Julie Petrera, National Lead of Financial Planning Content, and Jean-Francois Bordeleau, Senior Practice Manager, Investments, at MD Financial Management discuss investing within the context of financial planning for physician families.
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Thank you again to all the doctors and health care professionals out there for taking care of us at this time. While you’re focused on public health, we here at MD are committed to protecting everything you’ve worked hard to achieve. We are here for you and your family. If you have any questions about topics covered in this podcast or your financial plan, we are here to help.
In episode 16 of the MD Market Watch Podcast, we had the chance to sit down with Julie Petrera, National Lead of Financial Planning Content, and Jean-Francois Bordeleau, Senior Practice Manager, Investments. The conversation was about investing and – more broadly – financial planning in the current environment. We covered everything from what financial planning is, pandemic challenges, trends like responsible investing and cryptocurrency, to opportunities available to physicians and their families right now.
What are some of the recurring financial questions or challenges physician families are trying to figure out right now?
Julie Petrera [1:00] I'll go first. Yeah, we're still seeing reductions in incomes in many cases. So where medical procedures were cancelled due to [COVID-19], and in some provinces, remain cancelled or restricted somewhat. Again, depending on the province and the specialty. This leaves us continuing to adjust financial plans. So both for the short term where we're adjusting remuneration strategies, how much MPCs pay physicians and other parties and longer term plans like retirement savings strategies.
To help make up for some of that, government benefits. So, government benefits have been and remain a hot topic financially. We now have a pretty good handle on what physicians qualify for in terms of benefits as business owners, incorporated or not. And in some cases, it's not too late to apply for benefits from previous calendar or corporate years.
We also saw an increased interest in physicians ensuring they're properly insured, and that their estate plans are up to date.
And finally shifts in retirement both ways. So, we saw some doctors retire early or want to retire early, and some actually delaying retirement depending on the type of physician and how their practice was set up.
Jean-Francois Bordeleau [2:04] This is good stuff, Julie. I mean, there's a couple of other things that we've also seen when we look at it from a, call it a bit of a market or market behaviour perspective. One of it is I would say an increased desire to do it yourself when it comes to investing.
Some physicians, I mean, given the situation that Julie described, have a bit more time to look at investments – study investments – and investing is becoming a bit of a new hobby. So, physicians, like others, really in the world, have put a bit more focus on do-it-yourself investing. Have been more conscious around costs and things like that. So, this is a trend that we've seen, it's not a huge trend. But at the margin, we've seen a slight increase in interest for do-it-yourself investing.
But to me, the biggest trend that we've seen as of late is a greater focus on social issues. I mean, at first, when the pandemic hit in 2020, [it] was all about health issues, doing what's right to be safe. And then we had the U.S. election back in November, where it did highlight some inequities. We had the George Floyd event in the U.S. I mean, you could argue now in Canada, with what we've heard over the last couple of weeks with the indigenous school systems, there is really that focus on social matters, and wanting to ensure that, at the very least one's investments, do the least amount of harm possible, and if possible, actually have a positive impact.
So, this is another theme, Alex, that we've seen picking up quite a bit over the last little while, where there's a much greater interest.
A lot of people think financial planning is investing and investing is financial planning. Can you tell us what financial planning really is?
Julie Petrera [4:11] I'd love to. So, while planning includes investing, they are not the same. Planning is the whole kit and caboodle. So, it's ensuring that all of the financial aspects of your financial life work together, and in fact that they complement each other. Because if you focus on just one aspect that could actually work against another aspect and be counterproductive. So, planning makes sure that you don't focus on saving the pennies while spending the dollars.
Planning is the big picture and it's goal based. It starts with identifying the goal, being able to visualise it, articulate it and schedule it – and then we determine how much it will cost. And from there we come up with a plan to get you there using all of the tools in the planning toolbox together.
Those tools include financial management, like cash flow, budgeting, debt repayment, asset management – and investing falls under there. But financial planning also includes asset location, or what account type to use based on goals and tax optimization.
Tax planning, and this is a big one for physicians.
Retirement planning, deciding when and where you want to retire, with whom, what you want to be doing, and then putting a plan in place to make it happen. Physicians don't often have pension plans. So, this is a very critical piece for physicians, more so than the general population.
