Investment

Thesis

How we invest

This document presents the standing investment thesis of Planworks: the framework against which the firm constructs and maintains portfolios for the households it advises. It draws on six decades of academic research in financial economics and on the structural conditions of Canadian household balance sheets to which the framework is applied.



The premise is that a defensible investment philosophy must be readable. The literature on investor behavior (Kahneman and Tversky, 1979; Thaler, 1985; Barber and Odean, 2000) establishes that the largest controllable input to a household's realized return is not the allocation chosen but the discipline with which the allocation is maintained through periods of market stress. Discipline requires conviction, and conviction requires that the client understand, in writing and in advance, the principles to which the firm has committed.


Opacity in investment management is a structural barrier to client behavior, not an aesthetic preference of the legacy industry. The thesis is therefore published in full and revised under dated amendment.


The document is organized in three parts. Part I, The Planworks Thesis, sets out the conclusions drawn from the empirical literature and the commitments those conclusions impose on the firm. Part II, The Planworks Standard, specifies how those commitments are operationalized. Part III, Define Your Capacity. Engineer Your Allocation., presents the framework used to determine the appropriate allocation for an individual household, drawing on the life-cycle portfolio choice literature (Merton, 1969, 1971; Bodie, Merton, and Samuelson, 1992; Campbell and Viceira, 2002). An appendix provides the reference list and notes on supporting working papers maintained in the Planworks Research Vault.


Three claims structure the document. First, that the empirical record on long-horizon investment return has converged on a narrow set of conclusions, and competent portfolio construction at the household level requires the disciplined application of those conclusions and no more. Second, that the prevailing fee structure of Canadian wealth management is not justified by the cost of producing the work. Third, that the standard retail procedure for determining household allocation — psychometric tolerance assessment — is unsupported by the evidence and should be replaced with a capacity-based framework grounded in the household's observable balance sheet.

William Sharpe at the University of Washington, 1960s. The paper at the center of the argument here would later define how the world prices risk.

Part I.

The Planworks Thesis



Foundations

Modern portfolio theory begins with Markowitz (1952), who demonstrated that the variance of a portfolio depends on the covariances among its constituents and that diversification across imperfectly correlated assets reduces total risk while preserving expected return. Sharpe (1964), Lintner (1965), and Mossin (1966) extended the framework into the Capital Asset Pricing Model. Although the strict CAPM has been substantially modified by subsequent empirical work, its central insight — that compensation accrues to non-diversifiable risk and that idiosyncratic risk is unrewarded in equilibrium — remains foundational.

The efficient markets hypothesis (Fama, 1970) holds in its semi-strong form that publicly available information is rapidly incorporated into prices, such that the average active investor cannot reliably outperform a passive benchmark net of costs. Jensen (1968) found no evidence that the average active mutual fund manager produced returns above what factor exposures would predict, and subsequent reviews (Carhart, 1997; Fama and French, 2010) have confirmed the finding across markets and decades. Sharpe (1991) demonstrated that this is not an empirical accident but a mathematical necessity: in any defined market, the average active dollar must by construction earn the market return minus costs.

Factor exposures

A substantial literature documents that certain systematic exposures, beyond the broad market factor, have produced incremental returns over long horizons. Fama and French (1993) introduced the three-factor model, augmenting market beta with size and value factors. Carhart (1997) added momentum. Fama and French (2015) extended the model to five factors with the addition of profitability and investment. Asness, Moskowitz, and Pedersen (2013) documented value and momentum premia across asset classes globally; Ang (2014) provides a unified treatment for applied portfolio management. McLean and Pontiff (2016) document that some premia weaken following publication, and implementation costs erode portions of the theoretical premium. The conclusion drawn from the body of evidence is therefore narrow: modest, persistent, low-cost exposure to documented premia adds expected return over horizons relevant to retirement planning, and factor timing should not be attempted.


Cost

Cost is the largest controllable input to net-of-fee return. French (2008), in his presidential address to the American Finance Association, estimated that US investors collectively forfeited approximately 0.67% of assets per year between 1980 and 2006 in pursuit of active returns the average dollar could not by construction earn. Bogle (2007) presents the cost case at investor-facing length. The arithmetic is elementary: a household paying 1.5% per year over a thirty-year horizon, on a portfolio earning 7% nominal, surrenders approximately 35% of terminal wealth to fees relative to a 0.3% cost stack.

