YOUR RETIRING CLIENTS NEED YOU to Develop Income Solutions

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CASHING . C OUT A YOUR RETIRING CLIENTS NEED YOU to develop income solutions.

PASSIVE SAVING WITH ADVANTAGE INSURANCE P.10 P.25

Rogers Publishing Limited, P.O. Box 720, Station K, Toronto, ON M4P 3J6 • PM 40070230 R10969

AE07_OFC.indd 1 06/18/2008 01:49:30 PM ADVISOR Group/Groupe COnSeIlleR consists of Advisor’s Edge, Advisor’s Edge Report, Advisor.ca, Advisor live, Objectif Conseiller, Conseiller.ca and Conseillers en Direct. vol.11 no.7 j u ly 2 0 0 8

ADVISOR’S EDGE Philip Porado, editor; Advisor Group Conferences editor (416) 764-3802 [email protected] Heidi Staseson, Associate editor (416) 764-3804 18 Cashing Out [email protected] Your retiring clients need you to develop income solutions. Kanupriya Vashisht, Associate editor (416) 764-1342 By Clay Gillespie [email protected] Aniko nicholson, Art Director (416) 764-3850 [email protected]

Deanne Gage, Consulting editor 5 10 Bert Vandermoer, Contributing editor INSIDE EDGE CAN’T BEAT ’EM? Michael Finley, Production Manager ThE TROIkA Passive investing is good for (416) 764-3928 [email protected] Varied needs of multiple-age both clients and advisors. Marie Atkins, executive Assistant cohorts will challenge advisors. By Anthony Layton By Philip Porado Donna Kerry, Publisher Advisor’s Edge, Advisor’s Edge Report 25 (416) 764-3805 6 OVERLOOkED OPPORTUNITy [email protected] Jean Goulet, General Manager, FRONT END LOAD Juvenile insurance allows Quebec Operations & Business Development, News, people and trends from clients’ children to build cash Rogers Business & Professional Publishing Canada’s capital markets. and guarantee future coverage. Paul Williams, Vice-President Financial Publishing Brand extension & Online/Development Services By Robert S. Fleischacker

SUBSCRIPTIONS Cornerstone, 1-866-236-0608 28 [email protected] hOw ThINGS wORk

ADVISOR.CA CUSTOMER SERVICE MATURE AT 65 Cameron Clark 8 RRIF those RRSPs early and let Customer Service Administrator PICTURE PERFECT clients enjoy pension credit. (416) 764-3859, [email protected] By Preet Banerjee SALES Kathleen Murphy Senior national Account Manager 29 (416) 764-3838 TAx BREAk [email protected] IS OFFShORE OFF LIMITS? Amy nelson national Account Manager New rules make it harder to set (416) 764-3809 up non-resident trusts. [email protected] eileen lasswell By Gena Katz national Account Manager (416) 764-4164 [email protected] 30 Sophie Bellemare OUTSIDE EDGE Account Manager, eastern Canada AGE wAVES (514) 843-2133 [email protected] A changing population is changing everything. By David Scandiffio

left to right; top to bottom: Paul Williams, Deanne Gage, Donna Kerry, Philip Porado, John Milne, Terry Ritchie, Preet Banerjee, and John De Goey.

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AE07_003.indd 3 06/18/2008 01:50:35 PM inside edge editor CIrCUlaTIoN aNd rESEarCh p h I l I p p o r a d o [email protected] Keith Fulford, Justin Graham, Circulation Director Senior Research Manager Cindy Younan, Vinod Ramlakhan, Circulation Manager Research Analyst (maternity leave) Sarah Gunn, Tricia Benn, Research Assistant Director of Research Elizabeth Hall, Senior Research Manager The Troika EdITorIal adVISorY Board David Wm. Brown Clay Gillespie Varied needs of multiple-age cohorts Al G. Brown and Rogers Group Financial Associates Kurt Rosentreter David Christianson Berkshire Securities will challenge advisors. Wellington West Total Nancy Shewfelt Wealth Management Wellington West Capital Inc. Kathleen Clough Thane Stenner PWL Capital Stenner Investment Partners, I don’t envy advisors today. John Horwood GMP Private Client Richardson Partners Lynne Triffon And it’s not because of the constant calls from clients about the state of Financial Limited T.E. Wealth their portfolios, or the extra compliance paperwork, or the constant con- Rebecca Horwood Terry Zive Richardson Partners Zive Financial Inc. cern that someone will log an unjustified complaint with a regulator. Financial Limited Cynthia J. Kett No, my sympathy stems from the complexity of client circumstances Stewart & Kett Financial that advisors will be facing during the next quarter century. Financial Advisors Ltd. advisors, today, aren’t just experiencing a single generation gap; they’re roGErS MEdIa INC. Anthony P. Viner, President and CEO coping with three. roGErS pUBlIShING lIMITEd Older boomers have shifted from obsessing about accumulation to Brian Segal, President and CEO John Milne, Senior Vice-President, worrying about income production. The longest anticipated large-scale Business & Professional Publishing Group shift to retirement in North American history is finally coming to pass. Marc Blondeau and Michael Fox, Senior Vice-Presidents And as those boomers retire, you’d best be ready to help the X-ers who Immee Chee Wah and Patrick Renard, are finally moving up the salary curve. A lot of them feel angry, ripped Vice-Presidents off, and stunted career-wise by the generation that’s been parked in front

, established 1998, is of them their whole working lives. The oldest of the X-ers, now in their published by Rogers Publishing Limited, a division of Rogers Media mid-40s, believe there’s no time to lose. They’ve finally gotten inflated Inc. Advisor’s Edge subscriptions include 24 issues per year, consisting of 12 issues of Advisor’s Edge in magazine format and housing costs under control and are looking to start saving for retirement 12 issues of Advisor’s Edge Report in tabloid newspaper format. Rogers Publishing Limited, One Mount Pleasant Rd., Toronto, in earnest. They need to get their assets in order. And fast. Ontario M4Y 2Y5. Montreal office: 1200 avenue McGill College, Meanwhile, Gen Y has its own demand issues, having been raised by the Bureau 800, Montreal, Quebec H3B 4G7. Our environmental policy is available at most pampered cohort in history. Their expectations will vastly outstrip www.rogerspublishing.ca/environment their willingness to save. A lot of them are also anticipating inheritances; Subscription price per year: $72 CDN; outside Canada per year: $148 US; single copy price: $15 CDN. ISSN 0703-7732. banking on them, in fact. Not a good thing, given their boomer parents’ Printed in Canada. PM 40070230 R10969. Canada Post: penchant for healthy living and the ever-advancing march of medical Please return undeliverable address blocks to: science. That money likely won’t be coming any time soon. Advisor’s Edge, P.O. Box 720, Station K, While it’s true many advisors opt to specialize and serve clients within Toronto, ON M4P 3J6. E-mail: [email protected] their own age ranges, not everyone has that option. Many advisors who We acknowledge the assistance of the Government of Canada, are just starting out need to fill their client rosters, meaning anything through the Publications Assistance Program toward our mailing costs. Contents copyright © 2008 by Rogers Publishing Limited, with a pulse will do. That being the case, they’re in for a nightmarish di- may not be reprinted without permission. Advisor’s Edge receives unsolicited materials (including letters to versity of client needs. Newbies won’t know whether to wear a suit, jeans, the editor, press releases, promotional items and images) from or surfing shorts to client meetings. time to time. Advisor’s Edge, its affiliates and assignees may use, reproduce, publish, re-publish, distribute, store and archive such To the more experienced, I offer this plea. You have a golden opportu- submissions in whole or in part in any form or medium whatsoever, without compensation of any sort. nity to give back to younger advisors. Help them benefit from your expe- rience; your wisdom. They need to learn, and you have the knowledge. Tricky times are ahead, so help make a difference. AE porAdo

