canada’s magazine for the financial professional • … · 2019-10-04 · sharpen your listening...

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • JULY 2002

Publications Mail Agreement Number 40069298, Rogers Publishing Inc., 777 Bay St., Toronto, Ont. M5W 1A7

Tapping into the millionaires club

Securing disability coverage for contract workers

Hear what women clients want from their advisors

PLUS

TIMESELLTO

?Watch for these redflags in your clients’mutual funds.

www.advisor.ca

INTERACTIVE FEATURE:

46 MONKEY BUSINESS

24 ATTRACTING THE AFFLUENT

18 SELLING TIMEINSIDE EDGE

7 Conflict of InterestThe Investment Dealers Association must decide what role it wants toplay in the industry.

TOOLBOX

13 Listen Up!Men and women look for different criteria in their financial advisors.Sharpen your listening skills when working with your women clients.

KNOW YOUR CLIENT

16 Farmers’ MarketCanadian farmers are aging and their financial needs are changing asthey look toward retirement. Meagre investments in RRSPs can makefor a challenging cash flow but smart tax planning can help.

COVER STORY / INVESTMENTS

18 The Right Time to SellKnowing when to sell mutual funds is just as important as knowingwhen and what to buy. Here are some fund changes to be on the lookout for to ensure your clients’ portfolios perform properly.By Jennifer McLaughlin

INTERACTIVE FEATURE / MARKETING

24 The Millionaires ClubMillionaires are the most desired type of clients but can also be themost underserved. Recent studies show wealthy Canadians believe theyhave only an average ability to handle their own finances.By Geoff Kirbyson

INSURANCE

29 When Benefits DisappearIf your clients are moving to contract work from full-time employmentthey are losing their fringe benefits—including disability insurance. Youshould explain their DI options that would cover them in their new jobs.By Bruce Cumming and Diana Bacon-Pearson

YOUR BUSINESS

37 Fate of the RFPThe registered financial planner designation has a new home at the Institute of Advanced Financial Planning but will licensees renew their commitment to it next year?

39 Tax Break with Gena Katz Your clients may have received assessments of their 2001 tax returnsfrom the CCRA and wish to dispute them—here’s how.

44 Guest Column with Ellen J. BessnerIf a client complains against you, a regulator will first look at the KYCform. Be sure to keep all of your files updated.

46 This ‘n’That with Andrew RickardPink monkeys in bed. It’s a business doing pleasure.The oenophile’smind at ease. What to do when the shoeshine boy gives you stock tips.

JULY 20025

July 2002 Volume 5, Number 7

Most weeknights and almostevery weekend, a game of ball hockeybreaks out on my street involving adozen kids and sometimes a coupleof dads. On occasion I have foundmyself playing some fairly shakydefence for one of the teams, and acting as referee. Invariably one of thekids on the opposing team willprotest, “That’s bogus, you can’t calla penalty on us and play for the otherteam at the same time.”

Despite what I’m sure has beeneven-handed officiating on my part,the conflict was obvious to the kids.That’s the thing about a conflict ofinterest, often the appearance is justas unpalatable as the fact. That’s thebelief of the Ontario governmentpanel appointed to review thatprovince’s securities legislation, par-ticularly with respect to the dual roleof the Investment Dealers Associa-tion (IDA) as both a Self RegulatoryOrganization (SRO) and a tradeassociation for investment dealers.

In its May draft report, The FiveYear Review Committee states that“conflict, including the appearance ofconflict, must be contained and that

the most appropriate way to do this isto separate the IDA’s functions as anSRO from its role as a trade associa-tion.” Committee member David Wilson, himself a former chair of theIDA says, “The IDA has functionedvery well in the past but it’s probablytime to create a firm separation.”

To be fair, there has not been asustained public outcry for restruc-turing the IDA. And for its part theassociation feels no need to split itsSRO and trade association func-tions. But Wilson is right when hesays that the time for change is here.But it no longer seems enough to, asthe IDA has proposed, maintain barriers within the organization tocontain any conflict.

Questions of conflict have also sur-faced in the wake of the CanadianInstitute of Financial Planning’s(CIFP) announcement in May that itis “exploring” the notion of creatinga membership organization for itsalumni in the planner community.Putting aside the wrench this ideathrows into plans by the CanadianAssociation of Insurance and Finan-cial Advisors and the Canadian

Association of Financial Planners tounite and form a single, dominantplanner association, there’s also thematter of an apparent conflict.

The CIFP, which offers educationalprograms for both aspiring and prac-tising financial planners, is an affiliateorganization of the Investment FundsInstitute of Canada (IFIC). Amongother things, IFIC serves as the indus-try lobby group for manufacturers ofinvestment funds in Canada—prod-ucts most financial planners can sell.Can the CIFP act as a planner associ-ation, while maintaining its connectionto IFIC without at least the appear-ance of a conflict?

If the CIFP would like to becomea planner association it should firstsever its ties with IFIC. The indus-try is rife with enough perceived con-flicts as it stands. Surely it shouldavoid creating new ones.

And as for the street hockey games,I’ve decided to hang up the whistle andstick to working on my wrist shot. Asfor officiating, we’ll just self-regulate.

DARIN DIEHLCONTENT DIRECTOR

[email protected]

INSIDEEDGECONFLICT OF INTERESTThe double role of the Investment Dealers Association is questionable and no longer viable.

JULY 2002 7

ADVISOR’S EDGE8

MORTGAGEINSURANCEI read the article on the prosand cons of reverse mortgages(“Home’s Equity,” May 2002,page 16). But an importantaspect of the strategy wasomitted. For many years, theconcept of insuring a mortgagehas been at the forefront of financial planning. Why stopthis practice when the mortgage is a reverse one?

As part of proper estate planning, using last-to-die life insurance (or single life, as in the case discussed inthe article) can reduce the estate’s liability for taxes andother debts, so including the reverse mortgage makes goodlong-term sense. While the actual amount of the debt can’tbe precise, as the principal amount accrues interest, it canbe calculated to a “close counts” amount using mortalitytables and other actuarial figures available.

Premiums can be expensive but can be incorporated intothe increased amount of income generated by the reversemortgage. This will help the clients now, through higherincome, while preserving their family home, to be disposedof by the family as they see fit, as opposed to selling bydefault. I have used this approach on a number of occa-sions, with great success, not only in the case of reversemortgages, but also for annuity and RRIF payments, whenthere is one account and two spouses.

Angus R. Gray, CFP, CLUHutcheson, Reynolds and Caswell Insurance Ltd.Bracebridge, Ont.

WHY CLIENTS CAN’T PAYI just helped a client with his tax return. He owes andhe can’t pay. So I was interested in Gena Katz’s article(“Equal Benefits,” May 2002, page 41). What a pity. Shespeaks on a subject that pre-supposes that the client isshort of cash but does not get down to the nuts and bolts.Why are they short on cash? If they have to pay tax where are the assets whose investment developed the

Deanne N. GageManaging Editor(416) 642-4729, [email protected]

Jennifer McLaughlinAssistant Editor(416) 642-4944, [email protected]

Sheila Avari Assistant Editor (416) 642-4862, [email protected]

Aniko TothArt Director (416) 596-5648, [email protected]

Peter Boisseau, Harvey Schachter and Bert VandermoerContributing Editors

Adrian ValksProduction Manager(416) 596-5035, [email protected]

Jim MacDonald Managing Editor(416) 642-4787, [email protected]

Scot BlytheInvestments Editor(416) 642-4836, [email protected]

John CraigPractice Management Editor (416) 642-4860, [email protected]

Opal PatelWeb Projects Editor (416) 642-4839, [email protected]

Wendi PhillipsProduction Editor/Client Centre Editor (416) 642-4844, [email protected]

Doug WattReporter(416) 642-4852, [email protected]

Andrew GregoryWeb Production Manager (416) 642-4855, [email protected]

Philip KahnCustomer Service Administrator(416) 596-5779, [email protected]

Yves Bonneau Editor(514) 843-2142, [email protected]

James Wagner Art Designer (514) 845-5141

Patty LesterProject Director (416) 642-4709, [email protected]

Pauline NolanProject Manager (416) 642-4710, [email protected]

Antonia MitchellAdministrative Coordinator (416) 642-4711, [email protected]

EDITORIAL ADVISORY BOARDElaine Andrew John De Goey Robert FleischackerInvestors Group Assante Capital Management CAIFA

Jim Rogers Catherine Hurlburt Evelyn JacksThe Rogers Group CAFP, Assante Evelyn JacksFinancial Advisors Ltd. Capital Management Productions Inc.

Dan Richards Sandra Foster Ralph SommerfeldStrategic Imperatives! Headspring Consulting Inc. Raymond James Ltd.

