AE01 OFC 12/02/2003 05:17 PM Page 1 SPECIAL INSIDE! no · Some client defection is inevitable, so...

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

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • JANUARY 2004 • WWW.ADVISOR.CA

SPECIAL

RRSP GUIDE

INSIDE!

NEW TAX LOSS RULES • KEEPING YOUR KEY PERSON

noplan?

GET ONE AND FAST.

A solid business plan is

the best way to ensure

your practice’s viability.

AE01_OFC 12/02/2003 05:17 PM

INSIDE EDGE

7 Breaking the ChainsIt’s time to overhaul regulations that make it tough for advisors tochange 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’sretirement income programs and Nick Murray on a rare opportunity for advisors.

TOOLBOX

17 Key to the BusinessProtect 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 goodbusiness plan? Follow these nine steps and watch your business goalsbecome 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 KatzWhen support payments are made through third parties, different taxrules apply.

33 Compliance Check with Ellen J. BessnerThe Financial Planners Standards Council’s practice standards are ablessing for the know-your-client process.

35 True Wealth with Thane StennerTrain clients to think about hedge funds as an idea, a way of thinkingabout how one should control risk and return in the portfolio. Here’show.

37 Marketing Frontlines with Dan RichardsSome client defection is inevitable, so put a prospecting plan in place to stay on stable footing.

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

January 2004 Volume 7, Number 1

17 KEY PERSON PROTECTION

RRSP SURVIVAL GUIDE

5

22 PLAN TO PROFIT

AE01_005 12/02/2003 05:20 PM Page 5

Advisors who have changed firmsknow from bitter experience what afrustrating process it can be. Whileswitching firms will always create cer-tain challenges, some of what hobblesadvisors is unnecessarily punitive.

Advisor mobility, or more accuratelythe lack thereof, is high on the list ofwhat ails the industry, according to BrianMallard, a veteran Saskatoon-based advi-sor and the current chair of Advocis.

At the Advisor Forum conferencesthis past fall, Mallard spoke on behalfof Advocis about a number of regula-tory issues—including the currentimpediments on advisors moving theirbooks of business to another firm.

“Under the current regulatory envi-ronment advisors have no right tochange affiliation without a great dealof difficulty and expense,” Mallard tolddelegates. “Advisors should have thesame right to select who they work with as any other Canadian. Regulationshouldn’t allow someone to be heldhostage like this.”

The problem can be summed up intwo words: dealer hindrance. Dealers areunderstandably motivated to keep theclient accounts and the revenue theygenerate. So they have little motivation

to facilitate the departing advisor’sefforts to take his clients with him.

Here’s the scenario. When an advisorleaves a firm, whether it’s on the MFDAor IDA platform, his registration lapsesuntil he re-registers via his new firm. Atthe same time, regulations stipulate thatevery account within a dealer firm musthave a representative assigned to it. Sonaturally the dealer will be quick to haveanother advisor contact the clients.While the departing advisor is betweenregistrations, he cannot provide anyadvice to his clients, although he cancertainly inform them of his leaving. Aslong as the advisor’s time in limbo isshort, say a few days, the inconvenienceto the departing advisor and his clientswill be minimal.

Unfortunately, it doesn’t always workout that way. Mallard knows of caseswhere the transfer and reapplicationprocess has taken up to three weeks.The IDA says it will process the paper-work in two days—but admits it’s up tothe dealer firm to send the informationin a timely fashion.

Advisors can also find themselvesbogged down by the internal policies ofthe firms from which they are leaving.Some of them layer on non-compete

and non-solicit clauses to the contractssigned by their reps. Yet these samefirms have no qualms about recruitingadvisors from other firms.

This all stems from the longstandingindustry debate about who “owns” theclient—a debate which rarely takes intoaccount the notion that perhaps clientsmight object to being “owned” in thefirst place. Instead, look at where therelationship exists. If the advisors areindeed providing the advice, then theyare also the ones who have the relation-ship with the clients. So clearly, it’s inthe interest of the client to allow themto quickly move with the departingadvisor—if that’s what they wish.

Mallard proposes a cooling-offperiod whereby the dealer does notappoint a new rep to the departingadvisor’s accounts for 30 days. Thiswould allow both the firm and advisorto contact the clients. Combine thatwith a fast-tracked termination and re-registration process, and voilà—a better served public and a lessrestricted advisor will result.

