self-directed or a series of self-directed accounts, whether that's my TFSA or my LIRA or my, I have a few RSPs. I prefer about two thirds to be self-directed the other third, uh, managed. And my thinking is because the management expense ratio, in other words, how much the manager of the directed account is charging me is roughly 1.5%. I suppose, that is very, some of them are two something. Some of them are less than 1%. I get it. But roughly 1.5%. Yup. And they can't make more money than me on the market. I am going to make, eh, 8%, a good year, more, bad year, less. I'm gonna make about 8% on the market. And they're just stealing 1.5% from me. So that's my thinking, but what are, uh, objectively, what are the advantages and disadvantages of directed accounts versus self-directed. 

Sara McCullough (13:06):

Okay. And so that is, that's a very common question. And it's, um, it's one where it's so easy to be swayed because it's, it's kind of a hot button thing, right? We're paying somebody else, a defined fee. It's not a defined amount, right, because it's a percentage of your assets. So, so it varies and that, that causes its own confusion. And you know, that question of which is better, good news, bad news. It's almost unanswerable as a kind of standalone thing. Okay. Because here's the reality. At any given moment, there's probably 10,000 ways to make money in the market. Stocks, bonds, alternatives, whatever. 10,000 ways, so in that moment that I just said that 10,000 ways to make money, there's probably a hundred thousand ways to lose money. 

Sara McCullough (14:13):

Okay. The longer I do this, and especially when I was directly managing investments for clients. Markets, humans are not cut out for markets that give us none of what we like. They're unpredictable. We take losses, we feel stupid. We compare ourselves to others. We try to invest in hindsight. None of those work, none of those work. So for what's right for you actually does not depend on how much you're paying year to year, because where you need to is what's your total outcome going to be. Okay. So if you are comfortable doing it yourself, through all markets, your fees are low. You will come out with a consistent rate of return because you're not gonna panic when it goes down, you're going to be very disciplined, not only on when you buy, but when you sell. And so your returns are going to be there. 

Sara McCullough (15:21):

If you do it yourself, just because of fees. But in fact, you panic, you don't like it. It's uncomfortable. Um, you don't care. A lot of my clients don't care about investing. Don't do it yourself to save the money then, because over time, you're also not going to make the money. Okay. And I had a client recently where this was the biggest part of our conversation actually for about a year, because he had stalled so long in this conversation, he had built up high six figures of cash, trying to make this decision. So the bigger that amount got, the more he felt was at stake for this question of do it myself, or use a very low cost ETF strategy or hire an advisor. And again, he, a lot of his friends did it themselves. A lot of his friends paid low fees, but that's all he knew. 

Sara McCullough (16:19):

He didn't know what their returns were. He didn't know anything else. And so we, we chewed through this a number of times, and he did end up meeting an investment advisor that he really liked personality wise. So to me, you need to pick the thing that doesn't drive you crazy. Even on its worst day. I tell people, investments are like children. You need to be able to live with them on its worst day. Okay? Your kids, everybody has a bad day. Toddlers are sometimes no fun, teenagers sometimes no fun. Okay. If you didn't give away your kids in those time periods, you can probably invest, but we need you in a space that you're comfortable. So when I actually broke it out, cuz he's a numbers guy. He's like, sure, Sara, I hear what you're saying about communication, handholding, ongoing management. He goes, but I need the numbers. So if I would've done a DIY five years ago or started working with this other advisor who did charge one and a half percent, which one is better, which do I come out with higher numbers? So, I broke it out for him because I did have this, this advisor's returns for his portfolio. Um, he, my client would have paid more obviously to the advisor at one and a half percent. He also would have been ahead dollar wise. 

Doug (17:47):

Oh wow. 