The persistence of 1.0%–1.5% AUM advisory fees in Canadian wealth management — on top of index funds available at sub-ten-basis-point cost — is, in the firm's view, a function of pricing power and information asymmetry rather than a reflection of the cost of work delivered.


Investor behavior


The behavioral finance literature, beginning with Kahneman and Tversky (1979) and developing through Thaler (1985) on mental accounting and Shefrin and Statman (1985) on the disposition effect, establishes that investor behavior systematically diverges from expected utility theory in ways that are costly to long-run wealth. Morningstar's annual Mind the Gap studies estimate that the average US fund investor earns 1.5%–2.0% per year less than the funds they invest in, attributable primarily to the timing of contributions and withdrawals; Barber and Odean (2000) document analogous effects at the brokerage level. A substantial portion of the value an advisor produces accrues in the moments when the client's instinct is to act against their long-run interest, and the advisor's task in those moments is to maintain the plan that was agreed in calmer conditions.


Taxes


Taxes are a first-order determinant of after-tax wealth at the household level, particularly in Canada where registered, non-registered, and corporate accounts are taxed under materially different regimes. The literature on tax-aware investing (Arnott and Jeffrey, 1993; Berkin and Ye, 2003; Bergstresser and Poterba, 2004; Sialm and Zhang, 2020) finds that location optimization, year-round tax-loss harvesting, and gain-realization sequencing add measurable basis points of after-tax return without introducing additional risk. These are operational disciplines, routinely under-applied in retail portfolios because the cost of applying them with rigor was historically substantial. With current planning infrastructure, the marginal cost is low.


The conclusions of the literature support broad diversification across global markets; passive implementation as the default, with active exposure restricted to documented factor premia implemented through transparent rules-based vehicles; cost discipline as a primary controllable; tax-aware implementation as a first-class input; and behavioral support for the household, anchored in a written plan agreed in advance.

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."


— Charlie Munger

Part II.

The Planworks Standard



The Planworks Standard specifies the operational discipline applied to every client portfolio. Each commitment is verifiable and documented in writing prior to engagement.

Cost. Total cost of ownership is targeted at a small fraction of legacy industry pricing, inclusive of the Planworks flat fee on a per-dollar-managed basis. Components — fund management expense ratios, advisory fee, transaction costs, foreign withholding leakage, currency conversion — are disclosed individually.

Diversification. Every portfolio holds globally diversified equity exposure across developed and emerging markets, with regional weights set by market capitalization. Currency exposure is engineered against household liability profile.

Factor tilts. Tilts toward documented premia (value, profitability, momentum, low volatility) are implemented through rules-based ETFs from issuers whose construction methodology is published. Magnitudes are sized to add expected return without producing tracking error sufficient to test client behavior.

Tax location. Optimized at the household level, modeled quarterly. Following the established literature (Bergstresser and Poterba, 2004; Sialm and Zhang, 2020), high-yield fixed income and US dividend equity are typically located in RRSPs, highest-expected-return assets in TFSAs, foreign equity with foreign tax credit recovery in non-registered accounts, and corporate accounts optimized for capital-dividend-account integration.

Tax-loss harvesting. Conducted year-round in eligible accounts. Each harvest pairs the realized loss with a substitute holding selected to preserve factor and risk exposures, in compliance with superficial loss rules.

Rebalancing. Threshold-based rather than calendar-based, triggered at approximately 20% relative deviation from target weight. Each candidate trade is scored for after-tax cost prior to execution.

Withdrawal sequencing. Modeled over the full decumulation horizon, accounting for OAS clawback thresholds, RRIF minimums, capital gains realization, marginal-bracket management, and corporate dividend strategy where applicable. Plans are rebuilt annually.

Custody. The firm does not custody client assets. Custody is held at a platform of the client's choosing.

Conflicts. The firm accepts no commissions, trailers, referral fees, or soft-dollar arrangements. The flat fee is the sole revenue source.

