HOW DIGGING DEEPER LEADS TO MORE MEANINGFUL AND PROFITABLE … · 2019-10-04 · Senior...

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • FEBRUARY 2005 • WWW.ADVISOR.CA

Rogers Publishing Limited, One Mount Pleasant Rd., Toronto, Ont. M4Y 2Y5 • Publications Mail Agreement Number 40070230

RETIREMENT COMPENSATION ARRANGEMENTS+

ADVISOR FORUM SNAPSHOT

DEEPHOW DIGGING DEEPER LEADS TO MORE MEANINGFULAND PROFITABLE CLIENT RELATIONSHIPS

IMPACT

AE02_OFC 01/17/2005 03:17 PM

7Inside Edge with Darin DiehlPonder an image of one voice heraldingthe values of Canadian advisors coast-to-coast. With the current fragmentedregulatory structure reigning overCanada’s financial industry, are advisorsanywhere close to finding consensusamong their own?

10FRONT END LOAD No (Right) BrainerPut your academia hat on as Februarymarks the premiere of a section entitled“Your Picks,” where we feature an advisor’s book recommendations to their clients and industry peers. And,Canadian advisors are generously dishing out dollars for tsunami relief.

15TOOLBOX Retirement Alternative Now that stock options have lost theirlustre, many firms are consideringretirement compensation arrangements.Offering the right retirement packagecan help employers lure the best and the brightest. By Michael Berton

20COVER STORY Deep ImpactBeing a professional advisor meansmore than just crunching numbers.To get to the heart of your clients’deepest values—both personally andfinancially—you need to establish

meaningful and trusting relationships.By Alison MacAlpine

27ADVISOR FORUM Passive PhilosophiesThe following seven pages highlightindustry trends from keynote speakers at the 2004 Advisor Forum.

28ADVISOR FORUM Protecting Assets

30ADVISOR FORUM Sudden Windfalls

32ADVISOR FORUM Investment Predictions

35ADVISOR FORUM Trust Options

39ADVISOR FORUM Equity Advantages

41ADVISOR FORUM A New Sensation

43Tax Break with Gena Katz

44Insurance Insights with David Wm. Brown

47Managing with Harvey Schachter

49The Bowen Report with John J. Bowen Jr.

50This ’n’That by Andrew RickardSenior speculation. Right address.Proactive planning. Scary will.

THE

FEBRUARY • 2 0 0 5 •VOLUME 8NUMBER 2

ONCOVER

www.advisor.ca ADVISOR’S EDGE | FEBRUARY 2005 5

20DRILL DOWN DEEP

15 Retirement CompensationArrangements

20 Deep ImpactHow digging deeper leads to moremeaningful and profitable clientrelationships

27 Advisor Forum Snapshot

AE02_005 01/17/2005 03:18 PM Page 5

Across this industry and within thepages of this magazine, the word advisoris used as a catch-all to describe any indi-vidual whose profession involves theprovision of financial advice. The indus-try has evolved well beyond a time whenspecific advisory services were availableonly from specific advisors. But despitethe merging and overlap of services,advisors are still far from representingthemselves as a homogeneous group.

We witness this in microcosm everytime we convene with members of ourown editorial advisory board—a groupwhich includes independent and captiveadvisors, commission and fee-only advi-sors, insurance advisors, investmentadvisors and financial planners. There’soften a lively debate about what issuesour publications, website and confer-ences should tackle to best serve theneeds of advisors. Consensus some-times happens, but it is not routine.

Across this country, while there areissues that are common to all advisors,there is no common voice to representthe varying views on those issues.

With 15,000 members, Advocis is by far the largest association of advisorsin Canada and has shown it can be an effective advocate. However, its

constituency lacks significant represen-tation from investment advisors, andessentially excludes Quebec, where theregulatory regime mandates member-ship in provincially sanctioned associ-ations.

Some advisors have found homes insmaller associations like the CanadianInstitute of Financial Planners (CIFPs),which is building toward a membershipof 2,000 CFP-designated advisors bymid-year. There’s also the IndependentFinancial Brokers of Canada (IFBC)that boasts 4,000 members who aremutual fund and insurance advisors.The Institute of Advanced FinancialPlanners (IAFP) has a membership of500 advisors who have earned the Reg-istered Financial Planner designation.

All the associations have their ownagendas and interests to promote. Rela-tions between them range from none at all, to somewhat frosty, to, at best,cordial but never, it seems, coordinated.

Canada’s fractured regulatorymakeup is another reason why a unify-ing advisor advocate eludes the indus-try. The various federal and provincialinsurance and securities regulators affecteach channel of the industry differently.It’s unrealistic, I suppose, to expect one

advisor association to be equipped to tackle every issue affecting every sub-group of advisors.

But this country’s current regulatoryregime might also provide a hint abouthow advisor associations could cometogether occasionally in a collective way.The Canadian Securities Administra-tors (CSA) is a forum for the 13 secu-rities regulators of Canada’s provincesand territories, designed to coordinateand harmonize regulation. The CSA isitself a part of The Joint Forum ofFinancial Market Regulators, whosemandate is to coordinate and streamlineregulation across an even wider scopeof financial products and services.

These various regulators also havedisparate agendas, but are able to worktogether when the need compels them.Is it such a crazy notion that the various advisor associations might also do the same? Just imagine theimpression a joint forum of advisorassociations would carry when lobby-ing governments and regulators.

DARIN DIEHLEXECUTIVE EDITOR &

ASSOCIATE [email protected]

INSIDEEDGEDISPARATE VOICESAdvisors need a forum to represent their collective interests.


AE02_007 01/17/2005 03:19 PM Page 7

Darin Diehl, Executive Editor & Associate Publisher, ADVISOR Group (416) 764-3812, [email protected]

ADVISOR’S EDGEDeanne N. Gage, Managing Editor Marika Tamm, Chief Copy Editor(416) 764-3803, [email protected] (416) 764-3814, [email protected] Porado, Associate Editor Harvey Schachter(416) 764-3802, [email protected] Contributing EditorHeidi Staseson, Assistant Editor Lisa Darwen, Production Manager(416) 764-3804, [email protected] (416) 764-3928, [email protected] Nicholson, Art Director Maggie Sicilia, Administrative Assistant(416) 764-3850, [email protected] (416) 764-3822, [email protected]

ADVISOR’S EDGE REPORT / ADVISOR.CAJohn Craig, Editor Steven Lamb, Investments Editor(416) 764-3811, [email protected] (416) 764-3961, [email protected] Blythe, Managing Editor Kate McCaffery, Senior Reporter(416) 764-3810, [email protected] (416) 764-3959Doug Watt, News Director [email protected](416) 764-3815, [email protected] Andrew Gregory, Manager, Web Production &Opal Patel, Practice Management Editor Special Projects, (416) 764-3817(416) 764-3818, [email protected] [email protected]

OBJECTIF CONSEILLERYves Bonneau, Editor Christian Benoit-Lapointe, Assistant Editor(514) 843-2142 James Wagner, Art Designer

SALESGarth Thomas Gisela StephanyGeneral Manager Sales Manager, Eastern Canada(416) 764-3806, [email protected] (514) 843-2133, [email protected] Kerry Graham Blair, Account ManagerNational Account Manager (416) 764-3809, [email protected](416) 764-3805, [email protected] David Carmichael, Marketing Research AnalystKathleen Murphy, National Account Manager (416) 764-3820 (416) 764-3838, [email protected] [email protected]

MARKETING AND COMMUNICATIONS Nancy Matheson, Group Director Giovanna Margani, Conference Planner,Angela Bobotsis, Conference Project Planner ADVISOR GroupMelissa Horwood, Conference and Promotion Joanne Merrick, Promotions ManagerPlanner Tricia Moore, Conference Planner

CIRCULATION AND RESEARCHDenise Brearley, Circulation Director Tricia Benn, Director of ResearchCindy Younan, Circulation Manager Rosa Regula, Research Assistant

Ann McDonagh, Group Publisher (416) 764-3830, [email protected]

ROGERS MEDIA INC.Anthony P. Viner, President and CEO

ROGERS PUBLISHING LIMITEDBrian Segal, President and CEOJohn Milne, Senior Vice-President, Healthcare & Financial Services GroupMarc Thibodeau, Senior Vice-President, Business Development, Healthcare & Financial Services GroupHarvey Botting, Marc Blondeau and Michael Fox, Senior Vice-PresidentsPaul Williams, Vice-President, Healthcare & Financial Services GroupImmee Chee Wah and Larry Michieli, Vice-Presidents

, established 1998, is published monthly by Rogers Publishing Limited, a division of Rogers Media Inc.

Rogers Publishing Limited, One Mount Pleasant Rd., Toronto, Ontario M4Y 2Y5. Montreal office: 1200 avenue McGill College, Bureau 800, Montreal, Quebec H3B 4G7.

Subscription price per year: $68.95 CDN; outside Canada per year: $139.30 US; single copy price: $15 CDN.ISSN 0703-7732. Printed in Canada.

PM 40070230. Canada Post: Please return undeliverable address blocks to Advisor’s Edge, CirculationDepartment, One Mount Pleasant Rd., 7th floor, Toronto, Ontario M4Y 2Y5. E-mail: [email protected]

We acknowledge the financial support of the Government of Canada, through the Canada MagazineFund, towards our mailing and editorial costs. Contents copyright © 2005 by Rogers PublishingLimited, may not be reprinted without permission.

Advisor’s Edge receives unsolicited materials (including letters to the editor, press releases, promotional items andimages) from time to time. Advisor’s Edge, its affiliates and assignees may use, reproduce, publish, re-publish, distribute, store and archive such submissions in whole or in part in any form or medium whatsoever, withoutcompensation of any sort.

FEBRUARY 2005, VOLUME 8, NUMBER 2

The ADVISOR Group is a division of Rogers Publishing Limited that consists of Advisor’s Edge, Advisor’s Edge Report, Advisor.ca, Advisor Forum,

Objectif Conseiller and Forum Des Conseillers.

EDITORIAL ADVISORY BOARDElaine Andrew John OrdInvestors Group BMO Nesbitt BurnsDavid Wm. Brown Jim RogersAl G. Brown and Associates Rogers Group FinancialDavid Christianson Nancy ShewfeltWellington West Total Wealth Management Wellington West Capital Inc.John De Goey Thane StennerAssante Capital Management The Stenner Group, CIBC Wood GundyRobert Fleischacker Lynne TriffonAdvocis, Stonehaven Financial Group T.E. FinancialCynthia J. KettStewart & Kett Financial Advisors Ltd.

Online: www.advisor.ca/customerserviceE-mail: [email protected] or [email protected]: (866) 236-0608 or (416) 764-3859

SUBSCRIBER SERVICES

More online

www.advisor.ca/interact@

Watch for this icon.It signifies there is more

information or tools related tothe story you’re reading at

www.advisor.ca/interact

WHAT’S NEW @ ADVISOR.CA?■ An online package of fresh expert insights, strategies and

tools to help you with your focus and follow through in 2005.

Under “Special Report” in Advisor.ca’s Practice Zone,

this online package includes:

› A tip sheet on building call schedules (and client

relationships)

› A closer look at assumptions

› An all-new client template letter

■ Enter to win big in our monthly Advisor.ca Book Draw

■ Daily news coverage of the industry stories and issues you

need to know

■ Free customizable practice management tools (located on

left nav bar)

■ Lively debates on industry issues in our online discussion

forum

■ The latest market news, in our twice-daily e-mail bulletins

ALWAYS ONLINE @ ADVISOR.CA!