Risk management, which is protecting your biggest asset, your human capital and estate planning, which is the act of determining what happens to the corp. at death, transferring assets in the most tax efficient way to whomever you want and leaving any legacies you want.
Anything to add to that?
Jean-Francois Bordeleau [5:45] Not specifically to that. I mean, like Julie, I mean, I value getting help and support from a human professional when we look at the bigger picture of financial planning. Yet, what we're starting to find, and I think that's a nice distinction that Julie did between financial planning and investment planning, is that we're starting to see a few more investors wanting to play a role or owning a portion of the investment decision. So in as much as they value the human professional, we've seen that interest for what is called robo-advisors, for example. MD does have a solution in that space called MD ExO Direct.
We are seeing many stories (meme stocks, cryptocurrencies) with regards to do-it-yourself investing, creating a sense of fear of missing out. What are your thoughts here?
Jean-Francois Bordeleau [6:53] It's been interesting. And I'll go back to, again, not everybody is the same. But with the work situation, not only physicians or some physicians, but I mean, just the population in general, where some stay at home, or working more part time and things like that – it gave people more time. More time to follow investing, more time to pick up investing as a hobby, and more time to pursue what may appear to be hot leads. And you know, I use the word appear to be hot leads for a reason.
You see, I mean, I can't remember what the exact number was. But recently, like AMC, the movie theatre chain in the U.S. went up like crazy over the last couple of weeks and was one of these meme stocks. But the reality is that not all investors in AMC would have had those returns. Because when you got in, and when you got out, and when you got back in, and when you're getting out again, could have a big impact on your actual return.
When the GameStop stuff actually came out back in February, if I remember correctly. So, there’s been a lot of focus by the media on those few people that have been able to realise the full return from those meme stocks. And these people are the people that kind of got first in and got first out. So, from the bottom to the top. [For] most people, that’s not how it worked. They got in as the prices were going up and they got out as prices were going down, which means that many people not only didn’t get the full return but actually had flat returns, if not negative returns by investing in meme stocks such as GameStop.
So that's the risk. What I would say about do-it-yourself investing, if you combine do-it-yourself with hype investing, if you're lucky, yeah, you'll make a lot of money. But luck is not an investment strategy that I do recommend. I much prefer the slower but steadier path of looking at some good companies, some good fundamentals. And if do-it-yourself investing is what's right for you, although that takes the fun out of it, I would recommend do a bit more of a traditional analysis of quality and fundamentals and not relying too, too much on the hype.
When is it a good time to do it yourself? And when is it a good time to engage that professional?
Julie Petrera [9:42] Yeah, I would say you know, do it yourself if you love doing it. Do it yourself with some of your money and do it yourself after you have a plan in place that you know is going to get you to whatever goals you have established.
So, say retirement – the retirement that you want, that's going to protect your family and leave a legacy that you want, but not at the possible expense of those things. So, remember, as a physician, you likely don't have a pension plan to fall back on. Those that have pensions, they have their assets managed for them in the background by professional money managers, right? Pension administrators. So even if they are very unsuccessful investors, their maximum loss won't impact their entire retirement, they will still have pension income in retirement. Physicians, on the other hand, have access to their pension assets, whether they're in a corp. or in an RRSP, or another type of account. So, I would caution physicians about trading with that money.
An important facet of working with an advisor or planner is to find the right person. Where would you start? What would you recommend? At MD, we often talk about being non-commissioned, what does that mean?
Julie Petrera [10:50] So two questions there. So, you know, in terms of finding an advisor, recommendations from somebody, you trust, family and friends. I do think it's important that somebody understands physicians very well, because they really are very different. We saw that, you know, related to the pandemic, and government benefits. They do fit into many different boxes. So, somebody that's able to help navigate that.
Our advisors are not commissioned, and that means that our advisors at MD are not paid commissions for selling product. They are paid mostly by salary, and then they can be paid bonuses for good performance, which includes engaging and onboarding new clients. So, their pay is not directly tied to selling investments.
Jean-Francois Bordeleau [11:29] Yea and Julie, I mean, on that, I mean, I would say that's why, I mean, that's my personal belief, I don't know how you feel about that, but I would argue that our clients probably get one of the best deals, when it comes to receiving advice from a certified professional.