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AE07_005.indd 5 06/18/2008 12:04:37 PM u n d e r w r i t i n g t i p s leave no Blanks

one of the biggest head- cated society, most advisors aches for advisors working in know they should list the front the insurance space is the re- prescriptions their client turned application. Not only may have, but far too often, does the advisor have to ex- Powell says, the dosage is plain why coverage has been omitted. He cites anti-de- delayed, but it also leaves the pressants as an example: if client exposed while the ap- the dosage is relatively low, end plication is resubmitted. it shouldn’t pose a barrier to At the Advisor Group’s re- approval. If the client is tak- cent MGA symposium, Kev- ing 80mg of Paxil, however, in Powell, chief underwriter the risk will be rated signifi- at Equitable Life, offered cantly higher. some commonsense tips for “Underwriters tend to be underwriting, such as fill in a suspicious little group,” load the application with a black Powell says. “If you’re miss- or blue pen, as this will make ing information, it might the form much easier to read. mean the client is try- “longevity risk presents Obvious? Yes, but Powell ing to hide something, so planners with a major says some applications are make sure the application is challenge. If we knew with still being submitted in red complete.” —Steven Lamb ink, or have been filled out certainty how long clients with a felt-tip pen. sTATs would live, our jobs would Next, avoid vague answers, such as describing a 3 in 10 be simple.” read client as a “social drinker,” insurance advisors it clay gillesPie, because the advisor’s defini- say they have a rogers grouP financial tion of social means little to succession plan in c h , 2 0 8 the carrier. Far more useful this e s a r

place. r issue is a quantitative answer, such as “consumes five drinks per y m p o s i u s week.” Better still, include in 2 10 g a page 18 the client’s preference—is he cashing out o u p M consider their r a wine drinker, or pounding g B u s i n e s s M o d e l l i n g MGA to be that

boilermakers? d v i s o r succession plan. a e : shop Around In today’s heavily medi- c o u r s

ever wondered if the rating you got from an insurance carrier was and they’ll just pay the higher premium because they feel there’s no truly justified for your client? other option,” says palter. “But the reality is that the advisor is work- That question was the starting point for the partners at ips insur- ing with one carrier and doesn’t know the options.” ance, a Toronto-based firm that helps individual clients, or their advi- A better approach, he says, is to have an advocate who can shop sors, navigate the underwriting process and get better prices for the client’s insurance needs to a variety of companies, and manage personal or business coverage. the underwriting process to bring the rating down. The problem for some clients, says partner and managing direc- The service was originally designed to be used directly by clients, tor, Jay palter, is that many advisory relationships use single-source but palter says he’s been interacting with MFdA and idA advisors of procurement. And that may not work for some clients, especially late who want to offer their clients a more transparent insurance those with age and health issues. “Clients will get a rating on a policy, process. —Philip Porado

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AE07_006-007.indd 6 06/18/2008 12:06:27 PM E D U C AT I O N O P T I O N S ADVISOR TRAINING GETS A BOOST LETTERS A TRAINING program aimed “Phase two is to get the FOUNDATION OF promoter of philanthropy in at producing the next gen- program successfully deployed GIVING I commend your all its many forms. eration of fi nancial advisors across the country,” says Sam recent article about the That’s why Canada’s first received an important shot Albanese, the creator of the opportunities charitable giv- commercial gift fund was in the arm from the province program. “By the year 2010, ing can open up for advisors, launched in conjunction of Ontario, which offi cially we would hope to be in all the clients and our communities with the community founda- recognized Seneca College’s major colleges across the (“Cast Away,” April, 2008). tion movement, which has Financial Services Practitioner country.” I must, however, correct the more than 160 foundations. program under the Ministry So far, there are 16 col- assertion that “the develop- Community foundations see of Colleges, Training and leges nationwide looking at the ment of donor-advised funds commercial gift funds as an Universities. program, and Albanese says from firms … was met with opportunity to spread the Until now, the program had 12 are “really serious” about reticence, even hostility, from word about the benefits of been considered a professional adopting it. the charitable giving sector.” giving. development program, which Upon graduation, students That’s not true. The Com- Barbara McInnes disqualified students from the earn three credits toward the munity Foundation of Ottawa President & CEO, Community usual subsidies associated with Certified Financial Planner is a strong supporter and Foundation of Ottawa accredited programs. designation, and three toward Recognition by the province the Chartered Life Underwriter N I T P I X should attract more students. designation. The Ontario government will “If you’re interested in going BOOK: Go Green, Live Rich, by David Bach partially fund the program, after your CFP, which I think Review by Romana King allowing tuition fees to drop down the line will be manda- from $4,000 per semester to a tory, you’re well on your way,” One of the biggest barriers more manageable $2,050 per says Albanese. people face when thinking semester. So far the program has of living a greener lifestyle is the Students who don’t have that produced 26 graduates over perception it’s going to cost a lot more amount on hand can now apply the first two years it has been money. Many people believe saving money for loans through the Ontario offered. Albanese says there has everything to do with economies of scale, and nothing to Student Assistance Program has been a 100% placement do with small changes. (OSAP). The government’s rate, pointing to Investors Enter David Bach, author of seven consecutive national stamp of approval also means Group, Desjardins and Sun Life bestsellers. He offers a 50-item laundry list of ways a person the program is now RESP-eli- as leading employers. Some of can change to a greener, healthier lifestyle and save money. gible, and qualifies for Lifelong the more entrepreneurial gradu- A few suggestions are, however, too simplistic. Take for ex- Learning Plan withdrawals from ates have struck out on their ample, number 5: switch to biofuels. With debate on Bill C- an RRSP. own, setting up shop in the 33 still underway in the Canadian Parliament (and among in- The program has already independent channel. dustry pundits and environmentalists), the verdict on whether expanded to two more col- Albanese says one of the sur- biofuels really do offer a more sustainable option than oil leges; and starting January prising aspects of the program and gas is not yet in. This leaves the substance behind the 2009, it will be available at has been the appeal it seems tip (a healthier planet comes from more sustainable choices) Ontario’s Niagara College and to hold for women between the a bit defl ated. Yet, Bach suc- St. Lawrence College. ages of 45 and 55 who have ceeds where many others BE THERE been out of the workforce while have failed—he simplifi es September 23 to 25, IFIC Annual Leader- raising their children. the process by offering easy, ship Conference, Metro Toronto Convention Centre, This year alone there were quick tips, and simple cal- www.ific.ca; September 29 to October 1, Advisor Group’s four former housewives who culations that show how the Mutual Fund Dealers’ Summit, Collingwood, ON, graduated, a large percentage implementation of each sug- www.advisorlive.ca considering the small size of gestion can save you money. the class. —Steven Lamb

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AE07_006-007.indd 7 06/18/2008 12:06:34 PM picture perfect We extend our thanks to everyone who joined us June 10, 2008 to celebrate the Advisor’s Edge 10th Anniversary.

Left to right; top to bottom: John De Goey, Angus Fisher, Amy Nelson, Matthew Snare, Robert Bell, Deanne Gage, Gena Katz, Kathleen Clough, Cynthia Kett, Paul Williams, Bruce Cumming, Howard Atkinson, David Carmichael, Sandy Cardy, Katita Stark, Carol Bezaire, Jim Rogers, John Milne, Philip Porado, Rebecca Cowdery, Diana Cawfield, Alison MacAlpine, The Advisor’s Edge Team, Terry Zive, Jim Rogers, Deanne Gage, Robert Fleischacker,

Ellen Bessner, David Christianson, and Marc Lamontagne. S T E v E N

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AE07_008.indd 8 06/18/2008 12:07:45 PM can’t beat ’em? Passive investing is good for both clients and advisors.