Capacity. The firm operates against a published advisor-to-client ratio. When the ratio is reached in a given service tier, the firm closes to new clients in that tier until additional licensed advisor capacity has been added.

Part III.

Capacity & Allocation



The case against tolerance polling

The standard retail procedure is to administer a brief psychometric instrument and derive an allocation from the resulting tolerance score. Roszkowski, Davey, and Grable (2005) review the risk-tolerance assessment literature and find that scores derived from such instruments display low test-retest reliability and substantial sensitivity to question framing, recent market performance, and ambient mood. A client's tolerance score after a 10% market decline differs systematically from the same client's score after a 10% advance. The score is, in substantial part, a measurement of recent emotional state.

Allocations constructed against an unstable input are themselves unstable. The literature on investor behavior (Kahneman and Tversky, 1979; Barber and Odean, 2000) suggests that allocations calibrated to recent emotional state will tend to amplify the very behavioral patterns that produce the gap between fund returns and investor-realized returns.

The capacity framework

The life-cycle portfolio choice literature (Samuelson, 1969; Merton, 1969, 1971; Bodie, Merton, and Samuelson, 1992; Campbell and Viceira, 2002) provides the theoretical foundation for an alternative procedure. Appropriate equity allocation is determined by the household's capacity to bear equity risk — a function of observable balance-sheet and human-capital variables — rather than by self-reported preferences.

Capacity is determined by five inputs.

Time horizon. The years until the capital is required for consumption. The literature on equity premia over multi-decade horizons (Dimson, Marsh, and Staunton, 2002; Siegel, 2014) supports substantially higher equity allocations at longer horizons than at shorter ones.

Required real return. The compounding rate at which the capital must grow to fund the household's stated consumption goals. This input is mathematical rather than psychological. A household whose stated goals require a 6% real return cannot fund those goals from a 30% equity allocation, irrespective of expressed preference.

Human capital. The present value, stability, and structure of the household's labor income. Bodie, Merton, and Samuelson (1992) demonstrate that a household with stable, bond-like labor income has greater capacity for portfolio equity exposure than a household whose labor income is itself equity-correlated.

Alternative liquidity. Access to non-portfolio sources of liquidity in the event of adverse shocks: private banking facilities, lines of credit secured against real estate, corporate cash reserves, family resources.

Tax structure. Registered, non-registered, and corporate account composition; capital-loss carryforwards; capital-dividend-account balances; flexibility in the sequencing of decumulation.

These inputs jointly determine a capacity surface — the range of equity allocations the household's situation can rationally support. The final allocation is engineered within that range.

Capacity and tolerance

The framework does not dismiss tolerance. Tolerance is properly used as a position-within-capacity adjustment and not as a determinant of the capacity range. A household whose capacity supports a 75% equity allocation but whose tolerance suggests 60% is allocated at 60%, with the gap documented and addressed through ongoing client education. A household whose tolerance suggests 90% but whose capacity supports 50% is allocated at 50%, with the binding constraint explained.

Every capacity assessment is documented for the client, specifying the values of the five inputs, the resulting capacity range, the position chosen on the basis of tolerance, and the rationale for any deviation. Assessments are reviewed annually and on the occurrence of material life events. The full mechanics of the capacity surface model are presented in a working paper maintained in the Planworks Research Vault.

APPENDIX

The firm does not select securities to beat the market, which few funds do consistently after fees. Value is added instead through cost, tax location, loss harvesting, and adherence to plan — the set of disciplines the literature calls advisor alpha, which compound by design rather than depend on being right.


  1. The $1 trillion over 20 years figure is a rounded estimate of lost future wealth, not a direct annual fee number. It comes from combining two related sources of avoidable wealth drag in Canadian wealth management:


    Advice-fee drag

    Morningstar estimated that Canadians hold about $1 trillion in commission-based advice share classes, with an implied advice cost of about 1.08% to 1.10% per year.

    Using a 7% gross return assumption, a 1.09% annual advice-cost drag on $1 trillion compounds into about $717 billion of lost future value over 20 years before adjusting for the cost of an alternative planner. After subtracting a flat-fee planning alternative, such as $5,000 per year per client, the net future-value loss is still roughly $500 billion to $665 billion, depending on average client size.