Sara McCullough (17:49):

So yes, you paid more and you kind of paid like shockingly more. Right. Um, but the account would've been higher based on what I could see. Okay. And again, I'm, I'm modeling backwards, so I, I, you know, I kind of averaged when the deposits would've happened and all those kinds of things. So, so was it perfect? No, it was not for any of my, you know, real number crunchers out there was it perfect. It was not, but it gave him an idea. So yes, he paid more, but he got more. So again, a lot of it comes down to, um, because we that's often the line, well, I don't think a manager can beat the market. Maybe not, but what they can beat is, is your desire to get in your own way and to make the wrong decision at the wrong time. So they can beat timing and they can beat our desire to screw this up. 

Doug (18:47):

That's a whole mental mindset. I, I know. And I could admit this in a weak moment that those of us who, who prefer a higher percentage of self-directed, it's the same mentality as the reason I speed. Because I can do it because I am superior to others in my investing. Right. I will buy Apple at that low price. 

Sara McCullough (19:11):

Right. 

Doug (19:12):

I won't panic when the good stock goes down, but I'm smart enough to sell the bad one. The minute it has a very slight downturn, which is ridiculous as I say it, but that honest, honestly, that is the mindset. 

Sara McCullough (19:25):

I know. And again, it, uh, you know, self-directed clients are very interesting because a lot of it is self-reporting, right. So when my clients come in and say, but my neighbor said this and you know, I heard this, or I heard this in the, um, at work, um, when we all used to be in offices, you know, so it's, it's very difficult and it's a difficult area to get actual statistics. But when researchers have been able to access, um, clients who manage their own investments, when the researchers access the accounts. So just looking at the pure numbers, not what's reported. Overall, they do not, not only do they not outperform the market, um, you, you don't even necessarily beat the average mutual fund and I have specifically had that conversation with a client. I, I had to tell 'em, you know, you are over the last three years down, 8% per year. <laugh> It's a lot of money. Sir, if you would've purchased an average mutual fund, you would have gained four and a half percent after fees a year. That is a 12% a year difference. 

Doug (20:40):

And I I've had where I forgot I was sitting in mostly cash for like eight months. Right. I just, I just forgot to go look at it and figure, oh, I'm fully in. I'm fully investing. I'm good. I'm good. 

Sara McCullough (20:50):

Yeah. I think there's some debate about where the saying comes from, but I often apply it to myself. Uh, the saying is he lies like an eyewitness. 

Doug (21:01):

<laugh> okay. Investing. I'm thinking of borrowing $10,000 against my house. I guess all our lives of credit are against the house and the bank's tripping over themselves to loan us money. True. My interest is just under 3%, which I think is normal right now because interest rates are two something and with the bank charging their bandit fees, it's up closer to 3%. I'm gonna take that 10,000 pay the 3% interest per year, but in invest it through my TFSA where I have room okay. Into Royal bank, which has a 3.2% dividend annual dividend paid quarterly. 

Sara McCullough (21:45):

Okay. 

Doug (21:46):

Am I doing, how do you feel about leveraged investing is ultimately the question here, but, uh, I thought I'd put a story to it, am I doing the right thing? Because I'm making more on the dividend alone to pay off the interest. 

Sara McCullough (21:58):

I hate leveraged investing. In, in my career, I've been advising clients for about 19 years. In my career, my, my up close and personal experience with my clients in leveraged investing, um, has involved the client coming to me because they did a loan with another advisor, had a portfolio and they are now so distressed that the first thing we do is figure out how to unwind the loan. Okay. So what I find, um, I mean, there's a number of things. Generally speaking, if you need the leveraged loan to meet your goals, long term, retirement, income, whatever, if that's the only way to meet your goals, the ironic thing is leveraged investing is too risky for you. Okay. So we talk a lot about risk tolerance, how much up and down can you handle in investments? We talk about that all the time as an industry. What we talk about less is risk capacity. Okay. So if you need that $10,000 loan to meet your goals, I'm telling you, you don't have the capacity to lose that money. Right. You don't have the capacity to sustain a downturn. Okay.  