Thane Stenner Dan Thompson Lynne TriffonCIBC Wood Gundy George Brown College T.E. Financial

LETTERSJULY 2002, VOLUME 5, NUMBER 7

Letters continued on page 10

Paul WilliamsVice-President, Healthcare & Financial Publishing (416) 642-4848, [email protected]

Darin DiehlContent Director (416) 642-4837, [email protected]

Denise Brearley Director of Circulation and Marketing Research(416) 596-3470

Nancy MathesonMarketing Manager (416) 642-4943, [email protected]

Katisha Rasheed Promotions Coordinator (416) 596-5043, [email protected]

Marie Atkins Executive Assistant (416) 642-4988, [email protected]

Ari Marc AronsonAssociate Publisher, Director of Sales & Business Development (416) 642-4838, [email protected]

Karen AzlenNational Account Manager (416) 642-4846, [email protected]

Garth ThomasNational Account Manager(416) 642-4851, [email protected]

Fiona StedmanNational Account Manager(416) 642-4869, [email protected]

David CarmichaelSales Coordinator (416) 642-4823, [email protected]

ADVISOR’S EDGE is published 12 times a year by Rogers Media.

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Published in Canada by Rogers Publishing Inc. since June 1998. Rogers Media Inc., 777 Bay St.,Toronto, Ontario M5W 1A7, (416) 596-5000, fax (416) 642-4949. Offices: 1001 deMaisonneuve West, Montreal H3A 3E1, (514) 845-5141; Ste. 900, 1130 West Pender St.,Vancouver V6E 4A4, (604) 683-8254.Subscription price plus taxes: Canada $65 per year, 2 years: $105, 3 years: $138.00; USA/Foreign:$131.50 (one year only). Single copy: $15. Published 12 times a year. G.S.T. #137813424RT.ADVISOR’S EDGE is indexed by the Canadian Magazine Index by Micromedia Limited and theCanadian Periodical Index. Canadian back copies are available in microform from MicromediaLimited, 20 Victoria Street, Toronto, Ontario M5C 2N8. Indexed by the Canadian Business Indexand available online in the Canadian Business & Current Affairs Database. Publications MailAgreement Number 40069298. Canada Post: Please return undeliverable address blocks to RogersPublishing, 777 Bay St., Toronto, Ontario M5W 1A7. ISSN 0703-7732. We acknowledge thefinancial support of the Government of Canada, through the Canada Magazine Fund, toward oureditorial costs. Copyright © 2002 Rogers Publishing Inc.

problem? What is an advisor to do? What precautionsshould the advisor work out with the client for the nextyear? Is this going to be a chronic problem? Was it badplanning? Will a capital loss next year solve the problem?In my client’s case he has a locked-in RRIF. I have sug-gested that he make application on a hardship basis (owingtax) for sufficient funds to be released. In the meantimehe is sending 50% of the amount with an explanation anda series of post-dated cheques.

Gerald K. Burgess, CFP, CLU, CH.F.C.Burgess Leclerc Financial Group Inc., Toronto

THE VALUE OF EDUCATIONThe article “A Question of Degrees” (February 2002,page 9) was interesting, particularly because so many plan-ners seem to think that a degree is superfluous at best.

A degree is living proof that a person is capable of tak-ing on a challenge and seeing it through to completion.It is not unreasonable to expect a person to pursue a liberal arts degree for four years and then study to be afinancial planner for another two. It is only when plannerssubject themselves to this type of rigorous demand thatthey might finally be considered among the other profes-sionals to which they often equate themselves.

Jerry Iwanus, CFPJ. Iwanus & Associates Ltd., Bawlf, Alta.

Continued from page 8

LETTERS

ADVISOR’S EDGE10

JULY 2002, VOLUME 5, NUMBER 7

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HOTLINES

JULY 200213

So how’s your sex file? You know,the one where you’ve broken down yourclient list into men and women. If amajority of your clients are men, you’remissing out on a huge opportunity.

Women make up slightly over half(50.5%) of the total Canadian popu-lation. Their numbers rise to 57% forthose aged 65 and over.

The travel, automobile, business andInternet industries are calling womentheir fastest-growing market segment.These days women are partners infirms, business owners, techies on theway up, and wives and mothers whocontrol the family finances. They arebecoming major consumers of finan-cial services and yet many advisorsdon’t prospect to women, nor do theyknow how to build or maintain a rela-tionship with them.

Today’s women have more moneyand less time. Family responsibilitiesstill tend to land mostly on theirshoulders. The family purse stringsthey’ve traditionally controlled nowinclude things like insurance options,investment strategies, retirement pro-jection and estate planning. This year’sRRSP Poll sponsored by RBC Finan-cial Group found that 40% of thosewomen polled are “more inclined now than in the past to look for pro-fessional advice, compared to 25% of men.”

Women have money. They want helpand they’re willing to pay for it. So howdo you find success with this admittedlydiverse group?

The financial needs of women arepretty much the same as those ofmen—with the exception that womenneed to save a bigger nest egg becauseof their statistical longevity. But womenexpect different things from a financialadvisor than men—not in investingstyle or rate of returns, but in commu-nication.

Sally Smith, a 56-year-old seniorvice-president of a major oil and gascompany, came to me after leaving heradvisor. Though well educated and cer-tainly capable of understanding thecomponents of her financial plan, whenI asked her why she left her advisor, shesaid: “I just felt that I was being talkeddown to.”

It’s the biggest complaint I hear from

women who haven’t managed to find agood fit in a financial advisor. And Ihear it from experienced investors aswell as from beginners.

On the other hand, I have yet to meeta colleague who wouldn’t wholeheart-edly deny any accusation of talkingdown to anyone. We’re professionals.We all look at our clients’ situations,female and male, and use our knowl-edge to guide them to informed deci-sions.

So where exactly is this communica-tions chasm? And why is it mainlywomen who define it as “being talkeddown to?”

TALK IT OUT: Men and women reactto information differently. Men get theinformation they need, listen to youradvice, maybe go and think it over a bit,then give you a yea or nay. Most womenneed to talk it out. They have to makesure they’ve understood the informationand they have to go over the pros andcons of each choice. Even if there’s anobvious right choice among the alter-natives you’ve suggested, they will wantto poke around in the nooks and cran-nies of the other choices just to makesure they’re not missing anything.

THE MISTAKE:This probing and dia-logue can easily be mistaken for inse-curity or indecisiveness. Some advisorswill try to make it all better by assuring

TOOLBOXBy Diane McCurdy

Women expect different things from a financial advisor than men.Start by sharpening your listening skills.

LISTEN UP!

Continued on page 15

Illustration by Claudia N

ewell

JULY 200215

these women that the whole situation isunder control and they don’t have tobother with the details if they don’twant to. Big miscue.

That’s exactly when a woman startsthinking, “Are you telling me that it’sall too complicated for me?” Mean-while, she is a senior executive, runs herown business or has a PhD.

THE SOLUTION: With women clientsyou will need to spend more time dis-cussing options. It’s not that women areunsure of themselves. In most cases,

they may already have made their deci-sion. The whole process of talkingthings out is simply a vital part of theway women approach the world. Butthis doesn’t mean you’ll have to spendmore time with female clients overall. Ifyou understand from the start whatthey want to achieve, you can spendmore of your time getting down tobusiness and helping them achieve it.

The secret is homework. Before ourfirst meeting, I give clients a to-do list.I ask them to provide a cash-flow state-ment and a list of their assets and

liabilities. They’re also requested tomake a financial wish list. What aretheir financial priorities? In an idealworld, what would they spend theirmoney on and in what order? Big wishesand small wishes, all on the same list.

Nothing gets me into clients’ mindsfaster. The cash-flow statement showsme where the potential funds are. Theassets and liabilities show me where themoney should be going. The prioritizedwish list tells me what they’re strivingfor and how they’re thinking. Are they

TOOLBOXContinued from page 13

"Prime time" women are working.

The numbers of employed women increase in the 25 to 44 and

45 to 54 age groups. In 2000, 75% in the first category and

72% in the second were employed.That’s especially interest-

ing when you consider that ages 25 to 44 are when a woman

is likeliest to be having children or caring for them.

The majority of women with children at home are working.

In 1976 just over one-third of moms, 39%, were employed. In

2000, the number was up to 70%. Even the majority of women

with children under six are working—64% of them. Most of

these women are in two-income families.

The majority of recent university students and graduates are

women. More than half of the students at Canadian universities

are women: 55% in the 1998-1999 year.* And in 2000, 58%

of all university degrees were granted to women.*

The better the education, the more likely women are to work.

On average, 76% of those with university degrees and 68% of

women with a community college certificate or diploma worked.

Women are making their way in professions and management.

In just 13 years women substantially increased their presence

in several prestigious fields.

More women are creating their own jobs.

In 2000, over 852,000 women were self-employed.That’s 12%

of all women with jobs. And women are doing it for themselves

at a faster rate than men. A 1996 study on behalf of the Bank

of Montreal’s Institute for Small Business found that women-

owned businesses created jobs for 1.7 million Canadians, which

was a job-creation rate four times the national average. The

study also said that women-led firms provided more jobs than

the Canadian Business Top 100 companies combined.

—D.M.

