Lighten The Load In Your Investing Backpack

Building a strong financial base is simple in theory, but people still struggle.

It is about making money, spending it wisely now, and investing some to grow for future use. I recently spent an afternoon with a colleague of mine, helping her to take action on her financial future. As high income professionals, we are usually good at making money. My colleague was both working hard and optimizing that nicely. She also had her head on straight about spending priorities and balancing that with saving.

However, she did have another common problem that Canadian doctors face in optimizing their financial health. She had a high fee drag on her portfolio from mutual funds. Fortunately, she recognized this and wanted to change her practice to follow the best evidence and passive index invest. Alas, she also didn’t know where to start and found it a bit intimidating. That caused her to accumulate a pile of cash sitting in her account that could be working for her instead.

There are some good reasons why this is a very common situation for Canadian doctors.

She got a load filled backpack

Note the CMA and OMA logos on the bottom of the MD Financial backpack.

She has since upgraded to a really nice bag from the Women in Medicine Wellness Conference (looking at the programme of that conference, and the bag, I am totally jealous). However, like most medical students, she was initially tagged with an MD Financial Management (MDM) backpack. MDM was a Canadian Medical Association (CMA) owned financial company that was just recently sold to Scotiabank. They have gained direct access to medical students right at entry to medical school for years and have been heavily branded as being “for physicians, by physicians”. This has resulted in a very high uptake by Canadian physicians as their wealth management company.

That has both pros and cons. MDM is as well in-tune with physician life and financial concerns as any financial company could be given their large physician clientele and focus. For example, backpacks as a marketing tool are brilliant since most med students and residents use them. It took me all of five minutes looking around my hospital to find one for this picture.

Under the veneer, MDM aren’t really physicians helping physicians.

They are finance industry professionals, and MDM is a bank model financial company. They make money from their products. Otherwise, Scotiabank would not have purchased them for $2.6 billion. Scotia did that because they anticipate making more money.

That doesn’t necessarily mean that MDM is bad. All financial companies are in the business to make a profit. They provide a service/product for that money. Further, many or most physicians can benefit from hiring some financial expertise. It does, however, mean that you need to look inside the backpack. When using an advisor, it is vital to understand how they are compensated and the inherent costs and biases from that.

I use MDM still, but don’t have the backpack.

MD Financial ManagementDespite their historical affliation with the CMA, MDM doesn’t always understand what makes docs tick. For example, in my medical school year they gave us a T-shirt with “I have no money” on the front and “I will” on the back.

Financial industry folks would likely think that is awesome. Who doesn’t want to have more money?!? Conversely, it floated like a lead balloon with a group of medical students fresh off the I-volunteered-with-Mother-Theresa interview circuit. The taboo about money in medicine is usually at its peak at that stage.

Most doctors do want to have more money, but they definitely won’t want to publicly admit that fact. Or flaunt it on a T-shirt.

Despite the occasional blunder, MDM does learn and adapt.

There have been no more controversial T-shirts. They have also recently broadened their approach on the financial product front.

In addition to the usual fee-laden mutual fund and the fee-based private wealth options, MDM also recently added MD Direct and MD ExO as items on their menu. For many years, I have received the benefit of an advisor while managing my own portfolio of stocks and ETFs at MDM. It has saved thousands of dollars for me, but it has been a money-loser for them.

So, it was unsurprising to me that they changed their business model to separate out different service levels.

MD Direct separates the investment and financial advisor roles.

This allows you to DIY invest (and get paid better than any clinical procedure for doing it) while also being able to pay for fee-only financial advising from MD advisors as needed. Personally, after a circuitous route through different advisors, I now use MD Direct. I am comfortable managing my investments. However, having another eye on the ball of other aspects of my financial planning is helpful to me at times.

We will have to see how this option pans out and whether there will be a bias towards certain insurance or other products despite being “fee-only”. I think that most advisors are well-intentioned, but their training is affected by their place of employment. I have had good relationships with my advisors and received some valuable advice to date. However, I do filter that advice critically.

MD ExO is similar to MD Direct, but instead uses higher fee (~0.5%) F series actively managed MD mutual funds for investing. So, there is a range of options from low fee DIY to a higher fee actively managed option.

This post is not some sort of advertisement for MDM.

