A 60-year-old woman living in Ontario is newly divorced after 30 years of marriage. Following this significant change, the woman must now work toward getting her life in financial order. She would like to ensure that her retirement is well funded, with enough money to travel and spoil her future grandchildren. She would also like to try to leave her children an estate.

Prior to the divorce, the woman worked in the family business. She is eligible for full Canada Pension Plan benefits at age 65, but has no medical or dental insurance. She took assets instead of alimony in the divorce settlement and has limited financial knowledge. She is also conservative by nature.

She currently has $800,000 in non-registered assets and $300,000 in RRSPs. She is also the capital beneficiary, along with her brother, of a testamentary trust worth $1 million set up by her grandmother. (Her mother, who is 89 and in failing health, is the income beneficiary.)

The client’s income requirement is $60,000 after taxes in today’s dollars, which includes $10,000 for travel. At age 76, her income requirement drops to $50,000 and will stay at that level until she reaches 95 years of age.

The woman is considering buying a condominium for $300,000-$400,000; she is currently paying $2,000 a month to rent an apartment.

The client has two daughters, aged 28 and 25. The older daughter is self-sufficient; the younger one is “finding her way” and is somewhat dependent. The client would like to be an “indulgent” grandmother when her daughters have children.

If possible, the woman would also like to leave a $1-million estate in today’s dollars for her children.

Youngberg thinks the client’s goals are achievable only if she inherits her $500,000 share of her grandmother’s estate in the next year. In his view, if her mother survives for a longer period, things could be a bit tight. Should the inheritance not materialize in the next year, the easiest solution would be for the client to take a part-time job that brings in about $20,000 a year for four years. That would allow her to meet her income goals and still leave financial assets of a little more than $1 million in today’s dollars at age 95.

A term annuity to cover the additional $10,000 she needs for the first 15 years is worth considering. This strategy would provide income certainty, but Youngberg says he would need to determine the cost and look at the implications for the portfolio before discussing it with the client.

Youngberg also suggests that the client consider medical and long-term care insurance, but notes that the latter is expensive and she may have to make some choices in terms of income or estate goals if she decides to take out a policy. A $200,000 life policy should also be discussed. It would be a good way to make sure the $1-million estate goal is realized. Premiums on a $200,000 policy wouldn’t be too high.

Duquette doesn’t think any of this will be necessary. His projections suggest she will have $2.8 million in 2042 dollars — which is “bang on” $1 million in today’s dollars — even if her mother lives another 15 years. This assumes the inheritance will increase with inflation.

Youngberg and Duquette both assume the condo will be purchased soon, reducing the client’s income requirements by the $2,000 she’s been paying monthly in rent. Condo fees are expected to be minimal, in the range of $300-$500 a month, and she wouldn’t require additional income to pay them.

In devising a strategy for the client, both advisors are assuming a 7% nominal return after fees, but Youngberg uses 2.5% inflation, which translates into a 4.5% real return, while Duquette uses 3% inflation for a real return of 4%.

Both advisors also suggest a discretionary managed account because of the client’s limited financial knowledge and conservative nature. Youngberg adds that discretionary management is particularly appropriate, given the time she needs to devote to personal matters such as adjusting psychologically to her divorce.

Fees would be 1.5%-2% at HSBC and 1.1%-1.35% at UBS.

Asset mix recommendations are considerably different. Duquette suggests a balanced portfolio with 55% in equities and 45% in fixed-income. Youngberg’s proposed portfolio would have only 12% in equities, with 68% in fixed-income, 5% in cash and 15% in alternative investments (placed in UBS’s Global Alpha Fund to reduce risk and targeting a return of 6% plus inflation.)

@page_break@Duquette also uses an alternative product, but as part of the fixed-income portion of the portfolio rather than as a separate asset class. He would use a bond-replacement alternative strategy that can have leverage of up to 50% and has the potential for enhancing returns. As well, its volatility is one-third that of a 10-year Government of Canada bond. The product would have a 10% weighting in the overall portfolio.

Duquette would put 25% of the portfolio’s total assets into an actively managed bond fund and a high-yield fund. (The latter would include income trusts, which he counts as part of the equities portion of the portfolio.)

Duquette’s view of income trusts has not changed with the announcement last fall of changes in how they will be taxed. “There are still good ones out there,” he says. Nevertheless, he would have exposure only through the high-yield fund and he suspects that the portion will decline now that the tax rules are being changed.

He would reduce costs in the fixed-income portion of the portfolio by creating a bond ladder with 10% of total assets. The ladder would be no more than 10 years and usually five years or less.

Foreign equities would be 25% of Duquette’s suggested portfolio, with U.S. equities comprising 11% of that. The foreign equities will reduce risk and should increase returns over time, he says. Emerging markets exposure would be through Canadian companies and possibly through investments made by the global managers. He doesn’t want too much currency exposure, as the client is living in Canada, so he suggests a little more of the equities in Canadian investments. As such, Canadian equities would comprise 30% of the overall portfolio.

All the equities would be in a wrap account with a value tilt, which Duquette believes would enhance returns over time. Canadian equities would have a lot of resources and financial services, with the U.S. and international equities providing the broader sector diversification.

Of Youngberg’s 12% in equities, 3% would be Canadian and 9% would be foreign; 5%-6% of the latter would be in U.S. equities, with no more than 1% in emerging markets.

It is also worth noting that his suggested portfolio has a good deal of foreign exposure through the 15% of total assets that would be in the alternative fund. He notes, however, that if his assumption of early inheritance does not happen, the portfolio would probably have to be more aggressive, with 25% equities.

All the equities would be in UBS pools. UBS takes a macro approach, making geographical and sector calls, then picking individual stocks. The investment style is based on “intrinsic value,” which the firm calculates by taking all future cash flows and discounting them at an appropriate rate. But the firm doesn’t wait until stocks are deeply discounted; it will buy whenever a stock is significantly below that level and sell whenever it is above. As a result, UBS invests in growth as well as value companies.

Youngberg might also consider income trusts, given the drop in their prices following the tax change announcement.

For the fixed-income portion of his proposed portfolio, Youngberg would build a ladder of two to five years of investment-grade bonds. The ladder could go longer if market conditions warranted it, but wouldn’t be longer than 10 years.

There could be changes in the client’s portfolio as a result of changes in its investments, but Duquette would not suggest changing the portfolio as the client ages. Rather, if she wants to leave an estate, the time horizon should also encompass the life expectancy of the heirs.

Youngberg agrees but says that, given the time horizon for client’s children, it may be appropriate to be a little more aggressive when the client is older and her income requirements decline. IE