Except where otherwise noted, all statistics are from Statistics Canada. Most

are from “Women in Canada: Work Chapter Updates” published in August

2001 by the Target Groups Project of StatsCan.Those marked with * are

not from that study.

* “Myths and Realities:The Economic Power of Women-led Firms in Canada,"

1996, Bank of Montreal’s Institute for Small Business, National Foundation

for Women Business Owners, Dun & Bradstreet Information Services.

THE STATISTICS TELL THE STORYYou’ll find more women, from all walks of life, working in all fields.

Field 1987 2000

Business and financial professionals 41% 49%

Doctors and dentists 44% 53%

Social sciences and religious professionals 48% 60%

Managers* 29% 35%


BY SHEILA AVARI

Katherine and Steven should have been contentthe day they found out they had just received a sizable inheritance. Instead their first feeling was fear. Katherinehad just received the family farm after her father’s death.The couple was unsure if they should just sell the farm.They were concerned about the tax liability of the farm andthe thought of operating the farm business made them feelstrapped for cash.

Due to increasing costs, the number of farms in Canadais decreasing. Statistics Canada reports that between 1996and 2001 the number of farms declined by nearly 11%.This decrease represents nearly 30,000 fewer farms since1996. Still, more than 370,000 Canadians worked in agriculture in 2000. Farmers are among the leaders ofasset-rich, cash-poor Canadians and it is easy to see why.

In 2000, total farm receipts or revenue in Canada was $38.3 billion. But operating expenses, including fertilizer,fuel and ensuring farmers are in compliance, reached $33billion. On an individual level, a farm in Southern Ontariovalued at $2 million, grossed an average of $175,000 buthad operating expenses of $155,000. This means a farmerworked gruelling hours to make a living of $20,000.

Kirk Baines, who has a client base of mostly farmers, seestheir low cash-flow situations all the time. Just as with asmall business owner, farmers invest most of their moneyinto their farm. “Typically a farmer’s wealth is 80% hardfarm assets, which includes his land, tractors, equipmentand quota,” says Baines, president of London, Ont.-basedAllied Financial Services (TWC Financial Corp.). “Theother 20% is cash, RRSPs and other investments. So when

Illustration by Russ W

illms

Trends, statistics and demographicsKNOW YOUR

FARMERS’MARKETWhen it comes to a farmer’s finances,management by crisis is more common than management by planning.

CLIENT

ADVISOR’S EDGE16

This is the third of a three-part series on asset-rich,

cash-poor Canadians.

you look at a net-worth statement of a farmer and see the 80-20 split, it can be dangerous.”

The role of a financial advisor in a farmer’s fiscal situa-tion is more critical than ever, he adds. One of the biggestchallenges farmers face is capital acquisition management—buying property and equipment. If a tractor fails in themiddle of planting, the farmer must decide immediately,often without consulting an advisor, if he is going to buyanother $100,000 tractor on his line of credit. “Manage-ment by crisis is often the norm versus management byplanning,” says Baines.

It’s little surprise when Baines explains that few farmershave actual business plans. The paperwork that comes withkeeping up with environmental and compliance regulationsleaves a farmer with less time to drive the farm. Ten yearsago it was not mandatory to write detailed reports on thesource and destination of cattle.

Baines says now that Canadian farmers are getting older,new strategies need to be implemented. Even as late as a decadeago the focus was still on debt protection and investing mea-grely in RRSPs. But now that 50% of Ontario farmers areover the age of 55 and more than 30% of Ontario farms willchange hands in the next eight years, there are a lot of plan-ning opportunities for the farm advisor, Baines explains. “Ourfocus now is on tax and estate planning and retirement.”

Taxing Issues for FarmersTax planning for farmers can be very different, says IreneVassalo, a certified financial planner with Investors Groupin Waterloo, Ont., who has farming clients. “With farmersit is not beneficial to maximize an RRSP for tax purposesbecause there is not a lot of liquid income and they are not paying a lot of tax,” she says. “Depending on how thefarm is set up, farmers can write off business expenses againsttheir income.”

Depreciation rates vary, based on the type of farmingequipment purchased. Depending on when they were builtand what they are made of, buildings can depreciate at a valueof anywhere between 4% to 10% per year, explains Bob Allebone, a registered financial planner with Investors Groupin Winnipeg and an expert in succession planning for farm-ers. Pulled equipment (such as a swather) depreciates at a rateof 20% annually while the depreciation rate for self-propelled equipment is 30%. Under the “half-rate rule,” inthe year of purchase of depreciable assets, a farmer can deductonly half of the rate of depreciation against his income. Inthe following years the full rate of depreciation can bededucted on the declining value of the asset class.

The two most important tax rights for farmers are the

tax-deferred rollover and the $500,000 capital gains exemp-tion, Allebone says. The tax-deferred rollover has been lawin the Income Tax Act for decades so a family farm would notbe torn apart by taxation when it is passed on to the nextgeneration. A farmer can transfer farm assets to a child,grandchild, adopted child, spouse of child or spouse offarmer without any tax implications either after death in awill or while the farmer is still alive. There is an exception,however. Before death a farmer can’t transfer inventory suchas grain in bins without tax implications.

The tax-deferred rollover is not available to nieces,nephews, aunts or uncles. If the farmer leased the land toa “peripheral” relative, he would be considered a landlordand lose his farmer status and the ability to use the tax-deferred rollover to a child or spouse. The couple couldenter into a custom farm agreement with the renter and create an employer-employee relationship. Although more complicated, this would help retain the farmer status and facilitate the tax-deferred rollover, if desired. The farmland must have been actively farmed for more than 50% of the number of years of ownership beforeusing the tax-deferred rollover.

For sole proprietor farmers, there are two ways to qual-ify for the $500,000 capital gains exemption. The farmerhas to find any two years while they farmed the land wherethe gross income from farming was more than any othersource. Or, if the land was acquired before June 18, 1987,and the farmer can find five years where he or she, a par-ent or grandparent farmed the land, whether or not revenuewas generated, the capital gains rule would apply.

While intergenerational transfers keep the farm in the fam-ily, Allebone says one of the worst things that can happen isthat a child wants to farm. “If a child wants to take over thefarm there will be only one source of income to graduallybuy out Mom and Dad, provide a living for the child and hisfamily and have money to operate the farm,” Allebone says.“Mom and Dad find that they are not getting paid enoughin their retirement and there is not enough money to goaround, and the cycle continues.” This is why RRSPs are suchan important part of a farmer’s financial plan, he adds.

“Farmers are asset-rich and cash-poor while they arefarmers, but should they ever decide to sell they would be millionaires because of the high value of their land andequipment,” Allebone says. “If they are able to sell at a satisfactory price, their retirement will be more than comfortable.”

Sheila Avari is assistant editor of Advisor’s Edge. [email protected]

JULY 200217

ADVISOR’S EDGE18

9 10 11 12 1 2

Knowing when to sell mutual funds

is just as important as knowing

when and what to buy. Here’s how

to ensure your clients’ portfolios

perform properly.

By Jennifer McLaughlin

THE RIGHT

TIMESELLTO

JULY 200219

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3 4 5 6 7 8 Investments

uy and hold. It’s one ofthe most recognized catchphrases of the industry.

Barry Hodson, a certified financialplanner with Cartier Partners in Winnipeg, considers himself a sup-porter of the buy and hold philosophybut he says recent years have caused hima great deal of introspection.

“Buy and hold is not as big as it usedto be,” he says. He adds that many advi-sors and brokers have begun to view theindividual mutual fund as a commod-ity or a stock to be freely traded. “I canunderstand it to some degree. There aremore mutual funds now than there arestocks on the TSE.”

With the number of mutual funds to choose from, ensuring the funds youchoose fit with your clients becomes anincreasingly difficult challenge. Mutualfunds aren’t static investment vehicleseither. The content can change, themanagers can leave, the fund’s style candrift, all leaving advisors and clientswondering when is the right time to sellinvestments in favour of other funds.

Knowing when clients should selltheir funds is an integral part of yourrole. Has the fund changed since yousuggested it? And is the fund still play-ing the role you intended it to play inthe client’s portfolio?

FUNDAMENTAL CHANGES When fundamental changes, as definedin the Securities Act, occur to a mutualfund that a client currently holds, therewill be some fair warning. According tothe legislation, the following changescannot occur without the consent ofthe “securityholders.”

• the fees or expenses charged to themutual fund increase;

• the manager of the fund changes;• the fundamental investment objec-

tives of the mutual fund are changed;• the auditor of the fund is changed; • the mutual fund transfers its assets to

another fund; or• the mutual fund acquires assets from

another mutual fund.However, the act also specifies that if

the simplified prospectus tells investorsthat they will be sent 60 days, writtennotice prior to a change, approval fromthe investors is not necessary. And whena manager change occurs, if the newmanager is an affiliate of the currentmanager, securityholder approval is notrequired.