    Active-management underperformance

    Morningstar also reported that Canadians had about $1.9 trillion in active funds versus $467 billion in passive funds. If active-management underperformance creates even a 1% annual drag versus lower-cost passive alternatives, the 20-year future-value loss is about $1.26 trillion.


    So $1 trillion is used as a rounded, conservative national estimate. It is higher than the fee-drag-only estimate, but lower than the full modeled loss if a 1% active-management performance gap is applied to all Canadian active fund assets.


    The 20-year period is used because wealth-management costs compound. A 1% annual drag does not just cost 1% once. It reduces the portfolio every year and also reduces the future growth that would have been earned on that money. Over two decades, that compounding effect turns annual fees and underperformance into a much larger future wealth gap.


    In short, the $1 trillion estimate reflects the approximate long-term future wealth Canadian clients may fail to accumulate over 20 years because of higher advice costs and investment underperformance compared with lower-cost investing plus flat-fee planning.


  2. This page is dated and revised as the research and our methodology develops. When the analysis changes, the page is updated and the prior version is kept on record.

Investment

Thesis

How we invest

Continue reading

This document presents the standing investment thesis of Planworks: the framework against which the firm constructs and maintains portfolios for the households it advises. It draws on six decades of academic research in financial economics and on the structural conditions of Canadian household balance sheets to which the framework is applied.



The premise is that a defensible investment philosophy must be readable. The literature on investor behavior (Kahneman and Tversky, 1979; Thaler, 1985; Barber and Odean, 2000) establishes that the largest controllable input to a household's realized return is not the allocation chosen but the discipline with which the allocation is maintained through periods of market stress. Discipline requires conviction, and conviction requires that the client understand, in writing and in advance, the principles to which the firm has committed. Opacity in investment management is a structural barrier to client behavior, not an aesthetic preference of the legacy industry. The thesis is therefore published in full and revised under dated amendment.


The document is organized in three parts. Part I, The Planworks Thesis, sets out the conclusions drawn from the empirical literature and the commitments those conclusions impose on the firm. Part II, The Planworks Standard, specifies how those commitments are operationalized. Part III, Define Your Capacity. Engineer Your Allocation., presents the framework used to determine the appropriate allocation for an individual household, drawing on the life-cycle portfolio choice literature (Merton, 1969, 1971; Bodie, Merton, and Samuelson, 1992; Campbell and Viceira, 2002). An appendix provides the reference list and notes on supporting working papers maintained in the Planworks Research Vault.

Three claims structure the document. First, that the empirical record on long-horizon investment return has converged on a narrow set of conclusions, and competent portfolio construction at the household level requires the disciplined application of those conclusions and no more. Second, that the prevailing fee structure of Canadian wealth management is not justified by the cost of producing the work. Third, that the standard retail procedure for determining household allocation — psychometric tolerance assessment — is unsupported by the evidence and should be replaced with a capacity-based framework grounded in the household's observable balance sheet.

This document presents the standing investment thesis of Planworks: the framework against which the firm constructs and maintains portfolios for the households it advises. It draws on six decades of academic research in financial economics and on the structural conditions of Canadian household balance sheets to which the framework is applied.



The premise is that a defensible investment philosophy must be readable. The literature on investor behavior (Kahneman and Tversky, 1979; Thaler, 1985; Barber and Odean, 2000) establishes that the largest controllable input to a household's realized return is not the allocation chosen but the discipline with which the allocation is maintained through periods of market stress. Discipline requires conviction, and conviction requires that the client understand, in writing and in advance, the principles to which the firm has committed. Opacity in investment management is a structural barrier to client behavior, not an aesthetic preference of the legacy industry. The thesis is therefore published in full and revised under dated amendment.


The document is organized in three parts. Part I, The Planworks Thesis, sets out the conclusions drawn from the empirical literature and the commitments those conclusions impose on the firm. Part II, The Planworks Standard, specifies how those commitments are operationalized. Part III, Define Your Capacity. Engineer Your Allocation., presents the framework used to determine the appropriate allocation for an individual household, drawing on the life-cycle portfolio choice literature (Merton, 1969, 1971; Bodie, Merton, and Samuelson, 1992; Campbell and Viceira, 2002). An appendix provides the reference list and notes on supporting working papers maintained in the Planworks Research Vault.