AE02_009 01/17/2005 03:03 PM Page 9

YO

UR

PI

CK

S No successful advisor would be complete without a few choice books onhand to recommend to their industry peers or clients. In this new section,advisors talk about their current literary treasures.

By John de Goey, senior financial advisor,Assante Capital Management, Toronto,as told to Heidi Staseson

Book: Values-Based Financial Planning: The Art of Creating and Inspiring Financial Strategy

by Bill Bachrach (self published).For the past 10 years, this North American icon has been

building an empire based on a simple question: “What’simportant about money to you?” Bachrach’s process helpsadvisors build trust on purpose, and helps them do a bet-ter job of serving their clients. When advisors are coachedon how to ask that question, a series of questions follows.It’s like peeling back the layers of an onion.

The book helps clients understand the process and helpsthem think, not so much about what money is, but ratherabout what money does, what it is going to be used for, whatis important to them in their lives, and what they want toaccomplish with this pool of capital they have accumulatedor will be accumulating over the course of their working lives.

Instead of getting advisors to say: “Mr. Client, if youput aside $10,000 a year for the next 21 years of yourworking life, you should be able to generate a pre-taxincome of $65,000 a year for as long as you live.” That’sall very staid, grey and uninformed compared with: “Mr.Client, if you follow what I recommend, you’ll be able tohave the lifestyle you want, be able to spend time golfing,giving back to the community, and leaving a legacy for yourchildren and grandchildren because those are your highestvalues. If I could show you how to do that, would you be interested?” Suddenly, it becomes a much more meaningful conversation.

This is a right-brain book. It’s accessible, it’s conceptual,and it doesn’t deal with money or tax rates or investmentstrategies in a conventional way. It’s universal. It workswhether you’re a prince or a pauper.

A NO (RIGHT) BRAINER

FRONT

ENDLOADPeople, trends, events and analysis

10 ADVISOR’S EDGE | FEBRUARY 2005 www.advisor.ca

Retirement RemissionA new trend may be developing

with the retirement median age—rising significantly for men and marginally for women.

Source: Statistics Canada, Labour Force Survey, 2004

Cartoon by S

ue Dew

ar

197656

58

60

62

64

66

68

1979 1982 1985 1988 1991

Women

both sexes

Men

1994 1997 2000 2003

AE02_010-012 01/17/2005 05:34 PM Page 10


ADVISOR AID

hile donations to the tsunami relief

effort have been pouring in across all

sectors of the global economy, from the big

banks and capital markets, to the heavy hit-

ters of Hollywood and even children’s piggy

banks,Canadian financial advisors are mak-

ing their own charitable contributions

toward the recent world tragedy.

And while philanthropic activities often

count as a part of a corporation’s or an advi-

sor’s annual fiscal agenda, many advisors

feel this particular cause warrants action

above and beyond the normal scope.

“In the case of the tsunami,it was so dev-

astating and so overwhelming in terms of its

negative impact that it’s unlike anything else

that I’ve seen in my lifetime,” says Jim

Rogers, chairman of Rogers Group Finan-

cial in Vancouver.He says although his com-

pany supports the United Way and its 110

different sub-agencies through regular

fundraising campaigns annually, the corpo-

ration has chosen to make a further sizeable

contribution to the Red Cross relief fund.

“We hadn’t budgeted for it, obviously,

how could you? We did it anyway,” Rogers

says.“Everybody has their giving opportu-

nities and favourite giving recipients,but this

is so unique that I think people of all stripes

are reaching into their pockets for more.”

Further, the Million Dollar Round Table

(MDRT) and its foundation, have estab-

lished a tsunami relief matching fund of

$200,000 U.S.

Advisors reaching into their own pock-

ets include Irene So, senior vice-president

and chair of the Asian Strategy and China

Project with RBC Dominion Securities in

Toronto. In January, So spearheaded

an information campaign to her peers,

to enlighten them on some of the lesser-

known fundraising centres, such as two

multi-ethnic media stations and a Chinese

web-TV station.

And Wayne Rothe, a CFP and branch

manager of Wayne Rothe and Associates,

a division of Berkshire Investments in

Spruce Grove, Alta., posted a message on

Advisor.ca’s Talvest Town Hall, asking

advisors to suggest to their clients they

take advantage of the federal govern-

ment’s decision to extend the charitable

contribution deadline for charities work-

ing on tsunami relief.

Charities eligible for the extension

included the Canadian Red Cross, World

Vision, Oxfam, Doctors Without Borders,

CARE, UNICEF, Development and Peace,

Save the Children, the Mennonite Central

Committee and Canadian Lutheran World

Relief.The deadline for charitable dona-

tions is usually the end of the year, but

Ottawa loosened the rules to encourage

more aid. Donations could be made up to

Jan. 11, 2005.

However, John Hope, an advisor with

Allied Financial in London, Ont., cautions

although the South Asian crisis warrants

worldwide financial attention, it should not

supersede the importance of aid to other

ongoing, worldwide suffering.“For every-

body out there who’s rushing to give money

to this because it’s a very good thing, stop

and give pause to the idea that there’s an

awful lot of suffering and impoverished and

unfortunate people in the world,”Hope says.

“One of the objectives of globalization is to

share wealth on an ongoing basis. So

giving money now to a specific event is not

unlike making an investment in a fund that

had a really good year.We need to be doing

it consistently.” —Heidi Staseson

S O U T H E A S T A S I A C R I S I S

W

■ FEBRUARY 11 to 13, 12th Annual Vancouver

Financial Forum,Vancouver Convention &

Exhibition Centre, Vancouver, www.financial-

forum.ca ■ FEBRUARY 17 to 18, 15th Annual

Securities Superconference, King Edward

Hotel, Toronto, www.canadianinstitute.com

■ MARCH 8, National Registration System,

Hotel Intercontinental, Toronto, www.strategy-

institute.com ■ MARCH 15, Peel Institute West-

ern Tour Symposia, Coast Plaza Hotel & Con-

ference Centre, Calgary, www.peelinstitute.com

■ MARCH 16, Peel Institute Western Tour

Symposia, Mayfield Inn & Suites, Edmonton,

www.peelinstitute.com ■ APRIL 7 to 9,

3rd Annual World Critical Illness Insurance

Conference, Sheraton Centre Hotel, Toronto,

www.criticalinsurance.ca ■ APRIL 10 to 12,

CFO Canada Summit,The Fairmont Le

Château Frontenac, Quebec City, www.cfocanada-

summit.com ■ MAY 11 to 14, Advocis National

Conference,World Trade Convention Centre,

Halifax, www.advocis.ca ■ MAY 17,Toronto

Insurance Women’s Association, Annual

General Meeting, Toronto, www.tiwa.org

■ JUNE 7,Toronto Insurance Conference

Golf Tournament, Emerald Hills, Stouffville, Ont.

Contact: Margaret Parent at 416-410-4842

■ JUNE 12 to 14, Canadian Social Investment

Conference, Radisson Admiral Hotel, Toronto,

www.socialinvestment.ca ■ JUNE 19 to 22,

CIFPs National Conference, Niagara Fallsview

Casino Resort, Niagara Falls, Ont., www.cifps.ca

■ JUNE 25 to 29, IDA 89th Annual Meeting

and Conference, Fairmont Banff Springs,

Banff, Alta., www.ida.ca ■ JUNE 26 to 29,

Insurance Marketing & Communications

Association Annual Meeting, La Mansion

Del Rio, San Antonio, Texas, www.imcanet.com

■ SEPTEMBER 18 to 21, 30th Annual Risk

& Insurance Management Society Canada

Conference, Montreal, www.rimscanada.org

■ OCTOBER 19 to 21, Insurance Brokers

Association of Ontario Annual Convention, Fair-

mont Royal York Hotel, Toronto, www.ibao.org

CA

LE

ND

AR

OF

EV

EN

TS

To submit an event, [email protected]

AE02_010-012 01/17/2005 05:34 PM Page 11

FRONTENDLOAD

■ CFA Institute namedJEFFREY DIERMEIER tothe position of presidentand chief executive officer. He replacesTHOMAS BOWMAN, whoserved as president andCEO since 1994. Dier-meier most recently wasglobal chief investmentofficer at UBS GlobalAsset Management. Inhis new role, he willoversee the managementof the Institute through

its offices in London, Hong Kong andCharlottesville, Va. The associationalso named KURT N. SCHACHT as exec-utive director, Centre for Financial

Market Integrity ofCFA Institute.■ The Bank of Canadaappointed TIFF MACK-LEM as deputy governor,replacing MARK CAR-NEY.■ Mutual fund executiveand Fidelity Canadapresident DAVID DENI-SON is the new CEO ofThe CPP InvestmentBoard (CPPIB). Deni-son replaces JOHN MAC-NAUGHTON, who led theCPPIB since its incep-tion in 1999.■ Standard Lifeannounced the appoint-ment of JOSEPH IANNI-CELLI as its new president, Canadianoperations, replacingCLAUDE GARCIA. Previ-ously, he was senior vice-president, groupinsurance, Canadianoperations. Iannicelli hasbeen with the companysince 1992.■ Aon Reed Stenhousein Toronto appointedJOHN JOHNSTONE tothe position of seniorVP and national direc-tor, risk management.Most recently, he held asenior leadership rolewith a major interna-tional insurance broker.

■ The Canadian Investment FundsStandards Committee (CIFSC)appointed RUDY LUUKKO as its new

chair, replacing JOHN

CAMPEA. Luukko is alsoinvestment funds editorof Morningstar Canada.■ TERRI OSWALD is thenew director, media rela-tions, at AIC in Toronto.She hails from AssanteWealth Mangement,where she was commu-

nications director.■ Fidelity Investments hired MARK

WETTLAUFER as executive VP, prod-ucts and marketing. He hails from TD Asset Management, where he waspresident.■ Equinox Financial Group appointedDANIEL DESSUREAULT to the positionof general manager. ■ CHARLEY TSAI joined AIM Trimarkas assistant VP, tax and estate planning.Previously, he worked as a senior finan-cial planning consultant at RBCInvestments in Toronto.■ Winnipeg-based Rice FinancialGroup Inc. appointed FRED WING asexecutive VP, sales, marketing and dis-tribution, and RANDY CHAPMAN asVP, distribution sales.■ Guardian Capital Advisors LPappointed MICHAEL BARKLEY to VPand portfolio manager. He hails fromTD Private Investment Council, wherehe was portfolio manager.

&MOVERS SHAKERS

J. Iannicelli

D. Denison

K. N. Schacht

T. Macklem J. Johnstone

R. Luukko

T. Oswald

M. Wettlaufer

D. Dessureault

F. Wing

M. Barkley

R. ChapmanJ. Diermeier

ST

AT

IS

TI

CS 55550000%%%%

of Canadians believe the

increased value of the Canadian

dollar has a negative impact

on the national economy.

SOURCE: POLLARA INC.

66665555%%%%

of Canadians have an RRSP,

up from 57% in 2002.

SOURCE: RBC FINANCIAL GROUP

66665555%%%%

of Canadians say now is a

“good” or “very good time” to

invest in their own homes.

SOURCE: MANULIFE 5TH ANNUAL

INVESTOR SENTIMENT SURVEY


DIDknow?13% of Canadian employers plan

to reduce their proportion of the cost

of employer-sponsored healthcare

in the next 24 months.