By Anthony LAyton, MBA, CIM, RFP, F.Pl. (Quebec), a portfolio manager and CEO of PWL Capital Inc. (member CIPF), an independent wealth management boutique with offices in Montreal, Rivière-du-Loup, Ottawa and Toronto. [email protected]

eating the stock market is a on low-turnover passive invest- return as compared to actively B challenge that motivates many ing, such as PWL’s approach that traded accounts. investors and their advisors to fol- utilizes ETFs and “tilted” index- As of March 2008, actively low an aggressive active-manage- based funds, have almost always managed funds in the Canadian, ment strategy. But as historical resulted in a superior after-tax U.S. and International equity performance statistics have forever demonstrated, few active money Spreading Out managers are actually able to outperform the market. International stock diversification = Better risk-adjusted returns; Indeed, fewer than 9% of ac- International Equity Diversification (1980-2006). tively managed Canadian equity mutual funds outpaced the S&P/ 16 TSX Composite Index during the 15 U.S. Large Cap Value five years ended 2007 on a com- international 14 U.S. Small Cap Portfolio Europe Large pound annual return. While for- Cap 13 U.S. Large Cap e t u r n ( % )

eign funds fared somewhat better, r 12 85% of U.S. equity funds and 87% Asia-Pacific 11 Canadian Large Cap Equities of international equity funds still o m p u n d 10 c

underperformed their respective 9

benchmarks, according to Stan- 8 dard & Poor’s most recent SPIVA 14 16 18 20 22 24 report comparing active and pas- risk (standard deviation %)

sive management. Source: Ibbotson Associates, PWL Long-term strategies based

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AE07_010-015.indd 10 06/18/2008 12:32:34 PM categories underperformed their bench- ment program increases wealth by min- Clients will also be happy to pay your marks in every traditionally compared imizing investment turnover, which is a fees because their returns will probably period (three, five, 10, 15, 20 and 25 major source of transaction costs. This be better than published active returns years), according to the Morningstar in turn creates tax efficiency, as capital (those of mutual funds and wrap pro- Fund Indices, which provide weighted gains are realized less frequently than in grams). And, they’ll be pleased to pay average compound annual returns for an active portfolio. you because they’ll continued on page 12 the various fund categories, corrected for survivorship bias, so that they include all funds that were in existence at Deference Pays any time during a specific period. For example, Canadian equity funds Put off portfolio taxes as long as possible; lagged the S&P/TSX Composite by $1,000,000 Invested Over 20 Years. more than two percentage points during the five years ended March 2008. $4,500,000 $4,000,000 There was a similar gap between in- Pay Capital Gain Taxes Terminal $3,500,000 Every Year value: 12% ternational equity funds and the MSCI 100% Deferred Capital more capital $3,000,000 Gain Taxes with the EAFE Index during that period, while $2,500,000 100% tax- deferral C a p i t l U.S. funds fared somewhat better, lag- $2,000,000 strategy ging the S&P 500 Composite by a mere $1,500,000 one percentage point (see “Performance $1,000,000 $500,000 Comparison,” page 15). 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years Source: PWL Advisor Benefits Source: PWL So, as the markets continually prove, AAssusmumptpiotinosn:s :E qEuqiutyit yrerteutrunrsn sarear 8e %8 %pe pr eyre yaer,a cr,o cnosntasntat.n Dt. ivDidiveidnedn rdetruertnu r=n 1=. 51%.5 %pe pr earn annumnu;m ; Capital passive investing produces better results, Cgaapiinta rle gtuarin =re 6tu.5r%n =pe 6r .a5n%n upmer. Mananrguimna. lM taaxrgraintael otnax c araptieta lo gna cina p =it a(4l 6g%a in÷ =2 )( 4= 62%3% ÷. M2 a)r g=i n2a3l %ta.x rate on dividends = 30%. All investments are liquidated at the end of the period. 9 Marginal tax rate on dividends = 30%. All investments are liquidated at the end of the period. and without the angst and uncertainty that characterizes the active alternative. That’s better for the investor, but could it also be better for the advisor? The Balancing Act answer, we believe, is yes. Buy and Rebalance = Better risk-adjusted returns; Of course, you might ask why you’d Rebalancing vs. No Rebalancing (1980-2005). want to tell clients that all they can do is mirror market returns. It makes it 12.50 hard to justify the fees they pay you. 12.45 12.40 And, why would you want to forgo the 12.35 9 rebalancing strategies opportunity to grow a client’s portfolio 12.30 faster, and at the same time command 12.25 12.20 No higher fees for greater assets under 12.15 C o m p u n d R e t r ( % ) rebalancing management—or through transaction 12.10 12.05 fees accruing from a commission-based 9.20 9.40 9.60 9.80 10.00 10.20 10.40

account? Risk (Standard deviation %) All valid questions. The answers lie Source: PWL and Ibbotson Associates in the realities of passive investing. As historical performance shows, the long- Index composition: 30% Scotia Capital Short-term Index, 10% Domestic High-yield Index, 10% FTSE-NAREIT Equity Index, 17% S&P/TSX Composite Index, 6.6% S&P500 Index in CAD, 6.6% term market return is likely to be better Fama-French Large Value Index in CAD, 3.3% US Small Stock Index in CAD, 6.6% MSCI EAFE than what’s achieved through active in- Index in CAD, 6.6% MSCI EAFE Value Index in CAD, 3.3% DFA International Small Cap Index in CAD vesting. What’s more, a passive invest-

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AE07_010-015.indd 11 06/18/2008 12:33:23 PM continued from page 11 be content with their relationship with you. All of this combined can lead to a more loyal client base. A passive investment program also minimizes emotional tur- moil and the accompanying mistakes brought on by market timing, such as selling low and buying high. Further, it gets rid of hindsight bias. It’s an approach that keeps clients off the market roller-coaster created by the daily financial press. A key contributor to the success of passive investing is a lower fee. William Sharpe, Nobel Prize winner and author of the Sharpe Ratio, says passive and active managers together represent the market. As a group, passive managers mimic the FUNDWRAPFILTER, market’s return (gross of fees). Active managers, who make up the balance, must also match the market’s return (gross of ASSETALLOCATIONFILTER& fees). Therefore, due to lower fees, Sharpe concludes the passive managers will always outperform as a group. And better STRUCTUREDNOTESFILTER performance in client portfolios translates into higher advisory fees because assets under management are greater.

Certainty is Welcome Clients love certainty. So why do so many advisors ignore the MORE HANDS. well-known and easy-to-implement factors that can help them MORE HANDS ON. build better client relationships and superior business? The un- fortunate answer is that most advisors use the aura of stock-pick- One program—three free tools— to filter, ing (or fund-manager, or wrap-picking) to justify what they’re sort and streamline asset allocation, paid. But once they admit to themselves and their clients that no structured note and fund wrap programs. one can successfully predict the future, the door is open to more Get your hands on these tools now at rewarding relationships. advisor.ca Indeed, there are advisors who will, during certain periods, help their clients outperform the market. But they can’t achieve this all the time. And when they fail, their clients leave them in search of another advisor who can help them outperform again. It’s basically impossible to successfully manage the transitions that happen when a portfolio moves from overperformance to underperformance. So the switch to a passive strategy helps ensure you’re getting paid for services you actually can provide and control, and which truly help the clients. For example, fee levels are a constant issue for clients. This doesn’t mean you should offer to work for free, but it does suggest you should minimize the fees they pay on the investments you manage on their behalf. Never forget, it’s their money. The median Canadian equity mutual fund’s management

PARTNERS expense ratio is 2.34%. The least expensive way to buy the S&P/TSX Composite Index—the iShares Canadian Compos- ite Fund—is 0.25%, which, added to a 1.25% advisor fee, totals 1.50%. With active investing, your client is already behind by 84 basis points even before the portfolio begins to make, or lose, money.

