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RRSPSPECIAL GUIDE

INSIDE!

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • JANUARY 2004 • WWW. ADVISOR.CA no plan? GET ONE AND FAST. A solid business plan is the best way to ensure your practice’s viability.

NEW TAX LOSS RULES • KEEPING YOUR KEY PERSON

Rogers Publishing Inc., One Mount Pleasant Rd., Toronto, Ont., M4Y 2Y5 • Publications Mail Agreement Number 40070230 AE01_005 12/02/2003 05:20 PM Page 5

January 2004 Volume 7, Number 1

INSIDE EDGE 7 Breaking the Chains 17 KEY PERSON PROTECTION It’s time to overhaul regulations that make it tough for advisors to change firms.

LETTERS 10 CFP vs.R.F.P. A reader challenges what designation it takes to be a true professional.

FRONT END LOAD 12 Challenge the CLU A miscellany of noteworthy items including the balance of Canada’s retirement income programs and Nick Murray on a rare opportunity for advisors.

TOOLBOX 17 Key to the Business Protect your client’s small business succession plan with enhanced insurance coverage that can reward and retain key senior staff.

COVER STORY / PRACTICE MANAGEMENT 22 No Plan? First things first: get one in place and fast. Not sure what makes a good 22 PLAN TO PROFIT business plan? Follow these nine steps and watch your business goals become that much clearer. By Brian J. Quinlan

SPECIAL PULLOUT SECTION RRSP Survival Guide: Portfolio Construction The third of our four-part series focuses on rebalancing portfolios. A scientific method to building the right portfolio.Tune-up tips to have a well-functioning portfolio.Transferring tuition credits. A possible alternate to RRSPs.

TAX PLANNING 27 The New Loss Rules New tax laws are coming in 2005 and could affect clients who are borrowing to invest. By Jamie Golombek 31 Tax Break with Gena Katz When support payments are made through third parties, different tax rules apply. 33 Compliance Check with Ellen J. Bessner The Financial Planners Standards Council’s practice standards are a RRSP SURVIVAL GUIDE blessing for the know-your-client process. 35 True Wealth with Thane Stenner Train clients to think about hedge funds as an idea, a way of thinking about how one should control risk and return in the portfolio. Here’s how. 37 Marketing Frontlines with Dan Richards Some client defection is inevitable, so put a prospecting plan in place to stay on stable footing.

38 This ’n’That by Andrew Rickard Baby bonus. Lunar lifestyle. Buried treasure. Retirement fund.

5 AE01_007 12/02/2003 05:23 PM Page 7 INSIDEEDGE

BREAKING THE CHAINS It’s time to overhaul regulations that make it tough for advisors to change firms.

Advisors who have changed firms to facilitate the departing advisor’s and non-solicit clauses to the contracts know from bitter experience what a efforts to take his clients with him. signed by their reps. Yet these same frustrating process it can be. While Here’s the scenario. When an advisor firms have no qualms about recruiting switching firms will always create cer- leaves a firm, whether it’s on the MFDA advisors from other firms. tain challenges, some of what hobbles or IDA platform, his registration lapses This all stems from the longstanding advisors is unnecessarily punitive. until he re-registers via his new firm. At industry debate about who “owns” the Advisor mobility, or more accurately the same time, regulations stipulate that client—a debate which rarely takes into the lack thereof, is high on the list of every account within a dealer firm must account the notion that perhaps clients what ails the industry, according to Brian have a representative assigned to it. So might object to being “owned” in the Mallard, a veteran Saskatoon-based advi- naturally the dealer will be quick to have first place. Instead, look at where the sor and the current chair of Advocis. another advisor contact the clients. relationship exists. If the advisors are At the Advisor Forum conferences While the departing advisor is between indeed providing the advice, then they this past fall, Mallard spoke on behalf registrations, he cannot provide any are also the ones who have the relation- of Advocis about a number of regula- advice to his clients, although he can ship with the clients. So clearly, it’s in tory issues—including the current certainly inform them of his leaving. As the interest of the client to allow them impediments on advisors moving their long as the advisor’s time in limbo is to quickly move with the departing books of business to another firm. short, say a few days, the inconvenience advisor—if that’s what they wish. “Under the current regulatory envi- to the departing advisor and his clients Mallard proposes a cooling-off ronment advisors have no right to will be minimal. period whereby the dealer does not change affiliation without a great deal Unfortunately, it doesn’t always work appoint a new rep to the departing of difficulty and expense,”Mallard told out that way. Mallard knows of cases advisor’s accounts for 30 days. This delegates. “Advisors should have the where the transfer and reapplication would allow both the firm and advisor same right to select who they work process has taken up to three weeks. to contact the clients. Combine that with as any other Canadian. Regulation The IDA says it will process the paper- with a fast-tracked termination and shouldn’t allow someone to be held work in two days—but admits it’s up to re-registration process, and voilà— hostage like this.” the dealer firm to send the information a better served public and a less The problem can be summed up in in a timely fashion. restricted advisor will result. two words: dealer hindrance. Dealers are Advisors can also find themselves understandably motivated to keep the bogged down by the internal policies of DARIN DIEHL client accounts and the revenue they the firms from which they are leaving. EDITOR generate. So they have little motivation Some of them layer on non-compete [email protected]

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 7 AE01_008 12/02/2003 05:23 PM Page 8

The ADVISOR Group is a division of Rogers Publishing Limited that consists of Advisor’s Edge, Advisor.ca, Advisor Forum, Objectif Conseiller and Forum Des Conseillers.

WHAT’S NEW @ ADVISOR.CA? JANUARY 2004, VOLUME 7, NUMBER 1

■ Part three of our four-part RRSP Survival Guide series in the Darin Diehl, Editor, ADVISOR Group (416) 764-3812, [email protected] Practice Zone’s “Special Report” section. January’s theme is ADVISOR’S EDGE portfolio reconstruction and includes: Deanne N. Gage, Managing Editor Wendi Phillips, Chief Copy Editor (416) 764-3803 (416) 764-3814 › Advice on turning portfolio realignment into client acquisition; [email protected] [email protected] Sheila Avari, Assistant Editor Harvey Schachter and (416) 764-3802, [email protected] Contributing Editor Scot Blythe, Lisa Darwen, A customizable template letter on importance of balanced Investments Editor Production Manager › (416) 764-3810, [email protected] (416) 764-3928, [email protected] portfolios. Aniko Toth, Art Director Maggie Sicilia, Administrative Assistant (416) 764-3850, [email protected] (416) 764-3822, [email protected] ■ A multi-part feature on insurance and business owners in our ADVISOR.CA Product Zone. John Craig, Managing Editor Steven Lamb, Reporter (416) 764-3811, [email protected] (416) 764-3961 Opal Patel, Web Projects Editor [email protected] (416) 764-3818, [email protected] Andrew Gregory, Web Production Manager ALWAYS ONLINE @ ADVISOR.CA! Doug Watt, News Editor (416) 764-3817 (416) 764-3815, [email protected] [email protected] ■ Daily news coverage of the industry stories and issues you OBJECTIF CONSEILLER need to know Yves Bonneau, Editor Marie-France Cardinal, Assistant Editor (514) 843-2142, [email protected] James Wagner, Art Designer ■ Our latest insurance case study in the Product Zone ADVISOR FORUM ■ Sharing of opinions and knowledge in our online discussion Kevin Craig, General Manager Tricia Moore, Manager, Conferences (416) 764-3957 Antonia Mitchell, Administrative Coordinator forum [email protected] SALES ■ The latest market news, in our twice-daily e-mail bulletins Alexandra Blum Gisela Stephany GM, Sales & Business Development National Account Executive (416) 764-3830, [email protected] (514) 843-2133, [email protected] Watch for this icon. Garth Thomas Graham Blair More online It signifies there is more National Account Manager National Account Executive (416) 764-3806, [email protected] (416) 764-3809, [email protected] information or tools related to @ Donna Kerry David Carmichael, Sales Coordinator www.advisor.ca/interact the story you’re reading at National Account Manager (416) 764-3820 www.advisor.ca/interact (416) 764-3805, [email protected] [email protected] RESEARCH AND MARKETING Nancy Matheson, Director of Marketing Denise Brearley, Circulation Director, and Promotions Healthcare and Financial Services Group Joanne Merrick, Promotions Manager

Mark Stevens, Group Publisher HOTLINES (416) 764-3825, [email protected]

ADVISOR CUSTOMER SERVICE DESK is published 16 times a year by Rogers Publishing Limited. For help with your Advisor.ca settings or for general information about Advisor’s Edge receives unsolicited features and materials (including letters to the editor) from time to time. The ADVISOR Group, call (416) 764-3859 or e-mail [email protected] 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, without compensation of any sort. CHANGE YOUR ADDRESS ROGERS MEDIA Anthony P.Viner, President and CEO All address changes must be in writing. Include your old and new address ROGERS PUBLISHING and the code on your mailing label. Fax to Advisor’s Edge Customer Service at Brian Segal, President and CEO (416) 932-9566 or e-mail [email protected] Immee Chee Wah, Vice-President, Business Planning Tracey McKinley, Vice-President, Consumer Marketing REPRINT INQUIRIES John Milne, Harvey Botting, Donna Clark, Mitch Dent and Paul Jones, Senior Vice-Presidents Call (416) 764-1443 or e-mail [email protected] Paul Williams, Vice-President, Healthcare and Financial Services Group Published in Canada by Rogers Publishing Inc. since June 1998. Rogers Media Inc., One Mount Pleasant Rd., Toronto, Ontario M4Y 2Y5. Offices: 1200 Mc Gill College, Bureau 800, Montreal, Quebec H3B 4G7, (514) 843-6600; Ste. 900, 1130 West Pender St., Vancouver, British Columbia V6E 4A4, (604) 683-8254. Subscription price plus taxes: Canada $68.95 per year, 2 years: $115.50, 3 years: $146.50; USA/Foreign: $135.10 (one year only). Single copy: $15. Published 16 times a year. G.S.T. #137813424RT. ADVISOR’S EDGE is indexed by the Canadian Magazine Index by Micromedia Limited and the Canadian EDITORIAL ADVISORY BOARD Periodical Index. Canadian back copies are available in microform from Micromedia Limited, 20 Victoria Elaine Andrew Dan Richards Street, Toronto, Ontario M5C 2N8. Indexed by the Canadian Business Index and available online in the Investors Group Cartier Partners Canadian Business & Current Affairs Database. PM 40070230. Canada Post: Please return undeliverable address blocks to Advisor’s Edge, One Mount John De Goey Jim Rogers Pleasant Rd., 12th floor, Toronto, Ontario M4Y 2Y5. ISSN 0703-7732. Assante Capital Management Rogers Group Financial We acknowledge the financial support of the Government of Canada, through the Canada Magazine Robert Fleischacker Nancy Shewfelt Fund, toward our editorial costs. Copyright © 2004 Rogers Publishing Inc. Advocis, Stonehaven Financial Group Wellington West Capital Inc. Cynthia J. Kett Thane Stenner Stewart & Kett Financial Advisors Ltd. The Stenner Group, CIBC Wood Gundy John Ord Lynne Triffon BMO Nesbitt Burns T.E. Financial