SOURCE: MORNEAU SOBECO “60 SECOND SURVEY,”

DECEMBER 2004

YOU

AE02_010-012 01/17/2005 05:01 PM Page 12

Times are tough for employers andbusiness owners who want to build retire-ment packages to attract and retain top-notch professionals.

Employee stock option programs, whichcreated fortunes in the 1990s, have lost theirlustre, and challenging business conditionsthreaten the security of future compensa-tion. Even the certainty of the long-cherished defined benefit pension planseems at risk. And this has led to a re-emergence of interest in the retirement compensation arrangement (RCA).

Introduced in 1986 when personal rateswere around 50%, RCAs were intended toplace non-registered pension plans on thesame footing as paying bonuses. Governedby rules contained in subsection 248(1) ofthe Income Tax Act, RCAs are non-registered retirement sav-ings plans that provide members with supplemental retire-ment benefits without compromising the integrity of theirRRSPs or other registered plans. Employer contributions toan RCA are tax-deductible to the employer, but they are nota taxable benefit to the member employee. But there’s a hitch.To neutralize any tax advantage these arrangements mighthave over the old-fashioned bonus-out strategy, the tax rulesrequire payment of a special refundable tax. The amount ofthat refundable tax equals: • the aggregate of 50% of all contributions for the year andprevious years;• plus 50% of the net income and net capital gains for theyear and previous years; • less 50% of all distributions and benefits paid out to theplan member.

These funds must be paid to a non-interest-bearing

Refundable Tax Account (RTA) held by the CRA. The remaining 50% of the employer contribution is held in an RCA Investment Account (RCAIA) administered by acustodian (often the employer). The account can essentiallyhold any type of investment and, under certain rules, a cash-value life insurance policy or life annuity.

This is a retirement pension, so funds in an RCA trust canbe paid to the employee upon retirement, termination ordeath. For each dollar paid out of the RCAIA, the CRA willrefund $1 from the RTA. Payments received by the plan mem-ber are included in income as “other income” in the years theyare received (s. 56(1)(x)). There is some relief: Payments outof the plan that qualify as retirement allowances may be trans-ferred to either an RRSP or RPP subject to contribution lim-its under paragraph 60(j.1). Benefits paid out of the plan atthe member’s death are taxable either on the plan member’s

Retirement compensation arrangements can help employers lure and retain executives and other key employees.

RETIREMENT ALTERNATIVE

Illu

stra

tion

by

Sar

a Ty

son

TOOLBOX

Continued on page 16

Strategies for advisors from advisors

By Michael Berton


AE02_015-019 01/17/2005 05:02 PM Page 15

final return or as a “right or thing”(s. 70(2)). There are many benefits ofan RCA to high income-earning owner-managers, shareholder employees andexecutives:• It creates a pension in excess of thestatutory pension limits.• There’s potential immunity for thebeneficiary from business insolvency,new management arrangements orchanging personal conditions.

• There may be tax efficiency if theemployee enjoys a lower tax bracket inretirement or intends to retire in a lowertax jurisdiction.

The employer can benefit by estab-lishing an RCA as well. It can:• attract and retain key employees byoffering a special pension supplement;• gain flexibility in the timing and

amounts of contributions and payouts;• provide the employee with a writtenagreement concerning the amount, tim-ing and frequency of the contributions;• customize the design of the plan tosuit unique circumstances;• choose who will benefit;• potentially reduce payroll taxes;• reduce corporate profits with the tax-deductible RCA expense (effectivelyfunding post-retirement benefits withtax-deductible dollars today);• enjoy the tax deduction and achievelower corporate earning levels that putthe company in a better position toaccess the small business exemption fora future sale;• have confidence the contributionsmade on behalf of the employees to theRCA are safe in the hands of thetrustees; and

• potentially borrow against the RCAand use the funds to finance operations.

An RCA also can provide some ben-efits for business owners who are plan-ning for succession. Large contributionsto an RCA prior to an anticipated salewill reduce the value of the business,making it more affordable for a child orother family member. Such a provisionalso reduces, at least in part, a need forthe new owners to provide continuousincome to the retired owner. And theretired owner is secure in the knowledgethe bulk of his or her nest egg is safefrom the future business fluctuations.

Complex rules, outlined in subsec-tion 207.6 (2) of the Act, govern theuse of an exempt life insurance policyin the RCAIA. An exempt life insurancepolicy does not normally produce tax-able earnings that would give rise to

Continued from page 15


AE02_015-019 01/17/2005 05:08 PM Page 16

annual refundable tax. That allows theinsurance cash value to compoundwithout taxation. And should the planmember die, the death benefit will bepaid to the trust without creatingrefundable tax, and the payment in turnwill produce a refund to provide sur-vivor benefits. To make it so the bene-ficiary does not have to pay income taxon the benefit received from the trust,a split-dollar insurance arrangementwould have the death benefit owned bythe company as a key-person plan or bythe individual personally. At the sametime, the RCAIA would hold the accu-mulating cash value. This removes thecost of life insurance from the RCAand creates a tax-sheltered investmentaccount in the RCAIA.

As the employer is required to pay refundable tax to the CRA, it must

contribute twice the amount necessaryto pay the premium. While the prom-ise of greater tax efficiency is a worthyconsideration, bear in mind the insur-ance policy has a cost, too.

Controversy surrounds the use offront-end leveraged RCAs. Let’s sayXYZ Corporation has $3 million ofactive income left inside the corpora-tion after salaries and expenses. Theowner-shareholders would like to pur-chase another building, and plan tobonus out the money and then lend itback to the company.

This will help the company accessthe lower corporate rate. The only prob-lem is they will only net 53.6% of themoney after paying personal and cor-porate income tax. But by using theleveraged front-end RCA, they canavoid this problem. The $3 million is

contributed to an RCA on the owner’sbehalf and deducted from the com-pany’s income for the year. That elimi-nates corporate tax. The RCA trusteesprocure a loan of 90% of the total con-tribution (based on the value of thetrust assets and the refundable taxaccount) from a financial institution.The RCA then lends this money ($2.7million) back to XYZ Corporation.

CRA is on record questioning theexistence of an RCA in circumstanceswhere funds intended for retirement arelent back to employers. A negative rul-ing by CRA with attendant denial ofdeductions to the employer as well aspenalties and interest could be costly.Those considering this structure shouldget both an accountant’s opinion and anadvance ruling from the CRA.

TOOLBOX



...when you want your business to soar.

With Manulife Investments, you’ve got an

investment partner who can help your business

really take off. We’re here to help.

Using our range of innovative products, services

and support, you can develop comprehensive

investment solutions for your clients at every

stage of their lives and save you time and effort

managing your business.

You spend more time with your clients and less

time chained to your desk.

For a partnership that helps you and your clients

soar to new heights, choose Manulife Investments.

We’re with you every step of the way.

For more information call 1-877-977-2537

or visit www.manulifeinvestments.ca

Manulife Investments is the brand name identifying the personal wealth management lines of business offered by Manulife Financial (The Manufacturers Life InsuranceCompany) and its subsidiaries in Canada. Manulife and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company andare used by it and its affiliates including Manulife Financial Corporation.

AE02_015-019 01/17/2005 05:09 PM Page 17


Not just anyone or any company is areasonable prospect for an RCA. Thekey market seems to be senior execu-tives. The 50% tax rate, althoughrefundable, makes the RCA less tax-efficient for people who own their owncompanies. For many of these people,it may be better to simply pay them-selves a bonus and invest the funds.Advisors should pre-qualify potentialclients as:• shareholders and owners of corpo-rations, or key executives;• incorporated professionals with T4earnings in excess of $150,000;• employers who want to attract keyemployees and retain them with goldenhandcuffs; • employees who might wish to man-age or reduce certain kinds of bonuses;

• those with considerable past servicewith the company;• executives and business owners withindividual pension plans;• businesses with profits in excess ofthe $300,000 small business limit;• businesses expanding through inter-nal growth or acquisition; or• executives, professionals and businessowners who will likely retire in a low-tax jurisdiction outside Canada.

The company’s board must pass a res-olution to establish the plan and a trustagreement drafted (without the agree-ment, it will be deemed a trust undersubsection 207.6(1) of the Act with theemployer deemed trustee). The employ-ees must confirm the plan benefits and the RCA must be registered withthe CRA (form T733) along with a val-uation report as of the effective date.

TOOLBOX


HOW RCAs WORKRetirement compensation arrangements allow employers to create supplemental

retirement benefits that don’t compromise RRSPs.

Source: Integrated Planning Group

THE CORPORATIONThe corporation makes contributions to an RCA on behalf of the plan member employees. Reasonablecontributions are tax-deductible by the employer and are not taxable to the indidividual until received.Payroll taxes do not apply to RCA contributions.

RCA INVESTMENT ACCOUNT (RCAIA)Deposits can be invested in several instruments toearn income. 50% of annual investment income mustbe paid to the RTA.

CRA REFUNDABLE

TAX ACCOUNT

(RTA)The RTA balance doesnot earn interest; how-ever, the funds wouldhave been taxable if paidto the employees assalary bonuses.

SUPPLEMENTAL PENSION BENEFITSWhen the plan member receives benefits from theRCA, $1 of RTA funds are refunded for every $2 paidfrom the RCAIA.These are taxable to the plan member as other income at his/her marginal tax rate.

50% of deposits are directedto the RCA custodian.

50% of deposits are remittedto CRA and held in theRefundable Tax Account(RTA).

CULTIVATING THE

AFFLUENT

DOWNLOADyour free special report on CEG Worldwide’s coaching program for financial advisors

ON THE WEB:cegworldwide.com/coach

TOLL-FREE:(866) 348-2406

©COPYRIGHT 2005. RIGHTS RESERVED.

ELITE ATHLETESHAVE COACHES.

SHOULDN’T ELITE ADVISORS?

Introducing a GroundbreakingCoaching Program for Elite Advisors

REACH YOUR PERSONAL BEST. Whether

you are competing on the field or in the

office, achieving elite status takes dedica-

tion and the right attitude. Now there’s a

coaching program for advisors looking to

elevate their game. CEG Worldwide’s

turnkey coaching program, CULTIVATING

THE AFFLUENT, is designed to help you

take your business to the next level.

IS IT RIGHT FOR YOU? FIND OUT. We are

serious about your success. CEG

Worldwide only accepts advisors into the

program who, we believe, will experience

a serious impact on their businesses and

their incomes as a result of their partici-

pation. Are you ready?

AE02_015-019 01/17/2005 05:11 PM Page 18

Set-up fees for a simple RCA range inthe $5,000 area, but climb steadily perparticipant. In addition, an RCA requiresongoing maintenance, including:• annual reporting, along with an RCAcontribution summary (T737-RCA)and RCA tax return;• annual member statement;• review of investments;• periodic valuation;• document maintenance;• record keeping; and • filing T3-RCA within 90 days of thecalendar tax year.

A review of several trustees reveals awide range of annual trustee fees. For asimple RCA, an annual average seems tofall at about $2,500, plus an investmentmanagement fee which might range inthe area of 2%, depending on theinvestments chosen.

The RCA rules are complex withserious implications if errors or omis-sions are made. Care must be taken toavoid the application of the SalaryDeferral Arrangement (SDA) rules,which put off payment of salary to afuture date. If an RCA is set up andfunded with amounts that looselymatch a reduction in salary, the SDArules will apply, denying the taxdeductibility of the plan retroactively.