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AE07_010-015.indd 12 06/18/2008 12:37:15 PM Clients also dislike the lost opportu- is it to make use of such information nance at Dartmouth College, stated nity cost of high taxes. Put your clients without running afoul of compliance in a March 2008 study, “The Cost of in a low-turnover passive portfolio and rules? Even if a manager is able to real- Active Investing,” that overconfidence they will pay fewer taxes each year. Tax ize this advantage, what are the chances is a major reason investors are willing deferral is a powerful investment boost- this particular transaction will be more to incur the extra fees, expenses, and er (see “Deference Pays,” page 11). successful than what a competing, simi- transaction costs of active strategies. larly qualified manager is up to? “Investors who are overconfident about Common Misconceptions Kenneth French, professor of fi- their ability to pro- continued on page 15 In our industry we’re bombarded with marketing messages and media stories about undervalued stocks and successful fund manager picks. Many advisors are unaware the average investor would benefit from an increased return if he or she switched to a passive strategy. This is the case because you are eliminating the possibility of buying high and selling low, and simultaneously reducing transaction fees dramatically because investment posi- tions are being maintained rather than frequently changed. It’s also important to diversify inter- When a bull runs, nationally. An investment in a well-diversified portfolio of U.S., European and Asian equities over the past 25 years does it make noise? has produced a significantly higher re- Not necessarily. turn at considerably less risk, including currency fluctuations (see “Spread- An example? The spot price of natural gas in the opening months of 2008. After detaching from its historical tie with oil prices over the past year, natural gas ing Out,” page 10). Of course, market showed signs of closing the gap. movement will alter portfolio content, The point? If you’re not invested – or you wait for the bull to make enough noise so one can’t simply sit tight and make for everyone else to hear – you will miss the opportunity. no changes. Advisors need to rebalance At the Citadel Group of Funds, we make it our business to stay invested in quality a portfolio to maintain diversification companies at all times so our unitholders profit from bull runs – silent or otherwise. and asset mix in order to stay on course Today, investors in our three closed-end energy trusts – Sustainable Production (see “Balancing Act,” page 11), and Energy Trust (TSX: SPU.un), Energy Plus Income Trust (TSX: EPF.un) and Citadel there are rebalancing strategies which SMaRT Fund (TSX:CRT.un) – have benefited from the early stage recovery in the allow an advisor to handily outperform sector. And will continue to participate as the opportunity unfolds. a portfolio that employed no rebalanc- To learn more, contact Joe MacDonald, Executive Vice President Sales and ing and at much less risk. Marketing at 1 877 261 9674 or visit our web site at www.citadelfunds.com. Advisors and the investing public strive to beat the market. But how can this be practical in an age of instanta- neous global communications? How can a portfolio manager get a scoop on a stock and buy or sell it before the Commissions, trailing commissions, management fees, and expenses all may be associated with exchange-traded news is out? Moreover, how possible fund investments. Exchange-traded funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please review all information, including the risk factors, set out in each Fund’s prospectus.

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AE07_010-015.indd 13 06/18/2008 12:37:53 PM 3rd Annual Mutual Fund Performance Comparison Dealers Symposium Compound annual returns as of March 31, 2008. Back to Business

fund category* or index 3 yr 5yr 10yr 15yr 20yr 25yr September 29-30, 2008 The Westin Trillium House, Canadian Equity funds 12.3 16.4 6.8 9.3 8.3 9.1 Collingwood, Ontario S&P/TSX Composite TR CAD 14.2 18.5 7.8 11.3 9.8 10.3 Presented by US Equity funds -1.0 2.6 -1.6 5.1 6.9 7.7

S&P 500 TR (Bank of Canada) CAD 0.3 3.6 0.2 8.0 9.9 11.0

International Equity funds 5.2 11.5 0.9 5.6 5.2 6.9 In cooperation with the

MSCI EAFE GR CAD 7.7 13.4 3.1 6.9 5.5 11.2

* Fund category data are Morningstar Fund Indices, which are weighted averages and Gold corrected for survivorship bias

Source: Morningstar Canada

continued from page 13 duce superior re- big picture—financial planning. To Welcome Gift turns are unlikely to be discouraged by contribute to the best net wealth im-

the knowledge that the average active provement for a client, you must pro- Fund Management Inc. trader must lose,” he wrote. vide advice on such factors as paying Welcome Cocktail down debt, splitting family income, Don’t Over-Promise capturing cash flow excesses, and risks Advisors need to set their egos aside and like disability and death. Dinner Sponsor pave the way for their clients to feel confident that portfolio returns will, at Active = Expensive the very least, keep pace with the capital The market volatility of recent months Lunch Sponsor markets. If keeping pace with the mar- has created considerable stress in advi- ket won’t fulfill their goals, educate sor-client relationships. But it’s been them and help them determine a plan to a test that has proven the mettle of Cocktail save more or need less. our investment approach. Our clients, Teach your clients to realize the folly while disappointed at the market’s per- Golf Cart Sponsor of counting on the market to make them formance during the past year, have

rich. As an advisor, your role is to be a continued to be satisfied with their Fund Management Inc. good steward of capital. So ensure there long-term investment plans. Bronze Sponsors is a disciplined and achievable method This is not to say there’s no stress that sees to it clients’ capital keeps pace when markets decline. But the differ- with inflation on an after-tax basis. Let ence is that by not promising to beat them know you will work with them to the market, and by having educated boost returns through proven means: our clients accordingly, we can easily tax management of family accounts, as- demonstrate that we are following the set allocation, structured diversification disciplined strategy that’s stated in our using academically proven research on investment policy. Markets are always value and small factors, the efficient- doing what we expect—experiencing a frontier models proving that interna- reaction to economic or media infor- tional diversification produces better mation. As advisors, our role is to fo- risk-adjusted returns, and reducing the cus on the client’s life, family, goals and risk through disciplined rebalancing. factors that, together, we can demon- It’s also important to remember the strably influence. AE lAyton

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AE07_010-015.indd 15 06/20/2008 02:14:15 PM cashing out

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by CLAy GILLESPIE, a Financial Advisor and VP with Rogers Group Financial. The views expressed are ty imag a m i y t g E

those of the author and not necessarily t those of Rogers Group Financial. [email protected] E s cashing out yOur retiring clients need yOu tO develOp incOme sOlutiOns.