8 ADVISOR’S EDGE | JANUARY 2004 www.advisor.ca AE01_010 12/02/2003 10:36 AM Page 10

LETTERS

R.F.P.vs. CFP professional financial planner in the future. Re: “Are Advisors True Profes- I do concur with De Goey’s observation that the vast major- sionals?” October 2003, page 58. ity of advisors are just salespeople using the concept of finan- Maybe John De Goey’s problem cial planning as a prospecting tool. If clients are looking for is that he hangs around with the a financial planner and are committed to doing comprehen- wrong people. I spent two days sive financial planning, they should be looking to work with in Toronto at the Institute of an advisor holding an R.F.P., or someone directly supervised Advanced Financial Planners by such an individual. (IAFP) symposium in November with more than 100 extremely professional and committed Doug Macdonald, MBA, CMA, R.F.P. registered financial planners (R.F.P.). De Goey’s comments Macdonald, Shymko & Company Ltd. on professionalism may have validity on an industry-wide Vancouver basis, but there has always been a core group of R.F.P.s who have stood for all the things he laments. The content and focus of the symposium emphasized this, TOP ADVISOR QUALITIES as does the IAFP’s code of ethics and recently introduced Professional Standards of Practice for R.F.P.s. I believe these Re: “What It Takes,” October 2003, page 7. standards are the most comprehensive for financial planners I want to commend Darin Diehl for his October editorial. in North America and will become the benchmark for a truly He managed to ferret out what it takes to succeed as a financial advisor, and say it in less than a page. He indicated that successful advisors possess these three Darin Diehl, editor of qualities: The ADVISOR Group, • Quiet pride about their professionalism and constant is pleased to announce self-improvement; the promotion of •True entrepreneurial zeal—projecting confidence and Doug Watt to news editor integrity; and of Advisor.ca. •The ability to be client-centric—as measured by the level of adrenaline rush when a solution they have crafted makes Doug has been a reporter with Advisor.ca for three years a huge impact on a client’s life. covering industry news. In his new role Doug will oversee You certainly nailed it in my opinion. Thanks. the assignment and lineup of news for the Web site and daily e-mail bulletins. He will also work with managing editor John Craig to evolve and improve news content on John A. Page, CFP, R.F.P. Advisor.ca. Page & Associates Advisor.ca is part of The ADVISOR Group at Rogers Markham, Ont. Healthcare & Financial Services Group. The ADVISOR Group also includes the award-winning magazines Advisor’s Edge and Objectif Conseiller, and Advisor Forum, which organizes I will forward this editorial on to our board of directors. I and stages numerous educational events for financial advisors. love the part about being “client-centric” and the fact that you cannot “fake” being it. Keep up the great insight and your “The ADVISOR Group is part of Rogers Publishing, a division of Rogers Media Inc. Rogers Media Inc., a division of Rogers Communications Inc., (TSX: RCI.A and RCI.B; NYSE: RG) operates Rogers Broadcasting and Rogers Publishing. Rogers Broadcasting has 43 AM and FM radio stations across Canada. Television properties include Toronto multicultural television broadcasters CFMT (OMNI.1) and OMNI.2, televised and own passion for improving the quality of our industry. Maybe electronic shopping service, the Shopping Channel, regional sports channel, Rogers Sportsnet and the management of three digital television services. Rogers Publishing produces many well-known consumer magazines such as Maclean’s, Chatelaine, Flare, L’actualité and Canadian Business, and is the leading publisher of a number of trade publications. All media properties are integrated with their own popular Web sites.” there is hope if we all take an active role in this!

Nancy Shewfelt, CIM Wellington West Capital Inc. Surrey, B.C. AE01_012-014 12/02/200305:40PMPage12 END INDUSTRY FRONT 12 CHALLENGE THE CLU CHALLENGE THE ates in partnership withtheCLU Institute. ates inpartnership ex ev v put theirknowledge tothetestandberecognized for the is tooffer to theseveteran advisors aone-timeopportunity addsCLU Institutechairedge,” KristanBirchard.“Our goal f rience intheindustry, but who holdapro- donotcurrently on career experience, says CLUDeborah Kraft. Institutetrustee have acquired extensive skillsandknowledge through hands- c combinedwiththree specializedcourses. CFP program The nation by writingasingle exam. will allow experienced advisors toobtaintheCLU desig- ieteCUbcm eurmn fadvice-giving. like theCLU becomearequirement of systeminCanadasothatdesignations present regulatory designation. T the institute. says operatingofficer of Terrythis program,” Taylor, chief “Candidates willonly haveber. in sixmonthstoparticipate inApril.begin lastrewrite examThe willbeoffered in Octo- thismonthandthe prep coursewill the bridgingprogram Institute said. theCLU taughtintheCFPandCLUconcepts curricula,” the “thoroughly testcandidatesontheirknowledgewill of thefirst exam, scheduled for May 2004. examThe of essional designation,toeffectively demonstratetheirknowl- hallenge exam recognizes thatmany non-designatedadvisors aluable advice theyoffer theirclients.” here are currently3,600advisors inCanadawiththeCLU ant work experience towritethe andeducationprograms, m hyms lob ebr fAdvocis, which oper- am. mustalsobemembersof They T T Candidates mustsubmitqualifyingcriteria,including rel- expe- willallow“This advisors who have many years of T Advocis hasbeenactively campaigningtochange the T T he CLU that Instituteisintroducing abridgingprogram enra ot oteCUivle opeino the route totheCLUhe normal involves completionof he exam willcost$500andtheprep coursecosts$295. he instituteisoffering optionalprep coursesinadvance he CLU applicationsfor accepting Institutewill begin ADVISOR ’ S EDGE | JANUARY P 2004 ol,ted,eventsandanalysis trends, eople, —Doug Watt LOAD Source: 1,000,000 1,200,000 1,400,000 Assets (inAssets millions ofdollars) 200,000 400,000 600,000 800,000 Statistics Canada, November 2003 November Canada, Statistics 0 9019 9419 9820 2001 2000 1998 1996 1994 1992 1990 $1.15 trillion in thethreemain retirement R Canadians had accumulatednearly etirement Reserves programs bytheendof2001. Registered pension plans RRSPs Public government plans

www.advisor.ca Cartoon by Sue Dewar Sue by Cartoon AE01_012-014 12/02/2003 05:40 PM Page 13

INDUSTRY CALENDAR ■ JANUARY 15 to 17, The Second World Critical Illness Insurance Conference, Fairmont 2004:THE SWEET SPOT Empress Hotel, Victoria, www.criticalinsurance.ca ■ JANUARY 19, 116th Toronto Board of Trade Annual Dinner, Keynote: Michael Lee-Chin,

he religious imagery of the title was 55% planning, 30% asset allocation and Sheraton Hotel, Toronto, www.bot.com

T well suited, as author and business 15% avoiding big mistakes, like ignoring the ■ JANUARY 22 to 23, Finance for the coach Nick Murray delivered his lecture advice of their advisor. Non-Financial Manager, Toronto, www.epixtrain-

Opportunism After the Apocalypse with “All the rest is selection and timing,” he ing.com ■ JANUARY 22 to 23, Third National the zeal of a preacher in a revival tent.The jokes. “And what do you spend a third or Summit on Income Trusts, Hilton Hotel, Toronto, OF congregation at Advisor Forum in Toronto a half of your time working on? Stop it. www.canadianinstitute.com ■ FEBRUARY 23 to in November soaked the sermon up in near You can’t control it and it doesn’t contribute 24, 14th Annual Securities Super Conference,

reverential silence. anything.” Four Seasons Hotel, Toronto, www.canadianinsti- EVENTS

“There are only two kinds of people in Murray says a financial plan reminds tute.com ■ FEBRUARY 26 to 27, Canada/U.S. the world: people with too much class to say the clients they are working toward a goal Legal and Business Guide to Cross-Border

‘I told you so,’ and people like me,” said and gives the advisor a document to point Financing, Metropolitan Hotel, Toronto,

Murray,an advisor favourite whose speeches to when the client starts to stray from the www.canadianinstitute.com ■ MARCH 19, always attract large crowds. plan. “My experience with people with 2004 Ontario Congress, Sheraton Parkway

Murray predicts that 2004 will be ripe plans is that they can be induced to con- Conference Centre, Richmond Hill, Ont.,

with opportunity and that advisors need to tinue to act on the plan,” Murray says. www.advocis.ca ■ MARCH 21 to APRIL 2, actively pursue new clients before the mar- “Financial success is almost purely a Annuity and Pension Conferences, Flamingo

kets instill complacency. “You will never function of acting as opposed to reacting. Hotel, Las Vegas, www.limra.com/events again find so many people, with so much When I have a plan and I continue to act To submit an event, e-mail money, so consciously, actively desirous of on it through my life ... I achieve all my [email protected] quality financial advice and so disappointed financial goals.” with their previous advisor,” he says. Murray says asset allocation is also “Especially if their previous advisor was important, but that most people use the term themselves.” as a justification for market timing. Since He cautions that 2004 is only about a proper financial plan is not only genera- 1,600 professional hours long, warning advi- tional, but trans-generational, asset alloca- sors that the windows of opportunity will tion under that plan should also be based on DID start to close quickly. It will only take one an extremely long time horizon. He says YOU year of decent market returns, let alone there is only one asset class that can his- know outstanding returns, he adds, for investor torically be shown to provide the returns complacency to creep back. needed to offset this erosion of purchasing And one step behind complacency is what power.It might make clients uncomfortable, Women aged 25 to 64 contribute Murray calls “the foul fiend,” do-it-yourself but advisors need to explain the real risk of about $10 billion to an RRSP.This investing.The year 2004 will be the “sweet outliving their money. is up 8% from 1999, while men spot” for the advisor industry, the interim “Tell your countrymen, without ceasing, contributed $16.5 billion, up .2% between the horror and complacency.“Peo- that if they think in retirement, that bonds

ple will still be chastened enough by the are safe and stocks are risky, it’s the other SOURCE:STATISTICS CANADA,NOVEMBER 2003 experience of the past four or five years, to way around,” he says.“How would you fail be willing to listen to reason, to be willing to to achieve all your long-term financial goals ? listen to good counsel and to follow it.” in an asset class that’s been compounding Murray says the reasons for a household's at 10% to 12% since Lindbergh flew the financial success can be broken down into Atlantic?” —Steven Lamb

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 13 AE01_012-014 12/04/2003 03:08 PM Page 14

