Sammy Sellmore leans back in his business‐class seat. With just an hour before landing in Kuala Lumpur, it's time to get to work. He calls over a flight attendant, orders a glass of champagne, and opens his laptop to scroll through his client files.

The Canadian financial advisor meets overseas clients a few times each year. To be good at what he does—really good—he needs to maintain relationships. His job, after all, is more about managing people than it is about managing money. It's much the same for every successful salesperson. In Sammy's case, he needs to remember his clients' names, their kids' names, and what subjects each of them favors in school.

He'll take the wealthier clients out for dinner, and make notes to remember birthday and Christmas cards. If he becomes a dear friend of the family, he'll never get fired. Sammy's a persona representing leagues of advisors whose clients are expats.

So is Sammy friend or foe? There's one acid test: Is he selling actively managed Canadian mutual funds? If so, cost‐conscious investors would have to let him go.

Canadian Funds Earn an “F” for Costs

Fund rating company Morningstar publishes an annual “Global Fund Investor Experience” report. Each year that it has been doing so, actively managed Canadian funds earn an F grade on costs. According to Morningstar, “Canada is hampered by having the world's highest total expense ratios.”¹

In the Globe and Mail, I wrote a 2014 article comparing 10‐year returns for the Royal Bank of Canada's (RBC) actively managed mutual funds versus indexes in equal asset classes.² Where RBC had multiple funds representing the same broad asset class, I averaged the returns of those funds and compared them with an equivalent stock market index.

RBC's results weren't pretty. A media‐relations gentleman from a competing firm, Fidelity Canada, congratulated me: “Great job on that RBC mutual fund article. Most of our funds have beaten indexes. But it's great to see you calling out the poorly performing fund companies.”

Before receiving his e‐mail, I hadn't thought about comparing Fidelity's funds to indexes. After some research, I wrote an article about Fidelity.³ As with RBC, their performances were poor. Shortly after it was published, the Fidelity gentleman e‐mailed back, stating that most of the poorly performing fund managers had been fired the previous year. Hampered by high fees, their new managers will likely fare no better.

A few weeks later, a media‐relations woman from Manulife Financial e‐mailed. “If you choose to write an article about our funds,” she asked, “please use our lower‐cost products.” Some firms offer two classes of funds: expensive and ridiculously expensive. To be honest, I hadn't thought about writing an article exposing Manulife's funds either. But it was fun doing so. Like RBC and Fidelity, their results lagged the market—and I did use the lowest‐cost products Manulife had!⁴

Enjoying the shake‐up, I then wrote about funds from Canadian Imperial Bank of Commerce (CIBC),⁵ Toronto‐Dominion Bank,⁶ and IA Clarington.⁷ The company I chose made little difference. In aggregate, portfolios of funds with 10‐year track records were walloped by the indexes.

What's worse, many advisors flog funds with back‐end loads. In such cases, if you own a fund for fewer than six or seven years and you sell it, you get slapped with a penalty. Who pockets proceeds from the fine? Your friendly, jet‐setting financial advisor.

In 2016, I joined a Facebook page for owners of a condominium complex in Victoria, British Columbia. I posted the following message:

I'm looking for four people who will each walk into a different Canadian bank. I'll pay you each $50. I would like you to book an appointment with a financial advisor and ask him or her if they could build you a portfolio of index funds.

Four young residents of Victoria jumped at the offer. Armed with recording devices, they visited the Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), Toronto Dominion Bank (TD), and the Bank of Montreal (BMO).

None of the advisors wanted to build a low‐cost portfolio with the bank's index funds. They offered actively managed funds instead. On average, the funds that they offered cost 2.2 percent per year—more than double the cost of the bank's index funds. The advisors' lack of knowledge and disclosure shocked Tim Godfrey.

Tim was my first keen reporter. He's also an economics and finance graduate of Dalhousie University. A few years previous, he had worked at the Australian Treasury. “I was advising the government on the regulation of financial advice,” he said. “We were determining how investment fees should be disclosed to clients.”