Advisors should seek professionalpension consultants to assist them inthe establishment of these plans. Sucha firm or individual would be an excel-lent addition to your team of externalconsultants.

Michael Berton, CFP, CLU, R.F.P., FMA, isa financial planner with Assante FinancialManagement Ltd. and part-time instructor atthe B.C. Institute of Technology (BCIT) inVancouver. The opinions expressed are those ofthe author and not necessarily those of AssanteFinancial Management Ltd. or BCIT.

Commissions, trailing commissions, management fees and expenses all may be associatedwith mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns for the periodending December 31st, 2004 including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optionalcharges or income taxes payable by any unitholder that would have reduced returns.Mutual funds are not guaranteed, their values change frequently and past performancemay not be repeated.

There’s a lot to be saidabout investment

expertise…

…especially when you have 20+ years

of pension fund management experience

behind it.

Get Stone & Co. Flagship Stock FundCanada working for you. Contactyour Stone Funds Sales Manager at 1-877-812-0792 or visitwww.stoneco.com.

Chyanne Fickes, Vice President, Investmentswith Stone Asset Management, took over management of Flagship Stock Fund Canada in October 2002.

Chyanne’s experienced, pension-fund modelapproach, honed after 20 years managing the Canadian Pacific Pension Fund, has produced consistent, positive results.

Stone & Co. FlagshipStock Fund Canada

Average CanadianEquity Fund

S&P/TSXComposite Index

1Mth

3Mth

6Mth YTD

1Yr

3Yr

5Yr

SinceInception

5.7 11.7 14.9 24.6 24.6 5.8 4.2

3.2 7.3 7.4 11.9 11.9 5.9 5.2

2.6 7.2 9.2 14.5 14.5 8.3 3.6

9.0

n/a

n/a

Source: PALTrak, December 31, 2004

ADVISOR’S EDGE | FEBRUARY 2005 19

AE02_015-019 01/20/2005 08:52 AM Page 19

20 ADVISOR’S EDGE | FEBRUARY 2005

DEEPDIG TO THE CORE OFCLIENT VALUES AND COMEUP WITH A ROCK-SOLIDRELATIONSHIP.

By Alison MacAlpineIMPACT

dvisors often cite “deeperclient relationships” as oneof the chief benefits of

streamlining. But once they’ve taken theplunge and pared down their portfolios,what exactly constitutes a strong advi-sor/client relationship? And how dosuccessful advisors go about intensify-ing those connections?

The consensus is it’s achieved byoffering tailor-made levels of serviceinspired by a solid understanding ofwhat makes specific clients tick. Inaddition to that, advisors concur thefoundation for deep client relationshipsis trust.

Bev Moir, a financial planner withToronto-based ScotiaMcLeod, buildstrust by putting clients at ease. She does

A

AE02_020-025 01/20/2005 08:53 AM Page 20


this by revealing her own vulnerabilities.“I have to show myself to be human,”she explains. “There are times that Ishare information of a personal naturewith clients—especially early in therelationship when they’re having to getfinancially undressed and may beuncomfortable exposing themselves.”

Later on, Moir looks for opportuni-ties to learn from her clients, particu-larly in their own areas of expertise,which may be something as basic as child-rearing. She also believes relationships are enhanced when theteaching goes both ways.

One advisor coach recommendsbuilding trusting relationships by ask-ing clients open-ended questions and allowing them to respond, ratherthan dominating the conversation.According to Steve Hemphill, partnerof Advisor Pathways, a consulting firmin Oakville, Ont., the benefits for thosewho listen well, and take good notes, are compelling: “You’re going to get a higher share of wallet. You’re going toget more referrals. And you’re going to get higher client loyalty.”

Dave Pickett, who heads up PracticeManagement at TD Waterhouse PrivateInvestment Advice in Toronto, stressesthe importance of a related skill: tun-ing your radar. “You have to move awayfrom the traditional financial planningquestions and start to ask personalquestions,” he says, adding that whilethe core of the advisor/client relation-ship is investment performance, build-ing intimacy with clients is still the keyto solidifying lasting relationships.

Interestingly, although many advisorsagree in principle about what constitutes a deep client relationship,

as well as the importance of buildingtrust, the strategies they adopt to bring clients closer are as unique as their practices.

Financial Advisor asGUIDANCE COUNSELLORBea Grant remembers how proud shewas when she learned that a fundingorganization awarded one of her client’schildren the top scholarship to attenduniversity. She was proud as she knewshe’d played an important role in thisstudent’s success.

Grant, a CFP with Dundee WealthManagement in South Surrey/WhiteRock, B.C., regularly coaches her clientsand their children through the applica-tion process for scholarships and bur-saries. “We try to do a lot of littlethings that really make the difference,”she explains. “By talking with peopleover a period of years, you get to knowthings. You can’t just sit down withthem once and know your client. You’vegot to listen—that’s key.”

Listening prompted Grant to remindher client’s son that some of his com-munity activities could complement thegood marks on his application. Shepointed out the time he spent talkingto residents and volunteering to call outbingo numbers while visiting his grand-mother in a nursing home during thelast year of her life. She recalled he hadbecome heavily involved with a localpolitical party and attended a leader-ship convention. And she rememberedhe had delivered CDs to children inhospital when his brother was sick—at which time his family chimed in thatthey had received a thank-you letterfrom the hospital. She recommended

the son include a copy of the letter withthe scholarship application.

Grant acknowledges her practice ofworking with families (including dif-ferent generations of families) has paidoff. “It’s long-lasting relationships thatyou’re forming, and they grow over timeif you genuinely care,” she says.

Financial Advisor as LIFE COACHDavid Bluteau and his partner, MichaelDeVenney, both hold coaching desig-nations that give them a competitiveedge in relationship building. Bluteau,a CFP, investment advisor and vice-pres-ident of Wellington West Capital inHalifax, explains, “Retirement planningis a huge topic that deals with a lot ofthings that I view as more importantthan money. What are you going to dothroughout retirement? What are yourgoals? One of the beliefs that we haveis you always have to have a future that’sbigger than your past.”

Bluteau teaches his clients aboutstrategies that have helped others makesmooth transitions into retirement. Forexample, he says not all clients want togo cold turkey and stop working.Rather, clients who have successfullytransitioned into retirement havereplaced time spent working with othermeaningful activities.

“Working and having a sense of pur-pose has always been important forclients,” he explains. “It’s probably alwaysbetter to phase it in and come up withnew activities, new interests and newgoals to replace the work parts of theirlives. But if you’re going to try andreplace 40 hours a week of work, what

Cover Story


AE02_020-025 01/20/2005 08:57 AM Page 21

are you going to substitute?” Bluteau saysthat “purpose” comes down to morethan just golfing and leisurely activities.The client may opt for something assimple as volunteering.

He then offers clients financial plan-ning tips that dovetail with their lifegoals. “Financial planning is a smallpiece of the puzzle,” he says. “A lot ofour clients want things handled for them.So it’s making sure that their investmentsmeet their objectives, their requirementsfor income, and that money is set asideif something’s important for them, suchas taking a trip, or going to do some vol-unteer work.”

The result is a rock-solid practicewhere the average client has been withhim for eight to 10 years. Bluteau cred-its his strength in relationship buildingas the key strategy accounting for thatlongevity. He recalls a time a clientcame to him after leaving a financialplanning competitor. The client wasseeking greater overall advice. Althoughthe competition did a first-rate job ofaccount management, Bluteau thinksthe client switched sides primarilybecause he was looking for that relationship factor.

“There was no question the invest-ment advice this individual was receiv-ing was excellent. What he was not receiving was the relationship andalso the overall financial planning,”acknowledges Bluteau.

One client used the term “profes-sional friend” to describe his relation-ship with Bluteau because the advisoroften meets with clients socially forlunch and accepts invitations to dinnerat their homes. And on more than oneoccasion, he has even sat with clients attheir deathbeds.

Financial Advisor as CAR BROKERCFP Vera Adamovich understands cars.Her husband is self-employed in a fieldrelated to the automobile industry, soAdamovich, an advisor with LaurentianFinancial Services in Ottawa, has an“ear-to-the-ground” sense of the mostreliable, cost-effective automobiles.When one couple—both clients—called to arrange to take money out oftheir short-term savings to purchase anew vehicle, she found herself taking

Rule #1: DiversifyAdding Managed Futures Notes to a portfolio of stocks and bonds can help to increase returns while decreasing volatility.

For more information onCWB Managed Futures Notes, Series N-11,visit www.3-wheeler.com

rrsp & rrifeligible




Pho

togr

aphy

by

Rob

ert

Kar

pa

“You CAN’T just sit down withthem once and KNOW YOURCLIENT.You’ve got to listen—that’s key.”

CFPDUNDEE WEALTH

MANAGEMENTSouth Surrey/

White Rock, B.C.

B E A G R A N T

AE02_020-025 01/20/2005 08:59 AM Page 23


on the role of car broker. In the past,the couple had complained long andloud about a series of cars they hadbought from their brother-in-law.

This time, when they announcedthey were about to purchase anupdated model of exactly the samemake, Adamovich decided to step in.She called around town and visitedtwo dealerships to negotiate the bestprice on a type of car she herself hadowned in the past. Then she made an appointment with one dealer for 10 a.m. on a Saturday, picked up her clients and accompanied them ontheir test drive.

“They loved it. They bought it. Thedealer offered me a job!” Adamovichlaughs. “Every time I’ve seen them since then, they give me a hug and say, ‘What would we have done if we didn’t have you?’”

Now, when clients ask for advice inthe car-buying arena, Adamovich offersrecommendations and referrals to specific, well-regarded dealerships in the community.


hen’s the right time to go deeper with clients?

The correct answer is: ALWAYS. But sometimes, especially when you’re

dealing with an overload of clients, it’s just not possible to reach every Bob

and Mary in your book. Many experienced advisors concur it’s necessary to focus atten-

tion on clients who are a good fit so they have time to go the extra mile and develop

deep relationships. Scott Plaskett says he’s cut down his practice to target only clients

who are motivated to get involved in a comprehensive financial planning process.The

senior financial planner and CEO of IRONSHIELD Financial Planning in Toronto, also

looks for ways to enhance efficiencies within his practice. “We’ve tried to systematize

everything that’s predictable, everything that we can control.That frees up myself and

my staff to recognize areas where we can do unique things for clients,” says Plaskett.

Streamlining was, to some extent, imposed on Bea Grant when she moved her prac-

tice from Ontario to British Columbia in 1992. She left all but 15 families behind, and

then carefully replenished her numbers in South Surrey/White Rock. Now, in addition

to providing financial guidance to 150 B.C. households (and helping them to win

scholarships), she personally visits a controlled cluster of 55 Ottawa families several

times a year. She emphasizes:“I’m always very, very cautious that I don’t take on more

than I can do.You don’t want people to be neglected.” —A.M.

(For more on streamlining, see “Less is more,” Advisor’s Edge, Jan. 2005,

page 22)

W

WHITTLE WITHOUT WORRYYour creativity with clients will surge when you free up your time.

Rule #2: ProtectWhy risk your Capital? Managed Futures Notes provideAAA-rated† principal protection* and a GuaranteedMinimum Yield if held to maturity‡.


rrsp & rrifeligible† Standard & Poor’s. * The Notes will be unconditionally and irrevocably guaranteed by the Minister of Finance on behalf of Her Majesty in Right ofCanada pursuant to The Canadian Wheat Board Act, as amended. The Notes are guaranteed by the full faith and credit of the Government of Canada.For further details, please refer to the Information Statement. ‡ The CWB guarantees a minimum return of $103 for every $100 invested, if purchasedat issue price and held to maturity (03/28/2013).