FRONTENDLOAD MOVERS& SHAKERS ■ JOHN MOUNTAIN, ■ ROBERT S. BELL, president of R.S. 55..55 IFIC’s vice-president of Bell & Associates Ltd., and William million members were participating regulation, is on a one- J. Smith, president of W.J. Smith in 13,861 registered pension year leave of absence Capital Management Inc., are joining TISTICS plans as of January 2002.* John Mountain effective this month. forces to offer investment counsel and His position will be advisory services. filled by IFIC’s cur- STA rent vice-president of FUND NEWS $$229933 corporate affairs and ■ INVESTORS GROUP’s Investors billion had been invested in RRSPs John Murray general counsel, JOHN Canadian Money Market Fund, at the end of 2001.* MURRAY. Investors U.S. Money Market Fund ■ LESLIE BYBERG has left IFIC as and Investors Canadian High Yield senior legal counsel and has been Money Market Fund now include appointed manager of investment a deferred sales charge purchase $$6655 funds for the Ontario Securities option. billion had been invested in Commission. ■ AIM TRIMARK has replaced Kiki CPP and QPP at the end of 2001.* ■ DAVID SCANDIFFIO Delaney of C.A. Delaney Capital left MRS as vice-presi- Management as manager of the Tri- dent of marketing and mark Enterprise Fund. The fund will has been appointed be managed by Ian Hardacre, cur- 22..55 David Scandiffio president of Industrial rently manager of Trimark Canadian million female workers belonged Alliance funds. Fund and Trimark Select Balanced to a registered pension plan ■ FRANK SWITZER, formerly with Fund. at the end of 2001.* the media relations division of the ■ MACKENZIE FINANCIAL is making Ontario Securities Commission, the Mackenzie Cundill Canadian has joined Scotiabank as director of Security Fund, Mackenzie Universal % public affairs. U.S. Growth Leaders Fund, Macken- 9 ■ CLAUDE HUOT has been appointed zie Maxxum Dividend Fund and 9 as a director of the Canada Deposit Mackenzie Maxxum Canadian of tax filers used 95% or more Insurance Corporation. Equity Growth Fund available in its of their available RRSP room in ■ JAN HOPKINS, former CNN tax-efficient Capital Class structure. 2001.* anchor, has joined the Citigroup Pri- The funds will also remain available vate Bank as managing director and in their regular structure. head of client communication. 4400% of tax filers using most of Investment income dives their RRSP room had an income of $80,000 or more.* oth the number of Canadians reporting investment income and the amount of B income they received plunged in 2002, according to Statistics Canada. SOURCE:STATISTICS CANADA,NOVEMBER 2003 In 2002, 7.5 million Canadians reported investment income. That is down 6.3% from 7.9 million in 2001. The amount of money they received from investments fell 12.1% to $29.5 billion in 2002 from $33.6 billion in 2001. The median invest- ment income held steady at $500.

14 ADVISOR’S EDGE | JANUARY 2004 www.advisor.ca AE01_017-021 12/03/2003 10:47 AM Page 17

Strategies for advisors from advisors

By Douglas V. NelsonTOOLBOX KEY TO THE BUSINESS Protect your client’s small business succession plan with enhanced insurance coverage that can reward and retain key senior staff.

Victor has been running his own plumbing company for 25 years. In fact, he started his company at about the same time his son, Christopher, was born. Now 60, Victor is thinking about retirement and wants Christopher to take a more active role in the business. However, his business wouldn’t have been as successful if his employee, Jim, hadn’t been part of the team. Losing Jim at this time of transition would be a terrible blow to the company. Victor has come to you, his advisor, for suggestions about how to keep this key person in the company while his son gets more involved. When meeting with Victor, you explain three important considerations for manag- ing a key-person relationship: • basic strategies to protect the business; •enhanced strategies to tie the key person to the business; established in his new leadership role. and • strategies to make sure Jim does not feel threatened by What are the risks to the client and his company? Chris’s arrival in the business. In the event Jim was to depart from the business, due to death, disability or illness, a cost will be incurred by the company. What is a key person? Jim may have a unique ability to price out certain jobs accu- A key person is an individual with unique skills, relationships rately and efficiently, to work on specific client relationships or experience who makes a substantial contribution to the or to close certain sales opportunities. If a job is lost or is success of a business. This may be a person who has grown priced incorrectly, the impact to the business could be sub- with the company into a senior management position. The stantial. The company may also have to hire temporary help person is key if the business will suffer a substantial loss of to pick up some of the workload or employ a nationwide income, increase its risk exposure or lose valuable time if this search firm to find a replacement. individual left the business for any reason. What would be the real cost to the business in the event Yet, in a family business situation, this individual is often that Jim passed away unexpectedly or became disabled? A caught between their loyalty to the senior generation family good rule of thumb is to take Jim’s annual wages and multi- member who may be retiring and the younger generation fam- ply by five. If he’s earning $100,000 annually, for example,

Illustration by Christiane Beauregard Illustration ily member who may be set on “changing things” once he is Continued on page 19

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 17 AE01_017-021 12/03/2003 05:53 PM Page 19

TOOLBOX

Continued from page 17 Consideration #2: Enhanced strate- sickness plan” structure. The insurance odds are that the company will need to gies to tie the key person to the product would be owned by the indi- spend one to two times this amount to business. vidual so the benefits would be tax- free replace him. Based on this level of Victor may also seek out enhanced per- to the employee when received. The pre- income, the company may also be at sonal security benefits for Jim to help tie miums would be paid by the company risk to the tune of three times his salary him to the business. These benefit pack- and therefore tax-deductible. A “private in lost sales, mistakes or mispriced ages could include enhanced life, dis- health services plan” could be set up in quotes. ability, critical illness and long-term care the same manner using long-term care insurance as well as other income and insurance. Consideration #1: Basic strategies bonus strategies. Jim will recognize the Finally, a group accident and sickness to protect the business. value he could receive from these bene- plan structure could also be used to cre- Victor could consider purchasing life, fits and thus feel it is important to stay ate a combined benefit package using a disability and critical illness insurance with the business. single insurance product. Today, there as financial tools that will provide For example, a key employee with an is a product available whereby life, dis- money in the event Jim passed away, was above-average income may be under- ability, critical illness and long-term unable to work due to an accident or ill- insured for disability insurance by their care insurance can be combined on top ness and/or suffered from a critical ill- group insurance program. To enhance of a universal life insurance chassis. In ness such as a heart attack, stroke or benefits for a specific “class” of a situation where the company is pay- cancer. All of these insurance plans employees, one approach is to establish ing a bonus to the key employee, the would be owned by the company, for a “wage loss replacement program.” As portion of the bonus received by the the benefit of the company. The pre- long as all individuals in the class have employee that relates to personal dis- miums are paid with after-tax corporate access to the plan, and so long as the ability, critical illness and long-term dollars. class is not specific to the shareholders, care insurance premiums would not be If Jim were to suddenly become dis- the premiums may be tax-deductible to taxable to them on receipt. abled, the income received from the dis- the company. The individual disability For example, assuming Jim receives a ability plan would be received by the plan would be owned by the key bonus of $25,000, and $10,000 of this company tax-free. The company would employee so he gets all the benefits amount was used by the company to fund typically use this money to fund the directly. He would be taxed on the ben- the annual premiums for the living ben- ongoing salary of the disabled key efits but the premium is not a taxable efits, the net bonus of $15,000 would be employee. This would reduce the finan- benefit to the individual. taxable as income to Jim; the $10,000 cial risk to the business and/or free up Another approach would be to estab- related to the living benefits premiums company cash to find a replacement. lish a critical illness plan in the same would not. This strategy creates a The money received by the employee manner, with three employees of the fully deductible benefit to the company would be taxable as income. same class, using a “group accident and Continued on page 21 AE01_017-021 12/03/2003 10:48 AM Page 21

TOOLBOX

Continued from page 19 younger generation to find ways to by insuring Jim for life, disability and (i.e., the bonus) and a partially taxable work with these key employees so that critical illness insurance; bonus to Jim. Jim would own and be the everyone benefits. • meet with Jim to discuss his ongoing beneficiary of the insurance product. For example, recommend to Victor role in the business and ways in At this point in a meeting with Vic- that when Chris enters the business, he which Victor can not only encourage tor, stress how important it is to con- should work in a position that is based him to commit to the long-term sider the unique abilities, desires and age on his skills and merit, rather than a growth of the business but to also be of the key person. Recommend that the supervisory position that may be con- a mentor to Chris; and best approach is to discuss these alter- strued by others as given to Chris • spend time with Chris assessing his natives openly with Jim so sincerity is because he has the “right last name.” It current abilities and mapping out a clearly communicated. will be necessary for Chris to establish three-year career path. Genuine interest in their personal his own unique relationships and build By acting on these three steps, Victor well-being will probably be the greatest the trust and confidence of the people was able to ensure that the business was benefit you can provide to your key per- around him. Building confidence means protected against the risk that Jim son(s). However, emphasize to Victor having and encouraging open and hon- would die, become disabled or suffer a that this discussion should include est communication, being consistent critical illness. Victor can also be assured some points regarding Chris’s involve- and being dependable. that Jim was part of the process of ment in the business. Over time, however, give Chris the developing an enhanced benefits pro- opportunity to develop and lead a proj- gram and that both Jim and Chris will Consideration #3: Strategies to use ect on his own and build it in his own work together to build the future vision when the key person is trapped image. This will give him the opportu- of the company. between two generations. nity to demonstrate his ability to meet As years passed since these discus- You explain to Victor that it is common deadlines and overcome obstacles. sions, Jim and Chris have had their dis- for a key person to feel trapped between Should Chris fail at this task, the expe- agreements. However, because of the their loyalty to the senior generation rience will demonstrate to Jim and oth- open discussions about a career path for and anxiousness about the plans of the ers Chris’s ability to admit mistakes and each of them, Victor was able to younger generation. The incoming bounce back to find solutions. These develop a strong new leadership team generation may be motivated to make real-life experiences will do a tremen- that ultimately helped him retire in innovative changes to the company, dous amount to build credibility comfort. while the key employee may feel the between Chris, Jim and other key sen- changes are inappropriate. Unfortu- ior people. Douglas V. Nelson, CFP, CLU, is a partner of nately, in many situations a key person Based on your professional guidance, Nelson Financial Consultants based in Winnipeg may either undermine the new leader or Victor has decided to: and author of Advising Family Businesses leave for another job. It is crucial for the •protect the cash flow of the business (The Knowledge Bureau). AE01_022-027 12/02/2003 05:52 PM Page 22 Cover Story / Practice Managementno plan? Our advice is simple: GET ONE AND FAST. Without a business plan, your practice will lack focus and direction.