When I wrote about this story for The Globe and Mail, I joked that I had recruited Sidney Crosby for a beer league game. “The advisor said that index funds are riskier than actively managed funds,” said Tim. “That surprised me. After all, risk has nothing to do with whether a fund is active or passive [indexed]. Portfolio allocation is what determines risk.”

Tim is right. Take two portfolios. One is comprised of actively managed funds. It's split four ways between Canadian government bonds, Canadian stocks, US stocks, and international stocks. In other words, 25 percent of the portfolio is invested in Canadian government bonds and 75 percent is invested in global stocks.

Compare that to a portfolio of index funds. If it contains 40 percent in Canadian government bonds, with the remaining 60 percent invested in global stocks, such a portfolio would have a far lower risk profile than an actively managed portfolio with 25 percent in bonds.

Deborah Bricks was my second young reporter. The 36‐year‐old events planner chose the Royal Bank of Canada (RBC). “I asked if she [the advisor] could build me a portfolio of index funds,” Deborah says. “But she dismissed that idea pretty quickly.”

Deborah already owned RBC's Select Balanced fund in her RRSP portfolio. It's an actively managed fund that charges 1.94 percent per year. The advisor suggested that she keep it.

“An index fund just holds a single market,” said the advisor. “If you did buy an index fund, you would have to figure out which one to buy. Do you want a US index fund or a Canadian one? RBC's Select Balanced fund is more diversified. It's better because it's actively managed.”

The advisor that Deborah spoke to didn't have a clue. She didn't seem to understand that she could build a diversified portfolio with the bank's index funds.

My third reporter, Marina McKercher, is a 30‐year‐old dental hygienist. She chose to report on her experience at the Canadian Imperial Bank of Commerce (CIBC). A great saver, she had $20,000 sitting in cash, ready to invest. The advisor immediately showed her CIBC's Balanced Portfolio fund and CIBC's Managed Income Portfolio fund. “He had data sheets on each of these two funds already printed out,” she says. The management expense ratios for the funds were 2.25 percent and 1.8 percent per year, respectively.

The bank's index funds charged expense ratio fees that were less than half those amounts. Marina asked about the bank's index funds instead. “The higher‐fee balanced funds are worth the extra costs,” said the advisor, “because the money is managed. The index funds would just sit there, not doing much of anything.”

Dan Bortolotti, an associate portfolio manager with PWL Capital says, “I'm not surprised many advisors have no clue about how to properly build a portfolio of index funds or ETFs. The way advisors are educated and trained presumes that their job is to beat the market by analyzing stocks and picking winning funds. The idea that an advisor might add value in other ways is foreign to them.”

Such Canadian‐based advisors, however, are Boy Scouts and Girl Guides compared to those selling offshore pensions from firms like Friends Provident, Zurich International, Generali, and Old Mutual. Owning Canadian actively managed funds is like suffering from a constant cold. Most offshore pensions are like malaria.

Brokerage Options for Expatriate Canadians

Building a portfolio of exchange‐traded funds (ETFs) requires a brokerage. Some Canadians, such as Scott Rousseu, have opened nonresident accounts with Toronto‐based TD Waterhouse.⁸ Investors can open such accounts only in person, and they must provide proof they reside overseas.

The 47‐year‐old, originally from Vancouver, British Columbia, did so in 2000, two years after leaving Canada. He currently teaches English at a university in the United Arab Emirates.

As a Middle East resident, he doesn't pay capital gains taxes on his TD Waterhouse investment profits. His dividends are taxed at a flat 15 percent.

Scott is comfortable investing in a nonresident Toronto‐based account. Many Canadian accountants suggest doing so won't jeopardize nonresidency status. In 2009, Canadian accountant Arun (Ernie) Nagratha spoke to a group of Hong Kong–based Canadians to alleviate such fears. The seminar, supported by the Canadian Expat Association, can be found on YouTube at the following link: http://goo.gl/JkpR4r.⁹

Brokerages for Canadians in Capital Gains–Free Jurisdictions

Some expatriates fear Canada may change its tax laws, either closing or taxing nonresident investment accounts based in Canada. Such investors prefer keeping their assets offshore. Luxembourg, Singapore, and Hong Kong attract plenty of expatriate clients, based on their low‐cost tax structure. Foreign‐based brokerages (see Chapter 9) tend to cost more than they do in Canada. But for some, it's a small price to pay for a sound night's sleep. Keep in mind, however, that Canadians residing in Europe won't be able to buy Canadian domiciled ETFs from a European-based brokerage. EU regulations, as of 2018, are blocking such purchases. That's why Canadians residing in Europe might consider using the firm, Interactive Brokers.