Three claims structure the document. First, that the empirical record on long-horizon investment return has converged on a narrow set of conclusions, and competent portfolio construction at the household level requires the disciplined application of those conclusions and no more. Second, that the prevailing fee structure of Canadian wealth management is not justified by the cost of producing the work. Third, that the standard retail procedure for determining household allocation — psychometric tolerance assessment — is unsupported by the evidence and should be replaced with a capacity-based framework grounded in the household's observable balance sheet.

William Sharpe at the University of Washington, 1960s. The paper at the center of the argument here would later define how the world prices risk.

Part I.

The Planworks Thesis

Foundations

Modern portfolio theory begins with Markowitz (1952), who demonstrated that the variance of a portfolio depends on the covariances among its constituents and that diversification across imperfectly correlated assets reduces total risk while preserving expected return. Sharpe (1964), Lintner (1965), and Mossin (1966) extended the framework into the Capital Asset Pricing Model. Although the strict CAPM has been substantially modified by subsequent empirical work, its central insight — that compensation accrues to non-diversifiable risk and that idiosyncratic risk is unrewarded in equilibrium — remains foundational.

The efficient markets hypothesis (Fama, 1970) holds in its semi-strong form that publicly available information is rapidly incorporated into prices, such that the average active investor cannot reliably outperform a passive benchmark net of costs. Jensen (1968) found no evidence that the average active mutual fund manager produced returns above what factor exposures would predict, and subsequent reviews (Carhart, 1997; Fama and French, 2010) have confirmed the finding across markets and decades. Sharpe (1991) demonstrated that this is not an empirical accident but a mathematical necessity: in any defined market, the average active dollar must by construction earn the market return minus costs.

Factor exposures

A substantial literature documents that certain systematic exposures, beyond the broad market factor, have produced incremental returns over long horizons. Fama and French (1993) introduced the three-factor model, augmenting market beta with size and value factors. Carhart (1997) added momentum. Fama and French (2015) extended the model to five factors with the addition of profitability and investment. Asness, Moskowitz, and Pedersen (2013) documented value and momentum premia across asset classes globally; Ang (2014) provides a unified treatment for applied portfolio management. McLean and Pontiff (2016) document that some premia weaken following publication, and implementation costs erode portions of the theoretical premium. The conclusion drawn from the body of evidence is therefore narrow: modest, persistent, low-cost exposure to documented premia adds expected return over horizons relevant to retirement planning, and factor timing should not be attempted.

Cost

Cost is the largest controllable input to net-of-fee return. French (2008), in his presidential address to the American Finance Association, estimated that US investors collectively forfeited approximately 0.67% of assets per year between 1980 and 2006 in pursuit of active returns the average dollar could not by construction earn. Bogle (2007) presents the cost case at investor-facing length. The arithmetic is elementary: a household paying 1.5% per year over a thirty-year horizon, on a portfolio earning 7% nominal, surrenders approximately 35% of terminal wealth to fees relative to a 0.3% cost stack. The persistence of 1.0%–1.5% AUM advisory fees in Canadian wealth management — on top of index funds available at sub-ten-basis-point cost — is, in the firm's view, a function of pricing power and information asymmetry rather than a reflection of the cost of work delivered.

Investor behavior

The behavioral finance literature, beginning with Kahneman and Tversky (1979) and developing through Thaler (1985) on mental accounting and Shefrin and Statman (1985) on the disposition effect, establishes that investor behavior systematically diverges from expected utility theory in ways that are costly to long-run wealth. Morningstar's annual Mind the Gap studies estimate that the average US fund investor earns 1.5%–2.0% per year less than the funds they invest in, attributable primarily to the timing of contributions and withdrawals; Barber and Odean (2000) document analogous effects at the brokerage level. A substantial portion of the value an advisor produces accrues in the moments when the client's instinct is to act against their long-run interest, and the advisor's task in those moments is to maintain the plan that was agreed in calmer conditions.