However, there are a couple of reasons why I am focusing on MDM in particular. You could use any online discount broker to DIY invest and there are a whole slew of fee only advisors out there. I just know that many doctors do use MDM, there is inertia for people to change, and it may not be necessary for people to do so. If there is a hope for getting doctors to lower their fee burden through DIY investing, then showing how to do this in the context of the MDM suite is very relevant. Inertia can be very damaging to physician financial health.

The other issue is that for those with mutual funds at MDM, moving to another financial institution could trigger sale of those and trigger a capital gains event. So, DIY investing with MD Direct could have some advantages for existing MDM customers. A large group of Canadian physicians fall into this category.

Your backpack will become harder to shoulder over time.

As a percentage, the fee drag on your investments from mutual funds or fee-based advisors (who charge a % of your portfolio annually) may stay relatively constant or shrink slightly with large portfolios. However, as your portfolio grows with age, the absolute dollar amount will increase. This is like weight in your backpack while you are trying to run to get to a clinic. When you are young, this may just make you a little sweaty. You may even relish the cardio. However, when you start getting older, there could be a code blue.

The drag of high fee mutual funds are also not as easy to lift out of your pack when they become large because selling them to go a lower cost route can trigger capital gains taxes.

With these factors, why don’t more doctors DIY invest asap?

Some may prefer to pay for someone to handle their investing. Investment advisors can provide some value in terms of asset allocation, behavioural coaching, rebalancing, and withdrawal strategy. Most of those aspects can be emulated by passive index investing and some effort. There is no shame in a busy professional paying someone for a service, as long as they recognize the cost, and are getting good value for their dollar. Unfortunately, most doctors don’t really appreciate how expensive it is compared to what their take-home pay for practicing medicine is… until the weight in their backpack is ripping their shoulder off.

For those who do want to switch to managing their own portfolio, there are still real barriers in terms of getting started. The two biggest ones are psychological: feeling intimidated and overwhelmed.

Part of generating this feeling in physicians is deliberate, I suspect.

After my friend and I sold her mutual funds and bought her first ETF, there was a pause followed by… “That’s it? Done? We didn’t have to call anybody?” She was flabbergasted.

This highlighted for me some of the theatre that can make managing your portfolio seem tougher than it is.

I remember in the past when I was using various advisors, that after chatting about the plan, there was an exciting phone call. We would dial in to the “trading floor” and describe what we wanted to buy and sell line by line. It really reminded me of some soldier on a battlefield calling in an airstrike. You could almost hear the sound of a chopper and gunfire in the background.

Who in their right mind would want to jump inexperienced into the breach? I thought I would have to be like Rambo to take this task of investing on.

Another part is unintentional and I have been guilty of it.

Those looking to DIY invest often turn to the internet to get information. There are many blogs and other websites with great information. However, these also tend to attract enthusiasts.

That leads to great debates about many of the nuances of different approaches. Slight differences in the holdings of one ETF vs another or slight differences in tax efficiency. These can make a difference when the effects accumulate over time. In Canada, this is magnified by some extra complexities when dealing with the wide variety of account types for incorporated professionals. Too much complexity and too many options can lead to “paralysis by analysis” or feeling overwhelmed.

It is far better to make a good plan that is simple enough that you actually feel comfortable executing it than striving for the optimal plan that you never perfect enough to implement. Further, even the best laid plans need to change as life changes or the tax rules change.

There are some really good websites that give step by step approaches to building an ETF based passive investment portfolio:

  • Canadian Couch Potato has some really simple model ETF portfolios. They are good to show how simple it can be.
  • Justin Bender’s Canadian Portfolio Manager blog site has a step by step process for building model ETF portfolios for different risk tolerances and account types. The historical returns are also reported to illustrate the difference that different stock versus bond allocations can make in terms of returns and scary volatility. It is excellent.
  • For those using Questrade, Paul Healey has an excellent step by step video on how to buy an ETF.

There are still a few gaps to fill.

One opportunity is to have more direct physician to physician mentoring, such as what I recently did with my colleague. The Canadian Physician Financial Independence Facebook group is piloting linking up mentors and mentees on their page. What a great idea and platform to do that! I look forward to participating.