AE02_020-025 01/20/2005 09:01 AM Page 24

Financial Advisor as COISandra McLeod, CFP, charteredaccountant and director of estates andtrusts at Grant Thornton LLP inToronto, makes a point of building alarge network of contacts, including cen-tres of influence (COIs) for clients. Shelooks for opportunities to connect herclients with resources they might need—from traditional lawyers and accountants,to marriage counsellors, career counsel-lors, and even professionals in the sport-ing and car businesses.

For example, she tries to introduceunemployed clients to contacts who canhelp them with new prospects. Or, if aclient’s child is in trouble, she recom-mends appropriate community resources.Essentially she becomes her client’s pri-mary COI. “I’m interested in getting toknow them—even if it’s not specificallyrelated to their finances or their taxes,”McLeod says. “You’re building a long-term relationship and you want them toknow that you’re prepared to go aboveand beyond. When they know that, theyknow you’re going to be there for themwhen they need the other things.”

When advisors perform leap-and-bound-like feats for their clients—thosefriendship-deepening aspects betweenthe advisor and client—it’s not a ques-tion of learning where to draw the linebetween being the consummate financialprofessional and getting to know clientsbetter, McLeod adds. “I guess I don’tlook at it that way,” she concedes. “Youoftentimes get to be very good friendswith your clients. So the way you drawthe line is when you’re doing business—whether it’s directly related to the tax orestate planning or something periph-eral—you do it in a business environ-ment and on a very professional level.Let’s say you’re out for dinner with themor at a social event—you deal with themas you would any other friend. You don’ttalk business.”

Like Bluteau, McLeod believes anideal client relationship extends beyondthe business platform. “Get to knowclients,” she urges. “Become genuinelyinterested in them. And if you’re notgenuinely interested in them—and itcan happen where you just don’t clickwith somebody—then find another

advisor they do click with. They willremember that you were looking out for their best interests.”

Alison MacAlpine is a Toronto-based editor and

writer. [email protected]

Looking to go even deeper with your clients this year? Advisor.ca is now featuring a collection of freshexpert insights, strategies and toolsto help you with your focus and follow- through in 2005.This specialpackage includes:

• A tip sheet on building call schedules (and client relationships)

• How to use the retirement discussion to truly get to know your clients

• An all-new client template letter

All this and more can be found in the Practice Zone at www.advisor.castarting February 4, 2005.For other online resources related toarticles in this magazine, please visitwww.advisor.ca/edge/.

More online

www.advisor.ca/interact@


Rule #3: ProfitAccess the proven performance of an industrywith an average annual return of 12.62%, netto the investor since 1980†.


rrsp & rrifeligible† CISDM Fund/Pool Qualified Universe Index adjusted for CDN T-Bills, net of fees January 1980 – September 2004. This index reflects the combined performance of a large number of sponsors. Historical experiences with managed futures investments are not necessarily indicative of future performance. There are risks associated with any investment. Speak to your financial advisor for more information.

AE02_020-025 01/20/2005 09:01 AM Page 25

TOP CONFERENCE SPEAKERSWEALTH MANAGEMENT IDEAS FROM OUR

Indexed strategies may be flawed–but don’t abandon them altogether. By Bradley G. Steiman

PASSIVE PHILOSOPHIES

For many years, the investmentcommunity has divided itself into twophilosophies: traditional active man-agement emphasizing stock picking ormarket timing, and passive manage-ment seeking to capture market ratesof return at low cost. Most passivestrategies seek to replicate the returnsof widely followed benchmark indexessuch as the S&P 500. Over the years,the words passive and indexing have oftenbeen used interchangeably.

Indexed strategies have achievedboth investment and commercial success over the past 30 years, withnearly $3 trillion in investmentsworldwide pursuing some version ofthis approach.

The success of indexing has broughtmore attention to this strategy, butrecent research has documented someflaws as it becomes more widelyapplied. Conventional index bench-marks were designed as scoreboards ofmarket performance, not blueprints forinvestment strategies.

Index managers are often judged bytheir degree of tracking error relativeto a stated benchmark, but untilrecently the associated costs have notbeen closely examined. Since index revi-sions are publicly announced inadvance, trading-oriented market par-ticipants can, and do, front-run indexmanagers who must buy or sell securi-ties on the reconstitution date to min-imize tracking error. That means index

results are biased downward by thisshort-term effect: Stocks entering theindex generally rise in advance of thereconstitution date and stocks leavingthe index generally fall. Managers candeliver index returns but the index itselfis penalized by the efforts of indexmanagers to minimize tracking error.

Another issue pertains to indexconstruction. Conventional bench-marks are intended to offer a simpleroadmap of market behavior. Whileuseful for shorthand analysis ofmarket performance, alternativeapproaches offer the opportunity todefine asset-class risk and return char-acteristics with greater precision. Forexample, with value stocks, a strategyfocusing on equities with sharplydefined value characteristics may provemore appealing than one which sim-ply splits the equity universe intoequal parts value and growth.

If indexed strategies are oftenflawed by reconstitution and engi-neering issues, the solution is not toabandon passive management. Instead,think of indexing as simply one(though perhaps not the most effec-tive) way to implement a passiveapproach. Equilibrium-based invest-ing is an alternative approach.

An equilibrium viewpoint suggeststhat while security prices vary, thereare powerful forces working to pushprices back toward their intrinsic val-ues. It makes more sense to harness

these forces to one’s advantage ratherthan incur the costs and uncertaintyassociated with efforts to outwit them.

But how do you develop investmentstrategies in the absence of benchmarkindexes? Take the following approach:The firm must develop its own privateindexes and maintain their secrecy. Byfocusing on the risk dimensions ofcapital markets, the focus on assetclass characteristics takes on evengreater significance. If real estate is aseparate asset class, for example, itmakes sense to isolate real estate secu-rities (typically REITs) in a separatestrategy, and remove them frombroad-based strategies. Investors arethen free to combine the two assetclasses in whatever mix they see fit, butwith a greater understanding of therisk and return characteristics associ-ated with their portfolio choices.

Once an equilibrium viewpoint is adopted, the focus shifts to identify-ing asset class risk and return character-istics and developing portfolio rules tocapture returns as reliably as possible.

This approach will likely involvegreater complexity than first-genera-tion index strategies, but it also offersthe prospect of more satisfying long-run results.

Bradley G. Steiman is a founding director ofDimensional Fund Advisors Canada Inc.,with files from Weston J. Wellington, one ofDimensional’s in-house research experts.


AE02_027 01/20/2005 11:32 AM Page 27

Advisors should use insurance solutions to preserve client capital.

PROTECTING ASSETS

Interview with Phil Marsillo, vice-president, distribution, Canada Life.ADVISOR’S EDGE: How should an

advisor assess whether critical illness

insurance is needed to protect a

client’s family and assets?

PHIL MARSILLO: You’ve got to lookat the family history. Some of the ill-nesses are genetic. Some advisors areuncomfortable asking those questions.A lot of advisors are used to a quicktransaction—“We’ll do the plan. We’ll buy you a financial instrument.” It’s inand out.

With insurance, you have to gothrough a whole underwriting process.So advisors need to be educated aboutwhy they have to obtain this informa-tion. It’s not so much that they get toknow their client more because of it,but they have to ask some questionsthat relate to pre-screening.

It helps the advisor as well becauseit protects their book of assets. Ifsomeone becomes disabled or is diag-nosed with a critical illness, the firstthing that will happen is the assets willbe touched. You need to build a planand protect the client’s wealth.

Some advisors aren’t comfortabletalking about medical history. Theydon’t want to get involved with that ormay feel it will impact the relationshipwith the client in some other area. Ifthat’s the case, develop an affiliationand refer them. Say: “We’re a team.This guy does the insurance and I dothe investments. I handle his clientsand he handles my clients.” Just makesure you have the alignments withother specialists. It goes over well withthe client when the advisor says he’sgoing to bring in a specialist. AE: Does it help to put yourself in the

client’s shoes?

PM: Imagine being diagnosed withcancer. The first thing on the client’smind is, “How can this happen tome?” But there are also financial ques-tions in the back of their mind abouthow they’re going to afford it. Or,when you have a heart attack, thebiggest risk is that you’re going to havea second heart attack. Your doctor isgoing to tell you to reduce the num-ber of hours you’ve been putting in.

But say you own a business. Eventhough you’re at home and you’re lyingin bed recuperating, where’s yourmind? It’s on the business. So you getcaught in a cycle. You worry aboutthat and you don’t get better. But ifyou transfer the risk, at least you knowthere’s some cash that becomespayable. It doesn’t cure your heartattack but it reduces your stress level.

Otherwise, you’re just thinking, “Ineed to get back to work or else myclients will walk away and I’ll lose myincome.”AE: What tools can help an advisor

make the argument for insurance?

PM: Ask the client if they’d be happywith a somewhat lower return. If it’s8%, would they be happy with 7% or7.5%? If a client has $100,000 withan advisor and they’re earning 8%,that’s $8,000. Ask them, “What if Icould generate 7%? Would you behappy with that?”That 1% differen-tial is often what it costs to add thelife insurance and CI policy premiumsto protect the assets—$1,000 is gen-erally going to cover the premiums. AE: What if the client objects to the

idea of insurance?

PM: It’s the role of the advisor to doa needs analysis. What happens ifsomebody dies and there isn’t enoughinsurance? Say you only insured theclient for $100,000 and the incomeearner dies. The beneficiary couldcome back and say, “I’m suing youbecause you didn’t do a completeneeds analysis and I needed a milliondollars of insurance.” As an advisoryou have an obligation to present the solution. If the client says he orshe can’t afford it and says they want half of that, or a tenth, makethem make that decision. And put itin writing.

—Philip Porado


“If you transfer therisk, at least you knowthere’s some cash thatbecomes payable.”

AE02_028 01/20/2005 09:09 AM Page 28

Clients who win or inherit a large sum of money experience a number of challenges.

SUDDEN WINDFALLS

Interview with Tim Cestnick,managing director, AIC tax and estateplanning group.

For most people, a million-dollar-plus inheritance would be a dreamcome true. But there are a number ofpitfalls to an inheritance of that size.That’s where advisors can offer valu-able assistance to heirs, says tax expertTim Cestnick. “The larger the inher-itance is, the greater are the challengesyour client will face in dealing withthat money,” he says.

The most obvious pitfall is spend-ing too much too soon, because theclient considers the inheritance awindfall. Cestnick recommends theclient allot a set percentage for spend-ing sprees. “If the client wants to gocrazy and spend some money, then letthem take 5% of the money and justblow it,” he says.

But there’s also the potential for

negative psychological responses, Cestnick warns, such as paranoia,boredom, immaturity and inadequacy.“Immaturity and paranoia are themost common. Inheritors can bespared life’s challenges. It can inhibityour growth as an individual.”

As for paranoia, Cestnick says heirswith large amounts of money canbecome targets of other people’sgreed. “New friends are coming outof the woodwork and you have toquestion their motives. People tend tostart mistrusting other people. Rela-tionships become more difficult to establish. There’s not a lot that advisors can do about that except help them deal with it.”