Taxes

Taxes are a first-order determinant of after-tax wealth at the household level, particularly in Canada where registered, non-registered, and corporate accounts are taxed under materially different regimes. The literature on tax-aware investing (Arnott and Jeffrey, 1993; Berkin and Ye, 2003; Bergstresser and Poterba, 2004; Sialm and Zhang, 2020) finds that location optimization, year-round tax-loss harvesting, and gain-realization sequencing add measurable basis points of after-tax return without introducing additional risk. These are operational disciplines, routinely under-applied in retail portfolios because the cost of applying them with rigor was historically substantial. With current planning infrastructure, the marginal cost is low.

The conclusions of the literature support broad diversification across global markets; passive implementation as the default, with active exposure restricted to documented factor premia implemented through transparent rules-based vehicles; cost discipline as a primary controllable; tax-aware implementation as a first-class input; and behavioral support for the household, anchored in a written plan agreed in advance.

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."


— Charlie Munger

Part II.

The Planworks Standard

The Planworks Standard specifies the operational discipline applied to every client portfolio. Each commitment is verifiable and documented in writing prior to engagement.

Cost. Total cost of ownership is targeted at a small fraction of legacy industry pricing, inclusive of the Planworks flat fee on a per-dollar-managed basis. Components — fund management expense ratios, advisory fee, transaction costs, foreign withholding leakage, currency conversion — are disclosed individually.

Diversification. Every portfolio holds globally diversified equity exposure across developed and emerging markets, with regional weights set by market capitalization. Currency exposure is engineered against household liability profile.

Factor tilts. Tilts toward documented premia (value, profitability, momentum, low volatility) are implemented through rules-based ETFs from issuers whose construction methodology is published. Magnitudes are sized to add expected return without producing tracking error sufficient to test client behavior.

Tax location. Optimized at the household level, modeled quarterly. Following the established literature (Bergstresser and Poterba, 2004; Sialm and Zhang, 2020), high-yield fixed income and US dividend equity are typically located in RRSPs, highest-expected-return assets in TFSAs, foreign equity with foreign tax credit recovery in non-registered accounts, and corporate accounts optimized for capital-dividend-account integration.

Tax-loss harvesting. Conducted year-round in eligible accounts. Each harvest pairs the realized loss with a substitute holding selected to preserve factor and risk exposures, in compliance with superficial loss rules.

Rebalancing. Threshold-based rather than calendar-based, triggered at approximately 20% relative deviation from target weight. Each candidate trade is scored for after-tax cost prior to execution.

Withdrawal sequencing. Modeled over the full decumulation horizon, accounting for OAS clawback thresholds, RRIF minimums, capital gains realization, marginal-bracket management, and corporate dividend strategy where applicable. Plans are rebuilt annually.

Custody. The firm does not custody client assets. Custody is held at a platform of the client's choosing.

Conflicts. The firm accepts no commissions, trailers, referral fees, or soft-dollar arrangements. The flat fee is the sole revenue source.

Capacity. The firm operates against a published advisor-to-client ratio. When the ratio is reached in a given service tier, the firm closes to new clients in that tier until additional licensed advisor capacity has been added.

Part III

Capacity & Allocation

The case against tolerance polling

The standard retail procedure is to administer a brief psychometric instrument and derive an allocation from the resulting tolerance score. Roszkowski, Davey, and Grable (2005) review the risk-tolerance assessment literature and find that scores derived from such instruments display low test-retest reliability and substantial sensitivity to question framing, recent market performance, and ambient mood. A client's tolerance score after a 10% market decline differs systematically from the same client's score after a 10% advance. The score is, in substantial part, a measurement of recent emotional state.

Allocations constructed against an unstable input are themselves unstable. The literature on investor behavior (Kahneman and Tversky, 1979; Barber and Odean, 2000) suggests that allocations calibrated to recent emotional state will tend to amplify the very behavioral patterns that produce the gap between fund returns and investor-realized returns.