Doug (23:24):

But it's Royal bank though. It's Royal bank. I can't lose. 

Sara McCullough (23:30):

Are you trying to tell me Doug, that it's different this time? Yes. Which is the classic line for, it's all about to go to hell in a hand basket, and I'm gonna be surprised, but I shouldn't be because every other time that's the line that's been used the moment before it all goes to hell! That line? 

Doug (23:49):

<laugh>. Yeah. That line <laugh>. 

Sara McCullough (23:56):

So where I find, um, leverage loans. So again, they're not necessarily good for the client. Okay. They are good for the bank cuz they're getting that interest guaranteed. And they're good for the advisor. Okay. Now we just talked about your, your DIYing it. So that's, that's maybe you're saving there, but if it's an advisor recommending it, that advisor just got 10,000 or 50,000 or a hundred thousand more money on which they are getting paid to manage. So it's good for the advisor. So we've talked about, if you need that loan to meet your goals, there's probably too much risk in there. If you don't need the money to meet your goals. Why? Right. I, and it was interesting because I did have a client for a long time who had done a leveraged loan and he was actually extremely good in the time that he was my client. He was also picking his own stocks because that was the setup at the last firm I was with that the client could treat it like a DIY account, but I could actually still see it. He was genius. He was averaging 12, 15, 18% a year. 

Doug (25:13):

Nice. 

Sara McCullough (25:15):

And he was paying interest only on the loan. So when I looked at the amount of time he had had the loan, the amount of money he had paid to the bank and if he needed to unwind it. So let's say we're actually taking that debt down. Right. And we're using the investment account to do that. There's capital gains. And he was in the highest marginal tax bracket. So when I looked at what he had gained, and again, the pure numbers were fantastic. He took this half million dollars to almost 900 in a relatively short period of time. But when I looked at what it would take to unwind that, so kind of what's his ultimate net worth, the gain was not much more than if he had taken that interest payment every month and built up that account slowly. So what I'm saying is he took on a lot of risk to get something that he could have gotten with exponentially less risk. 

Doug (26:21):

Is it different if you have the room in your tax free savings account? Is, is that the, the, the magic bullet here that changes the dynamic of some of this? Cuz he wouldn't have the capital gains tax to pay. 

Sara McCullough (26:35):

Sure. So you don't have the capital gains. You also are not paying tax on that dividend payment. Right. Cuz you were buying Royal Bank cuz you're excited about the dividend payment because it's basically offsetting the interest in your head, right? Yes. So does it make a difference? Yes. You have to remember then that you cannot tax deduct the interest for that loan. Okay. Because you put it into a tax sheltered account. So Revenue Canada will let you deduct interest for investment purposes in a non-registered situation, not in a registered situation. It may work if you have the capacity to pay down the loan. So you have to have the free cash flow to pay not only the interest, but to pay that loan down and get it gone. Okay. Because otherwise over time I can really confidently tell you that's not better than if you had taken that interest amount every month, put it in your TFSA slowly. Right? So there's, there's an art and a science to what I do. We've talked a lot about the science side and the numbers side where I am going to land at the end on this one is there's a little bit of an art to it. Okay. In that I can't tell you exactly for sure with numbers, why it's not likely to work. I can just tell you in 19 years I have rarely seen it work. 

Doug (28:06):

My last question and, and I've deliberately worded this inflammatory. So just. Excellent. Yeah. Just to, just to get some jabs in, <laugh> only the wealthy need financial advisors and essentially because the exercise of it reminds them of how much money they actually have. 

Sara McCullough (28:26):

Yeah. It's not as inflammatory as some of the things I've been told.  

Doug (28:31):

Am I slightly on target with that? 

