As a wealth advisor, you play a pivotal role in guiding your clients. You are constantly evaluating opportunities to enhance after-tax returns and build lasting legacies. When a sophisticated strategy like an Immediate Financing Arrangement (IFA) comes up, your clients look to you to understand how—or if—it fits within their overall wealth plan.
However, many IFA presentations oversimplify or omit the details of the investments made with the borrowed funds, creating a significant risk for both your clients and their advisory teams. These presentations might suggest you can simply “invest in the same things as before”, which not always true.
This guide provides a transparent look at the IFA from a wealth advisor’s perspective, focusing on the real-world complexities of portfolio integration and interest deductibility. For a deeper exploration of IFAs, read our foundational guide.
Page Contents
The “Use Your Money Twice” Pitch: What’s Missing?
A common angle for the IFA is that it allows a client to “use the same dollar twice”—once to pay for an insurance policy and a second time to invest in their portfolio. While conceptually appealing, this overlooks a most critical question for you as their wealth advisor: What, exactly, can that dollar be invested in the second time?
The challenge—and the key to the IFA’s success—is structuring a portfolio that meets the CRA’s requirements for interest deductibility. The loan interest is only deductible if the borrowed funds are used to acquire investments with a “reasonable expectation of income”. This means a portfolio heavily weighted towards capital-gains-only stocks or certain return-of-capital (ROC) funds may not qualify.
Meeting these requirements requires a thoughtful approach to asset allocation and a deep understanding of the investment mandate—a nuance easily lost in IFA presentations.
Why an IFA Isn’t a Universal Solution
Answering the question “Why isn’t everyone doing this?” demonstrates your diligence and helps clients understand the strategy’s specific nature.
- Reason for Insurance: The foundation of an IFA is a genuine reason for permanent life insurance, such as for estate planning or funding a corporate buy-sell agreement.
- Investment Mandate Mismatch: The requirement for income-producing assets means an IFA is often unsuitable for portfolios with a pure growth or speculative mandate. It must align with the client’s objectives and your investment philosophy.
- Minimum Scale: IFAs are designed for significant financial objectives. Lenders typically require annual premiums of at least $50,000 for a decade, creating a total loan of $500,000 or more.
- Comfort with Leverage: A client’s psychological comfort with leverage is critical. Even if the numbers make sense, a client who is fundamentally opposed to borrowing may not have the fortitude to stick with the strategy during market volatility.
- A Cohesive Advisory Team: The strategy’s success depends on the seamless integration of your investment management, the client’s accountant’s tax oversight, and Taxevity’s insurance structuring. If any advisor on the team is not informed or comfortable, mistakes can arise and put the client’s IFA at risk.
Answering The Question: “Why Haven’t I Heard This From You?”
Your clients trust you to bring them the best ideas. If an IFA is a viable strategy, they may wonder why you didn’t discuss it before. The answer is multi-faceted. The modern IFA’s viability is a relatively recent evolution driven by several factors.
Addressing the Fine Print: A Look at Key Risks
For an IFA, a transparent discussion of risk is essential. Beyond the investment mandate, several factors must be considered:
- Interest Rate Volatility: While the goal is for after-tax investment returns to outperform the after-tax loan cost, a sharp rise in interest rates can narrow this spread. To show sensitivity to this risk, our IFA projections model a higher-than-current loan rate, helping to build confidence in the strategy’s resilience.
- Lender & Loan Risk: We can make introductions to major Canadian financial institutions that have dedicated IFA programs, but clients should understand that the loan will have renewal terms, conditions, and costs, like any other commercial financing arrangement. By default, we suggest clients contact their own bank first.
- Policy Performance: Our projections are built on conservative assumptions, using a dividend scale below the insurer’s current scale to stress-test the plan against underperformance.
- The Exit Strategy: An IFA is designed to be held for life. While an early exit is possible, it can be complex and trigger tax consequences if the investments made with the loan proceeds are sold, reinforcing the need for a long-term commitment.
A Partnership to Enhance Client Wealth
An IFA can be a powerful tool to amplify your clients’ after-tax wealth, creating significant capital for you to manage while giving your clients’ the insurance coverage they need. The strategy works best when a client’s team of trusted advisors works in concert. Our role is to build, explain, and service the insurance structure. Your role is to provide the expert investment management. Your client’s accountant provides the essential tax oversight and guidance. This clear division of responsibility ensures your clients receive specialized expertise in each critical area of the strategy, leading to a more robust and well-managed plan.
Whether you have clients who may be suitable, or if you’d like a second opinion on a proposal a client has received, we invite you to connect with us.
For a deeper exploration, please review our detailed guides:
- Integrating IFAs With Your Wealth Advisory Practice
- A Wealth Advisor’s Companion to Interest Deductibility
At Taxevity Insurance, we’re passionate about bringing clarity to complex financial decisions. Let us empower you with personalized strategies to achieve your goals. We focus on life and health insurance solutions to protect your business, your family, and your legacy.