The other way that I think that I can contribute is by building some basic step by step posts and maybe videos (if I can make that technological jump). My focus will be a basic approach to building a portfolio combining a corporate account, RRSP, and TFSA. The aim will to be simple using only a few ETFs, but tax efficient in the context of these different account types. The other aspect that will be a bit different is that I will do this using the MD Direct platform with screenshots etc.

This will take me some time to put together. I want to get it right (or “right enough”). Plus it is summer.

It is exciting to see more physicians looking to take control of their investing and financial health. I think that the recent sale of MDM, following on the heels of the recent tax changes targeting high income professionals, have proven to be wake up calls for many Canadian doctors. Leveraging those catalysts for moving physicians towards better financial health would be an intrinsically rewarding opportunity.

I do, however, have another conflict of interest to declare. In addition to the intrinsic rewards of feeling good about helping my colleague, I was richly rewarded in a material fashion with the items below. It is amazing how salt and chocolate makes on call so much better. I will be strongly biased towards helping physicians learn to manage their own portfolios in the future.

The only downside is that, by now, my wife will have edited this post. She will be wondering why these items never made it home. Although, I think she was already growing suspicious as our recent trip to the beach illuminated some of my recent dietary indiscretions.

15 comments

  1. Hi LD!!

    Let me be first up for your online pickings!

    Here is my CCPC portfolio:
    – 70% equities/ 30% fixed Income
    – the equities will be 20% VCN and 80% XAW ( I am using the Couch Potato Porfilio ETFs)
    – my fixed income is already in GIC’s but I may think about ZDB in a couple of years.
    – I am far from fully invested but I am more than okay with market timing my portfolio. (It’s a me thing😊)

    RRSPs are 100% laddered 5 year GICs

    TFSAs are 100% VGRO

    And that’s it.

    I use MDM but I think my advisor has been using ME for advice instead!!

    Do you see any large tax issues with my mix? I welcome any blowing up of it since learning is free….usually.

    1. I think it looks good. Plus, importantly, I would say that you striking the balance between the simplicity that you want without any major tax or performance give aways. Your advisor isn’t the only person listening to your financial advice 😉

    2. Hey, Dr. MB, loooks good to me, too. One suggestion I would make is have some of your fixed income in bonds so you’ll have some liquidity to rebalance when the next crash comes. For a 70/30 portfolio you need about 1/3 of your fixed income (10% of your total portfolio) in bonds in order to have enough to rebalance after a 50% equity crash, as described in this article.

      https://www.canadianportfoliomanagerblog.com/the-most-boring-battle-ever-bond-etfs-or-gics/

      VGRO is an excellent solution for a TFSA. We can’t know, in advance, which part of the world will do better in the long term, so it makes sense to have 1/3 for each area of the world (and mainly equities) in the most tax favourable account we have. That far outweighs any concerns about loss of the small foreign withholding tax in the TFSA.

      You may want to consider having a bit more fixed income outside your TFSA in order to have your whole portfolio 70% stocks, seeing VGRO is 80% stocks, but that is not really that important.

      P.S. Forget the timing thing and get fully invested, like yesterday!

  2. Hi Grant!!

    I am THE WORST when it come to market timing this thing. But since I was prepared to have put almost all of it in a GiC, this is already better than nothing. Did I already say that I am not a good investor….

    The TFSA started when we were already in our 40s. The real benefit of these will likely be for our children. Tax free compounding for decades will allow these portfolios to grow to very large amounts even with such small deposits. I think I will let my kids use mine when they are older.

    I am learning constantly when I read comments such as yours. Thanks again.

  3. When I gave my dad a copy of The Simple Path to Wealth, he was amazed at how few funds you need to hold (1), in order to invest.

    It’s not rocket science!!

    BTW, when is the Loonie Doc summer investing conference on the farm again? ^_^

    1. Hey Debt Free! It can be as simple or complex as you make it. Biggest thing is to get invested. Tweaking later for optimization is both optional and has progressively smaller return on time invested after a point. We do need to get some big things right here due to our tax structure. However, I think that it can be done with some minimal effort.

      Summer down on the farm here is pretty action packed. I only really spend time thinking about investing when the weather is crappy or I am trapped at the hospital with a good chunk of time between patients or meetings. It will likely take me all summer to get this current project together. Now drinking beer and talking finance is a totally different story… that would be my kind of conference 😉
      -LD

      1. Let me know when you are having a “drinking beer and talking finance conference”, and I’ll bring some local craft brews from my corner of the province!

