Ben Felix - Asset Location

Short Summary

Main recommendation: Do not spend time trying to optimize asset location; hold the same mix of assets in every account instead, since the expected benefit depends on predicting future returns and tax rates that cannot be known. Asset location, which means holding particular asset classes in particular account types (such as bonds in an RRSP and Canadian stocks in a taxable account), can add value in theory, but that value largely disappears when tested against actual rather than expected returns. Ben Felix, Associate Portfolio Manager at PWL Capital, says the complexity and added risks often outweigh the benefit.

Key Points

• Asset location differs from asset allocation: allocation decides how much of each asset class to hold, while location decides which account type holds each class to reduce tax drag.
• Published estimates of the benefit were modest: Blanchett and Kaplan (Morningstar, 2013) estimated about 23 basis points per year, and Bortolotti and Bender (PWL, 2014) estimated about 30 basis points per year on an ETF portfolio from 2003 to 2012.
• Felix's own 2017 model found about 23 basis points per year in an ideal case, but when tested with actual returns instead of expected returns, the average added value fell to about 0.07% and beat holding the same mix everywhere only 58% of the time.
• Asset location carries extra risks: tax rule changes (for example, higher tax on Canadian dividends or capital gains inclusion) could make a previously optimal setup suboptimal.
• Complexity adds costs: self-managed investors find rebalancing and new contributions harder, and wealth managers optimizing location scale less well, which can lead to higher long-term fees.
• Other experts share the skepticism: Gerard O'Reilly (Dimensional, 2009) found the model too sensitive to its inputs, and John Robertson (The Value of Simple) suggested replicating the same allocation in all accounts.

Details Worth Noting

• Concrete instructions: The traditional location rules the video describes are: hold fixed income in the RRSP, since interest is taxed at the full marginal rate; hold Canadian equities in the personal taxable account, since Canadian dividends get favorable tax treatment; hold international equities in the TFSA, since international stocks tend to have higher yields and foreign dividends are fully taxable; and hold U.S. equities in the RRSP (after fixed income), since a U.S.-listed ETF avoids U.S. withholding tax that is unrecoverable in an RRSP. Felix's recommended practical instruction is to skip optimization and hold the same asset mix across all accounts, so you avoid delaying investing or ignoring rebalancing while sorting assets into accounts, as Felix and others he cites warn can happen with asset location.
• Felix's 2017 test assumed an investor taxed at Ontario's highest marginal rate with enough RRSP room to hold most bonds while staying on target allocation. Monte Carlo testing across 1,000 simulations found asset location added value in about 80% of outcomes under expected returns.
• The advantage of optimizing shrinks sharply once real uncertainty is included, so the benefit is highly sensitive to assumptions about returns and future tax rates.
• Felix says he does not optimize location in the portfolios he oversees at PWL Capital, holding the same mix in all accounts.

Bottom Line: Asset location can theoretically help after-tax returns, but its benefit is small, uncertain, and fragile against future tax changes, so for many investors simply holding the same allocation everywhere is the more practical choice.