When we look at the level of fees we do have. And you combine that with fairly objective, I'll argue, compensation structure, I mean, it's not something that is very common. I do realise that there's investors, investors are looking for other options and you know, it's great that we do have those options. But for those who do value their relationship with an advisor, I mean, I would argue, it's probably one of the best values in the industry.
What's the deal with robo-advisors?
Jean-Francois Bordeleau [12:23] The beauty of the robo-advisor model for those whom this approach is suitable for, is that this is a bit of a hybrid approach where your account objective or your risk profile is still validated. And there is a recommendation being made by an algorithm or aka the robo as to which portfolio you should have.
Now you don't have discretion. If the risk profile says that your moderate growth I mean, you are moderate growth. So, there's no real way around that. It's one way to take some of the emotion out of investing, it's one way to have a lower cost way to invest, while getting some validation that you are on the right track.
Does that replace a human professional that can do that was all your things? No. But for those investors that lets say, want to play that active role. They feel they know enough. They're looking for some validation. They may be a bit more conscious of the fees they pay for investment management. This is an interesting solution.
Can you talk a bit more about responsible investing?
Jean-Francois Bordeleau [13:44] Yes, yes, Alex, thanks for that question. Responsible investing comes in many different names and versions. I would say for today's discussion, I'll talk about E.S.G., environment, social and governance. And Alex, the focus, I would say, with our physician clients since well, since almost forever, but much more so since 2016, has really been the E part of the ESG equation, environment. Really strong focus there and that's one of the reasons why we did launch the Fossil Fuel Free Fund option about five years ago, in response to the desire and needs of physician wanting a solution that was doing less harm to no harm to the environment, while having the ability over time to potentially have a positive impact.
Now that has shifted as I've mentioned earlier, quite a bit over the last few months, where the S part, the social is becoming much more important as well. And you see it, I mean, if I know many of you, you know the physicians that are listening to us today, would be on Twitter, or other social media and just seeing what's going on.
And you can see, for example, many physicians advocating for, for example, making sure that vaccines hit hotspots that may have less wealthy demographics, people more in need, larger families and things like that. So, you've seen that advocacy fairly early on to ensure that the pandemic is controlled potentially faster. So, it was a health issue, but combined with a very strong social issue, because government could have said, "hey, you know what, we're just rolling things evenly, end of story, and you know, it is what it is." But as soon as there was a realisation that, “hey, you know what, there are groups of people that we may not be as able to reach with the vaccine,” and so the advocacy for hotspots, the advocacy for a novel means, something like these mass vaccination clinics, in workplace or in those hotspots area, these were different ways of doing things to deal with that. So, I mean, that itself, vaccination, has nothing to do with investment. But the point is that those social issues, and I mentioned a few again, earlier. I mean, you see that inclusion – whether in the U.S. it's been a Black Lives Matters movement, here in Canada, I mean, I've talked about the indigenous school situation that we've heard more over the last couple of days, and the impact that this is having on the indigenous people. I mean, these are issues that are dear to the heart of our physicians. And it's not easy to have an investment strategy that focuses on these very specific issues. But it does lead to more questions around, you know, well, what kind of labour is being used by some of the companies that you're investing into? What are the customer relationships? Do these companies have inclusion policies in place? So, we're starting to see a little bit more of that.
And going back to a do-it-yourself approach we were talking earlier, there are some tools that do score investment on an ESG basis. But the reality is that ESG is very different for everyone. So, working with an advisor on these matters is actually something I would strongly recommend.
Julie Petrera [17:05] I'll add on to that, actually. And to your point there JF, where you know, what's important to somebody, what makes an investment responsible, it is very personal, right? It is a reflection of your values, and what's important to you. And when we're dealing with physicians and investing responsibly, there's actually an increased opportunity here.
So, I mentioned earlier that it's uncommon for physicians to have pension plans, pension plans are administered by third parties. And we know that that means that those third parties are deciding what these plans are invested in.