Some funds’ objectives are stated sobroad in the simplified prospectus thatthey include fundamental changes, saysAamir Mirza, legal counsel for Invest-ment Funds Institute of Canada (IFIC).But there are good reasons why everyfund change doesn’t need unit holderapproval. “The best way to look at it isthat mutual fund unit holders are theowners of the property and the managershave a delegated responsibility to man-age the property on behalf of the own-ers,” he says. “A new [affiliated] man-ager’s slightly different style or fundcomponents is not a fundamentalchange. Changing a tech stock fromNortel to Cisco is not a fundamentalchange.” Obtaining approval for frequentchanges would add costs that the fundwould have to bear. “It would be a dis-service to unit holders,” Mirza adds.

If a mutual fund changes fundamen-tally it doesn’t necessarily mean that the

fund is no longer suitable for yourclient. Each change has to be evaluatedon an individual basis, says Dan Hal-lett, senior investment analyst at Wind-sor, Ont.-based Sterling Mutuals Inc.“Each fund should play a unique rolein the portfolio,” he adds. “If a funda-mental change makes it so that twofunds are playing the same role, a sell isin order.”

FEE CHANGES

A quantitative change in fee structure isrelatively simple to judge for suitabilityin the client’s portfolio. Denzil Fein-berg, a certified financial planner withFeinberg & IQON Financial in Win-nipeg, says he does consider MERs andadditional fees. “It’s one of the criteriathat we look at, but it is second to per-formance and the quartile performanceas well,” Feinberg says. “A high MER,certainly anything over 2.85%, I avoid,including in guaranteed seg funds.” If afund’s fees do increase, Feinberg addsthat he will consider selling or trans-ferring out and into another fund in thesame family group. Feinberg says hedoes not sell for this reason frequently,but he has done it in the past.

NEW MANDATE

When a fund introduces a new mandate or merges with a fund of a different mandate, determining if thenew mandate fits with the client portfolio is straightforward. In theportfolios Hallett reviews, he says thatone of the most common problems is that they are spread too thin. “Youshouldn’t have five different funds that


B

ADVISOR’S EDGE20

perform the same function,” Hallettsays. “Eventually, there isn’t perfectoverlap over them and you end up dilut-ing your exposure to a particular assetclass or style.” As an example, he says aCanadian large cap value fund wouldprovide domestic exposure, while asmall cap fund should be a diversifierwith a bit of growth. Add in a Cana-dian growth fund, you could be diluting the portfolio. “After a funda-mental change, you might have twofunds that are performing the samefunction,” he adds.

When Hodson thinks a fund is nolonger appropriate for his client, helooks to move the investment to anotherfund in the same group to save thedeferred sales charge. “I don’t want theclient to be hurt by any of thesechanges, just because the fund managerdidn’t stick to their mandate,” he says.

MANAGER LEAVES

A change in management does not auto-matically suggest that advisors shouldredeem their funds and move the assetsto another fund company. But it is thehardest of the fundamental changes toassess, says Hallett.

Hodson says he likes to take a wait-and-see approach when a managerleaves. He points to the recent changesto the AGF International Value Fund.After Brandes Investment Partners L.P.announced that it was resigning frommanaging the AGF International ValueFund, AGF launched a worldwidesearch to find a new fund manager.“Rather than have a knee-jerk reactionand bail out, I’m willing to look atwho they are going to bring in as a newmanager,” Hodson says. For now, he will keep the AGF fund on his roster, but he won’t add any money onbehalf of his clients for up to a year.

“I’ll wait until I’m satisfied the original premise for owning that fund in the first place is justified.”

Dan Tutton, senior vice-president ofsales at AGF Management Ltd., saystaking the wait-and-see approach isexactly what most advisors did afterBrandes made their announcement.“Obviously there are going to be someadvisors who will move clients’ moniesout immediately,” Tutton says. “We didsee a small increase in overall redemp-tions, but they were a lot smaller thanwhat we had anticipated.” In fact,redemption of funds during the transi-tion period was only about 1% higherthan the regular redemption rate (whichincludes RRIFs and other systematicwithdrawal plans).

It’s prudent to wait and see, saysMoshe Milevsky, associate professor atthe Schulich School of Business at YorkUniversity in Toronto. “New managers


5 6 7 8

are known for coming in and cleaninghouse, and changing the structure of aportfolio,” he says. “In a sense, it’s notthe same fund once it comes under newmanagement.” When a new portfoliomanager is introduced, it’s time forrenewed due diligence, he adds. “It’stime to do your homework and if thenew manager has a good track record,then maybe it’s time to put more moneybehind him or her.”

Hallett notes mutual funds will gothrough management changes often. “Alot of people move around in thisindustry,” he says. “They move on. Theyretire.”This is why he looks for a team-based process to fund management. “Ifyou have a process that is not depend-ent on an individual, you will have better consistency of style over time.”

MOTIVES TO MOVEApart from fundamental changes, other

alterations to funds can occur that advisors have to look out for.

EFFICIENCY

In addition to management fees andoperating expenses (as noted above in“Fee Changes”), there are also othercosts that result from a managementstyle. If a fund manager is tradingstocks frequently, the turnover rate rises,which will cause brokerage fees and ahigher tax liability. Hallett says an advi-sor’s preference should lean towardsfunds with lower turnover.

INCONSISTENT BEHAVIOUR

In mutual fund investing it’s importantto have a benchmark with which tomeasure funds. “Just because a mutualfund isn’t doing well, doesn’t mean thatthere was some sort of breach ofresponsibility, or that it is time to revisitit, or throw them out,” says Milevsky.

Poor performance isn’t as key to deter-mining the fund’s place in the portfolioas its overall behaviour.

If a fund is not doing well, relative tothe sector, that’s a reason to start askingquestions. “People like good absoluteperformance,” Hallett says, “but withfunds that are more focused you have tocompare them with a suitable benchmarkor to the funds of their peers in the samecategory.” For sector-specific funds, youalso want to look at how that industry isdoing. “If the energy sector is up 20%and your energy fund is down 5%, youwant to find out why,” he continues.“You want to look at the positive sur-prises too, though it may just be a fluke.It might be luck one way or another.”

STYLE DRIFT

In the heyday of tech stocks, most mutual funds had a Nortel

JULY 200221


12 1 2 3

component—including value funds.This type of “style drift” can affectyour own ability to diversify your clientportfolios, says Hodson. “If I’ve allo-cated 20% to a value fund and the valuefund is not acting like a value fund, then I’ve got a problem,” he explains. “Nowmy client’s portfolio is grossly out of balance.” He admits being out of balance can sometimes produce agreater positive return in the short term,if the market favours the unbalance.“But in a down market, we really arehoping that the diversification will bal-ance the portfolio out.”

It’s your role to ensure that yourclient’s portfolio is well diversified, notthe fund manager’s, says Milevsky. “Ifit’s an equity fund and it contains 50%bonds, you should ask the fund man-ager why,” he says. If the answer youreceive justifies placing bonds in anequity fund “because the market is over-valued,” Milevsky says that’s a problem.“You didn’t buy the fund for that,” heexplains. “It’s almost like a bait andswitch and it’s a justifiable reason to sell.”

STYLE SLIPPAGE

How the manager applies his or herinvestment process to the mutual fundcan determine its success down theroad. Dan Tutton at AGF ManagementLimited says one of the main pointsAGF looked at when considering a newmanager for the AGF InternationalValue Fund was the manager’s ability totake on new assets. “Advisors need tolook at how much money the mutualfund manager currently has underadministration and whether those assetshave significantly grown over the years,”Tutton says. “If the manager wasresponsible for $1 billion five years ago

and today is managing $50 billion, doesthe investment process today reflect thetrack record of five to 10 years ago?”Tutton says advisors have to considerwhether the manager is able to take onmore money over the next five to 10years and still apply their craft consis-tently. “There could be style slippagewhen they are managing too muchmoney. Some managers will actuallyclose off their mandates because theyare approaching capacity.”

THE BOTTOM LINE Although assessing changes is in thename of better overall performance,advisors have to resist the urge toattempt to time the market. “Investorsand advisors are very bad markettimers,” says Milevsky. “Studies showthat investors who move in and out doworse than investors who stay put.Why? There are extra costs and they justdon’t know when to move.” Milevskyadds that researching and choosing tobuy a fund on behalf of your client sixmonths ago, and now considering sell-ing it, “borders on myopia.”

Though poor performance alone is

not reason to sell, relative performancein a well-diversified portfolio is keyto making sure your mutual funds are onpar. “When it comes to mutual fundinvesting, keeping up with the Joneses isa very important concept,” says Milevsky.“If you and the Joneses lost money, thenyou are OK.” But if other similar fundsmade money while yours didn’t, it isprobably time to sell.

Time and diversification are the bot-tom line. “Time has a certain way ofreaching out and lowering the volatilityand to some degree the risk,” says Hod-son. “We all can’t be leading the race everyday. There are going to be different funds,different managers that are going to be invogue or in favour at different times. Youwant to participate when they are doingwell and to some degree in the ones thatare doing not so well.”

And keeping in mind the changesthat mutual funds can and will gothrough will pay off for both you andyour clients.