Early retirement is another com-mon response to a large inheritance,but Cestnick says it’s not always theright move, citing the example of a35-year-old man who inherited a mil-

lion dollars and immediately quit hisjob. “I’ve never met a more miserableguy because he didn’t plan how he wasgoing to spend the rest of his life. Youdon’t just go quitting your job, there’splanning to be done, such as decid-ing what you will do with your time.”

There really are only four optionsfor inheritances, says Cestnick: Invest,spend, pay down debt or give it away.The correct strategy depends on theclient’s circumstances.

Cestnick has a number of usefultips for maximizing inheritance byminimizing tax. “Make sure wills areset up so their heirs will inherit morerather than less,” he suggests. “Triggerlosses in the first year of the estate.Any losses realized by the estate in thefirst year can be carried back to thefinal tax return of the deceased indi-vidual to offset any capital gains orother income.” —Doug Watt


AE02_030 01/20/2005 09:39 AM Page 30

Look for inflation to return this year.

INVESTMENT PREDICTIONS

Interview with Gavin Graham,director of investments, GuardianGroup of Funds.

Inflation is coming back, and thatmeans higher interest rates and a likelyend to the recent cyclical bull market,says Gavin Graham of GuardianGroup of Funds.

Graham, who presented a sessionon the global investment outlook atthis year’s Advisor Forum conferences,says Canadian stocks have been per-forming relatively well over the pastyear. However, he thinks that thegrowing strength of the U.S. economywill cause inflation to return and, as aconsequence, this growth will also leadto higher interest rates. “What youwant to be in depends on where we arein the economic cycle, and that can bediscerned by looking at interest rates,”he says. “It’s not rocket science. Ifinterest rates are going down, gener-

ally financial assets will be performingwell because the risk-free rate that youget in GICs and bank depositsbecomes less attractive.”

Graham adds that rates have goneup three times in the U.S. in recentmonths and twice in Canada. That’sa trend that will likely continue. “It’shighly likely that Mr. Dodge and Mr.Greenspan will raise rates anotherquarter point by the end of the year.”

So what does that mean forinvestors, since rising interest rates aregenerally not good for conventionalfixed-income instruments? “Four yearsago, you were telling your clients tosell growth stocks and buy bonds.

Now you tell your clients, don’t buyconventional long-dated bonds.”

Still, Graham likes high-yield andreal return bonds and is also a fan ofincome trusts, despite naysayers whoworry about their recent run-up.“You’ll get a 6% to 8% yield. It’s stillan attractive product.”

“The banks are still up despite ris-ing rates, so don’t bet against them.And healthcare is a buy because noneof us are getting any younger.”

The other main story of 2004, thedecline of the U.S. dollar, will prob-ably continue this year, Graham pre-dicts. “They want the U.S. dollar togo down because that’s how you solveyour current-account deficit. Youmake imports more expensive andexports cheaper, and gradually overtime you get a J-curve, where it getsworse initially and then it starts getting better.” —Doug Watt


“If interest rates aregoing down, generallyfinancial assets will beperforming well.”

WHAT’S THE BEST WAY TO BUILD YOUR WEALTH? FROM THE GROUND UP...

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds arenot guaranteed, their values change frequently and past performance may not be repeated. Tax credits are generally subject to recapture if shares are redeemed within eight years.*Federal and Provincial tax credits apply to individuals resident in Ontario, Nova Scotia and New Brunswick.

To build a prosperous future you need to start with a strong foundation. That’s why RetrocomGrowth Fund makes such a solid investment decision. As the only fund in its class to invest inreal assets - real estate development - Retrocom delivers concrete results, including:

• 30% in tax credits*

• Investment in physical assets • Security through subordinated debt

• Portfolio diversification

• Defined exit strategy

• 100% RRSP eligibility

Call 1-888-743-5627 or visit retrocom.ca today.

AE02_032 01/20/2005 09:14 AM Page 32

A larger income trust market means portfolio diversification can offset rising interest rates.

TRUST OPTIONS

Interview with Dean Orrico, portfolio manager, Middlefield In-come Funds.

The booming income trust marketwill always have its naysayers, but thereare compelling reasons to believe theasset class is here to stay, and willremain profitable, according to DeanOrrico, portfolio manager at Middle-field Income Funds.

Admittedly, Orrico has a vested

interest in the sector—his firm manages seven closed-end trusts worth$3.2 billion. But he makes a strongargument that income trusts haveevolved beyond their fledgling begin-nings and will continue to thrive, evenif interest rates continue their slow rise.“Is this a flash in the pan?” he asks.“Over eight years, income trusts haveoutperformed every other asset class.Trusts are a great total return vehicle.”

The Canadian trust market has ballooned in the past few years, to 160 issues worth $108 billion. Thatrepresents 8% of the TSX’s marketcap, Orrico notes. Of course, thatkind of growth inevitably leads to talkof a trust bubble, similar to what hap-pened to tech stocks a few years back.Orrico says it’s not a fair comparison.“The tech market was a bubble



Darin Diehl, executive editor andassociate publisher of The ADVISORGroup, is pleased to announce theappointment of Philip Porado asassociate editor of Advisor’s Edge.Prior to joining Advisor’s Edge,Philip wrote and edited a weeklynewsletter geared toward regulatoryand compliance professionals at

U.S. brokerage firms. He has been on the staff of severalU.S. magazines and newspapers and is a graduate ofthe American University in Washington, D.C. He recentlyimmigrated to Canada from the United States.

Darin Diehl, executive editor andassociate publisher of The ADVISORGroup, is pleased to announce theappointment of Marika Tamm aschief copy editor, ADVISOR Group.Marika has 15 years of experience inacademic and legal publishing. Shehas written for university publicationsand newspapers, and most recently

worked as an editor and writer on corporate, commercialand securities products for a legal publisher. Marika hasan LL.B from the University of Toronto and a B.A. inEnglish from the University of Waterloo.

“The ADVISOR Group” is a part of Rogers Publishing, a division of Rogers Media Inc., a division of Rogers Communications Inc. (TSX: RCI; NYSE: RG) RogersCommunications Inc. is a diversified Canadian communications and media company. It is engaged in cable television, high-speed Internet access and video retailingthrough Canada’s largest cable television provider,Rogers Cable Inc.; in wireless voice and data communications services through Canada’s leading national GSM/GPRScellular provider, Rogers Wireless Communications Inc.; and in radio, television broadcasting, televised shopping and publishing businesses through Rogers Media Inc.

ANNOUNCEMENTS

The ADVISOR Group comprises of Advisor's Edge, Advisor's Edge Report, Advisor.ca, Objectif Conseiller, Conseiller.ca and Advisor Conferences.Our mission is to help advisors build a community where they can receive and share insight and tools that help them serve their clients' bestinterests.We will work to inspire advisors to attain a high standard of competency and ethical conduct — in the belief that doing so produces botha well-satisfied client and a prosperous advisor.

AE02_035-036 01/20/2005 08:49 AM Page 35

because you had companies that had no cash flow and noearnings,” he says. “Trusts are the exact opposite—they gen-erate high levels of cash flow and earnings. So that’s not abubble, these are real businesses and a lot of them have beenaround for a long time.”

And since the trust market has now become much larger and therefore more diversified, portfolios can be positioned to offset any rise in interest rates, the fund manager believes.

Orrico manages interest rate risk by currently over-weighting in economically sensitive sectors, such as oil andgas and business trusts. “In a period of growth, there’sgreater demand for commodities, so oil and gas trusts will enjoy greater revenues and cash flow and pay higherdistributions, offsetting rising interest rates,” he says. “Busi-ness trusts also do well during periods of economic growth.If in five years we thought we were going back into a recessionary environment, we’d skew back to more interest-rate-sensitive trusts, such as power and pipeline. My thesisis that you can create diversification in an income trust portfolio.”

In addition, Orrico believes trusts are reasonably valued,with a long-term average of 10% to 11% per annum. “But you’re getting most of that return in the form ofcurrent distribution, on a monthly basis and on a tax-efficient basis.”

Oil and gas trusts will continue to outperform, Orricosays, even though they are generating cash flow from declining assets. But commodity prices will remain strong forsimple supply and demand reasons, he adds.

“World oil production is declining and demand, specifi-cally from the developing world such as China and India, isgrowing,” Orrico notes.

There’s also good news for income trusts on the politicalfront, because the limited liability issue has been resolved inQuebec, Alberta and Ontario; these provinces represent 95%of Canada’s income trust market.

Although limited liability is a non-issue for firms likeMiddlefield, it has kept most of the major pension fundsaway. Orrico believes that will change, however, and maylead to another wave of buying by pension funds in Canada.“Given their clients’ need for income and their underfundedsituations, trusts are a logical alternative for pension funds.If I’m a pension fund investor, I can’t avoid trusts.”

—Doug Watt



AE02_035-036 01/17/2005 05:15 PM Page 36

Structured products are here to stay.

PORTFOLIO EVOLUTION


Interview with Steven Marshall,president, OpenSky Capital.ADVISOR’S EDGE: Describe, based on

your experience,how structured prod-

ucts work.

STEVEN MARSHALL: GICs were reallythe first structured product. GICs werelinked to an index but they didn’t workvery well. They weren’t innovativeenough because they weren’t structuredin a way that was beneficial to theclient. There’s no yield once you takeaway taxes and inflation. Now, wedesign products for a specific need inthe portfolio—for example, to replacea GIC. We say we’re going to guaranteeyour capital and we invest in an under-lying security or index that we think isgoing to do better than GIC rates. AE: Many advisors dismiss struc-

tured products since equities gener-

ally will make money over the long

term. So why pay for a guarantee?

SM: Clients are reanalyzing their com-fort level with volatility and risk, sowe have to look at other options.Many clients aren’t too sure they’reready to live through what they livedthrough in the last five years. They’reuncomfortable that part of their cap-ital may not be there tomorrow.They’re willing to forgo some of theirreturn to protect that capital.

We advisors may feel confidentabout equities but many clients donot. The standard portfolio advisorshave built over the past 10 to 15 years

is no longer enough. Whether or not advisors want to offer these intheir own practices, we at least have to explain them to clients who are definitely going to ask questions.AE: What do clients expect from

structured products?

SM: Clients want the comfort of aguarantee that their capital is pro-tected. That said, they still expect areturn. They want higher yields thanfixed income products offer withoutthe capital exposure to riskier equities.

Take my father for example. He’s63 years old and the last person I everthought would talk to me about struc-tured products. His portfolio consistsprimarily of balanced equities andfixed income. But he still wasn’t con-tent with it. Someone like my dad issaying he understands fixed incomeand equity, but he also wants a bit ofstability in his portfolio.AE: How much of a portfolio will one

day consist of structured products?

SM: I can see one day where struc-tured products would be 25% of aclient’s overall portfolio, but the corewould still be equities and fixedincome. It’s not so much an asset class;it’s an evolution of the portfolio thatreduces volatility, brings stability andgives clients a potential return.AE: How will they evolve?

SM: Absolute return productproviders need to better educate advisors about how the products work

so advisors are able to explain them totheir clients. We’ll also have to con-tinually increase the transparency.There’s a huge due diligence to gothrough with these products in orderto understand them. AE: How much should clients pay in

fees for a structured product?