One of the longest anticipated, preservation is always an important client’s standard of living is need- and planned for, retirement waves objective, in many client situations lessly reduced. Succeeding here has arrived. it isn’t feasible. Besides, it’s no lon- will require constant maintenance The first of the baby boomers ger safe to assume that interest or and monitoring of a client’s per- have left the workforce; and that earnings generated from an invest- sonal situation and portfolio. means retirement income planning ment will be sufficient to maintain is becoming a prominent issue. a client’s retirement income. Life Expectancy As with everything else they have A more comprehensive strategy Longevity risk presents planners touched, the boomers will change for retirement income planning with a major challenge. If we knew the face of retirement. must come into play and it needs with certainty how long clients There are many challenges fac- to let clients systematically dig into would live, our jobs would be sim- ing a planner who must balance the their capital. When push comes to ple. And life expectancy is one of needs of this demographic with the shove, few baby boomers will vol- the most misunderstood aspects of realities of influencing factors such untarily downgrade their lifestyles retirement income planning. Most as inflation rates, stock market risk when inflation reduces purchas- people assume life expectancy is and healthcare costs. Underpin- ing power. The primary source of the same as lifespan. Not true. Life ning this list of challenges is the income for most clients entering expectancy is a median number of fact that most Canadians will need retirement will be their RRIFs years a particular group will reach. a significant portion of their invest- and pension entitlements, so you’ll Roughly half will die before and ment capital to fund their desired want to incorporate enough safe- half after. retirement income levels for the guards to maintain income levels In other words, a man who is 65 rest of their lives. While capital without being so cautious that a today has a life continued on page 20

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AE07_018-022.indd 19 06/18/2008 12:40:02 PM continued from page 19 expectancy of 19 • The S&P/TSX should, over time, To mitigate correction years, but there’s a 50% chance he’ll live outperform the inflation rate by ap- longer. And, interestingly, there’s a 30% proximately 6%. risk, set aside three chance he’ll live to see his 90th birth- When running retirement-income illus- years’ worth of day. Meanwhile, a 65-year-old female is trations, you should only use a real rate expected to live for another 21.5 years of return (return over the inflation rate) retirement income. (86.5). But she has a 50% chance of liv- assumption of 4% or lower. If you use ing longer, and a 41% chance she’ll see a higher number, there’s a good chance a retiree will need 60% to 70% of his her 90th birthday. you’re overestimating your client’s abil- or her pre-retirement income in order The results for a couple, both aged 65, ity to maintain that income over a life- to maintain the same standard of living are even more interesting—now there’s time. Also, give your clients an after- during retirement. And it’s a good start- a 58% chance that one of the two will tax, after-inflation income number (net ing point. In retirement, a person is no survive to see his or her 90th birthday. spendable income). longer saving, but he or she also no lon- In addition, advances in medical sci- Retirement-income illustrations ger has employment-related expenses. ence mean historical numbers are prob- should be updated, and your client’s Ultimately, however, the income re- ably understated. The risk of your cli- situation re-analyzed, every two years at quirements depend on what a client in- ents outliving their funds is huge, so you minimum. If you continue to tweak and tends to do with life in retirement. need to deal with this issue proactively. adjust your client’s portfolio, as required, you should be able to help your clients Stock Market Risk Rate of Return achieve sufficient retirement income During employment years, stock market In producing any long-term financial il- over time. volatility isn’t a great concern, provided lustrations, you need to make certain the portfolio is properly diversified. rate-of-return assumptions. While in- Inflation Rate But what if there’s a sharp stock mar- vesting is more art than science, it’s still The inflation rate is usually measured by ket drop just before or just after retire- far from being guesswork. Use some the year-over-year change in the Con- ment? Proper diversification alone won’t fundamental historic relationships to sumer Price Index (CPI). offset this problem. Instead, while gen- help guide investment decisions, and set Since there is high probability a cli- erating income during retirement, it’s more realistic return expectations. Over ent’s retirement could last more than 30 important not to withdraw funds from the past 57 years (ending June 30, 2007), years, it’s important to understand how declining assets. the compound annual rates of return for the inflation rate can affect his or her If your client is unlucky enough to the following indices were: ability to maintain a desired lifestyle (see retire when the stock market is perform- “Dollar Maintenance,” page 21). Based ing poorly (and the portfolio must gen- Inflation rate (CPI) 3.9% on a 4% inflation rate (the historical erate income), capital can be depleted 5-year GIC 7.2% long-term average), in 20 years an advi- at an alarming rate. This further harms S&P/TSX 10.9% sor would need to generate $109,556 to the ability of the portfolio to generate S&P 500 (Canadian $) 12.0% buy the same basket of goods that costs the required net-spendable income. But, the client $50,000 today. here’s the thing: Your clients should be Do these figures mean a person in- Another issue with inflation rates is prepared for a stock market correction vested in the S&P/TSX index should ex- they mean one thing to a retired client, every single day in retirement. pect to earn 10.9% every year? No. In- and another to a 40-year-old working Let’s say Bob invested $100,000 in a stead, when setting return expectations, couple. The baskets of goods purchased portfolio diversified with stocks, bonds, it’s important to examine the historic by each one could be vastly different GICs, term deposits, and mutual funds. relationships between these indices: and not correspond accurately to the And assume he withdrew $450 per • The 5-year GIC should outperform CPI. Inflation planning is not generic. It month, and the stock market corrected, the inflation rate by between 2.5% needs to match up with the goods and causing his portfolio to lose 7% of its and 3.0%. This relationship almost services your clients consume. value. His account would only be worth always holds, even in the short term. There’s a generally held principle that $87,600 a year later. So Bob would need

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AE07_018-022.indd 20 06/18/2008 12:41:39 PM to earn 14.16% the following year to re- Dollar Maintenance store his portfolio, assuming he stopped To produce an income of $50,000 per year during retirement (in today’s dollars), a client must increase income each year to maintain the same further withdrawals. If he continued to standard of living. take out $450 per month, he’d need a return of 19.56% to restore his portfolio. Between August 1995 and August inflation rate 10 years 20 years 30 years 2005, the average Canadian balanced 2% $60,950 $74,297 $90,568 fund earned 7.4%. If Bob invested 3% 67,196 90,306 121,363 $100,000 in such a fund in August 4% 74,012 109,556 162,170 1995, and started a withdrawal rate of 7% ($583 per month), his account 5% 81,445 132,665 216,097 would have been worth approximately $107,700 in August 2005. So, one would assume withdrawing 7% from a balanced portfolio would still maintain his capital. Annuity Example However, if Bob had invested $100,000 CPI Indexed ($100,000) in the same average fund in August 2000 and withdrew at a rate of 7% ($583 per month), his account would have been age a B C worth $75,600 in August 2005. Male 65 $455 5.5% $611 Why the difference? In the first sce- Female 65 413 5.0% 555 nario, where Bob retired in August Joint 65 371 4.5% 497 1995, the market performed very well for the first five years, so a cushion built A - Monthly income with a 10-year guarantee

up in his portfolio. When the negative- B - Initial withdrawal rate equivalent

return-years started, his portfolio was C - Monthly payment after 10 years (assuming a 3% inflation rate) able to weather the storm. In the second scenario, in which Bob retired in August 2000, his portfolio would have taken an income during those years. either spouse is alive or for at least 10 immediate hit. Fortunately, there are quite a few op- years. The estate is somewhat protected To mitigate market correction risk, tions for generating that income: because there will be at least 10 years’ set aside at least three years’ worth of Indexed Annuity–This investment ve- worth of payments under any circum- retirement income in some type of guar- hicle guarantees a certain income for the stances (see “Annuity Example,” this anteed, fixed-income vehicle. That way remainder of the recipient’s lifetime, and page). This means that if the inflation if the market plunges, your client can as the name suggests, is indexed either at rate were on average 3% over the next weather the correction. a set percentage or to inflation. Income 10 years, the monthly income from this increases every year by a set amount (i.e. annuity would be $497.25 at the end of Retirement Lifestyle 3%) or by the inflation rate as measured that 10-year period. It takes at least two years for an average by the CPI. However, the more fea- Buying an indexed annuity is very sim- client to develop a retirement lifestyle, tures added to an annuity, the lower the ilar to setting up a diversified portfolio and standardize his or her spending pat- monthly income. (a combination of stocks, bonds, GICs, terns. Until that happens, it’s difficult to Let’s say a couple—both aged 65— mutual funds, etc.), starting with an ini- create a longer-term retirement income can purchase an indexed annuity for tial withdrawal rate of 4.5% and increas- strategy to match the actual lifestyle. I’ve $100,000 that will generate approxi- ing the payment each year by the rate of also noticed most clients are healthier mately $371 per month (indexed to in- inflation (as measured by the CPI). The and more energetic in the first 10 to 15 flation) for the remainder of their life- initial withdrawal rate equivalent varies, years of retirement, and so require more times. This annuity would pay as long as however, depending continued on page 22