By Brian J. Quinlan Illustration by Mike Constable

22 ADVISOR’S EDGE | JANUARY 2004 www.advisor.ca AE01_022-027 12/04/2003 10:59 AM Page 23

AS AN ACCOUNTANT, I have the All advisors need business plans, can pinpoint where things go wrong, privilege of working with a number of period, since they are in the business of and because you have a step-by-step financial advisors who refer clients managing their client bases. Just because approach, correcting an error may just to me. From time to time, an advisor will the advisor doesn’t need to find capital mean taking one step back versus start- ask me to do a business plan for a client. or source product from China doesn’t ing from scratch. When I, in turn, ask if the advisor has a mean it’s any less of a business. The plan should be written by you. business plan, the answer is usually “no.” A business plan goes beyond simply Who else knows your business, your pri- articulating your goals. It’s a written sum- orities, your goals, your strengths and mary of your business, where it is going weaknesses better than you? Only you can and how it is going to get there. It con- take responsibility for following (or fail- tains information from the past and pres- ing to follow) the plan. Third-party ent and expectations for the future. It authors of business plans, such as also provides an early “reality check”— accountants, have preconceived notions. a way to minimize surprises in the future They may be too optimistic or more and to handle the stumbling blocks now. likely pessimistic. However, once you fin- Without a business plan, it’s difficult ished drafting your plan, consider hav- to reach your goals. Instead of taking ing a business advisor critique it. They the straightest path, you’ll take the sce- can point out matters that may have been nic route. Worse, you won’t realize you overlooked, are unclear or have been have strayed from the path. You may glossed over. miss an opportunity that would have A proper business plan is made up of moved you ahead of the game. nine standard components. By writing down your plan, you Continued on page 24 BIZ PLAN ASSISTANCE Here are some URLs that provide more relief on how to ? draft your best business plan.

› Standard Life › CIBC www.standardlife.ca www.cibc.com/ca/small- Click on “Business Consultancy business/article-tools/business- Services.” planning.html

› Lemoine Hyland LLP Chartered › TD Canada Trust Accountants www.tdcanadatrust.com/ www.lhgroup.com smallbusiness/windocs.jsp Click on “Newsletter,” then click › Bank of Montreal on “Issue #9.” http://www4.bmo.com/business/ › Business Development Bank of 0,4344,35490_35905,00.html Click Canada on “Business Planning Resources” www.bdc.ca/en/my_project/ on the right navigational bar. Projects/starting_business.htm › Advisor Magazine › Royal Bank http://businessadvisor.us/doc/08260 www.royalbank.com/sme/index.html

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 23 AE01_022-027 12/02/2003 05:52 PM Page 24

Continued from page 23 book at the end of the coming year? Consider the following. 1. Your Mission Statement What is my target for growth? What • Compensation: There are different Write down a sentence or two that do I need to put in place to reach ways to be compensated, including describes what you do (or what you are these goals? charging commissions, fees or a com- going to do) and how you are different •What are my client target groups bination of both. What control do from others. This is the shortest part (e.g., business owners, families, etc.)? you have over pricing? Would you be of your business plan but the most •Are my goals realistic? charging hourly and how much? How difficult to write. Marketers call this • Is there an industry or firm guideline are you going to communicate your “branding yourself.”What message and I can compare myself to? pricing policy to your clients and image do you want to communicate? •What is my most critical success fac- how will you deal with objections Your mission statement may become tor (e.g., technical skills, marketing, clients will have about your compen- your opening line in meeting a prospec- client service, etc.)? sation? tive client. •What is my most critical failure fac- • Education: You need to keep Your personal mission statement tor (e.g., rejection, intimidation, etc.)? expanding your professional knowl- explains how you are going to undertake • Do I accept that people will not edge—how will you keep up with the the mission and how you will differ break down my door to see me just new products and new regulatory and from your competitors. because I think I have exceptional tax laws? Will you be working toward investment/insurance knowledge? additional designations or degrees? 2. Your Background •What constraints do I have? Consider how much time you will Who are you and what have you •What obstacles do I need to get over? dedicate to readings and continuing accomplished? Better, what have you •How can I be the best I can be? education. If you need additional done lately that supports you being a • Do I have a contingency plan? (Note: expertise, who will you turn to? financial advisor and how it will help This is not a sign of weakness or • Serving clients: Great service is a you in the future? Consider: planned failure, but a sign of reality.) given in a client’s mind. Will you meet •your specific strengths and weaknesses; with them in the office, visit them at •what you have accomplished to date; 4. Your Target Market home, limit them to phone conversa- •your experience, education and train- Describe your target market, why it is tions or exchange e-mails? How often ing as a financial advisor; your target market and what is the out- will you be in contact? How quickly •how you focus on sales and/or client look for this market (current, short, will you return phone calls or e-mails? relationship management; and mid or long term). Be wary of generic How often will you review an •your experience in marketing yourself. comments that we all could read in a account? Is there a special treatment newspaper (baby boomers inheriting, for ultimate clients? What tasks will 3. Your Direction less kids per family being born, etc.) and you handle personally and what will Simply put, what are your specific goals focus on your specifics (you are from a you delegate to your assistant? in being a financial advisor? Your goals wealthy graduating class, etc.) • Marketing: How much money and need to be challenging yet realistic— Also describe your ultimate client time per day will you dedicate to and measurable. Ask yourself: and why they would be your ultimate marketing? Will you purchase a block •Why the financial advisory business? client. Then, as a reality check, describe of clients? After you have contacted •What are my short-term, mid-term the next best client. all your relatives and friends, then and long-term goals? what? What types of advertising and •What will be my area of concentra- 5. Marketing promotional ideas do you have? Will tion? (financial planning, securities, How do you intend to get your name you do bulk mailing, article writing, insurance, etc.) out there, attract a client and retain that cold calling, write articles or distrib- •What is the desired value of my client? What is your marketing strategy? ute newsletters?

24 ADVISOR’S EDGE | JANUARY 2004 www.advisor.ca AE01_022-027 12/02/2003 05:52 PM Page 25

•When do I come off an employer’s A business plan is like a road map. It salary and really “go on my own”? •What is my break-even point? provides you with a level of confidence • Do I have other sources of cash? that you know where you are going • Do I have an “emergency fund” for the slower times? and how to get there. • Do I have access to a line of credit? •Have I arranged my financial affairs to ensure any interest I incur is tax What will be your daily routine? • Be involved in the interview deductible? Morning: Read paper? Networking process. If time is tight, you can hire • Am I looking after my own retire- breakfast club? Answer e-mails? Follow- a recruiter or use a hiring agency. ment savings? up phone calls? Cold calls—how many? Use the recruiters to narrow down Afternoon: Meet clients? Meet the number of applicants but the 9. Your Executive Summary prospective clients? What will you do at final decision is up to you. In the Sum up your whole business plan—in lunch? Cold calls—how many? end, you are the one who will be one paragraph. The executive summary Evening: More reading? Write working with and relying on the new highlights the major points of your newsletters? Seminars? Meet clients? employee. business plan—your purpose, a clear Home visits? Service club meeting? • Design an orientation program to description of your business, an analy- Recreational sports? Evening network- evaluate the abilities of the assistant. sis of the market and the competitive ing club? Cold calls—how many? This will benefit even the most advantage that will bring you success. experienced assistant. Ask yourself: 6. Your Competition • Be patient. Take your time to find • Is my summary too technical or does Detail your competitive advantage and the person you want, not just who it have too much jargon? how you will maintain or acquire it. Ask happens to be available. • Is it attractive enough for the reader yourself: • Relate your staffing needs to your to continue reading? •Who are my current and expected business growth expectations. You’ll •Does it communicate my enthusiasm? competitors? have to figure out how many assis- •Does it really communicate me? • Specifically, how will I differentiate tants you think you will need, A business plan is like a road map. myself ? How will I communicate whether they should be at different It provides you with a level of confi- that I am different? experience levels and how the respon- dence that you know where you are •What puts me ahead of the others in sibilities should be shared. going and how to get there. However, reaching and securing clients in my The assistant will only become what one usually looks at a road map more target market? you allow him or her to become. Make than once during a trip. The same goes the commitment to orient, educate and for a business plan. It needs to be 7. Support Staff integrate your assistant into the prac- looked at continually to confirm you are The growth of your business will tice. Without commitment, expect to on the right track. require help. The most successful peo- accept a lower level of performance ple in business have a great skill—they than you desire. Brian J. Quinlan, CA, CFP, TEP, is a partner delegate well and delegate often. So how at Campbell Lawless Professional Corporation, do you find the right support staff ? 8. Your Personal Finances Chartered Accountants. • Write a detailed job description How much money is realistic for you to More online for the position. You need to be able earn? How much money do you need to @ to communicate your requirements. live on? Ask yourself: www.advisor.ca/interact

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 25 AE01_SOFC 12/02/2003 05:37 PM Page s1

JANUARY 2004 PART 3 OF 4: PORTFOLIO CONSTRUCTION

A Special Supplement of

Tune-up ADVISORS SHARE HOW THEY FIX CLIENT PORTFOLIOS AFTER THE BEAR MARKET. (page 4)

ALSO INSIDE

2 Creating a process for selecting funds 8 Tuition transfer 10 TPSPs: changing the landscape? AE01_S002-S010 12/02/2003 06:16 PM Page s2

Behind the scenes Apply a consistent, scientific methodology when building a portfolio for clients. By Pierre Saint-Laurent

uilding powerful and well- performing portfolios is a key B component of your overall services to your clients. It’s actually the groundwork that allows advisors to build their businesses on solid ground to weather the market cycle through highs and lows. But how do you actually go about select- ing portfolio components, particularly mutual funds? According to The ADVISOR Group’s second Annual Dollars & Sense Survey, 80% of advisors use a fund’s track record as their selection criterion. Seventy-three per cent see investment style as another important parameter, while the fund’s manager scored highly with 57% of surveyed Canadian advisors. a good advisor to do? Efficient practice management needs At the same time, though, advisors are under pressure to be based on methodologies that add value. In your jour- to increase their business. The same survey has shown ney to success, it’s not possible for you to dwell on any spe- that an advisor’s greatest challenges are attracting new cific point, so you need to be consistent and purposeful clients, time management, client fear of investing and about your business processes. client servicing. In other words, you as an advisor not only feel huge pres- Value-Added Documents sure to increase your business, and be efficient at it, One of the most value-adding items in portfolio management you also need to address client fears and questions, and is the investment policy statement (IPS). Although obvious,

Illustration by Otto Steininger Illustration streamline the communications that this requires. So what’s it’s surprising how few advisors use these with their clients.

2 RRSP Survival Guide / January 2004 AE01_S002-S010 12/02/2003 06:16 PM Page s3

Going only for the brand-name funds could prevent you from accessing excellent products ()that may be more appropriate for your client.