Sara McCullough (28:33):

Um, yeah, absolutely. Absolutely. Um, and it's interesting that you say that because I've, um, I've even had conversations with other professionals. Um, I do remember clearly an accountant and he said to me, um, you know, I have these clients that I think really need you, but they need to wait until they have a little bit more money. So I'm going to, you know, I'm gonna wait a couple of years and then send them to you. And I said, that's interesting. How do you think they're gonna get the money if they don't have a plan? 

Doug (29:09):

<laugh> so chicken and the egg. 

Sara McCullough (29:14):

I get it. 

Doug (29:15):

Yeah. 

Sara McCullough (29:16):

And I'm telling you again, in practice, it doesn't work. And I think we, you know, I think we have that perception for a number of reasons. And I actually get asked this all the time, um, parti sometimes by, by clients sometimes by other advisors where they're looking for, what's your ideal client or what's your niche market and you must only deal with high income. Um, I specifically don't for, for a number of reasons, but I think that idea of only the wealthy need planning partly comes from the way we've set up, um, financial services in Canada and compensation because we have stapled the investment fee, the investment management fee that you mentioned earlier, part of that 1.5% that you mentioned actually is supposed to be for financial planning. So in Canada we have stapled these two things together, but because you're, you're compensated so clearly on the amount of investments you're managing, that's, that's where we get tangled up. 

Sara McCullough (30:23):

Well, if I don't have money, the advisor doesn't wanna talk to me. Unfortunately that's often true in Canada, right? Because the advisor's compensated by how much money you transfer to them. Um, one, I, you know, one of my clients in particular, when she started working with me, she was making $22,000 a year. It's not high. Hmm, no, I did a comprehensive plan for her, which if you look at what she paid me as a percentage of her income, it was high. We did a lot of work over a 12 month period. 15 months later, so three months after we had finished her comprehensive plan, she had increased her income to $34,000 plus benefits. 

Sara McCullough (31:14):

So that's a 30% increase. Ish. You tell me what's valuable. Yeah. That's amazing. Right. Yeah. Yeah. So I think, and it's so interesting because so much of our industry focuses on that high income segment. Yes, it's valuable and yes, they need it. They are also the people who are most likely, um, I mean, they're gonna have more advisors, they're gonna see more options. Um, for me, my love really is that that what we call the mid-market. Um, because that's most of us and if most of us have a better grip on our money, then I believe we're gonna live in a better society. So I, I really would love to erase this idea, that financial planning isn't for me, because I don't have enough money. If you want more money, get a plan. If you want to understand your money, better, get a plan, right? Like that, that is one of the ways to do this better. And I've seen incredible change happen for families. Just when we talk about again, what we consider basic money in and money out, where's it going? Where would you like it to go? Um, there's huge gains in there and, and that's exciting, right? That's what's gonna move the dial on society. 

Doug (32:40):

I, I get a lot from listening to every episode and I do find often if I'm I'm driving from one place to another, yours is one of the, even though I recorded the podcast with you and I've edited the podcast and I've heard it five times already, I'll often go back and listen. So it love being on, on the show. Thank you. 

Sara McCullough (32:58):

Ah, thank you. That's good for me to know. I mean, sometimes I'm, I, you know, again, I'm, I'm talking into a mic by myself, so 

Doug (33:05):

<laugh> 

Sara McCullough (33:06):

It's always good to hear feedback. 

Sara McCullough (33:12):

From time to time we need someone who can cut through the noise. And in this episode, we focused on the noise in your own head. Don't keep those questions in your head, ask them, get answers. Don't run it around in your head. It's not gonna get any more clear. So you need to ask your questions and you need to hear answers and you need to hear answers that are relevant to you. You need someone who not only gets to know you as a person, but also can really show and make sense of your financial plan, not just the numbers, but truly what the numbers mean for you. This relationship, this plan, it belongs to you, not your planner. I'm Sara McCullough. Thank you for listening to Sara Makes Sense. 

Disclaimer (33:59):

The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer or accountant before making any changes to your situation. Sara's designations and licensing include Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst and holding an insurance license.