The capacity framework

The life-cycle portfolio choice literature (Samuelson, 1969; Merton, 1969, 1971; Bodie, Merton, and Samuelson, 1992; Campbell and Viceira, 2002) provides the theoretical foundation for an alternative procedure. Appropriate equity allocation is determined by the household's capacity to bear equity risk — a function of observable balance-sheet and human-capital variables — rather than by self-reported preferences.

Capacity is determined by five inputs.

Time horizon. The years until the capital is required for consumption. The literature on equity premia over multi-decade horizons (Dimson, Marsh, and Staunton, 2002; Siegel, 2014) supports substantially higher equity allocations at longer horizons than at shorter ones.

Required real return. The compounding rate at which the capital must grow to fund the household's stated consumption goals. This input is mathematical rather than psychological. A household whose stated goals require a 6% real return cannot fund those goals from a 30% equity allocation, irrespective of expressed preference.

Human capital. The present value, stability, and structure of the household's labor income. Bodie, Merton, and Samuelson (1992) demonstrate that a household with stable, bond-like labor income has greater capacity for portfolio equity exposure than a household whose labor income is itself equity-correlated.

Alternative liquidity. Access to non-portfolio sources of liquidity in the event of adverse shocks: private banking facilities, lines of credit secured against real estate, corporate cash reserves, family resources.

Tax structure. Registered, non-registered, and corporate account composition; capital-loss carryforwards; capital-dividend-account balances; flexibility in the sequencing of decumulation.

These inputs jointly determine a capacity surface — the range of equity allocations the household's situation can rationally support. The final allocation is engineered within that range.

Capacity and tolerance

The framework does not dismiss tolerance. Tolerance is properly used as a position-within-capacity adjustment and not as a determinant of the capacity range. A household whose capacity supports a 75% equity allocation but whose tolerance suggests 60% is allocated at 60%, with the gap documented and addressed through ongoing client education. A household whose tolerance suggests 90% but whose capacity supports 50% is allocated at 50%, with the binding constraint explained.

Every capacity assessment is documented for the client, specifying the values of the five inputs, the resulting capacity range, the position chosen on the basis of tolerance, and the rationale for any deviation. Assessments are reviewed annually and on the occurrence of material life events. The full mechanics of the capacity surface model are presented in a working paper maintained in the Planworks Research Vault.

APPENDIX

The firm does not select securities to beat the market, which few funds do consistently after fees. Value is added instead through cost, tax location, loss harvesting, and adherence to plan — the set of disciplines the literature calls advisor alpha, which compound by design rather than depend on being right.


  1. The $1 trillion over 20 years figure is a rounded estimate of lost future wealth, not a direct annual fee number. It comes from combining two related sources of avoidable wealth drag in Canadian wealth management:


    Advice-fee drag

    Morningstar estimated that Canadians hold about $1 trillion in commission-based advice share classes, with an implied advice cost of about 1.08% to 1.10% per year.

    Using a 7% gross return assumption, a 1.09% annual advice-cost drag on $1 trillion compounds into about $717 billion of lost future value over 20 years before adjusting for the cost of an alternative planner. After subtracting a flat-fee planning alternative, such as $5,000 per year per client, the net future-value loss is still roughly $500 billion to $665 billion, depending on average client size.


    Active-management underperformance

    Morningstar also reported that Canadians had about $1.9 trillion in active funds versus $467 billion in passive funds. If active-management underperformance creates even a 1% annual drag versus lower-cost passive alternatives, the 20-year future-value loss is about $1.26 trillion.


    So $1 trillion is used as a rounded, conservative national estimate. It is higher than the fee-drag-only estimate, but lower than the full modeled loss if a 1% active-management performance gap is applied to all Canadian active fund assets.


    The 20-year period is used because wealth-management costs compound. A 1% annual drag does not just cost 1% once. It reduces the portfolio every year and also reduces the future growth that would have been earned on that money. Over two decades, that compounding effect turns annual fees and underperformance into a much larger future wealth gap.


    In short, the $1 trillion estimate reflects the approximate long-term future wealth Canadian clients may fail to accumulate over 20 years because of higher advice costs and investment underperformance compared with lower-cost investing plus flat-fee planning.


  2. This page is dated and revised as the research and our methodology develops. When the analysis changes, the page is updated and the prior version is kept on record.