An IPS is a well thought-out and systematic process which (Compounding tends to bury return and risk events evidences the client’s characteristics: investment horizon, liq- through averaging.) uidity preference, investment knowledge, risk tolerance, favoured or off-limits asset classes or investments and the like. ❸ Look at style. Narrow Canadian markets make it diffi- Although know-your-client forms fulfill an advisor’s cult to remain style-consistent. So look for consistency compliance requirements, they typically fall short of evi- in the manager’s top 10 list, validate the manager’s dencing investment needs—that is, what the client should approach and look at the evolution of asset-holding actually have in her portfolio (what asset classes, and ulti- through time. The pattern that emerges will tell you if the mately what products). I’m talking about the real thing: manager is consistent in his investment style. Don’t just selecting between stocks and bonds and between different look at banner years from the fund. Check to see if funds, in a consistent fashion. The benefits of using an IPS? the manager is doing what’s expected (e.g., a small-cap The client sees the plan (and hence the value added by you) manager remaining focused on that market segment). and more important, the client is proactive and can anticipate constructively any market downturn, as has been ❹ Beware of correlations. Although individual fund discussed previously with the advisor. correlations with a market index are widely available, fund correlations with an investor’s specific portfolio Building the Portfolio may not be. Ask yourself, “When I add a new fund to So you’ve assessed your client’s needs and devised the the account, what return-risk effect is this triggering?” right allocation among different asset classes. The time has come to select the actual building blocks of the portfolio: ➎ Create a peer group for each asset class. Within the funds. the database, and according to your fund sorting, cre- How can you optimize this part of the process? Clearly, ate a short list of funds that are up to your standards. going for the brand-name funds is a huge time-saver. But And maintain the list: you’ll need substitutes and it’s only one way of proceeding and it could prevent you replacements later, plus be able to justify fund choices from accessing excellent products that may be more appro- as you move forward. Beware of bumping off funds for priate for your client. In fact, being systematic about fund one spurious piece of data. Look at the bigger picture selection entails a bit of analysis. Here are some ideas: of risk-adjusted returns, volatility and its role within the portfolio. ❶ Use a good fund database. Ones to keep in mind come from Morningstar Canada, GlobeFund or a sim- ➏ Revisit your short list periodically. Add soft knowl- ilar comprehensive source. Make sure you have access to edge (e.g., your personal appreciation of the manager) Modern Portfolio Theory items such as Sharpe ratios. to the process through notes or your own template.

❷ Crunch the numbers. Look closely at the track record: ❼ Hire and fire managers. They’re there to help you Is it at least three years long (a necessary condition to grow your business—not the other way around. So ask obtain statistically meaningful data, such as standard yourself, “What has this manager done for me lately?” deviations, Sharpe and Treynor ratios, and the like)? If and then be ready to substitute superior players through so, sort funds according to different metrics, with no your short list. allegiance to brand name. If not, have a good reason to retain this fund without any metrics. Also, use calendar- Pierre Saint-Laurent, M.Sc., CFA, is the president of AssetCounsel Inc. year data to gain a sense of real-world fund behaviour. [email protected]

RRSP Survival Guide / January 2004 3 AE01_S002-S010 12/02/2003 06:16 PM Page s4

(Port folio tune-up)

Squeaky client portfolios, victim of the bear market, are all many advisors are seeing these days. Here’s how to get them humming again. By Geoff Kirbyson

ith financial mar- sion has resulted in many people near- Sherven just came over to Welling- kets apparently out ing retirement with a portfolio make- ton West from BMO Nesbitt Burns of the woods after up that would be more appropriate last summer and says discussions about w more than a half for their children or even grandchil- the merits of joining the new firm pres- year of positive dren, in the range of 85% equities ent a prime opportunity to revisit their returns, many investors coming out and 15% fixed income. “If I factor in clients’ portfolio breakdown. of the woodwork are facing myriad a 6% annual rate of return for the On the flip side, Leigh Cunning- problems that only a bear market portfolio, I can show clients they don’t ham, a vice-president at RBC Domin- could cause. need to be 85% in equities,” he ion Securities in Winnipeg, says it’s Whether it’s an overweighting in explains. “It’s very achievable with a quite common for retired or soon-to- bonds because they became too scared 60% equities, 40% fixed income be retired investors to consider the to hold equities or an overweighting split. The clients will have a greater bond market as an alternative given the in equities because they felt the mar- peace of mind knowing there’s more length of the bear market. While a ket couldn’t possibly go any lower, downside protection.” rebalancing into bonds would have many advisors are finding some So, Sherven is reviewing all of his made sense during the bear market, it clients’ portfolios are in serious need clients’ current portfolios, checking that can prove problematic for people who of a tune-up. their goals and objectives are still the now think this one vehicle is the only Gord Sherven, an advisor in same, and whether there have been any answer, particularly with interest rates Wellington West Capital’s Calgary significant changes in their situations. at 45-year lows. office, says many clients have main- But, he says, if you ask clients they “In a proper portfolio, bonds tained their pre-bubble-bursting asset wouldn’t be able to tell you what their should always have some representation, allocation through the last four years risk tolerance is. “We are reviewing even in the past bull market,” Cun- in the belief that the bull market was their risk tolerance, and asking ‘Is this ningham explains. “They should not, merely on a hiatus for a few months. still where you want to be?’Then we however, be the entire portfolio. And then a few months more. adjust accordingly. It’s the kind of thing Investors have preconceived notions. He says an obsession with aggres- that should be done each year,”he says. Because they’re now hearing that stocks

4 RRSP Survival Guide / January 2004 AE01_S002-S010 12/02/2003 06:17 PM Page s5

are bad and bonds are good, they’re investors who have entered the RRIF ble-whammy of late. Not only have assuming bonds to be the only solu- zone and are required by law to with- their portfolios taken a huge hit tion.” draw a certain percentage of their but most of them are in the farming Cunningham adds it’s the duty of fund each year. If they have become so business and have seen their incomes advisors everywhere to counsel clients averse to equities that they’ve put the sideswiped by mad cow disease, on the risks of using one type of majority of their portfolio in bonds, drought and flooding, depending investment even if it offers them the they are liable to spend their principal on their location. “Whereas (urban) ability to sleep. “It is not my intention much faster than they might other- clients have cash flow and can keep to disrupt their pillow factor but it is wise. “If they’re earning 4% on a averaging into the markets, (farmer my intention, in fact, my responsibil- portfolio made up predominantly of clients) can’t because their cash flow ity, to educate my clients as to the risks bonds and they have to take out 7% isn’t there,” he explains. “Some of associated with what they believe to be annually, where does the difference them are being forced to take money the perfect solution,” she says, adding come from?” she asks. “It comes from out of their RRSP to subsidize their that she finds it perplexing that many their own principal and they’re forced income or to keep their farm going.” investors are now so conservative that to spend their own money sooner. Rice believes there’s no use hiding they are unwilling to consider any We’re trying to keep that at bay.” from the facts so he’s been completely upfront with his clients about trying to make the best of a bad situation. First, he says he looks to improve their cash flow management. Then he’ll examine whether it makes sense to restructure their existing debt and then which assets should be sold first to generate the income they need. Generally, fixed income instruments are the first on the selling block, giving downtrodden equi- ties extra time to recover on the belief that the worst is over, he explains. “It’s not a fun time dealing with these Brad Rice, investment advisor, Winnipeg clients, they are difficult meetings,” he says, noting the situation is the same with clients in other struggling indus- “You’ve got to say to clients, tries, such as manufacturing. ‘There is risk in being Rice says another scenario he’s run- too conservative.’” ning into lately is older, primarily fixed ()income clients whose cash positions have become inflated but they’re reti- investment except one which comes Brad Rice, an investment advisor cent to invest in bonds when interest with a guarantee. “They were willing and executive vice-president of sales at rates are so low. Instead, they’ve left to take the risk in a crazed bull mar- Rice Financial Group in Winnipeg, their cash in savings accounts or ket. But now, having been burnt, they says many of his rural clients would money market funds while they wait no longer want to accept risk and are gladly trade for such problems. Most for the Bank of Canada to tighten looking to an investment they believe of his clients live in the Brandon area, money supply and raise rates. This to be the port in the storm.” 90 minutes east of the Manitoba- may have been a passable strategy in Cunningham notes that the conse- Saskatchewan border, and have expe- the short term but some of them have quences can be serious particularly for rienced an unenviable financial dou- been sticking to it for more than three

RRSP Survival Guide / January 2004 5 AE01_S002-S010 12/02/2003 06:17 PM Page s7

years now, he says, and it’s time to get and balanced funds,” he observes. long-term peace of mind, their allo- off the sidelines. “It’s pretty tough to mess clients up cations are generally 40% fixed Equities are out of the question for with that. As advisors, we got caught income, 50% equities and 10% cash, most of them so he’s trying to coax up in return being king as opposed with the first two categories varying them back with products such as to capital preservation. We were by 5% to 10% depending on the linked notes which provide both a advising going into science and tech markets. “You can take those per- principal guarantee plus some expo- funds, Far East funds, emerging mar- centages to the bank,” Rogers says. “If sure to the markets. “You’ve got to say kets, all to say we could provide a bet- professional money managers, in their to clients, ‘How long are you going to ter return than the advisor down the attempt to meet the needs of all these stay here? You need to generate street,” he says. “Many advisors and people, invest their money in this income. We did your planning assum- clients lost sight of the risk factor way, is there a message here for you? ing a 6% or 7% return but you’re sit- and many advisors were pushed by I say, ‘Tell me again why you should ting on a lot of cash now earning next clients to do so.” have 90% in equities or 90% in fixed to nothing. It’s impacting your nest Jim Rogers, a senior advisor and income?’ ” egg and your ability to generate chair of Vancouver-based Rogers income in the future.’There is risk in Group Financial, says many advisors Geoff Kirbyson is a writer based in Winnipeg. being too conservative,” he explains. wouldn’t be facing some of these chal- [email protected] There is also more risk in being in lenges if they had their clients complete the income-streaming stage during a an investment policy questionnaire. More online market downturn, says Daryl Dia- Providing a broader framework than @ mond, president of Diamond Retire- know-your-client (KYC) documents, www.advisor.ca/interact ment Planning in Winnipeg. He tries investment policy statements (IPS) are Advisor.ca extends this RRSP to provide income to clients by culling a superior way to gauge a client’s risk Survival Guide coverage with an profits in stocks but he’s also had to tolerance and goals because they are online package of expert advice. collapse bond holdings to keep some taken home to be completed by the This special January package includes: clients flush from month to month. client. KYCs are usually completed by “We’ve tried to give the equity posi- the advisor, who simply asks the client • Expert advice on turning tions some chance to heal,”he explains. questions and checks off boxes, he says. portfolio realignment into client acquisition “The more we have in fixed income in “It’s so facile as to be virtually use- •A template letter on the impor- a portfolio, given current yields, the less in its practical application,”Rogers tance of balanced portfolios harder that remaining equity portion says. “The better advisors say to their •Your own portfolio reconstruction has to work to give the portfolio yield clients (through the IPS), ‘Suppose online resource guide that you want.” you were presented with this oppor- All this and much more can He notes investors who broke even tunity, a real-world situation. When be found in the Practice Zone at during the past three years but with- you get that back as an advisor, clients www.advisor.ca starting January 6. drew 7% annually are down 21% really told you about themselves.” For other online resources related to articles in this magazine, please since 2000. And somebody who lost Rogers has some clients who think visit www.advisor.ca/interact/. 7% annually and withdrew an equal they would be investing conservatively amount has used up a whopping 40% if they continue to increase their expo- of their retirement savings after just sure on the fixed income side, despite Platinum sponsors for the three years. record-low interest rates. In an attempt RRSP Survival Guide Series Diamond says just sticking to the to appeal to their rational side, Rogers basics is often the best strategy. “Ten points to the portfolios of two or years ago, we had Canadian bond three major pension funds. funds, money market funds, Cana- Designed to give employees of the dian equity funds, U.S. equity funds participating companies a sense of

RRSP Survival Guide / January 2004 7 AE01_S002-S010 12/02/2003 06:17 PM Page s8

Transferring Tuit ion Two tax credits help students knock their income tax to zero. One may be more beneficial to their parents.