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AE07_018-022.indd 21 06/18/2008 12:41:44 PM continued from page 21 on the age and sex It’s important to realize if your income current market to influence them and of the annuitant(s). is not within these parameters (e.g. you thus you’ll know how much they will Government Entitlements–Your clients withdraw more than 5% or you withdraw be worth on a specific future date. A may qualify for certain government-in- more than the RRIF minimum) you may bond fund or mortgage fund is not come entitlements, which are typically lose the benefits of these products. suitable for this purpose because indexed to inflation. So, if you had a both of them can fluctuate alongside client who was 65 and entitled to full Unsustainable Withdrawal changes in interest rates—as interest OAS and CPP payments, it would cost A popular way of generating retirement rates rise, bond and mortgage fund approximately $300,000 to buy these income is to set up a diversified portfolio market values decline. pension entitlements personally. For and take monthly withdrawal from the 4. Invest the balance in a fixed income a 65-year-old female, it would cost ap- capital. It lets clients adjust income at and equity portfolio based on the re- proximately $320,000 to purchase these any time and gives full control of capital sults of the client’s personal Invest- benefits. For many Canadians, this will so a client’s estate gets the full benefit of ment Policy Statement. make up a significant portion of their the account value on death. pension incomes. However, it’s imprudent to dismiss How it Works Life Annuity–One of the strategies I use stock market volatility in designing these The rationale behind this strategy is that to ensure funds last the remainder of the strategies. Markets eventually correct the money market account will deplete clients’ lifetimes is to transfer registered and so it’s important to prepare. Many itself over the first year. After the first funds into a life annuity when they reach studies suggest only taking approxi- year, if the growth part of the account their late 70s or early 80s. You can always mately a 4% starting withdrawal from a has gained value, then you take the fol- transfer funds from a RRIF or LIF into a client’s capital in order to maintain the lowing year’s income from that account life annuity at any time. However, once ability to generate an indexed income to replenish the money market fund. If, you purchase the annuity, you can never over his or her lifetime. These studies however, the stock market performs transfer back into a RRIF or LIF. are flawed at worst and misleading at poorly and the growth account slips, It’s important to point out that reg- best. They assume there is nothing you then you use the maturing GIC (a vehi- istered funds are not tax-efficient for can do about the market even though we cle for which the maturity value is the estate because they’re fully taxed on do know it will correct approximately known) to replenish the money market death. Non-registered funds are tax-ef- two times out of 10. fund. If the GIC isn’t used for income, it ficient because most of the balance will In addition, this withdrawal rate is not will be re-invested for a guaranteed pe- pass on to beneficiaries tax-free. There- feasible in many client situations, and riod of two years. fore, later in life it may make sense to this is especially so for clients who typi- This strategy only works if the client maximize your client’s income with lon- cally spend more income during the first avoids taking income from any part of gevity protection (using an annuity) and 10 to 15 years of retirement. the portfolio that is declining in value. leave any non-registered investments So, what’s an advisor to do? Well, this There is no magic bullet to retirement they have to accumulate. strategy has worked well for my clients income planning but you need to know Variable Annuity–These products are and allowed me to secure an income the various strategies that are available. new in Canada but their use is wide- stream despite wobbles in the equity The retirement income strategy por- spread in the U.S. They allow for the markets. It’s got four simple steps: tion of the client’s financial lifecycle is combination of guarantees (protecting 1. Invest one year’s income in a money dramatically different. In the early years, against longevity risk) and let clients en- market account that will be used for you were helping clients accumulate joy some stock-market-based returns. the first year’s income. funds but their day-to-day income was A client who buys them is guaranteed 2. Invest one year’s income in a one-year coming from another source. In retire- to get 5% of the initial deposit for life. bond or GIC. ment, you need to change your thinking And, if the underlying investments in- 3. Invest one year’s income in a two-year dramatically in order to properly pre- crease in value, your client can receive bond or GIC. It’s important that the pare your retired clients to successfully a higher income. The benefits reset ap- client own the fixed income (bond or generate their required income. AE proximately every three years. GIC) directly as you don’t want the gillEspiE

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AE07_018-022.indd 22 06/18/2008 12:42:03 PM overlooked opportunity Juvenile inSurance allowS clienTS’ children To build caSh and guaranTee fuTure coverage.

By RoBERt S. FlEiSchAckER, RHU, CFP, CLU, president of Stonehaven Financial Group in Markham, Ontario. [email protected] NOVEMBER 2000

of our firm’s core inevitable financial transition - ev ONE beliefs in helping ery young adult will confront. I clients build and manage a finan- have said repeatedly that there are cial plan is to have a strategy on two issues, the effects of which intergenerational wealth transfer. will pervade your adult life: sex

In fact, we say it in writing: “It is and money. There may be educa- “The Money Shuffle,” page 33 reasonable to expect that our chil- tion and training on the mechan- dren will incur significant post ics of each but little is focused on one indisputable secondary education costs, and the implications. fact of life is that usually there are additional costs A vast majority of Canadian forced savings associated with helping them tran- families simply do not have suf- works. sition to an independent adult sta- ficient cash flow to seriously en- tus. Our greatest ally in dealing tertain doing much more for their But the reality is that most car- with these costs is time and com- children than RESP funding, if ing upper-middle-class parents pound interest. A good plan even that. There is, however, a will try to help their children fi- should anticipate these future small percentage of the popula- nancially, provided it does not needs. Income-splitting opportu- tion that can entertain more. It’s adversely affect their own fiscal nities, tax deferral or minimiza- understandable that some of this security. After educational fund- tion, ownership and control of may be further down their “to ing is dealt with, the choices usu- the plans are some of the design do” lists than the more urgent is- ally boil down to giving kids mon- criteria.” sues—such as proper insurance ey or not, and maybe taking back However, beyond RESP ac- funding on the parents themselves a promissory note to maintain a counts we seldom see structured and appropriate current wills, or bit of control. The problem with arrangements that anticipate the maximum RRSP funding. this approach continued on page 26

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AE07_025-027.indd 25 06/18/2008 02:15:01 PM continued from page 25 is there is no op- instead of return on their money, they very high-interest, tax-deferred cred- portunity to teach the value of savings. wouldn’t have any financial problems!” iting account; The young people simply come to ex- One indisputable fact of life is that • The flexibility of temporarily discon- pect the cash to flow, and your clients forced savings works. Over 29 years tinuing deposits and the effects on make no progress toward we’ve earned 4.5% cash and death benefit balances; the goal of ceasing to be JULY tax-deferred on the • The current or likely future need for 2003 the BoMD (Bank of Mom deposits but the death benefit and the relative costs; and Dad). death benefit has now • What it will take for mom and dad Juvenile life insurance grown to be in excess to transfer this account to the child; is the overlooked oppor- of $325,000, and will and tunity that can help teach likely double in the • The possibilities of using this as a a valuable lesson. I am not next 20 years. Don’t supplemental retirement income talking about a baby policy bother reaching for source.