  4. Hi LD,

    That’s great that you are going to make step by step posts/videos for new DIY physician investors!

    Like you, I recently helped one of my colleagues become a DIY investor by directing her to some resources and then took her step by step how to buy an ETF on the MD direct platform. After I showed her, she said “That’s it???” . She couldn’t believe how easy it is!

    When I meet residents/medical students that express an interest in learning about DIY investing, I now direct them to Paul Healey’s videos and his/Jane’s FB group. When your posts/videos come out, I’ll be sure to also direct them to those as well.

    The 1 thing that I always caution newbie DIY investors to try to avoid is “analysis paralysis”. But it’s bound to happen, and it’s normal. You want to have the “perfect” portfolio, but there really is no such thing. If you go under the hood of experienced DIY investors (such as yourself and those on the FB group), I’d bet that none of them will have the exact same portfolio even though they have read the same resources. One may use only Vanguards ETFs, another will use only IShares ETFs, while another may use a mixture. Even if you look at CCP’s model portfolios over the years, they have changed from year to year b/c of the introduction of newer ETFs

    Although it’s important to avoid the urge to tinker too much with your portfolio, sometimes it may make sense to change b/c of a better ETF that has come along. For me, I started off with VTI (US), VXUS (Int’l) and XIU (Can) back in 2011. However, Vanguard Canada came along with their ETFs, so I simply started buying VUN, VDU, VEE and VCN in my corporate account. Now that there are a bunch of 1 fund ETFs, it may make sense to purchase those instead of individual ETFs.

    It’s a balancing act to decide to tinker or not to tinker. I think it’s important not to stress out about these “minor details”, since you have already won the battle in the long-term by simply becoming a DIY investor with ETFs.

    1. Hey DN! I agree. The doctor perfectionist/scholar personality makes us especially prone to analysis paralysis.

      There is no perfect portfolio and honestly too many options. People could us a CCP portfolio or one of the ones on Canadian Portfolio Manager. Can’t go wrong really. I aim to put something out that is “good enough”. It will be a little more complex than a three fund portfolio to pay some attention to tax efficiency, but hopefully still straight forward and with explicit step by step instructions. People get frozen with the little things – like which box to tick on an account setup form. There is always time to tinker later as you progress. The main thing is to get started with something. Anything.

      We usually have very little money when we start out. So, adding later makes our initial moves almost trivial – other than the fact that they help us to overcome inertia and get started.
      -LD

  5. Hello LD, big fan of your blog btw,

    Maybe one thing I’d like to see addressed (although it would be more work on your part) would be two different portfolio designs in the CCPC one using “traditional” ETFs like those recommended on CCP and another portfolio which is more swap based using some of horizons ETFs like HXT, HXS, HXDM.

    I read somewhere else that you hold swap etfs as part of your portfolio but I find that international exposure with HXDM is really lacking. Would be interested to see how you structure this.

    1. Hey Drillnfill. Awesome handle!

      I will start with the traditional ETFs and possibly HBB. They will suffice for most people. In fact, the US and Canadian coverage in a CCPC is best with traditional ETFs unless you are over the active-passive SBD threshold already. My post on GRIP to flow money efficiently shows why for Canadian. The HBB bond ETF has some utility if you need to hold bonds in your corp as shown in my Legislator post. HXX could also work well for Europe coverage if in a highly taxed account. I use it for that, but you are right the more broad developed markets are better with the traditional ETFs. A mixed traditional/swap portfolio is definitely on my todo list and I actually have done much of the background work already.

      I just want to refocus on some real basics to make people comfortable getting started before venturing back into hard core tweaking. Most people just need a good traditional portfolio and I want to reach as many as possible to get them started without overwhelming them. Stay tuned – I will get to what you are asking about. There are actually some neat nuances.
      -LD

    2. Hi Drillnfill (Ouch, sounds painful!)

      Not wanting to stray too far from keeping things simple, but if you are nearing the $50k passive income limit, one option for international markets is a 2/3, 1/3 mix of HXDM and XEC. The market is covered and at least 2/3 of that doesn’t produce any passive income.

  6. Hello,

    I wanted to write a note of thanks for your time efforts on this blog. This is definitely the best resource for Canadian physicians on the internet.

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