As a physician, you actually have more control over your assets and how they're invested. Which gives you an additional opportunity to invest in companies, or industries, or countries that are in alignment with your values. You can also avoid companies, or industries, or sectors, to an extent, that don’t align to your values. So, this just presents an additional opportunity for physicians. So back to your point JF, we need to know what those values are. But if we do, we can help to ensure that your investments represent those.
Interest rates, bond yields and inflation have been in market headlines lately. What happens next, when we see policymakers slow down and eventually stop support and markets move out of the recovery mode that we're accustomed to?
Jean-Francois Bordeleau [18:32] Yeah. So, as you said, let's set the table. So, one thing to remind ourselves is that if you look at the performance of equity markets from the end of March 2020 to the end of March 2021, major equity markets around the world, were up between 35% to 50%. So, this is not something you see every year. This is not something you see every decade, and maybe you see those kind of things once in a generation, when in many cases, I mean, these are the kind of returns that you see almost once in a lifetime. So, we have to keep that in mind when we look at the backdrop and the path forward.
We do have a fairly interesting situation right now where, yes, the stimulus that's been provided by governments around the world to support world economies, is likely going to lead to some sort of at least short-term inflation. But that's not the only reason why you may see in the short term – that’s our view [in the] short term – we’ll see inflation.
As economies start to reopen, they need to hire or rehire people. In some cases, I mean, those government benefits haven't run out yet, and you know, everybody's looking at well, should I continue the way I am right now? Should I go back to my old job. It wasn't giving me what I was looking for, and things like that. So, what you're seeing right now in the U.S., a little bit in Canada and a few other countries in the world, is that, those so-called entry-level jobs, they're having a really hard time bringing people back. That so-called service economy, they do have to give benefits that I mean, many of them have never had to offer. So, if the service industry has to increase salary and for the right reasons, well, it ultimately [means] they'll have to increase the cost of the service or the goods that they do provide. And that is what kind of creates inflation.
Now we've heard Janet Yellen talking, actually this week with the G7, and a meeting of the finance ministers on the fact that, yes, there will be some inflation – and it's not a bad thing. Yes, rates are likely going to go up somewhat. But it's not the end of the world. And actually, world economies may need some of that. Actually, the central government do need some inflation to more easily pay back that debt. So, to be clear, we're not talking about inflation going to 10%, like the 1980s and something that lasts for 10 years.
As of now, I mean, the system is trying to work out a few kinks. As you said, Alex, kind of get past that early recovery mode, but we are in that early recovery mode. So, we will see some inflation, we will see rates go up at least temporarily, that could put a little bit of a break or cause a bit of headwind for equity markets. So that's a possibility. But as of now, I mean, yeah, we do not see an outright crash or bear market starting like tomorrow morning or something like that. There's still some fuel in the market. To see how much left there is.
What does this mean for our clients?
Julie Petrera [22:01] Yeah, I'll go first, you mentioned bias in the last question there. And I just want to note that, you know bias makes its way into other planning components too. People have feelings and attitudes and experiences related to not just investments or types of investments, but also account types and tax and incorporation and insurance and estate planning. And those biases impact planning, and they change over time, too.
So just like interest rates change, and we adjust portfolios, we have to continue to adjust for attitudes or rules related to other planning inputs. Planning is never done. First and foremost, we see goals change, right. So, this past year, a lot of goals changed or be moved, the timing of a goal could be moved to a different time in someone's life. For example, due to the pandemic, we've adjusted payment schedules related to reductions in pay, we've moved purchase decisions, safer capital expenditures, we've pushed out retirement dates. So, all of this is adjusting the plan, sort of at the at the larger level, not just related to adjusting what's held in a portfolio.
Jean-Francois Bordeleau [23:03] Yeah, and what I'm looking at it from an investment perspective, and I'll try to keep this one short, two elements that comes to mind.
First, is an understanding of one's risk appetite. Now, when markets go well, like they've done in the last year, the average risk appetite tends to go up. When things start to go sideways or down, then all of a sudden people's risk appetite tends to go down. We tried to see what's a constant, or the midpoint there like using tools like risk profile questionnaires, and just good discovery, and then assign the proper portfolio based on that risk level. So, our portfolio approach is rooted in strong risk management, and assigning that portfolio based on that volatility.