that plays on the fears of “The Insane Puzzle,” page 17 your calculator to try If you think about RESPs, In-Trust the parents, but rather a meaningful and prove this is a poor investment. Accounts, CSB programs, or even a insurance policy on a child (don’t limit Instead, focus on the concept. small mutual fund or stock portfo- your thinking to minor children) as a This is a contract that we still own lio, the only meaningful discussion a financial instrument to accumulate and and control. If and when we choose to parent can have with a child revolves control capital on a tax-preferred basis, transfer it to our children, it’s a tax-free around the decision to cash it, or keep and guarantee the child’s future insur- rollover, and the tax-deferred accumula- it. There’s little training opportunity. ability to a meaningful extent. tion continues in their names. That tax- By contrast, the ongoing role of the What parents wouldn’t seriously en- deferred annual growth is now about life policy can help you teach children tertain creating a million-dollar oppor- 7% on a year-to-year basis. If I could about how financial planning becomes a tunity for each of their children if they offer a 7% tax-deferred GIC where all process. Teaching children the value of could afford it? the tax goes away on death, there would thrift or the perils of living above their I’ll illustrate my point with a per- be people lining up at my door. incomes are important life lessons, and sonal example. When each of our three And therein lies the opportunity. this product may be the forum to com- children was born, we purchased life As parents we’ve always made sacri- mence that teaching. It’s a great value policies before their first birthdays. At fices to provide our children with the add that a seasoned advisor can provide the time, we committed about $900 things we believed were important. to his or her long-term clients’ adult per year, per child, with an initial face Wouldn’t parents embrace the same children. amount of $100,000. Many of our thing in a financial product? It’s true, the Besides the basic life policy, we in- friends thought we were sick to in- process seems unattractive when we first cluded a Guaranteed Insurability Op- sure our children at all, let alone for a start, but after a few years the momen- tion (GIO). This feature allows each substantial sum. Making the payments tum builds and our children win. child to purchase up to $50,000 more was not always easy. Short-term family A life insurance policy creates an op- coverage at periodic intervals up to age demands and financial ups and downs portunity for discussion about financ- 40. There’s no restriction on the type did not always align, yet we somehow es between parents and children—a of insurance, the option just guarantees managed to make the payments because topic that’s generally accepted as the access. If all your client’s child did was we felt it was a contractual obligation. second most awkward conversation to exercise these options and pile them on This raises the most distasteful aspect have with your kids. Having an estab- top of the basic policy, by the time he or of these plans, and yet they’re the very lished life insurance policy can bring she reaches 40 the coverage could total reason they work. many lessons to real life, including: $800,000, and be based on their health I worked for 11 years with the late • How credit works and how the loan at age zero. Ralph Simmons, a very wise man who feature in the life insurance policy That was a lot of money 30 years often said, “If people were more con- should be considered; ago, and for a young family today it still cerned about return of their money • The advantage of forced savings in a represents a reasonable coverage level,

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AE07_025-027.indd 26 06/18/2008 02:15:11 PM especially if the client becomes uninsur- while simultaneously imparting a valu- I know I have done my clients a ser- able. Parents always try and steer their able lesson on the advantages of thrift. vice with this strategy and implore all children away from dangers and risks. It’s an opportunity for a growing group of you to investigate the option fully And the GIO does just that. Two out of of seniors who have both the economic and give your clients an opportunity three of our children have been unable means and the desire to help out. There to participate. The final decision, of to acquire life insurance as young adults is a large, and growing, audience for the course, would be theirs but we do have for the following reasons: story. Unfortunately, too few advisors a responsibility to show them what’s • Residency, one worked and travelled are telling it. available. AE flEischAckEr overseas for two years; • Employment, one worked as a dive master in salt water; and • Health, one is a cancer survivor. So, what began as a theoretical problem became reality in our home, and needless to say those GIOs are exercised at every opportunity even though none of our children has yet reached the age at which they actually need insurance. When that time comes, though, each 10 Year Rate Guarantees will have an established insurance base which they’ll be able to expand. A lucky thing under the circumstances. with Group Benefits Over the years, I have asked my clients to consider doing the same thing for their children. Some have, many NEW: haven’t. By and large, those children are in their 20s and early 30s. The TM ones whose parents started a plan have money, a base of insurance, and most GROUP PLUS important have guaranteed future insurability. Some of the parents have transferred the policies to the kids; Provides better others are waiting to accumulate more, coverages and or until the kids are the right age. The adult children that I get the pleasure of lower costs! meeting with are initially always interested in the accumulated cash, but after we talk they develop a greater apprecia- tion for the many unique features of an established policy. Invariably, they opt SAVE YOUR CLIENTS MONEY to retain the insurance. One of the great advantages of hav- (905) 689-7911 Toll Free (877) TEN-STAR ing been in the business for more than 30 years is that my practice is over- www.tenstar.ca crowded with grandparents. For them, these policies are an excellent vehicle to Excellence Through Education R provide a legacy for their grandchildren

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AE07_025-027.indd 27 06/18/2008 02:15:54 PM deconstructing planning particulars

for the credit. Even OAS and CPP clients who don’t plan to make how do not qualify. On the other hand, withdrawals from their RRSPs be- one type of income that is eligible tween the ages of 65 and 71, and things for pension credit is the regularly have at least $14,000 in unused scheduled RRIF income. If, after contribution room, which they creating a financial plan for your know they will never use. They clients, you find they have no oth- can mature part of their RRSPs er sources of income that would into RRIF accounts, set up the qualify for the pension credit, then systematic RRIF withdrawals of there are two strategies that should $2,000 per year to qualify for the be the first order of business for maximum credit, and then re-con- BY your next review meeting. tribute the money right back into The first applies to clients who the RRSP accounts. preet banerjee, B.Sc., FMA Wealth Advisor, ScotiaMcLeod. might be planning withdrawals The tax owing on the RRIF in- The views expressed are those of from their RRSP accounts be- come is completely offset by the the author. tween ages 65 and 71. In many RRSP contribution. The net ef- [email protected] cases, clients may be under the fect for this two-step transfer is worimpresksion that an RRSP should that they are able to claim pension not be matured until as late as credits and the resulting $400 an- possible since an RRSP allows for nual tax savings in exchange for mature at 65 additional contributions and does burning up RRSP contribution not mandate a forced minimum room. If they had no intention of RRIF those RRSPs early and let level of withdrawal. Having more ever using that RRSP contribution clients enjoy pension credit. flexibility is indeed a good thing, room, the strategy amounts to free although it might make more money. I thought this sounded too sense to mature only part of the good to be true, so I called up the Question: What’s better than being able to call some RRSP into a RRIF account, and CRA. I was transferred to a senior of your clients and offering to send them on a seven- set up withdrawals on a regu- tax officer, who verified the valid- night, all-inclusive vacation for two as a retirement gift? lar basis in order to qualify for ity of the strategy. Answer: Figuring out who will foot the bill. the pension credit, and then save One caveat: If your platform While conventional planning assumes many roughly $400 in taxes per year. Af- has registered account annual ad- clients should delay maturing their RRSPs into ter seven years (ages 65 to 71 in- ministration fees you will need to RRIFs until the year they turn 71, there is an clusive), this would amount to the subtract the cost for holding one approximate $2,800 incentive to accelerating the aforementioned $2,800. Although more account from the annual tax process for a portion of their nest eggs, thanks in Canadians are not allowed to have savings. Assuming a $125 + GST part to the increase in pension credit from $1,000 RRSP accounts after they turn 72, fee, this would reduce the sav- to $2,000. Depending on which province you’re there is no reason why your clients ings over the full seven years from in, $2,000 of the income that qualifies for pension cannot simultaneously have both $2,800 to roughly $1,881.25. credit translates into net savings of roughly $400 an RRSP and a RRIF account at Once your clients figure out in your client’s pocket. any time up until they turn 71. As where they’d like to go on their free The pension credit, however, is only available a matter of fact, there’s no limit to vacation, don’t forget to ask them starting the year a client turns 65. And it is im- the number of RRSP or RRIF ac- if you could sponsor any of their portant to note that unless income from an RRSP counts they can own. friends for the trip. My guess is, is in the form of an annuity payment (this would The second strategy to lever- these will be among the easiest re- show up on box 16 of a T4RSP slip), withdraw- age the pension credit applies to ferrals you ever get. ae banerjee als from the client’s RRSP account will not qualify