Jennifer McLaughlin is assistant editor of

Advisor’s Edge magazine.

[email protected]

ADVISOR’S EDGE22


4 5 6 7 8

When a fund manager leaves,rather than have a knee-jerk reactionand bail out, I’mwilling to look atwho is brought inas a new manager.BARRY HODSON, FINANCIAL PLANNER

CARTIER PARTNERS

WINNIPEG

hey’re rich, they represent the highest-margin segment of the market, they’recraving financial advice and within eightyears, they’re going to triple in number.They are Canadian millionaires, easilythe most sought-after and targeted groupof clients. But despite all the financialprofessionals and corporate divisionsdedicated to this demographic, indus-try experts say significant holes still existwith servicing these clients, representinga lucrative opportunity for those advisorswho can deliver the right goods.

According to a recent survey fromToronto-based Cap Gemini Ernst &Young, more than 315,000 Canadianshave a minimum of $1 million ofinvestable financial assets, an increase of90,000 from five years ago. Thanks inpart to a growing number of babyboomers who are receiving sizable inher-itances, Cap Gemini says the number ofCanadian millionaires is projected to

ClubThe Millionaires

By Geoff Kirbyson

Millionaires are the most desired type of clients

but can also be the most underserved.

Interactive Feature / Marketing

grow to more than 900,000 by 2010.But advisors shouldn’t assume the bulk

of those assets will come their way, saysKeith Sjogren, leader of the wealth man-agement practice for Toronto-basedTaddingstone Consulting. According toTaddingstone’s 2001 Canadian Mil-lionaire report, full-service brokers havethe dubious honour of being the mostpopular advisor for high-net-worthclients, while also receiving the most crit-icism. Usage of full-service brokersdropped from 82% in the previous year’ssurvey to 71% last year.

Accordingly, some full-service bro-kerage relationships with millionaireclients could be in jeopardy. He addsthat many of the former full-serviceclients have either moved to the dis-count side—swayed by convenience and error-free trade execution—or to investment counsellors, who havediscretion over the clients’ assets.

Sjogren says the Taddingstone reportshows that advisors haven’t takenenough time to get to know theirwealthiest clients. “It’s not how fre-quently advisors communicate, it’s whattype of communications they use,” heexplains. “Many clients will say, ‘I gotanother birthday card from my advisor.’If only the advisor realized they didn’twant one. Advisors need to spend moretime understanding how the clientwants the relationship to be managed.”

There’s also a need for advisors tomove their focus to short-term assets andobtain copies of clients’ vital documentssuch as their most recent will, tax returnand employment benefits, Sjogren adds.“I think there’s a lot of basic informa-tion that advisors aren’t asking for,” hesays. “As a result, clients say, ‘he’s not an

advisor, he’s a salesman.’ Our impressionis that the millionaire client is quite will-ing to part with this information, but at the same time, they’re not going to voluntarily give it to their advisor. Theadvisor has to ask for it.”

Advisors would also do well to focustheir attention on other family membersand their financial needs, says Sjogren.“Some advisors may be unwilling toopen an RRSP for the teenage daughter,for example, because the daughter doesnot meet the minimum account size,” hesays. “But millionaire clients don’t careabout minimum account sizes. They seethe family as one customer and so shouldthe advisor.”

Not focusing on the family memberscould be costly as a significant percent-age of millionaire clients are eitherretired or planning to transition theirbusiness to other family members, saysSjogren. One Montreal-area business-man who built up a net worth of$15 million primarily through his owncompany, says leaving a legacy to bothhis family and his community is a highpriority for him. “I’d like to take care ofmy kids sooner rather than later,” he says.

His advisor, Armand Kessous, whoworks at Montreal-based Assante AssetManagement, says his wealthy clients arelooking for somebody who will coordi-nate all financial aspects of their lives,including cash-flow management, taxplanning and estate planning. The chal-lenge is to manage these and other fac-tors, and adjust them to their constantlychanging financial plans. “Typically,these are families that have passed thestage of financial security, they’re at thestage of leaving a legacy,” he explains.“Their wills are changing constantly,

they want to minimize their tax burden,they want to be fair to their kids and theywant to give money to charity. They’relooking years and decades down the roadinstead of weeks or months.”

By managing the multiple demands ofmillionaire clients, Kessous says he is ableto provide them with the one commod-ity they can’t buy—time. He says thedemands on his millionaire clients aretremendous while they juggle responsi-bilities of their business, family and com-munity. “There’s little time to go intothe day-to-day grinding work of assetmanagement, portfolio management, fol-lowing up on tax issues and meeting withaccountants and lawyers,” he says. “Allthe things they can delegate, they do. Youcan’t make more hours in a day.”

Kessous also puts a high priority ondownside risk protection for his clients.“The higher they are on the ladder ofwealth, the higher their sensitivity tolosses,” he explains. “Contrary to pop-ular belief, they can’t risk a lot.”

Steve Zilinek, an investment advisorat Wellington West Capital in Winnipeg, concurs. He says his mil-lionaire clients are essentially motivatedby two factors—saving taxes and pre-serving wealth. “Given the choice ofmaking money or not losing it, they’drather not lose it,” he says. “They focuson preserving what they’ve built up.They don’t need any more money.”

Zilinek notes their views are basedlargely on the fact that many clientsowned businesses at one time and theirpriorities of minimizing tax and losseshave remained with them.

One Winnipeg-based entrepreneursays because he has the majority of his

Continued on page 27 Pho

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by

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JULY 200225

wealth and risk tied up in his business,he looks to several advisors from dif-ferent firms to provide him withincome-generating options, such as pre-ferred shares, convertible debenturesand income trusts, to meet the conser-vative goals of his investment portfolio.

“My comfort level is having the bulkof my investments in products thatwould be more appropriate for some-one in their 60s,” says the 49-year-oldentrepreneur, who has a net worth ofapproximately $10 million. “My com-pany is an early stage equity investment.That provides a lot of upside, but it’salso more volatile.”

While he is satisfied with his currentsituation, he is considering a change to afee-only planner. “I’d like to get goodsolid advice from someone who has noother interest than to provide me withindependent advice and not sell me in-house mutual funds or insurance poli-cies,” he says, adding he has turned downseveral offers to consolidate his portfo-lio with a single firm for fear of havingproprietary products pushed on him.

In comparison, the Montreal-basedbusinessman says it’s the personal rela-tionship with Kessous that he really values. They only met a few years ago butnow each knows the other’s wife and chil-dren. “The biggest thing for me is I haveaccess to him 24 hours a day if I want,”he says. “I might talk to him once a weekfor different subjects. I try not to call himat home, but I have in the past. But justbecause we’re friends doesn’t stop mefrom telling him what I think he’s donewrong. There’s a lot of money involved.”

He says he doesn’t want to hear aboutfancy investment products that he doesn’t understand, such as hedge funds.“I’m interested in physical-type invest-

ments with companies that build or do things I can see,” he says.

Because many millionaires haveattained their financial status by build-ing up their own businesses or workingin high-ranking positions for other com-panies, they often have complicated stockoption plans to consider. Thane Stenner,first vice-president and investment advi-sor at CIBC Wood Gundy in Vancouver,says many of his clients seek his adviceon advanced strategies such as collaringand liquidating stock options over timeto maximize their value.

“Millionaire clients are looking forintelligent solutions,” Stenner explains.“Advisors to the affluent need an extraskill set. They must be able to anticipatepotential problems and provide a rangeof solutions. That’s where the high-net-worth family values advice. Ultimately,they expect a higher level of service.”

To that end, Stenner says he makesadvanced planning strategy sessions a priority in all client meetings. By pre-emptively addressing financial and lifeissues, and by presenting solutions in aclear and structured fashion, Stenner isable to create true value for his clients.Stenner says the number one concernfor many of his clients is not spoilingtheir children, an affliction he calls“affluenza.”

“Parents want to teach their childrenaccountability and responsibility forwealth,” he says. “A lot of the time, par-ents have worked incredibly hard to starta business and want to ingrain in theirchildren some of their values as well aswhy they’ve done what they’ve done. Themain challenge is raising their children ina manner that gives them an incentive towork so that they aren’t consumed by thepotential trappings of wealth.”

Geoff Kirbyson is a writer based in Winnipeg.


ARMAND KESSOUS

ASSANTE ASSET MANAGEMENT

MONTREAL

!As an extension of this coverage, Advisor.ca is currently featuring a special online

report focusing on the business of attracting and servicing millionaire clients, along

with the issues and challenges associated with this market. Articles and tools in

this package include:

• How to deepen relationships with affluent clients• Insights on handling intergenerational wealth transfers and “sudden money”• An online workout to determine if you serve the millionaire market well.• Incredible client appreciation events for your wealthy clients

All this and more can be found in the Practice Zone at www.advisor.ca.

INTERACT ON

JULY 200227

Illustration by Bill D

ickson

BENEFITSWHEN

DISAPPEARClients leaving the full-time work environment to go on contract lose the security offringe health benefits—including disability insurance. Advisors should discuss coverageoptions with clients to tide them over in the transition period.