SM: They shouldn’t pay above theaverage MER of a mutual fund. Atthat price, the client can expect adecent return in normal conditions,and if the conditions are adverse, thenthey’ll get their capital back. Mybiggest fear of structured products iswhen the underlying investment doeswell but the client doesn’t get a simi-lar return on the underlying invest-ment because the fees are too high.Advisors need to examine if the feescharged are a fair amount and if theclient is going to get enough. It’s all fine and dandy to put a capitalguarantee on something but if the client can’t make money, it just doesn’t make sense.

—Deanne N. Gage

“I can see one daywhere stuctured products would be 25%of a client’s overallportfolio, but the corewould still be equitiesand fixed income.”

AE02_037 01/17/2005 05:16 PM Page 37

Sound fundamentals for U.S. corporations will drive stock market improvements.

EQUITY ADVANTAGES


Interview with Scott Malatesta,Merrill Lynch Investment Managersfor Talvest Fund Management.ADVISOR’S EDGE: Consumers appear

tapped out, so what’s going to push

growth in the economy and equities

markets this year?

SCOTT MALATESTA: U.S. corpora-tions now have in excess of a trilliondollars in cash on their balance sheets and will be putting that moneyto work.

There will be capital expenditures.CFOs and CEOs tell us they will allo-cate more money to spending nextyear to the tune of an increase of50%, and the majority of that will bein information technology spending.

At some of the larger investmenthouses in the U.S., we last wentthrough an upgrade in our technologyequipment in 1999 in preparation forY2K. The shelf life for tech equip-ment is three to four years, so we’reworking on equipment that is nolonger up to standards. In order to becompetitive, we need to go throughsome sort of technological upgrade.Other firms will be forced to do theexact same thing in order to remaincompetitive in their industries.

Inventory expenditures also aregoing to take place because invento-ries are at rock bottom. And thenyou’ll get some export growth. We arevery positive on the profit outlook forU.S. corporations.

AE: What about jobs?

SM:The economy in the U.S. is reallyalmost firing on all eight cylinders, but jobs are the weak link. I think the job environment will improve, but the unemployment rate is 5.5%.The anomaly was the late stages ofthe Clinton administration when it was 3.7%. That is not a realisticnumber. An unemployment rate of5.5% is something we’re a little morecomfortable with.AE: What’s the wildcard for the

U.S. and other economies this year?

SM: Terrorism. If you want to knowwhat keeps portfolio managers up atnight, this is it. We can’t analyze whatthe impact of another terrorist actionon the U.S. (or outside the U.S. on aU.S. interest) would be. What we doknow is that the U.S. equity marketsdid rebound quickly after September11. There was a drop initially, but theyrebounded in the ensuing six-monthand nine-month periods. But, again,not something that’s analyzable fromour perspective. AE: What about high energy prices?

Won’t they crimp stock values for

U.S. companies?

SM: Oil prices at $50 posed someminor concerns for U.S. economicgrowth. We’re not as concerned at $42, $43 a barrel. Although I don’t think we’re going to go back to$30 a barrel, we’re in a range that’sprobably tolerable and certainly

doesn’t shave a lot off U.S. economicgrowth or worldwide GDP. If you putit on an inflation-adjusted basis, we’renowhere near the peak we saw in the1970s at $80 a barrel. AE: So what’s the forecast for equity

markets? Should advisors be direct-

ing clients to higher-growth stocks?

SM: A smaller number of liquidstocks are trading higher right now. Asyou move into a longer term of therecovery, the more established com-panies that offer a higher return onequity, and are able to pay a dividend,are the companies that will outper-form. We’ve moved up market cap in our investments.

The transition from lower-capstocks to the larger, higher-capstocks—while not taking place as fastas we’d thought as evidenced by per-formance disparity of the S&P 500and S&P 600—is beginning to takeplace. And if you take the componentof the S&P 500 index that pays a dividend, they are up over 7% throughthe end of October. The non-dividend payers are down over 4%.

We also believe it’s prudent to have an allocation in internationalinvestments. There are obviouslyopportunities outside the U.S. that are on par and in many cases superior to the equity market returns that we may experience in the U.S. thisyear.

—Philip Porado

AE02_039 01/20/2005 11:48 AM Page 39

Adjust your practice to the changing climate of retirement.

A NEW SENSATION

Interview with David Wahl, director national sales, TD Asset Management Inc. ADVISOR’S EDGE: How has retirement planning changed

in the last decade?

DAVID WAHL: Retirement is a complex issue now since people are living longer and retiring earlier. There are awhole range of issues that go along with being a financialadvisor and dealing with people in retirement. We’re talk-ing about a paradigm shift. When you are a retirement specialist, you go from looking after people’s money tolooking after people with money. Just before retirement iswhen people have the most wealth. People really accumu-late by the age of 55. Then they have an opportunity toenjoy their money. But if you do a financial plan from theage of 55 to 85, that’s 30 years of retirement. AE: What’s the biggest challenge facing advisors who are

dealing with retiring clientele?

DW: There are many complex issues that people gothrough—especially later in life—and you have to be cog-nizant of them to be a good financial planner. Health sta-tus and lifestyle may change. Some people spend longer inretirement than they did in their working years. That’s stag-gering when you think of all the changes you probably wentthrough in your working life: graduating from school; work-ing; getting married; having kids; and having grandchildren.Now you have another 30 years where you’re going to gothrough many more things. AE: What is the value proposition in differentiating

yourself as a retirement specialist?

DW: You are a trusted advisor and a confidante, probably,so you can provide the help that perhaps your retiring clientsare not getting from a support network. Maybe you helpedthem develop wealth and you were looking after theirwealth, but at some point in retirement you cross over, andyou have to start thinking about them as people who havemoney. You’ve probably helped them accumulate thatmoney, but now you have to worry about them as people.

It’s all about empathy and understanding—empathytowards the changes your elderly or retired clients will gothrough—right from wanting to travel, to having to giveup their property or home for the first time. It’s like takingKnow Your Client to the next level.AE: Why is intergenerational planning so important?

DW: It’s a necessary service in maintaining a support net-work for them and to make sure that family are involved insome of the decisions they need to make financially. It’s alsoa chance for you, on a purely business case, to get to knowthe next generation.

—Heidi Staseson


Rev into this RRSP Season Rev into this RRSP Season Approval in seconds using EASE ouronline RRSP loan application!Approval in seconds using EASE ouronline RRSP loan application!

For more information visit www.b2b-trust.com or call 1.877.TRY.EASE

EASE FEATURES

Pre-Approval OptionDeferral OptionImmediate Adjudication

RRSP LOAN OPTIONS

Early Bird at PrimeTraditionalTop-up

EASE FEATURES

Pre-Approval OptionDeferral OptionImmediate Adjudication

RRSP LOAN OPTIONS

Early Bird at PrimeTraditional Top-up

AE02_041 01/17/2005 05:19 PM Page 41

BREAKTAX

Use inter vivos trusts to move assets to family members with lower marginal tax rates. By Gena Katz

TRUST FOR A LIFETIME

Business owners and high-net-worth investors often use inter vivostrusts as a way to transfer ownership ofassets while still retaining control overthem. They’re particularly useful inaccomplishing family tax and financialplanning objectives. But to determinewhether a trust makes sense, it’s impor-tant to know how one works, the ben-efits it can provide and its limitations.

An inter vivos trust is a personaltrust created during an individual’slifetime. Trusts themselves are fairlysimple. They involve three parties: asettlor (who sets up the trust by con-tributing property); a trustee (whomanages and controls the assets of thetrust); and the beneficiaries (the endrecipients of the trust property). Forincome tax purposes, a trust is deemedto be an individual, although no per-sonal tax credits may be claimed. Allthe income of an inter vivos trust istaxable at the top marginal personalrate, but if the trust income is allo-cated to beneficiaries, it generallyretains its character and will be taxedin their hands instead. And that’swhere the major advantage lies.

So when does a trust make sense?I’ve discussed three distinct applica-tions of inter vivos trusts in previousarticles. One prior column looked atalter-ego or joint spousal trusts. Suchtrusts are created by seniors and can act as will substitutes while at the same time avoiding estate

administration taxes (probate fees).I’ve also examined use of a trust aspart of an estate freeze, and mostrecently I discussed the special rulesthat apply to immigration trusts (Advi-sor’s Edge, September 2004, page 41).

But even outside these situations,because income earned in a trust canbe allocated to beneficiaries, who canuse personal credits and are subject tolower marginal tax rates, a trust can beused for income splitting. However,there are a few things to watch out for,including the kiddie tax and attribu-tion rules.

The kiddie tax will apply to divi-dends from private corporationsreceived through a trust by a minorchild. It also applies to other propertyincome of the trust when it providesthe property in question to a businesscarried on by certain relatives. Attri-bution, meanwhile, may apply if prop-erty is gifted or loaned to a trust forthe benefit of a spouse or minor child.

To avoid attribution, the trustshould be settled with a non-income-producing property, and the trustshould borrow funds from a thirdparty to purchase income-producingproperty. In addition, it’s importantto ensure that property received by thetrust cannot revert back to, or be con-trolled by, the person who transferredthe property. This is why a trust settlor should not be the trustee or abeneficiary.

It is possible to avoid attribution ifa parent gives property to a trust forminor children and that property or asubstituted property earns capital gainsthat are allocated to the children. Thereare a couple of things to watch for. Atransfer of property to a trust is gen-erally a fair-market-value disposition tothe transferor. For that reason, considertransferring cash instead of appreciatedassets. In addition, the parent transfer-ring the property should not be thetrustee or a beneficiary.

Once you’re over the attributionhurdle, you have to deal with theincome allocations. It is not sufficientmerely to allocate the income on paperand have it taxed in the beneficiaries’hands. The income must be paid orpayable. In the case of a discretionarytrust, the trustee must either make dis-tributions to the beneficiaries or issuepromissory notes (this will make itpayable). Payments to third parties forcertain expenses (such as daycare,tuition fees or medical expenses forminor children) would be consideredpaid to the child. There is one excep-tion: If a beneficiary is mentally orphysically disabled, you can elect toallocate the income to that benefici-ary while retaining it in the trust.

Gena Katz, CA, CFP, is a senior principal with Ernst & Young’s NationalTax Practice in Toronto. “Tax Break”appears monthly.


AE02_043 01/17/2005 03:04 PM Page 43

INSIGHTSINSURANCE

Make charitable contributions part of your clients’ overall financial and estate plans. By David Wm. Brown

INTEGRATED GIVING

The tragic events in SoutheastAsia are a grim reminder that chari-table giving should be a year-roundactivity. Many taxpayers and charitiesfocus on the December 31 year-end inorder to qualify for federal tax credits,but advisors should be showing their clients that tax advantages can berealized throughout the year.

In order to feel comfortable rec-ommending a charitable gift in anestate or financial plan, advisorsshould review tax laws as they relateto such bequests. A savvy advisor alsowill profile clients to determine whichones will benefit from this type of taxplanning. A couple starting a familylikely won’t be the best prospect. Areally good prospect would be a clientwho is turning 69, and who has amaturing RRSP, since giving by help-ing a favourite charity allows him orher to save on taxes as well.

With the exception of Quebec,individuals residing in Canadianprovinces are entitled to a federal taxcredit of 16% on the first $200 ofcharitable donations, and 29% on anyremaining donations, pursuant to sub-section 118.1(3) of the Income TaxAct. At the top level of income, andincluding the surtax and provincialtax, a savings of 46% is generated foreach dollar donated in excess of $200.