Building a Canadian Couch Potato Portfolio

Canadian expats without a family vendetta should avoid US‐traded stocks and ETFs. US‐domiciled holdings exceeding $60,000 incur the wrath of US estate taxes when the account holder floats to his or her ultimate reward. So if you don't want to stiff your heirs with a US tax bill, avoid US‐domiciled products.¹⁰

That doesn't mean you can't build a fully diversified Couch Potato portfolio of ETFs, including US stock market exposure. If you choose ETFs domiciled in Canada, Uncle Sam's grim reaper doesn't knock for money.

My sample portfolios comprise low‐cost ETFs that aren't hedged to the Canadian dollar. Hedging (which I discussed in Chapter 10) reduces returns over time.

Allocating percentages for these ETFs has much to do with your age, your risk tolerance, and where you plan to retire. You might notice that I've provided two different bond market index funds for each model portfolio. Shorter‐term bond market index funds don't perform as well as broad bond market index funds. But they provide a bit more stability. As an investor, the choice is yours. Just don't sweat over it. Choosing a short‐term bond index over a broader bond market index won't make or break your retirement. If you don't know what to pick, simply flip a coin.

Forty‐three‐year‐old Ian Page and his 44‐year‐old wife, Bridget, have taught at Singapore American School since 2002. They also taught in Cairo and Switzerland after leaving Canada in 1997. They plan to retire in Canada, but won't be eligible for public school teacher pensions. Nor will they receive much from the Canadian Pension Plan (CPP) after a career overseas.¹¹

Without pensionable income, Ian and Bridget can't afford to take large financial risks. As a result, they've selected a balanced portfolio of stock and bond market index funds. Table 12.1 shows sample portfolios for investors with different tolerances for risk.

Because Ian and Bridget hope to repatriate one day, they're keeping more than half of their money in Canadian dollars: 40 percent Canadian bonds, 20 percent Canadian stocks. It makes sense, considering they'll pay most of their future bills in loonies. The remainder is split between US and international stocks.

Mark Holmes, 48, and his wife Christina, 45, might choose a slightly different allocation. Teachers at the Shanghai United International School, they'll eventually receive a couple of partial pensions. When Mark turns 60, he'll receive income from British Airways, where he once worked as an aircraft technician. He'll also receive income from the UK's National Insurance. Unlike Ian and Bridget, Mark and Christina are unsure of where they want to retire. “Malaysia looks very attractive,” says Mark, “but we also like Vancouver Island.”

Mark's partial pensions represent future guaranteed income—“if we can believe the providers' promises,” says Mark. The pension is much like a bond, so Mark and Christina can take slightly higher risks. Instead of matching their bond allocation with their average age (48 and 45), they could settle for 30 percent bonds and 70 percent stocks, increasing their bond allocation slightly over time. They might also consider a lower allocation to Canadian stocks if they start leaning more toward retiring in Malaysia.¹²

Table 12.2 shows how their portfolio might look.

There's no magic formula to the allocations themselves. Mark and Christina may choose to have slightly more in global stocks and slightly less in Canadian equities. They could choose iShares, Vanguard, or BMO ETFs. It's no big deal. They just need to remember to be fully diversified.

Whatever allocation you choose, stick with it and rebalance as necessary. At times, global stocks will outperform Canadian stocks. It might happen for a few years in a row. Just follow the game plan, rebalancing your portfolio back to the original allocation once a year, or purchasing (with your monthly or quarterly savings) the underperforming index. Doing so will allow you to maintain a balanced portfolio, and in Warren Buffett–speak, you'll always be acting a bit fearfully when others are greedy, and somewhat greedily when others are fearful.