By Bruce Cumming and Diana Bacon-Pearson

JULY 200229

K


Insurance

he workplace has changeddramatically in the lastfew years. Many people

are exiting the traditionalnine to five jobs to become independ-ent contractors or consultants. In fact,many Canadians are being de-hired andare offered temporary jobs or specificassignments rather than permanentemployment. Some people are perfectlycontent with this change as they areattracted to the idea of being their ownboss.

Angela, 45, has worked in the finan-cial services industry for many years. Shewants to take a severance package andbecome a consultant. She is tired ofcommuting and the monotony of hold-ing the same job for another 20 years.With more and more people in Angela’sposition, there are new planning oppor-tunities for advisors.

Perhaps the most important area toaddress quickly is their risk managementissues and in particular their disabilityinsurance coverage.

In terms of providing Angela withfuture disability insurance coverage,there is a real fork in the road at thispoint. Whether she went to her advisorbefore or after she left her job, the chal-lenge is the same because insurance coverage is impossible without verifi-able income.

In theory, one might assume if shehas not yet left her job before going toher advisor she could get a traditionaldisability policy. But how is she goingto answer the question on the disabil-ity insurance application about beingaware of any changes to her occupa-tional duties or job status in the next12 months? If she states there will beno changes, then that would constitute

a misrepresentation and place anyfuture claim in jeopardy.

If Angela has already started her consulting business, the insurance com-pany will not offer her a traditional

disability insurance policy unless she hasalready secured a solid contract of at leastsix months, and she can produce a copyof the contract that explicitly states theduration and pay scale.

If this is not the case but she even-tually secures a contract of limitedduration, she could, at best, qualify fora policy that typically only covers herfor a limited benefit period and includesseveral exclusions like mental and nerv-ous conditions or soft tissue disorders.Although this type of contract wouldbe “guaranteed renewable to age 65,”there would be no level premium guar-antee. In addition, these types of con-tracts are not convertible to a traditionalpolicy even when she is established andcan provide at least one year of finan-cial statements showing taxable income.

There is at least one specialty carrierin Canada (Hunter McCorquodale Inc.uses Hamilton, Ont.-based ReliableLife) that will insure a displaced highlypaid executive for a coverage period ofup to 24 months with a four-monthelimination period and a benefit periodextending to age 60. However, this policy is relatively expensive, excludes

several conditions like mental disorders,and coverage amounts can reach$10,000 per month. Nonetheless, thoseadvisors working with outplacementfirms should definitely learn about this

specific product offering. In a worst-case scenario, some cover-

age may be considered better than noneat all but Angela must weigh the costrelative to the actual benefit. It may beprudent to delay her disability insuranceunderwriting until she has establishedher self-employment for three to sixmonths.

However, if she has set up her officein her home and leaves the residence atleast 50% of the time to see clients, shemay be eligible for a contract that willcover her for $1,000 a month with nofinancial evidence required, a regularoccupation definition for the first 12months, and a benefit period to age 65.This type of contract also enjoys aguaranteed level premium to age 65 andno built-in exclusions.

However, the contract’s biggest ben-efit is that she can purchase a “conver-sion option” of up to $3,000 that hasto be used within the first three years.If in year 2 of her entrepreneurship shehas successfully filed a tax return show-ing at least $17,000, she can convert thepolicy to a traditional contract with

JULY 200231

It may be prudent to delay a client’s disability insurance underwriting until

she has established her self-employment for three to six months.

P



regular occupation definition to age 65and no medical evidence is required.With a convertible contract, Angela’smedical insurability has been guaran-teed during the first few years of self-employment and she is not stuck witha restrictive policy with non-guaranteed premiums going forward.

In an ideal world, Angela would haveconsidered securing her own policyyears ago even if she had long-term dis-ability on her group plan at work. Shecould have either “topped up” heremployment benefits if there were roomor purchased a policy with a “groupoffset” amendment that would allowher to deduct any benefit she receivesfrom the group plan from her privatedisability plan, possibly resulting in nobenefit from the private plan. This canbe a tough sell in the real world.

The Choice of RidersLet’s return to the more traditional dis-ability product where it is criticallyimportant to understand the variousoptions (riders) that can be added tothese policies. The bells and whistlesmust be appropriate before these riderscan be added.

One of the most important riders forAngela to consider would be an Addi-tional Insurance Rider (AIR), alsoknown as a Future Insurability Option(FIO). This rider allows Angela toincrease her monthly disability amountsimply by proving that her income is sufficiently high to warrant the additional coverage.

Let’s say Angela has already startedher own business, works at least 30hours a week and is away from herhome office at least 50% of the time.She has secured contracts acceptable to

an insurance company but if her insur-able income is low, she will be unable toget the desired amount of disabilitycoverage when the policy is initiallyissued. The AIR or FIO rider will allowher to increase the coverage withouthaving to go through more medicaltests, as long as she can demonstratethat her income warrants such coverage.

The riders are also important because early in Angela’s new career she really does not know how successful she isgoing to be. It is always a simple matterto drop riders but adding riders orincreasing coverage in the future is nighon impossible as you have to start all over. So this rider allows Angela to “grow into her coverage” as her newcareer grows. If she is going to make bigmoney she will want to have the optionof insuring that big money and the AIRor FIO rider provides that flexibility atlow cost.

Another popular rider that is perhapsused too frequently is the traditionalCost of Living Allowance (COLA)rider. The importance of this rider isbased on your views or fears of inflation.For example, some advisors think the fearmongering that generally goes with thesubject of inflation is overdone. Right orwrong, inflation is not something to befeared anymore. The world’s centralbankers have agreed uniformly that infla-tion is public enemy number one; henceat the first sign of inflation they will takeimmediate action (increase interest rates)to ease inflation.

For younger clients, highlighting the

potential value of COLA on a long-termclaim is more important even thoughmany clients will still not buy it due tothe expense. For older clients, an advi-sor’s due diligence dictates a discussionof the merit of COLA but most tend toshy away from the cost as their intent isto maximize the base benefit amount.

A favourite option is the Return ofPremium (ROP) rider. The sales of dis-ability insurance are abysmal because of the human rationalization that a disability is unlikely to happen. Oneway to deal with clients like Angela whohave this type of aversion to disabilityinsurance is to explain how the ROPrider can actually turn their coverageinto an “investment.” Most insurancecompanies have different featuresaround their ROP rider but here is oneexample of how it works. The ROPadds 25% to the total premium. So ifyou have basic coverage plus several rid-ers including ROP you will now pay anextra 25%. Why? After eight years ofpaying all these premiums the insurancecompany will now refund the client50% of all the premiums she has paidover that period less any claims theymay have paid to her.

Let’s look closer at the ROP math.Assume that Angela’s annual disabilitypremium is $2,700 and will provide amonthly benefit of $3,000 for basiccoverage plus an AIR rider. The cost ofthe ROP rider will be $675 (25% of$2,700) for a new premium total of$3,375 annually. After eight years she

ADVISOR’S EDGE32

Continued from page 31 The Return of Premium ridercan turn disability coverage

into an investment.


will have written cheques totalling$27,000. Assuming she has had noclaims, the insurance company will giveher a cheque for $13,500, tax-free, atthe end of the eighth year. Paying $675for eight years was an investment thatyielded 25% annually—after tax.

But you also have to explain theproverbial other side of the coin to yourclients. Any investment is a gamble andthe gamble with the ROP is that Angelawill go on claim. However, if she doesmake a claim, it will only take ninemonths of receiving benefits to recoupall the premiums spent over eight years.And the coverage is doing what shebought it to do—pay her bills.

One final observation on the ROPrider is that underwriting disability coverage is more onerous than under-writing a life insurance policy. For obvious reasons the underwriter is pay-ing particular attention to Angela’sincome, which is what is being insured.So not only are her financials to be collected but there is the gathering ofdetailed medical information to facili-tate the underwriting.

However, underwriters have beenknown to look at certain situationsmore leniently if a client is applying forthe ROP rider—for example, applyinga 180-day waiting period on a mildpre-existing muscular low-back condi-tion rather than applying a full exclu-sion. The logic is that if clients areanticipating a refund of premium theyare statistically less likely to file a short-term claim, thereby saving the insurancecompany valuable money and resourcesin adjudication. People who don’t havethe ROP rider, but who have paid yearsof premiums and then break a leg, mayfeel compelled to get even one month’s

benefit from the insurance company“just because.”

Other CoveragePreviously, Angela’s life insuranceissues had been addressed by her advi-sor so that is complete. But at the sametime that was done, the advisor intro-duced Angela and her husband to critical illness (CI) coverage. While the couple liked the concept they didnot purchase.

Now that Angela does not have abenevolent employer, she has decidedto purchase the critical illness insur-ance—on her husband. Her currentfinancial situation does not allow herto buy CI on herself as much as shewould like to. Her new disability pol-icy will have to bridge the gap until sheis comfortable paying for her own CIpolicy. But in the interim she painfullyrealizes that if her husband became ill,she would end up being the primarycaregiver and her consulting incomewould disappear.