This incentive can be further mul-tiplied through tax-friendly structuresand vehicles, such as life insurance,

annuities, and RRSPs or RRIFs.These vehicles can multiply a gift byutilizing the mortality gain in a lifeinsurance contract or by offsetting alltax payable on an RRSP maturing atdeath. All that’s required is a willingdonor, a cooperative endowmentdirector and a knowledgeable advisor.

The most common and straight-forward method of donation is the lifeinsurance gift. There are three ways adonor can gift a life insurance policyand they all have different tax outcomes. A donor can:• make a bequest of a life insurancepolicy through a will;• donate a policy while alive; or • name a charity as beneficiary on thecontract.

The options should be reviewed bythe donor, the advisor and a tax con-sultant to determine which is bestsuited to the client or the estate. Themajor difference boils down towhether the donor wants to claim thetax credit while alive, or have the peo-ple inheriting the balance of his or herestate benefit after death. If receivedat death, the policy can be used to off-set other income and lower tax in theyear of death, or one year prior.

A policy naming the charity asdirect beneficiary will pass through theestate and will generally not be subjectto probate fees, creditor claims orestate litigation.

If the donor transfers an existing

policy to the charity, there may be taxadvantages in the year of transfer, aswell as future tax credits for premiumspaid by the heirs if the policy is notalready paid up.

Using a life insurance contract alsooften allows the donor to make amuch larger contribution than he orshe otherwise might have afforded.For example, a male and female policyholder, both non-smokers, age55 and in good health, can purchase a$100,000 joint-life last-survivor pol-icy for a yearly premium of approxi-mately $700. When the tax credit isaccounted for, their annual cost wouldbe roughly $350. The policy can befunded using either a single premiumor limited premium method.

Insurance can also be used toretrieve or replace such assets as cash,publicly traded securities, property,registered funds or private companyshares formally donated to a charity.In these instances, the insurance ben-efits will replenish the estate with cashto offset the donated asset.

So when clients talk about wantingto make charitable contributions, present options that will help themgive all year-round.

David Wm. Brown, CFP, CLU, Ch.F.C.,RHU, is a member of the MDRT. He is apartner at Al G. Brown and Associates inToronto. “Insurance Insights” appears everyother issue.


AE02_044 01/17/2005 03:04 PM Page 44

MANAGING

Contemplate office paradoxes to create harmony among clients and staff. By Harvey Schachter

COMBATTING CONTRADICTION

For most of us, life involves sort-ing through and choosing betweencompeting forces that pull us in onedirection or the other. We walk a dailytightrope, for example, between howmuch time to put into our careers andhow much to put into our personal orhome lives.

In the office, we balance how muchwork to do ourselves with how muchto delegate. Many successful organi-zations view clients as their numberone priority, but other equally suc-cessful ones argue managers must con-cern themselves first with employeesatisfaction because that ultimatelyaffects clients and the bottom line.

Some of these contradictions canbe portrayed in a matrix, like StephenCovey’s time management classicabout the daily pressure of choosingbetween important or urgent work.Far too many people spend their livesin the urgent but not important quad-rant and need to spend more time in the non-urgent but important category.

Alex Lowy, a Toronto consultant,and his Silicon Valley-based partnerPhil Hood, present 55 such dilemmasin their book The Power of The 2x2Matrix. They call on us to apply “2x2Thinking” to our lives, looking forrevealing solutions to such conflicts byseeing both sides of an issue.

“2x2 Thinking recognizes the powerin exploring competing forces,” the

authors note. “By intentionally con-structing dilemmas, we challenge our-selves to think at a higher logical level.”

One helpful technique for man-agers is to identify basic contradic-tions that drive staff in an organiza-tion crazy such as the pressure to keepquality up and costs down, or toachieve high quality while meeting asteady stream of tough deadlines.Those aren’t necessarily opposites, butthey can clash, sparking divisionsbetween staff, as some aggressivelypush for the one goal and argueagainst the other.

Advisors can find themselvesdivided over how much time to spendon clients versus how much to devoteto other activities demanding atten-tion, such as research or administra-tion. Or, how much effort to dedicateserving current clients versus howmuch to bringing on new ones.

Sit down and discuss some of themost powerful contradictions pervad-ing your office. Map them on a flipchart, listing the advantages and dis-advantages of each element of theduality. Ask yourself how you canattain only the advantages, say, of highquality and cost reductions, withoutthe disadvantages?

One oft-overlooked managerialdilemma is between simplicity and com-plexity. Everybody craves simplicity. Youprobably seek simplicity, for example,in your reading material and the funds

you are considering for your clients.They want you to explain things tothem in a simple manner. Your staffmembers want you to give directions ina clear, direct and simple fashion.

But life is complex, as are the issuesan advisor faces. That means you needto grapple with those complexities tobe successful. Your clients and staffknow that. But clients are suspicious ofadvisors who try to make it seem toosimple. Likewise, employees aren’thappy with managers who spout mean-ingless cant. They’re unlikely to succeedand can cause managers serious prob-lems—unless they’re guided throughthe complexities they need to under-stand in order to act properly on yourbehalf.

Also think about how your com-munications with clients can indicateyou understand the complexities oftheir portfolios while explaining it tothem in an uncomplicated manner.

Take time thinking through the various contradictions you face as amanager, and how to address them sothey are less of a psychological burdenon you, your clients and your staff. The process will, as Lowy and Hoodsuggest, provide deeper understandingand superior solutions to the challengesfacing your organization.

Harvey Schachter is a contributing editor of Advisor’s Edge. “Managing” appearsmonthly.


AE02_047 01/17/2005 03:20 PM Page 47

REPORT

A survey of wealthy investors finds service outweighs performance. By John J. Bowen Jr.

GIVE THEM WHAT THEY WANT

There’s a lot of discussion thesedays about managed accounts andtheir apparent increasing popularitywith both advisors and clients. Astudy last year by my firm found asubstantial majority of advisors eithernow use, or plan to use, a managedaccount program (see chart below).

But take a closer look and you’ll seea wrinkle: Managed accounts are actu-ally being used less by the top-tieradvisors (those earning more than$200,000 per year) than by advisorsin the middle-income group. In fact,nearly one out of five of these elite

advisors do not use, and have no plansto use, managed accounts.

The important point, though, isnot simply whether managed accountsare right for your clients. It’s that youneed to be more than a product facil-itator to serve your clients well. Youhave to be the trusted person whounderstands your clients’ needs andhelps them make wise decisions abouttheir money.

An in-depth study of affluentinvestors in the U.S. by my researchpartner, Russ Alan Prince, revealsmore than nine out of 10 (92.6%)people he interviewed said they aremore careful about selecting theiradvisors than about choosing theirinvestment products.

To help clients reach their financialgoals, you need to align yourself withthe services they want, but not neces-sarily the investment products. One ofthe decisions you make every day is

which tools or products you will use.But advisors often spend a dispropor-tionate amount of time focusing onthe tools, and not enough on the serv-ices that will direct the overall strat-egy for their clients’ portfolios.

And what services do these affluentclients want? They want exactly what isbest for them (see table above). Thetable shows more than half of surveyedaffluent investors (56.7%) want assis-tance with asset allocation. Financialand estate planning are next (41.2%),followed by tax planning (23.5%).Being able to determine the mostappropriate products is important, buteven more critical is the ability todeliver the right services along with ahigh-quality client experience.

John J. Bowen Jr. is founder and CEO of CEG Worldwide, a U.S.-based globaltraining, research and consulting firm. “The Bowen Report” apprears monthly.


THE BOWEN

LESS THAN

$100,000

$100,000 - $200,000

MORE THAN

$200,000

0%

20%

40%

60%

80%

100%

64.8%

90.6%82.5%

Annual Net Income

MANAGED ACCOUNT POPULARITYPercentage of advisors who use,

or plan to use, a managed account

program.

579 financial advisors surveyed.Source: CEG Worldwide.

Source: Russ Alan Prince and Karen Mara File, with analysis by CEG Worldwide.

Services affluent investors say they want from their financial advisors.

CLIENT PREFERENCES

SERVICE CLIENTS DESIRING THIS SERVICEAsset allocation 56.7%Financial and estate planning 41.2%Tax planning 23.5%Manager of managers 1.5%Asset protection 1.0%Family business planning 0.8%Philanthropic advisory 0.7%Education/Information 0.2%Advice/Counselling 0.1%

AE02_049 01/17/2005 03:21 PM Page 49

By Andrew Rickard

SENIOR SPECULATIONAccording to Reuters, a British

woman stands to collect a cheque for

£12,650 ($23,300 Cdn) after betting

she would live to 100.

Rosalind Strover, from Sudbury

in Suffolk, eastern England, will cele-

brate her centenary alongside her

family at a nearby golf club. In addi-

tion to the traditional congratulatory

telegram from Queen Elizabeth, she

will also receive a cheque for her prize

winnings from bookmaker William

Hill.

A decade ago, her daughter-in-law,

Jennifer, wagered £100 at 100-1 that

Strover would reach her century. She

topped up the bet a year later with a

£50 stake at 50-1.

RIGHT ADDRESS Nick Mann of Bedfordshire, England,

was shocked when he received a letter

from The Prudential Assurance Com-

pany. The letter said he could save

about £80 if he transferred his home

insurance. What caught Nick’s eye,

however, was the letter was addressed

to “Mr. Shagslikeadonkey.”

A financial advisor himself, Mann

told the Sun newspaper in Britain

that although he was used to hearing

from insurance companies, he’d never

received anything like this before. Pru-

dential apologized for the error, blam-

ing a disgruntled employee who had

put the name into the system before

leaving the firm.

PROACTIVE PLANNINGThe average funeral costs about

$7,500—a significant liability for the

deceased’s estate. While most finan-

cial advisors recommend using life

insurance and liquid assets to pay final

expenses, a new product line from

Costco will allow consumers to

be more proactive in their estate

planning. According to a story from

the CNN Money news service, the

warehouse retailer has decided to test

market six models of steel caskets at

two of its Chicago stores.“We’re try-

ing to offer value to our customers like

with everything else that we sell,” said

Gary Ojendek, Costco’s general man-

ager of merchandising.The suggested

retail price for each casket is

$799.99. But the question remains:

How do you get it home?

SCARY WILLA Norwegian man altered his will and

inserted a clause promising to haunt

anyone who challenged the document.

“I take a solemn and holy vow that,

if at all possible, I will pursue you in

the darkest hours,” he wrote.“I warn

you in the strongest possible terms not

to try any nonsense.”

The unidentified man, who died in

mid-2003, left his half-sister out of

the will. She, however, wasn’t afraid of

things that go bump in the night.

According to the Associated Press,

the half-sister challenged the will in

the Arctic city of Tromsoe. She won

her case based on the grounds the tes-

tator’s two witnesses didn’t know what

they were signing. Neither she nor the

judge have yet had any late-night

chamber visitors.

END QUOTE: XXX XXXXXX XXXXXXXXX

“He who is not capable of enduring poverty is not capable of being free.”

—VICTOR HUGO (1802-1885), FRENCH NOVELIST AND PLAYWRIGHT


THIS’N’THATIllustration by S

andy Nichols

AE02_050 01/17/2005 03:21 PM Page 50

HOW DIGGING DEEPER LEADS TO MORE MEANINGFUL AND PROFITABLE … · 2019-10-04 · Senior...

Documents

Transcript of HOW DIGGING DEEPER LEADS TO MORE MEANINGFUL AND PROFITABLE … · 2019-10-04 · Senior...