ETF Canadian Price War

Canadian ETF providers are still trying to undercut one another's costs. While a great thing for investors, it presents certain risks. Those jumping from one ETF to another when a cheaper one gets launched risk paying plenty of money in commissions. What's more, gambling bones get tickled, blood pressures rise, and investors find themselves trading more. That's what the industry wants.

For years, iShares Canada was the country's dominant ETF provider. But when Vanguard started offering ETFs on the Canadian market in late 2011, iShares began losing a tremendous amount of market share. Like Schwab in the United States, iShares initiated a price war with Vanguard.

That's a great thing for investors.

What About RRSPs and TFSAs?

Expatriate Canadians aren't eligible to invest in registered retirement savings plans (RRSPs) or tax‐free savings accounts (TFSAs) while living offshore. Such tax‐deferred accounts encourage residents to invest. Expats can keep such accounts if they purchased them before leaving the country, but they can't contribute new money to them. In some cases, they may choose to sell their RRSPs, which is what I did with my portfolio in 2004.

When I had my RRSP, I was living in Canada and paying roughly 40 percent marginal income tax. If I had decided to moonlight as a cashier at 7‐Eleven (for additional income), I would have paid 40 cents in tax for every dollar earned.

Because of my tax rate, I earned a 40 percent rebate from the federal government on contributions to my RRSP. The money could have compounded, tax free, until I was willing to withdraw it at retirement.

But I sold the investments in 2004. At the time, I was living in Singapore. I paid a 25 percent withholding tax to do so. I had earned a 40 percent cash rebate for adding the money in the first place, and paid just 25 percent tax to sell. If you're an expatriate Canadian with an RRSP, you might consider doing the same.

Swap‐Based ETFs—The Ultimate Legal Tax Dodge

There is a third type of ETF that Canadians could use, providing the ultimate legal tax dodge. As mentioned, expatriate Canadians can avoid capital gains taxes. But there's also a way to dodge dividend taxes.

Horizons Canada offers three swap‐based ETFs on the Canadian market. Its Horizons S&P/TSX 60 index ETF costs just 0.03 percent. It tracks Canada's 60 biggest stocks. Horizons S&P 500 index ETF tracks the US market. It costs 0.12 percent. And Horizons' Canadian Select Bond Universe ETF costs 0.17 percent. Most indexes physically hold stocks or bonds within them, but not these. Instead, they're like contracts backed by the National Bank of Canada, promising investors the full return of a given index as if all dividends or interest were reinvested. Because investors don't actually own the index's holdings directly, they aren't charged dividend taxes on the stock indexes or income taxes on the bond index.

Finance writer and money manager Dan Bortolotti does a great job describing how swap‐based ETFs work in his Canadian Couch Potato blog post, “More Swap‐Based ETFs on the Horizon.”¹³ They're popular in Canada, having amassed more than a billion dollars in assets, because capital gains are taxed at a lower rate than dividends.

Canadian‐based investors in these products pay capital gains taxes only. In expatriate accounts, however, benefits multiply. Those not liable for capital gains taxes can legally avoid capital gains and dividend withholding taxes, as well as tax on the bond interest.

I own two of these ETFs in my personal portfolio.

But there's a higher degree of counterparty risk. If Canada's National Bank gets into trouble, there's always a chance it could default on its promise.

Horizons doesn't offer a swap‐based international stock market index. That's why, in Table 12.4, you'll see that my model portfolios include two international Vanguard indexes to provide the portfolios with full global diversification. Vanguard's FTSE Developed All‐Cap Index ETF includes developed world stocks outside the United States. For emerging‐market exposure, I included Vanguard's FTSE Emerging Markets All‐Cap ETF.

I've said this before, but it's worth repeating. There's no magic formula to these portfolio allocations. Don't sweat about your selection of ETFs. It won't make or break your retirement. Just ensure that your portfolio is diversified. Rebalance once a year (if needed). The biggest enemy is the one you face in the mirror each morning. Don't adjust your portfolio based on speculation. Sadly, most people reading this will do exactly that. Financial speculation is an inherent human weakness.

Don't become a victim of your own greed and fear. Stick to the game plan. Over an investment lifetime, such a strategy will earn a lot more money. Your money will also buy time so you can enjoy the more important things in life.