To manage this risk, Angela signedher husband up for a 10-year term pol-icy with a premium “refund rider”that, if he does not have a claim on thepolicy over the first 10 years, will payhim 100% of his premiums back inyear 11. The couple likes this policybecause even though they do not thinkhe will claim on the insurance, they do

not mind losing the annual interest onthe premium deposit over the first 10years knowing he will get his principalback in full. Further, in year 11 if heonly wants to hold the contract foranother 10 years, he can renew at theguaranteed rate for years 11 to 20 orlevel the premium to age 75 at attainedage rates with no medical underwrit-ing. He can even add another “refundrider” to the converted contract thatwill pay back either 100% at age 75 or80% at age 65 if he wants to surren-der the policy early.

However, to be fair, the pure cost ofthe return of premium rider is high com-pared to the underlying premium—notwithstanding that all the premiums arereturned after 10 years. In fact, the costof Angela’s husband’s return of premiumrider could have been used to buy herown CI policy. Many individuals goingthrough an uncertain career transitionperiod might be better off just buying thepure protection.

Bruce Cumming, CFP, RFP, RHU, CIM,

CLU, CH.FC., is the founder of Cumming &

Cumming Wealth Management Inc. in

Oakville, Ont.

Diana Bacon-Pearson is an independent

living benefit consultant based in Mississauga,

Ont. She also acts as the living benefit specialist

for Barakett & Associates in Richmond

Hill, Ont.

JULY 200235


Underwriting disablility coverage is more onerous than

a life insurance policy. But underwriters may look at certain

situations more leniently.

The registered financial plannerdesignation officially has a new homeoutside of the Canadian Associationof Financial Planners (CAFP). But thejury’s still out on whether the major-ity of RFP licensees will keep the des-ignation into 2003.

At the recent CAFP convention inEdmonton, association members votedoverwhelmingly in favour of movingthe RFP to the Institute of AdvancedFinancial Planning. The decision endsa year of debates and discussions aboutthe RFP’s future. Lynne Triffon andIan Secord, former members of theCAFP Board of Regents, will head upthe new institute.

The 600 advisors who hold theRFP designation will automatically bejoint members of the CAFP and theinstitute for the remainder of this year,says Triffon. But in November, theseadvisors will have to decide whetherthere’s value in retaining the RFP andjoining the institute in 2003. Theremay be stiff competition if advisorsdecide to forego their RFP to join thenew association proposed by theCAFP and the Canadian Association

of Insurance and Financial Advisors(CAIFA) instead. That means there’s a lot of work ahead for Triffon andSecord to promote the benefits oftheir institute.

“We’ve had positive feedbackabout the institute but until we actu-ally have the membership in place fornext year, we won’t know who’s goingto be signing up for the new institu-tion or not,” says Secord.

The institute has Larry Jacobson’svote. Jacobson, a Vancouver-basedpartner at Macdonald, Shymko &Co. Ltd., says he’s excited about join-ing the institute. “I’m not interestedin joining an organization with12,000 members,” says Jacobson,referring to the proposed CAFP-CAIFA merger. “It then becomes a trade association instead of a professional association.”

Triffon doesn’t see the institute asdirectly competing with the propos-ed CAFP-CAIFA association. “Therewasn’t room for us to offer an advancedplanning designation within [theirstructure],” explains Triffon. “We seethe RFP like a master’s degree versus

a bachelor’s degree [for the CFP].”But Jim Rogers, who holds both

the CFP and RFP, disagrees with theargument that the RFP is the moreadvanced designation. Unlike the RFP,he notes that holders of the CFP havepassed six rigorous courses.

Just because RFP holders mustprove they can write a financial planis not a key differentiator in Rogers’opinion. “Having to develop a com-prehensive financial plan once to getyour RFP doesn’t mean you’ve doneone since,” says Rogers, chairman of The Rogers Group Financial Advisors Ltd. in Vancouver. “So toassume these financial plans are beingdone regularly by RFP members is aquestionable assumption.”

Rogers intends to give up his RFPdesignation in favour of simplifyingthe designation/association land-scape for financial advisors.

Whether others will join Rogers’camp or the institute’s remains to beseen.

Deanne N. Gage is managing editor ofAdvisor’s Edge. [email protected]

Illustration by Isabelle Cardinal

Wealth and practice management strategies

BUSINESSYOUR

Tax Break . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Guest Column . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

JULY 200237

FATE OF THE RFPThe RFP is still alive and kicking but will licensees renew their commitment to the designation next year?By Deanne N. Gage

JULY 200239

BUSINESSYOUR

Within the next few monthsmany Canadians will be receivingCCRA assessments of their 2001 taxreturns. With any luck, these assess-ments will put the 2001 tax year torest. But in a number of cases, therewill be discrepancies between theassessments and the returns as filed.

Sometimes the differences bet-ween the filed tax return figures andthose found on the CCRA assess-ment result from keying errors, taxpreparer error or perhaps missinginformation. Generally, these prob-lems can be easily resolved with asimple phone call or a visit to thetaxpayer’s local tax services office.The taxpayer will have to wait untilthe local office receives the backupinformation from the national officebefore action can be taken.

Notice of ObjectionCertain deductions or income inclu-sions on the return or from a par-ticular interpretation of the tax laware less likely to be resolved at thelocal office level, so the taxpayershould file a formal written Noticeof Objection if he or she wishes todispute the assessment or reassess-ment. The Notice of Objection canbe filed within one year from the duedate of the tax return in question(April 30, 2003 for 2001 returns)or 90 days from the mailing date ofthe relevant Notice of Assessment

or Reassessment, whichever is later. The Notice of Objection is not

a prescribed form and therefore anyformat may be used, as long as the taxpayer includes all relevant personal information, such as name,address, phone number, socialinsurance number, relevant taxationyear and date of Notice of Assess-ment and sets out clearly the factsand reasons for the objection. The Notice of Objection shouldbe sent to the Chief of Appeals atthe taxpayer’s Tax Services Office or a Taxation Centre.

Then an appeals officer reviewsthe Notice of Objection and maycontact the taxpayer for additionalinformation. The appeals officer willmake recommendations to the Chiefof Appeals who makes the finaldecision about the item(s) at issue.

There are many cases where asettlement can be reached betweenthe taxpayer and appeals. For exam-ple, a taxpayer may have claimedmoving expenses in his return butthe CCRA may not have allowedthe full amount of the claim. Afterfiling a Notice of Objection andmaking various representations toappeals, a settlement may bereached at some figure between thetaxpayer’s initial claim and theCCRA’s amount. If the Notice ofObjection is accepted, in whole or in part, the taxpayer will receive

an appropriate Notice of Reassess-ment. If the Notice of Objectionis not accepted the taxpayer willreceive a Notice of Confirmation,stating the initial assessment orreassessment stands.

When an individual owes addi-tional tax as a result of an assessmentor reassessment, unless he or she is certain that the appeal will be suc-cessful, the tax should be paid imme-diately. Although the CCRA will suspend collection proceedings whilea Notice of Objection is outstand-ing, interest continues to accrue on the tax outstanding. This means,if a taxpayer is unsuccessful onappeal, not only will he or she have topay the additional tax, but also inter-est on the unpaid tax—accruing fromthe date the tax was due, generally,April 30. Interest owing to theCCRA can be very costly—the cur-rent prescribed rate is 6% and thisinterest is not tax-deductible.

If a taxpayer pays the additionaltax that has been (re)assessed by theCCRA, and ends up being success-ful on appeal of the amount in dis-pute, the CCRA will refund theadditional tax and pay interest fromthe date the amount was paid. Theinterest paid by the CCRA on over-payments of tax is computed usinga rate that is two percentage pointslower than the rate charged for

Here’s how to walk your clients through the objection process. By Gena Katz

DISPUTING ASSESSMENTS

TAX BREAK


BUSINESSYOUR

underpayments and the interestreceived is taxable.

Beyond the Notice of Objectionperiod, the CCRA has no obligationto accept any requests for adjust-ments made by taxpayers. However,in cases of errors or omissions, theCCRA will generally accept claimsthat go as far back as 1985, as longas they are adequately supported.

If a taxpayer is not satisfied withCCRA’s decision relating to theNotice of Objection he or she canappeal to the Tax Court of Canada inwriting. There are two avenues avail-able at the Tax Court; the informalprocedure, which is available whenamounts in dispute meet certain cri-teria, and the general procedure. Theinformal procedure has no associatedfiling fees and the appeal and related

judgment are dealt with quickly. If aneligible taxpayer does not specificallyrequest the informal procedure inhis/her appeal notice, the standardformal court procedure will apply.

If unsuccessful at the Tax Courtof Canada, a taxpayer can make a fur-ther appeal to the Federal Court ofAppeal. After that there is only oneadditional level of appeal—TheSupreme Court of Canada. However,the Supreme Court has discretion asto which appeals it will hear.