But on top of that base portfolio that's there, that's kind of [the] cornerstone of one’s plans, we do look at market conditions. And on the margin, we'll make some adjustments based on market conditions. We may increase equities a little bit, or increase fixed income, or adjust the country mix based on market conditions. But I want to be clear that this is at the margin.
The most important thing is understanding one's risk level. And assigning, not assigning, but discussing on the right portfolio that meets that risk appetite. As a firm and from a more central management perspective, make those tweaks when the market conditions do warrant them. So that's how we tend to take all of that into account and make those investment decisions on behalf of the client.
What are some of the government benefits available right now to physician families?
Julie Petrera [24:59] Yeah, good question. I would say the big one is CEWS, which is the wage subsidy. Wage subsidies remain available into late spring 2021. And you can actually go back and claim those for previous periods. So if they were in a previous corporate year, and the way that you're actually taxed on CEWS is you're taxed when you receive it, not when it was claimed for, so you actually could have deferred tax. If you haven't applied for CEWS yet, and you do qualify due to income reductions, still opportunity to do so there.
CRB replaced CERB, earlier this year in 2021. So, if you or a family member qualify, take a look at that.
And there are also some rent subsidies and other benefits available at the provincial or municipal level. So, my suggestion would be to check with an accountant and know what is available both federally and provincially. And continue to monitor benefits that are available because these do change as the restrictions and the impact that restrictions are having on physician income changes.
What are some of the financial planning opportunities currently available?
Julie Petrera [26:10] Sure, and I'll preface this by saying there's no one size fits all solution. Your situations are unique and depend on your personal values, goals, the timing of those goals, and what other income you may have coming into your household now or in retirement.
But high level, the main themes we tend to focus on with physicians according to career stage, so well, starting off – debt. Right, so from medical school, until the end of residency or fellowship, this group is accumulating debt. The average debt loads at the end of training range from $100,000 to $350,000, depending on the length of training and specialty.1 So we plan to manage that debt, but also to make sure that we can identify and track your other goals while managing the debt. And when I say managing the debt, yes, we want to plan to pay it off. But we also want to evaluate the benefit of doing so with other alternatives that may be available. That debt for physicians is cheap. So, we may not apply normal debt management procedures. That debt could also be special, debt incurred while training to become a physician especially could have certain status. So sometimes training debt has special status that could make it subject to interest forgiveness or deferral. So, we don't want to do anything that would result in losing the status of that debt, because that could cost you money.
That debt that I talked about often remains present in some form for about five to ten years into practice. And in fact, many physicians incur more debt when they start practice due to the high cost of transitioning. On top of that, since doctors start earning good salaries later in life, compared to their peers and other professions, they have a shorter time to save for their retirement. So mid career, or early career, they're faced with having to fund their own retirement and repay debt in a condensed period of time. So, we address this right away.
Planning for retirement can include incorporating, income splitting, tax deferral, and investing in various account types. So, all of which will depend on your personal goals and how comfortable you are with debt and what else is going on, right. People are having children, buying houses and moving.
Mid to late career, the name of the game here is often reducing and deferring tax while trying to meet all of the doctor's other personal goals. So again, retirement is a big one here, since physicians are funding their own retirement, and they may want to fund education for their children, travel, buy second properties, all of these normal things as well. So, the focus is on tax because billings are usually highest here. And tax can have a very large impact on real results. Usually much more significant than other inputs into the plan, like investments, or returns on investments, or investment fees.
And then once you're retired, planning doesn't stop. We've been prepping for this for quite some time. And at this point, we want to keep you on track. Every time there's a budget or an update to a government program or a pandemic, things change. So planning is based on doing the best with what we know to be true at the time we do the planning. And as those things change, so do plans.
And a shout out to the spouses. I know firsthand all of this impacts you too at every stage of the career. Planning for two is twice the fun and can be twice as effective. Even if you don't commingle assets. So, it's not a requirement to commingle assets to be able to plan together. If you share goals – sending children to school, retiring together, even some goals – I recommend that you plan together because there's much more opportunities available at the household level. So, I hope that provides a good overview Alex.
1 Graduation Questionnaire National Report 2020. The Association of Faculties of Medicine of Canada.
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