By Jamie Golombek

tudents” and “income tax” are words that also available for each month of either full- or part-time are seldom used in the same sentence, since post-secondary studies. most students have so little income that Some students may find they don’t need to claim all of they don’t have to pay any tax. But there are their tuition and/or education credits to reduce their “S still some significant tax planning oppor- income tax to zero. As a result, students can transfer the tunities advisors can discuss with students (or their parents). unused amounts to a spouse or common-law partner (CLP), parent, grandparent or carry forward unclaimed Tuition and Education Credits amounts indefinitely. The parent (which includes a natural Non-refundable tax credits are available for tuition fees paid parent, a step-parent, an adoptive parent or even a spouse’s for post-secondary level education. Education credits are or CLP’s parent) need not be the one who paid the tuition to entitle the credits to be transferred to him.

Limitations on Transfers The student must first use the tuition and education cred- its to reduce his or her tax payable to zero before carrying forward and/or choosing to transfer any unused amounts. The maximum amount that can be transferred to a spouse, CLP, parent or grandparent is $5,000 less the amount claimed on the student’s return. In addition, amounts car- ried forward from previous years must be used before the current year’s amounts, and any carried-forward amounts that are not completely used by the student in the current year can only be carried forward by the student and cannot be transferred in a subsequent year. The student needs to complete Schedule 11, Federal Tuition and Education Amounts to determine the amounts that must be used in the current year and the amounts that

Illustration by Alanna Cavanagh Illustration can be carried forward by the student and/or transferred

8 RRSP Survival Guide / January 2004 AE01_S002-S010 12/02/2003 06:18 PM Page s9

Interest on Student Loans The student’s taxable income is reduced by certain amounts, such as the basic personal amount, CPP contributions, employment insurance The other non-refundable tax credit that applies to stu- premiums, etc. dents is for interest paid on student loans. A student, or Does the student have any tuition or education amounts carried forward from a previous year? someone related to the student, can claim the interest paid on loans made for post-secondary education under the STEP 1 Canada Student Loans Act, the Canada Student Financial YES NO Assistance Act, or similar provincial or territorial laws. If the student or relative doesn’t need to claim all of the inter- Unused tuition and education Tuition and education amounts amounts carried forward from from the current year are applied est in the year it is paid, it can be carried forward and the previous year will be applied against any remaining taxable claimed in any of the next five years. against any income that remains income. But a recent tax case, Vilenski v. the Queen, illustrates a after STEP 1. problem. During Vilenski’s university studies, he received var- STEP 2(A) STEP 2(B) ious student loans, including a loan under the Canada Stu-

Does the student have any taxable income remaining? dent Loans Act (the “qualifying loan”). Vilenski learned of a bank’s “Professional Student Plan,” under which he could obtain a line of credit at a rate of interest that was 2% lower YES NO than the rate of interest payable on the qualifying loan. He opened up a line of credit and issued a cheque of almost No amount can be transferred or Lesser of: carried forward. a) $5,000 and $25,000 to repay the balance outstanding on the loan.

STEP 3(A) b) Current year’s tuition and edu- On his tax return, Vilenski claimed approximately cation amounts minus amounts used to reduce student’s income $4,300 of interest paid on the line of credit over three years to nil in STEP 2(B) can as qualifying for the tax credit. CCRA denied the tax credit be transferred to a spouse, because the interest paid on the line of credit was not CLP or a (grand)parent. technically paid on a qualifying loan. STEP 3(B) The judge agreed with CCRA and found the interest

Any tuition and education was not deductible. Vilenski argued that the line of credit amounts remaining after STEP is “essentially the same money” as the qualifying loan. Since 3(B) can be carried forward. the qualifying loan was subject to the Act, “therefore (the to a spouse, CLP, parent or grandparent. line of credit) should qualify in the same manner as if it To transfer the unused part of tuition and education were interest on the qualifying loan.”The judge went on to amounts to a spouse or CLP, the student needs to complete explain that the Act says interest is deductible when it is the applicable areas on the back of Form T2202, Educa- paid on a loan, which is made “under” the Canada Student tion Amount Certificate, or Form T2202A, Tuition and Loans Act. Since the line of credit was not subject to the Education Amounts Certificate. The spouse or CLP needs provisions of the Act, the interest is not deductible. to complete his or her own Schedule 2, Amounts All students should do the math before immediately Transferred From Your Spouse or Common-Law Partner, paying off a student loan. Whether it makes sense will to calculate the transfer amount. depend on the interest rate differential between the quali- The chart above illustrates these complex rules fying and non-qualifying loans. Assuming that the tax and how they work. credit is worth approximately 22% (combined value of the As a financial advisor, sit down with your student clients federal and provincial tax credits), as long as the interest (and their families) to determine who should be claiming rate on the new loan is at least 22% lower than the rate these credits. That being said, many parents who help on the qualifying loan, it makes sense to refinance. fund their children’s education often do so on the condition that the student transfers the tax credits back Jamie Golombek, CA, CPA, CFP, TEP, is vice-president of taxation to the parent. and estate planning at AIM Trimark Investments in Toronto.

RRSP Survival Guide / January 2004 9 AE01_S002-S010 12/02/2003 06:18 PM Page s10 RRSP (alternative How will TPSPs change the retirement landscape? ) By Richard Shillington

IN THE 2003 federal budget, a tax point of view because the accu- be included in taxable income. Ottawa signalled that it may add a new mulated investment income is taxed The potential advantages of retirement savings option that will work at the low tax rate of the student TPSPs are not limited to low-income better than RRSPs for many low- recipient, instead of the parent’s or Canadians. Those who have maxed income Canadians: tax prepaid savings contributor’s higher marginal tax rate. out their RRSP contribution room plans (TPSPs). TPSPs aren’t available yet but here will also see TPSPs as a useful invest- Like RRSPs, TPSPs allow individ- is my wish list for how they should ment tool. TPSPs will provide a more uals to contribute annual amounts for work. preferable tax treatment for invest- their retirement. Unlike RRSPs, con- ❶ TPSP contributions should be ments than is currently available for tributions to TPSPs would not be tax limited to a $10,000 annual limit non-sheltered investments. deductible. Instead, savings and invest- with a $100,000 lifetime limit. This Some economists complain the ment income in those plans would structure recognizes that for many economic growth in Canada is ham- grow tax-free. TPSPs would likely be Canadians, the funds available for sav- pered by a low savings rate, in part similar to Roth Individual Retirement ings will often come not from earn- because of high tax rates on investing Accounts (IRAs) in the U.S. ings, but through windfalls such as a outside an RRSP. TPSPs may encour- Roth IRAs were introduced in maturing life-insurance policy or a age savings and investing by those liv- 1998. Eligibility to make Roth IRA modest inheritance. ing in the highest income and wealth contributions is restricted to individ- ❷ Contribution limits for TPSPs, percentiles. ual taxpayers with income under after adjustments for their “after-tax” When TPSP legislation is intro- $110,000 and joint-filing couples status, should be added to the exist- duced, low-income Canadians should with income under $160,000. The ing RRSP/pension limits with the consider switching funds from their contribution limit for 2004 for Roth TPSP amounts. This may ease RRSP to a TPSP gradually before IRAs is $3,000 (plus an extra $500 administration by taking advantage of they turn 65. More important, with- for those age 50 or over). The contri- the tracking system for contributions drawals would not trigger massive bution limit will be further increased already in place. losses in health, income and social in 2005 and 2008. ❸ Funds should be able to move supports. Within Canada, the TPSP concept from RRSPs and employer pension would be similar to RESPs. RESP plans to TPSPs easily with few Richard Shillington is an independent researcher contributions do not create a tax administrative hassles. concentrating on the quantitative analysis of deduction, and withdrawals for edu- ❹ When funds are withdrawn from tax and social policy. cational purposes are attractive from a TPSP, the investment income should [email protected]

10 RRSP Survival Guide / January 2004 9 AE01_027-029 12/02/2003 05:46 PM Page 27

Tax Planning THE

New By Jamie Golombek LOSSRULES New tax laws coming in 2005 could affect clients who are borrowing to invest.

October, the Department of Finance intro- The Stewart Case duced new draft legislation on the deductibil- In 2002, the SCC released its decision in the case of Brian IN ity of losses, including losses created largely due Stewart. Stewart purchased condos that were highly leveraged to deductible interest expenses. The introduc- and which would generate losses for a 10-year period before tion of the new rules did not come as a surprise, since the Feb- becoming profitable. ruary 2003 federal budget stated that two recent court deci- Stewart claimed losses of over $58,000 which occurred sions (specifically Ludco and Stewart, discussed below) had primarily as a result of significant interest expense on the raised uncertainties that could lead to inappropriate tax results money borrowed to acquire the condos. CCRA disallowed and were inconsistent with the appropriate tax policy. The new these losses on the basis that Stewart had no “reasonable rules could affect clients who are borrowing to invest. expectation of profit” (REOP) and therefore no business was being carried on. If no business existed, then business losses The Ludco Case cannot have arisen to be claimed against other income. The Ludco decision in 2001 questioned whether the interest The SCC found in favour of Stewart, allowing the deduc- paid on a loan for purchasing shares was deductible. During the tion of the losses. According to the court, “the REOP test period in which the taxpayers held these shares, they deducted should not be accepted as the test to determine whether a tax- approximately $6 million in interest expenses and received div- payer’s activities constitute a source of income” (i.e., a busi- idend income of only $600,000. The Supreme Court of ness). The SCC continued, “The motivation of capital gains Canada (SCC) held that the taxpayers had a reasonable expec- accords with the ordinary businessperson’s understanding of tation of income from this investment notwithstanding that ‘pursuit of profit’ and may be taken into account to deter- they only received $600,000 in dividends. The court also mine whether the taxpayer’s activity is commercial in nature.” reviewed in the Income Tax Act, which states that interest is As a result of Stewart, the denial of deductions by the deductible where the borrowing was made “for the purpose CCRA of losses generated by many tax shelters because of of earning income.”The SCC concluded that income does not “no REOP” was put on hold and the doctrine of REOP is necessarily mean “profit” or “net income.”In other words, the dead—until 2005. quantum of income that was actually received was not rele- Under the new rules, a taxpayer will only be allowed to vant and, therefore, did not need to exceed the amount of inter- deduct a loss for a given year if, in that year, it is reasonable to est paid. As a result, the taxpayers were successful in having the assume that the taxpayer will realize a cumulative profit from interest be fully deductible. Continued on page 28