If a taxpayer simply wishes tomake changes to information in hisor her 2001 (or prior year) taxreturn—not in response to a CCRA(re)assessment, there is no need towait until an assessment is received,nor should the taxpayer file anamended tax return. CCRA prefersthat individual taxpayers who wish to

make changes to returns use formT1-ADJ (Adjustment Request),available at local tax services officesor on CCRA’s Web site. On this form the taxpayer must describe thenature of the change, the affected taxreturn line item(s) and the amountof change to the particular line item.To support the change, appropriatereceipts, statements or other relevantinformation must be included.

The adjustment requests shouldbe sent to the same taxation centrewhere the taxpayer filed the return.Adjustments relating to discretionarydeductions, such as depreciation, willgenerally only be accepted within thenormal objection period.

Gena Katz, CA, CFP, is a senior princi-pal with Ernst & Young’s National Tax Practice in Toronto.


being unrealistic, or can they have whatthey want with some good financialmanagement? How long are they will-ing to wait to reach a goal and how canI help make it happen for them in thespecified time? What are they spend-ing money on now that they’d be will-ing to give up or cut down to reachtheir goal? From the very start I can beasking the right questions and helpingthem to achieve their goals in a waythat’s comfortable for them. Withoutspending a lot of time, I gain greatinsight into their financial needs.

KEEP IT PERSONAL: Together wework towards the big goals such as kids’education, a house or retirement, andstill leave room for rewards and indul-gences along the way. I ask them to for-get about what other people are doing

and just focus on what’s important forthem and their family. For women thisis important because they know im-mediately that they’re being listened to.

The financial wish list is the great-est motivator I know. Clients won’tsave money or buy insurance justbecause it’s good for them. But if theyknow that by doing those things theycan retire in exactly seven years, or theycan put the new addition on the housein two years, they’ll be willing to giveup a few things that aren’t so impor-tant to them. And nothing makes anadvisor look more like a genius than amotivated client.

With a motivated client whosehopes and dreams you understand,you can get down to the business ofmaking the money work. Then youcan discuss items such as risk profile

and finding the appropriate productsand investments. Even if a womanopenly says, “You take charge ofinvesting my money,” you’ve been veryrespectful in having this dialogue first.She will have more confidence in you.

Women are twice as likely to givereferrals than men, which can mean bigrewards for you. When a womandecides to find an advisor, the firstthing she does is ask her friends abouttheirs. If those friends are happy, they’llgive glowing referrals. And if thoseglowing referrals are for your services,you’ll see more women at your door.

All you have to do is listen.

Diane McCurdy is president of Vancouver-based McCurdy Financial and author ofHow Much is Enough? (McGraw-HillRyerson)

JULY 200241

TOOLBOXContinued from page 15

BUSINESSYOUR

GUEST COLUMN

In my last column, I discussedhow to properly complete the KYCform. While this is a crucial step in the advisor/client relationship,maintaining updated KYC forms isjust as important. In many cases, theform dates back several years andtherefore, it is unlikely to reflect theclient’s present needs, concerns orobjectives. This results in confusionand a general lack of understandingof the client’s ultimate objectives. Allof this, in turn, results in unsuitablerecommendations.

If I went into most advisors’offices and reviewed a random sam-ple of two dozen client files, I canassure you that a significant numberof the files would not comply withregulations, industry practice, thefirm’s internal policies, and commonlaw requirements to “know theclient.” In some offices, I bet thatmore than 75% of the documenta-tion is inadequate.

Canadian courts have emphasizedthe importance of the advisor’s obli-gation to respect the golden rule ofknowing the client. The onus issquarely on you to ask the client forall relevant information.

It is also not prudent to rely solelyon a client’s simple oral confirma-tion of his or her understanding.The fact that you fear your clientmay be offended by the questionsdoes not absolve you from the duty

to conform to the golden rule. Onlythrough full inquiry can you obtainthe answers necessary to profession-ally fulfill your obligation.

Regulation doesn’t prescribespecifically how often the KYC mustbe updated. However, if the infor-mation no longer accurately reflectsthe client’s background, you will beseen to have failed to fulfill yourobligation. Update the KYC when-ever you become aware of clientchanges. To protect yourself, I sug-gest you update your forms at leastevery two years.

Here are some other problems withKYC forms that will likely result infurther investigation by a regulator.

Client’s copy differs from advisor’s. Some advisors are in thebad habit of not completing theKYC form with the client, or worse,asking the client to sign the KYCform before it is completed. This isa bad business practice that will leadto problems. If you don’t have proofthat the form was delivered to theclient after it was completed, any dis-crepancies will likely be decided inthe client’s favour.

Advisor never met client.When anexisting client opens an account in thename of a spouse, a parent or anadult child, you may have problemsproving that sufficient information

was obtained from the “new” clientor that the risks of the trades wereproperly explained to him or her.

Numbers not added accurately.Errors on the form will reflect badlyon the advisor and the investigatormay not close the file until the matter is investigated fully.

Go back and review all your files,and meet with each of your clientsto update each KYC form. But don’twait until the complaint is registeredto take steps to try to protect your-self; it will be too late. Wouldn’t youprefer the regulator to review theKYC form and the client accountstatements and immediately closethe file rather than institute a fullinvestigation?

Ellen Bessner is a lawyer in Toronto atGowling Lafleur Henderson. She practisesin the area of brokers’ liability and offerstraining to brokerage firms. The above isintended for a general audience and shouldnot be considered legal advice.

When you are faced with a client complaint, a regulator will look to theKYC form first, which is why maintaining updated files is crucial.

By Ellen J. Bessner

COMPLAINT EVASION

Advisor of the Year AwardsEntries are now being accepted

for the 4th annual Advisor of

the Year Awards. Nomination forms

can be found in this issue of

Advisor’s Edge and online at

www.advisor.ca. Deadline is August

16. For information, e-mail

[email protected].

Mark your calendar

ADVISOR’S EDGE44

THIS‘N’THATBy Andrew Rickard

Illu

stra

tion

by

Rus

s W

illm

s

MONKEYING AROUNDAt the turn of the last century,

E.J. Halley of Memphis,Tenn., inher-

ited a huge sum of money from his fos-

ter mother,and promptly began to drink

himself into an early grave. According

to Weird Wills & Eccentric LastWishes (Past Times),edited by Michelle

Lovric, when Halley died in 1910, he

left money in his will to sheriffs,

favourite baseball players and orphan-

ages, and also to those who had appar-

ently performed great services for

him during his last delirious days:

“To the nurse who kindly removed a

pink monkey from the foot of my bed,

$5,000. To the cook at the hospital

who removed snakes from my broth,

$5,000.” Needless to say, his relatives

contested the will.

IN MARKED BILLSIf you’ve ever received a dollar bill

marked with a “$ John Dough: It’s a

business doing pleasure” logo, it means

that bill has been through the hands of

a member of the Sex Workers Alliance

of Vancouver (SWAV). According to

their Web site, the SWAV wants to

show “banks and the government that

the sex trade is an important part of

[the Canadian] economy.”To get their

message into wider circulation SWAV

has created a self-inking stamp with

the clever slogan.

GRAPE INSURANCEThe property and casualty insurance

industry has finally developed a prod-

uct to put the oenophile’s mind at

ease. Wine-collection insurance not

only covers basic losses, such as

breakage and theft, but also odd situ-

ations, such as when bottles sponta-

neously pop their corks because of

a change in ambient temperature.

Premium policies will also pay off if

the bottles become worthless because,

say, firefighters hose down a wine cel-

lar during a house fire and the labels

peel off the soaked bottles. Recogniz-

ing that some will insist on taking

their liquid gold with them when they

travel, Chubb has even added world-

wide protection to their plan, “no

matter where you take your wines, they

are automatically covered.”

SHINING DECISIONSJoseph P. Kennedy was heavily

invested in the booming stock market

of the 1920s, until, legend has it, he

went to Wall Street to visit his broker,

JP Morgan, about a week before the

great crash of 1929. On his way, he

supposedly stopped to have his shoes

shined. While doing so, he asked the

shoeshine boy for the news on the

street.The boy, named Billy, suggested

that he buy US Steels and RCA stocks

because he had “heard they are hot.”

Shoes sparkling, Kennedy then con-

tinued on to JP Morgan’s offices,

where he liquidated all his holdings.

Returning home, his wife asked him

what he bought. “I sold everything,”

he said. “When the shoeshine boy

starts giving you tips, it is time to get

out of the market.” The Kennedy

dynasty was preserved from financial

ruin, and Joe’s son, John, would go on

to become U.S. President.

ADVISOR’S EDGE46

END QUOTE: XXX XXXXXX XXXXXXXXX

“The seven deadly sins... food, clothing, firing, rent, taxes,respectability and children. Nothing can lift those seven millstones from man’s neck but money; and the spirit cannotsoar until the millstones are lifted.

GEORGE BERNARD SHAW

canada’s magazine for the financial professional • … · 2019-10-04 · sharpen your listening...

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