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AE07_028.indd 28 06/18/2008 02:16:50 PM TAX BREAK

g Ena katz, FCA, CFP, an executive director with Ernst & Young’s National Tax Is OffshOre Off LImIts? Practice in Toronto. “Tax Break” appears monthly. New rules make it harder to set up [email protected] non-resident trusts.

But even when the contributor is a non-resident, it is still possible for This is the first of twO parts. Under the pre-2007 deeming the trust to be deemed resident in rules, a non-resident trust, which Canada if there is a resident benefi- We’ve all heard about wealthy Ca- had both a Canadian contributor ciary. In the case of a resident ben- nadians who move offshore, set up and a Canadian beneficiary, was de- eficiary, the only way to escape the trusts with their investment assets termined to be a resident trust. As deemed resident trust rules is if: in low- or no-tax jurisdictions, and a result, a Canadian could settle a • a contributor has been a resident wescape taxation. You too may have non-resident trust for beneficiaries of Canada for less than a total of clients who have had quite enough living outside Canada, and a non- 60 months in his or her lifetime; or of Canada’s tax regime, wishing to resident could settle a foreign trust • a contributor doesn’t make a explore these opportunities. for Canadian beneficiaries, with contribution to the trust within Be aware, the Canadian tax au- neither trust, generally, being tax- 60 months of being resident in thorities are wise to most non-resi- able in Canada. Canada. dent trust arrangements and have But beginning in 2007, if an off- The first exception allows for indi- introduced a number of complex shore trust has either a Canadian viduals who have never been resi- tax rules aimed at ensuring that resident contributor or a Canadian dents of Canada to use foreign Canadians pay their share of tax on resident beneficiary and a contribu- trusts for the benefit of Canadian offshore earnings. tor with a connection to Canada, family members. And immigrants Generally, a non-resident trust is the trust is deemed to be resident to Canada can set up foreign trusts one in which the majority of trustees in Canada and subject to many do- before establishing residence and who manage and control the assets mestic tax rules. There are some benefit from five years of tax-free reside outside Canada. As a non- specific exceptions for infirm ben- accumulation in the trust. resident, the trust’s foreign income eficiaries, marital breakdown and The second exception applies to is not taxable in Canada (although certain charitable trusts. individuals who were permanent Canadian income may be subject Now, any offshore trust that residents of Canada. In this case, if to non-resident withholding tax). receives a contribution from a Ca- the plan is to have Canadian resi- If the trust is established in a tax nadian is deemed to be a Canadian dent beneficiaries, the foreign trust haven, its earnings can potentially resident trust even if all the ben- cannot be established within five grow tax-free and the capital can eficiaries are non-resident family years of leaving Canada (18 months then be distributed to beneficiaries members (with the exception of im- for testamentary trusts). in Canada or elsewhere, with no ad- migration trusts discussed later). To Further, the contributor must ditional tax. reduce or eliminate any Canadian remain a non-resident for an addi- While it may not appear too tax liability, the trust might distrib- tional five years after the contribu- difficult to implement an offshore ute its income to the non-resident tion to avoid the deemed resident trust, there are a number of rules beneficiaries (if the terms of the rules from the time the trust was that deem an otherwise non-resi- trust allow). And if the beneficia- established. This means someone dent trust to be resident and there- ries live in countries that don’t tax has to be a non-resident for at least fore taxable in Canada. And these or have low rates of tax on this in- 10 years to effectively use a non- deeming rules have been casting an come, overall tax savings can still be resident trust for Canadian benefi- even wider net since 2007. achieved. ciaries. aE katz

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AE07_029.indd 47 06/19/2008 08:56:39 AM ADVICE FOR THE FUTURE BY

DAVID SCANDIFFIO, CFA, OUTSIDE President, IA Clarington Investments EDGE [email protected]

AGE WAVES the suitability of new products. And A changing population is changing everything. these regulatory requirements will only increase with proposed NI 31- Prospects for the Canadian wealth management industry are very good, 103 (Registration Reform), the Cli- despite recent market turbulence. And one of the driving factors is the ent Relationship Model (CRM) and aging population in Canada. the Point-of-Sale initiatives. While the benefi ts of guaranteed As the needs of this oncoming tinuing to generate innovative investment products are easy to un- tsunami of senior citizens change ideas to meet investors’ changing derstand, the mechanics are some- our marketplace, our industry is re- needs is the key challenge for fund what complex and differ signifi cant- sponding with innovative solutions manufacturers. ly from product to product. These that are more complex than tradi- Investing in new types of mutual are the kinds of vehicles that are tional investments. The result is in- funds that provide some form of designed to meet the concerns of an creased pressure: on advisors to fully guarantee is one way investors who aging population, which is shifting understand and explain these prod- are approaching, or in, retirement its attention to capital preservation ucts; on manufacturers to provide are hedging against market volatil- as well as growth. the necessary training and support; ity. Consider the rise in popularity of This is further complicated by and on regulators to help ensure in- guaranteed lifecycle funds—which the stratifi cation of the population vestors are getting all the informa- can provide exposure to growth-ori- as it ages. Baby boomers (and now tion they need to make informed ented asset classes with the security what some are calling Zoomers— decisions. of a guarantee. Other quite differ- highly active boomers who belie the As baby boomers reach the tra- ent forms of maturity guarantees are senior label), followed by Gen X-ers ditional retirement age, seniors provided by investment products and Gen Y, all place different chal- are expected to constitute 20% of such as segregated funds and princi- lenges on advisors. Those groups the Canadian population by 2026, pal-protected notes. that followed the boom generation compared to only about 12.5% in The ongoing development of have shorter windows of peak earn- 2001—and the proportion of seniors these new investment structures ing power, which means they’ll want will continue to grow for many years places greater demands on advi- (and perhaps need) to achieve fi nan- to come. Indeed, 70% of wealth- sors to keep abreast of new product cial independence much faster. management assets will be held by developments in order to counsel It’s up to us as an industry to con- people 55 or older by the year 2016. clients wisely. What’s more, these tinue adapting to the changing mar- No longer satisfi ed just with trends are taking shape against a ketplace, to provide the information traditional fund types, investors have backdrop of increasing regulation. and education necessary for every- R .

embraced emerging new investment In recent years, the bar has been one to make informed choices, and O .

structures that focus on risk man- raised by regulators and the courts it is up to regulators to provide on- L E C H

agement, tax efﬁ ciency and income when it comes to an advisor’s obli- going guidance in terms of inform- M A solutions. And that means con- gation to understand and evaluate ing investors. AE SCANDIFFIO N

30 AE 0 7 2 0 0 8 www.advisor.ca

AE07_030.indd 54 06/18/2008 12:17:53 PM