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 27 AE01_027-029 12/02/2003 05:46 PM Page 28

Jay’s Analysis Interest Share Dividend Rate on Cumulative Cumulative Cumulative Investment Increase Investment Yield Loan Income Expense Profit Year January 1 8% Dec. 31 3% 5% A B A - B 1 2005 $10,000 $800 $10,800 - ($500) - ($500) ($500) 2 2006 $10,800 $864 $11,664 - ($500) - ($1,000) ($1,000) 3 2007 $11,664 $933 $12,597 - ($500) - ($1,500) ($1,500) 4 2008 $12,597 $1,008 $13,605 $408 ($500) $408 ($2,000) ($1,592) 5 2009 $13,605 $1,088 $14,693 $441 ($500) $849 ($2,500) ($1,651) 6 2010 $14,693 $1,175 $15,869 $476 ($500) $1,325 ($3,000) ($1,675) 7 2011 $15,869 $1,269 $17,138 $514 ($500) $1,839 ($3,500) ($1,661) 8 2012 $17,138 $1,371 $18,509 $555 ($500) $2,394 ($4,000) ($1,606) 9 2013 $18,509 $1,481 $19,990 $600 ($500) $2,994 ($4,500) ($1,506) 10 2014 $19,990 $1,599 $21,589 $648 ($500) $3,642 ($5,000) ($1,358) 11 2015 $21,589 $1,727 $23,316 $699 ($500) $4,341 ($5,500) ($1,159) 12 2016 $23,316 $1,865 $25,182 $755 ($500) $5,097 ($6,000) ($903) 13 2017 $25,182 $2,015 $27,196 $816 ($500) $5,913 ($6,500) ($587) 14 2018 $27,196 $2,176 $29,372 $881 ($500) $6,794 ($7,000) ($206) 15 2019 $29,372 $2,350 $31,722 $952 ($500) $7,745 ($7,500) $245

Assumptions: •The share price will increase in value at 8% per year. •Dividends will begin to be paid in 2008 at a dividend yield of 3%. • Interest rate on the loan is fixed at 5%.

Continued from page 27 Many business owners, for example, often realize a start- the investment during the time the taxpayer holds (or can rea- up loss from the business for one or more years before the sonably be expected to hold) the investment. The new rules also business begins to generate a profit. The business owner would explicitly state that profit does not include capital gains, which be able to claim the loss provided his expectations for a cumu- essentially reverses the SCC’s comments in Stewart. lative profit over the entire relevant time period were reason- able. But what is reasonable? It must be reasonable, given the Cumulative Profit Test facts of a particular situation, for an investor to expect to profit “Cumulative profit” means the aggregate profit over the entire from the property or business. Consider this fictional case. profitability time period. It is not necessary that an investor Jack’s rental property purchase produces revenue in excess demonstrate an actual profit in any particular year to be con- of related rental expenses and might be seen as an invest- sidered to have a reasonable expectation of cumulative profit. ment that should provide Jack with an REOP. However, AE01_027-029 12/02/2003 05:46 PM Page 29

this wouldn’t be the case if Jack were to take on a large ultimately exceed the interest paid. This would produce a mortgage to finance the purchase of the property because the cumulative profit by the end of the profitability period. This interest expense associated with the mortgage means Jack can- concept is best illustrated the following case study. not profit from the rental activity.This was the issue in the In 2005, Jay borrows $10,000 at 5% to invest in shares that Stewart case.The difference in Stewart was that the SCC found are not expected to pay dividends until at least 2008. Based the opportunity for profit upon ultimate sale can be considered on his analysis of the company’s financial statements and eco- as part of the profit. Under the new rule, even if Jack intends nomic operating environment, Jay predicts that the share price to profit by reselling the rental property itself at a gain, this will increase, on average, by 8% compounded annually. will not count toward cumulative profit, since income from a It is therefore quite likely that Jay will realize a significant business does not include a capital gain. capital gain when he sells his shares. Under the new draft leg- Another “unreasonable” assumption might be an investor who islation, however, this capital gain is irrelevant when deter- borrows funds at a fixed rate of 8% and uses those funds to make mining whether or not he can deduct the $500 of interest an investment that has a fixed annual return of 5%. Assuming paid in 2005, 2006 and 2007. Instead, Jay would have to that the investment itself cannot increase in value, then there is demonstrate that he has a reasonable expectation of cumu- no reasonable expectation of profit and the taxpayer will not lative profit over the time period he plans to hold the shares. be allowed to deduct the loss. On the other hand, given that the Jay prepares the analysis (see chart, page 40) which shows investor may have greater expenses than he has revenues gener- that if he plans to hold the shares for at least 15 years, he will ated by the investment, the Department of Finance also con- indeed realize a cumulative profit. cedes that it would be “inappropriate” to tax any amount of that revenue. This would seem to permit the deduction of expenses Jamie Golombek, CA, CPA, CFP, TEP, is vice-president of taxation and up to the amount of revenue earned from the investment, but estate planning at AIM Trimark in Toronto. no more (i.e., a loss could not be created in this manner). The jurisprudence before the draft legislation supported the view that as long as an investment has the potential to earn MedicalMedical income, interest on such borrowings should be tax deductible. NoNo EvidenceEvidence The draft legislation introduces a new test: whether or not it is reasonable to expect a cumulative profit from the investment, Simple yes or no medical questions only! Very high commission very low premiums excluding any potential capital gain on ultimate disposition. • Guaranteed Issue age 25-80 up to $50,000 Interest on Money Borrowed to Purchase Common Shares • Critical Illness up to $100,000 Interest on money borrowed to purchase common shares or • 10 year term up to $250,000 mutual funds is generally tax deductible, but whether CCRA’s • Individual & family health plans position will be maintained in light of the proposed changes •Travel insurance remains to be seen. The main problem concerns investors who Our traditional term & whole life products are among the most competitive in the industry borrow to purchase common shares that do not pay dividends All plans insured and covered by CompCorp or whose dividend yield is lower than the interest rate on the Why deal with Canada Protection Plan loan. In this case, a taxpayer would have to argue there is still •Free leads •Frreeee broker admin system a reasonable expectation of cumulative profit. This argument •Free toll free & on-line service could be supported if the taxpayer plans to pay the debt down •Free simplistic illustration/quotation software • Comp paid to the closest geographical broker on a direct over time such that eventually the cumulative dividends to consumer sale Visit our broker services section at www.cpp.ca to receive our received during the profitability time period exceed the products, software and commission. amount of cumulative interest paid on the debt. Or an investor could argue that he plans to hold the shares for a long period Available in All Provinces of time so that as the shares appreciate the dividend yield will Toll Free 1 877 447-6060 www.cpp.ca

A leading Canadian supplier of Non-Medical Coverage AE01_031 12/02/2003 05:18 PM Page 31

TAX BREAK

THIRD-PARTY PAYMENTS When support payments are made through third parties, different tax rules apply. By Gena Katz

the recipient. However, in the case of also accepts that legal costs of seek- THIS IS THE SECOND OF A TWO-PART SERIES ON agreements entered into or altered ing to obtain an increase in support or SUPPORT PAYMENTS. after April 1997, only those amounts to make child support non-taxable as that are not child support will be also deductible. This change only Ordinarily, only payments made deductible and taxable. Payments will applies to assessments or reassess- directly to a former spouse or partner be treated as child support unless they ments issued after October 10, 2002. would be considered as support pay- can clearly be identified as being only Legal fees incurred by the paying ments. However, it is not uncommon for the benefit of the recipient spouse. spouse or partner, whether to reduce for payers to make payments to third Payments specifically excluded from spousal support or to contest an parties as part of a separation agree- the application of this rule include: application for increased support, are ment. As a result, there is a specific tax • Amounts paid for home expenses not deductible. Nor are fees relat- rule which deems an amount paid where the payer resides and ing to custody or lump-sum capital under a court order or written agree- amounts paid for the purchase of payments. ment to a third party for the benefit tangible property unless it relates to of a former spouse and/or children a medical expense; Cross-Border Payments to be received by the former spouse or • Education expenses; Generally, spousal support payments partner. This alone is not enough to • Maintenance of the home in which (and child support for pre-May 1997 have the payment considered to be the former spouse or partner agreements) to a U.S. resident is support; the amount must be payable resides; or deductible by a Canadian payer. Sup- as an allowance on a periodic basis and • Principal and interest on a home port received by a Canadian from a the recipient must have discretion as purchase or improvement loan (up U.S. resident payer is taxable for to the use of the amount. to 20% of the original principal spousal support only. However, under The recipient doesn’t necessarily amount of the loan). U.S. rules, spouses may designate sup- have full discretion of the use of port payments as neither deductible monies that go directly to a third Deducting Legal Fees nor taxable and if this designation is party, and often, such as the reim- Until recently, only those legal fees made, there will be no income inclu- bursement of medical expenses, third- relating to obtaining an order for child sion in Canada. This can provide tax party payments would not be periodic support or fees relating to the enforce- savings where the recipient spouse is in nature. However, for certain ment of support payments, or to subject to higher tax rates in Canada. expenses, where the order or agree- defend against a reduction of support And where the payer is Canadian, the ment explicitly provides that the third- payments (child or spousal) specified payment continues to be deductible in party payments are to be considered in an agreement was deductible. This Canada even though it’s not taxable to support amounts for tax purposes, changed about a year ago. CCRA now the U.S. recipient. such amounts are deemed to be considers legal costs incurred to payable or receivable as allowances obtain spousal support to have been Gena Katz, CA, CFP, is a senior principal paid on a periodic basis, making them incurred to enforce a pre-existing right with Ernst & Young’s National Tax deductible by the payer and taxable to and therefore deductible. CCRA now Practice in Toronto.

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 31 AE01_033 12/02/2003 05:26 PM Page 33

COMPLIANCE CHECK

A PLANNER’S OBLIGATION The KYC process now has an ally in the Financial Planners Standards Council’s practice standards. By Ellen J. Bessner

Bravo to the Financial Planners goals are to be achieved. Question- background if the client refuses to Standards Council (FPSC) for being ing the client and listening to the share the information. Therefore, the first to set out, in a comprehensive client’s answers are exercises that are the advisor should not be faulted manner, ethical and professional crucial to fulfilling KYC obliga- if he can prove he made the req- obligations for CFPs. tions. uisite inquiries. This requirement Regulations and policies established ❷Collect the client’s data and also reinforces the necessity for in the past have left advisors unin- information that may be rele- good communication and the formed and confused about their obli- vant to the client’s financial sit- ability to reduce it to written gations, especially as they relate to uation (draft standard 200B). form, to prove that the advisor “knowing the client.”The FPSC will Such information must be “com- made the inquiries. have none of that. Know your client plete, current and accurate.” Many ❸Clarify the client’s financial (KYC) is not a form, it is a process. I advisors report that clients com- position, income and cash flow have begged advisors to think of KYC plain such information is private and identify problems and in five steps. The first three steps are and they refuse to impart such opportunities (draft standard effectively communicating with the personal information to advisors 300). This is another call for good client (active listening, questioning they have just met for the first communication with the client, your client to understand her better time. The FPSC addressed this analysis and note taking, particu- and identifying problems). It is not issue with a practical solution: larly if the client refuses to impart until the fourth step that any forms “Communicate to the client how important personal information. (including the KYC) are completed. these limitations will impact the Evidence of comprehensive ques- Step five includes updating the forms engagement and the recommenda- tioning by the advisor will support on an ongoing basis to ensure the tions.” This is both clever and the advisor’s evidence that he/she process part of the KYC continues. practical because advisors want to fullfilled professional obligations. The draft of the Canadian Finan- do the best for their clients but All financial advisors should take cial Planning Practice and Standards will be limited if the client holds a page out of the FPSC’s book. makes me feel like I have an ally. back relevant information. Fur- The draft standards reflect common The KYC obligations are laid out thermore, if the advisor is later sense. clearly instead of in convoluted, vague accused of failing to have fulfilled language. KYC obligations by the client or Ellen J. Bessner is a lawyer at Gowling, In several comprehensive para- the regulator, the advisor can pres- Lafleur, Henderson. She practises in the area graphs, the draft standards set out a ent his copious and thorough of brokers’liability and offers compliance train- planner’s obligation to: notes and explain the limitation in ing to brokerage firms. The above is intended ❶Discuss the client’s goals, needs the “engagement letter” (see draft for a general audience and should not be and priorities (draft standard standard 100). The regulator considered legal advice. 200A). Goals should be “measura- and/or judge will more likely find More online ble, specific, realistic” and a time in the advisor’s favour. An advisor @ period established in which such cannot learn aspects of a client’s www.advisor.ca/interact

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 33 AE01_035 12/02/2003 05:26 PM Page 35

TRUE WEALTH

TALKING HEDGES Discussing hedge funds with clients requires a different approach. By Thane Stenner

Let’s talk about hedge funds. Or HNW extension of the philosophy of ❸ Present real-life examples. rather, let’s talk about how you should diversification, which is one of your Before you discuss hedge funds with be talking about hedge funds with your core investment principles. Over time, your clients, prepare a few detailed high-net-worth (HNW) clients. Over you’ll want to back up your case with examples to back up your case. A the past several years, hedge funds have charts, reports and articles that explain “compare and contrast” presentation generated more than their share of what hedge funds are (and more with two model portfolios (one with buzz from analysts, pundits and finan- important, what they aren’t). Be cau- hedge funds; one without) can work cial journalists. If your HNW clients tious about bombarding clients with well. The basic idea looks like this: haven’t yet asked you questions about jargon and technical documents, Chart the historical performance and hedge funds, they will soon. though. Your goal should be to initi- the volatility of both portfolios, and How you answer these questions ate a running dialogue about hedge demonstrate how the hedge fund could have a significant impact on funds rather than pitch product. This portfolio achieved higher returns with your ability to attract and retain will encourage clients to become lower volatility. Another possibility is HNW clients. Over the next few enthusiastic advocates of the central to take a closer look at some of the years, hedge funds are likely to become idea behind hedge funds, rather than high-profile institutions that use hedge a standard feature in a HNW portfo- simply consumers of a product. funds to protect their portfolios and lio. If you don’t know how to com- enhance returns. We use the Yale and municate the pros and cons of hedge ❷ Emphasize protection as well Harvard endowments in our examples funds effectively, you could lose clients as performance. (they are well known, and details for to those who can. Hedge funds have a reputation for both are readily available), but I’m sure If you’re talking about hedge funds high-octane performance. That’s one there are others. the same way you talk about other potential aspect of hedge funds, but it At the end of the day, hedge funds investment products, you’re missing shouldn’t be the sole focus of your dis- present an opportunity to reinforce the point of hedge funds. Ultimately, cussion. Explain to your clients that the your core principles, demonstrate your hedge funds are more than a product: primary role of hedge funds in a distinct value, and build strong client They are an idea, a way of thinking HNW context is to protect wealth. Per- relationships. about how one should control risk formance is a welcome by-product. and return in the portfolio. Here’s Explaining the benefit of non-corre- Thane Stenner, CIM, FCSI, is a first vice-president and invest- how to train clients to think about lated returns will keep the focus on ment advisor with The Stenner Group™ of CIBC Wood hedge funds in this way. strategy rather than on product, and Gundy. The views of the author do not necessarily reflect those allow you to steer clear of the percep- of CIBC World Markets Inc. This article is for information ❶ Educate early, educate often. tion that hedge funds are simply the only. CIBC Wood Gundy is a division of CIBC World The complexity of hedge funds hot investment du jour. More important, Markets Inc., a subsidiary of Canadian Imperial Bank of demands an ongoing educational this “security first” emphasis will rein- Commerce and Member CIPF. [email protected] effort from advisors. Ideally, this force your primary role with clients as More online effort should begin at the initial client a trusted steward of client wealth, not @ meeting: Introduce hedge funds as a a stock (or hedge fund) picker. www.advisor.ca/interact

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 35 AE01_037 12/02/2003 05:27 PM Page 37

MARKETING FRONTLINES

PROSPECTING PERSISTENCE A certain amount of client defection is inevitable, so put a prospecting plan in place to stay on stable footing. By Dan Richards

I recently talked to a successful Going forward, you’ll need to have know through a common community advisor who had lost a substantial three strategies to prosper. activity. client. Over a year ago, this client ❶ Stay the course. In the immedi- Once you’ve identified who you began getting monthly calls from a ate period ahead, stick with a disci- want to pursue, then you need to con- broker with one of the bank-owned plined investment process and tact them—and keep contacting them. firms, informing the client about new proactive client communication. The idea is not to become a pest (say- or existing products or services pro- This will minimize client defection. ing “It’s me again, calling to see if vided by his firm. After a year of these (Notice that I said “minimize,”not you’re ready to buy yet”) but to find calls, the client finally agreed to meet “eliminate.”) an opportunity to introduce new with him and ultimately moved his ❷Differentiate yourself from information or an idea each time you account over. others. Show clients they can’t call. If the prospect seems interested, The advisor felt he had done all the easily replicate the benefit bundle suggest you send him or her some right things—he’d put a solid plan in you’re offering. (I will write more information, or that you meet briefly place and had communicated regu- about this in a future column.) to discuss it further. larly. This hadn’t been good enough, ❸Recruit new clients. If a certain There are many variations on this however, as disappointment over mar- level of client loss is inevitable, approach. Some advisors send an e- ket returns had made this particular regardless of how effectively you mail or letter first and make the call client vulnerable. communicate or the quality of to follow up. Others prefer to call first There are three realities we’re all work you do, then you need a plan and send the information second. The going to have to contend with in the to replace those defecting clients key is to find the approach that works period ahead. simply to keep your business on a for you. First, we’re unlikely to see the kind stable footing. Ultimately, the object of these calls of supercharged market performance is to position yourself, in a profes- anytime soon that will automatically Position yourself as an sional fashion, as an advisor who is bond clients to us. advisor who provides interested in your prospect’s business Second, we’re in an environment an alternative to and who provides an interesting alter- where clients are becoming increas- whomever prospects are native to whomever they are currently ingly fickle—not just in our business currently working with. working with. but in every business. More and more, After you identify those 10 we’re all open to new relationships and Start by identifying 10 people you prospects, carve out an hour each methods of doing business if we think already know and, more important, month to contact them (let’s say, the they’ll provide better value. who already know you, who you see as first Friday of each month). You, too, Third, we’re going to be facing the kind of clients you’d like to have. can be the beneficiary of today’s increasingly intense competition from These prospects could be people increasingly fickle client mood. other advisors and institutions going you’ve met in the past who didn’t sign after our clients—particularly our on at the time. Or possibly it’s sim- Dan Richards is CEO of Cartier Partners biggest and best clients. ply people you went to school with or Financial Group.

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 37 AE01_038 12/02/2003 05:27 PM Page 38

By Andrew Rickard THIS’N’THAT

themselves up and put on blindfolds to make it look like a robbery, they were eventually charged and convicted of the crime. About $200,000 was recovered a year after the heist, but the where- abouts of the remaining $1.5 million was a mystery until this past October, when authorities received a tip. Police in Fairfield, Ala., found the stash buried in a local marsh. The money had rotted and turned into what officers described as a “mass of green goo.” BABY BONUS to sell lunar property from business- When Toronto lawyer Charles Millar man Dennis Hope. RETIREMENT FUND died in 1926, he left a strange Hope filed a declaration of owner- J. L. Hunter Rountree, better known legacy—something he described as ship for the moon in San Francisco in as “Red,” has found an unconventional “proof of my folly in gathering and 1980, taking advantage of a loophole source of retirement income. In retaining more than I required in my in the 1967 United Nations Outer August, the 91-year-old walked into an lifetime.” He bequeathed his estate to Space Treaty that forbids any country Abilene,Texas, bank, handed the teller whichever woman gave birth to the from owning the moon.The treaty says a manila envelope and told her to fill greatest number of children in the 10 nothing about companies. it with cash. years following his death. Jackson told the paper that every The Abilene Reporter says that the The Urban Legends pages at new moon landholder would receive a bank employee thought he was joking www.snopes.com says Millar’s rela- land deed, a certificate of mineral but eventually handed over $1,999 in tives tried to invalidate the will and rights, a lunar map and a lunar con- cash—all of which was recovered 20 went to the Supreme Court of Canada stitution logged on an international minutes later when police caught up before being resolved. database held in Switzerland. with Red on the edge of town. Four women showed nine properly This is Red’s third holdup in five registered live births apiece during the BURIED TREASURE years. He was asked what he would do specified 10-year period. Each mother In 1995, two security guards in the when he got out of prison. “I might received $125,000. southern U.S. stole from their own rob another bank,” Rountree said. “I armoured car.Although they had tied might need to.” LUNAR LIFESTYLE A real estate agency in Melbourne, END QUOTE: XXX XXXXXX XXXXXXXXX Australia, is selling one-acre sections of the moon for CDN$55 and 10-acre Wealth stays with us a little moment if at all: “lifestyle blocks” for CDN$278. Only our characters are steadfast, not our gold. The Herald Sun newspaper says that a businessman named Paul Jack- EURIPIDES BC GREEK PLAYWRIGHT Illustration by Russ Willms by Russ Illustration son has bought the Australian rights (480?-406 ),

38 ADVISOR’S EDGE | JANUARY 2004 www.advisor.ca