DARIN DIEHLEDITOR

[email protected]

INSIDEEDGEBREAKING THE CHAINSIt’s time to overhaul regulations that make it tough for advisors to change firms.

www.advisor.ca ADVISOR’S EDGE | JANUARY 2004 7

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

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

ADVISOR’S EDGEDeanne N. Gage, Managing Editor Wendi Phillips, Chief Copy Editor (416) 764-3803 (416) [email protected] [email protected] Avari, Assistant Editor Harvey Schachter(416) 764-3802, [email protected] Contributing EditorScot Blythe, Investments Editor Lisa Darwen, Production Manager(416) 764-3810, [email protected] (416) 764-3928, [email protected] Toth, Art Director Maggie Sicilia, Administrative Assistant(416) 764-3850, [email protected] (416) 764-3822, [email protected]

ADVISOR.CAJohn Craig, Managing Editor Steven Lamb, Reporter(416) 764-3811, [email protected] (416) 764-3961Opal Patel, Web Projects Editor [email protected](416) 764-3818, [email protected] Andrew Gregory, Web Production ManagerDoug Watt, News Editor (416) 764-3817(416) 764-3815, [email protected] [email protected]

OBJECTIF CONSEILLERYves Bonneau, Editor Marie-France Cardinal, Assistant Editor(514) 843-2142, [email protected] James Wagner, Art Designer

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■ Part three of our four-part RRSP Survival Guide series in the

Practice Zone’s “Special Report” section. January’s theme is

portfolio reconstruction and includes:

› Advice on turning portfolio realignment into client acquisition;

and

› A customizable template letter on importance of balanced

portfolios.

■ A multi-part feature on insurance and business owners in our

Product Zone.

■ Daily news coverage of the industry stories and issues you

need to know

■ Our latest insurance case study in the Product Zone

■ Sharing of opinions and knowledge in our online discussion

forum

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

AE01_008 12/02/2003 05:23 PM Page 8

LETTERSR.F.P. vs. CFP Re: “Are Advisors True Profes-sionals?” October 2003, page 58.

Maybe John De Goey’s problemis that he hangs around with thewrong people. I spent two days in Toronto at the Institute ofAdvanced Financial Planners(IAFP) symposium in November

with more than 100 extremely professional and committedregistered financial planners (R.F.P.). De Goey’s commentson professionalism may have validity on an industry-widebasis, but there has always been a core group of R.F.P.s whohave stood for all the things he laments.

The content and focus of the symposium emphasized this,as does the IAFP’s code of ethics and recently introducedProfessional Standards of Practice for R.F.P.s. I believe thesestandards are the most comprehensive for financial plannersin North America and will become the benchmark for a truly

professional financial planner in the future.I do concur with De Goey’s observation that the vast major-

ity of advisors are just salespeople using the concept of finan-cial planning as a prospecting tool. If clients are looking fora financial planner and are committed to doing comprehen-sive financial planning, they should be looking to work withan advisor holding an R.F.P., or someone directly supervisedby such an individual.

Doug Macdonald, MBA, CMA, R.F.P.Macdonald, Shymko & Company Ltd.Vancouver

TOP ADVISOR QUALITIES Re: “What It Takes,” October 2003, page 7.

I want to commend Darin Diehl for his October editorial.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 threequalities:• Quiet pride about their professionalism and constant

self-improvement; • True entrepreneurial zeal—projecting confidence and

integrity; and • The ability to be client-centric—as measured by the level

of adrenaline rush when a solution they have crafted makesa huge impact on a client’s life.You certainly nailed it in my opinion. Thanks.

John A. Page, CFP, R.F.P. Page & AssociatesMarkham, Ont.

I will forward this editorial on to our board of directors. Ilove the part about being “client-centric” and the fact thatyou cannot “fake” being it. Keep up the great insight and yourown passion for improving the quality of our industry. Maybethere is hope if we all take an active role in this!

Nancy Shewfelt, CIMWellington West Capital Inc.Surrey, B.C.

“The ADVISOR Group is part of Rogers Publishing, a division of Rogers Media Inc. Rogers Media Inc., a division of Rogers CommunicationsInc., (TSX: RCI.A and RCI.B; NYSE: RG) operates Rogers Broadcasting and Rogers Publishing. Rogers Broadcasting has 43 AM and FM radiostations across Canada. Television properties include Toronto multicultural television broadcasters CFMT (OMNI.1) and OMNI.2, televised andelectronic shopping service, the Shopping Channel, regional sports channel, Rogers Sportsnet and the management of three digital televisionservices. Rogers Publishing produces many well-known consumer magazines such as Maclean’s, Chatelaine, Flare, L’actualité and CanadianBusiness, and is the leading publisher of a number of trade publications. All media properties are integrated with their own popular Web sites.”

Darin Diehl, editor of The ADVISOR Group,

is pleased to announcethe promotion of

Doug Watt to news editorof Advisor.ca.

Doug has been a reporter with Advisor.ca for three yearscovering industry news. In his new role Doug will oversee the assignment and lineup of news for the Web site and dailye-mail bulletins. He will also work with managing editor John Craig to evolve and improve news content onAdvisor.ca.

Advisor.ca is part of The ADVISOR Group at RogersHealthcare & Financial Services Group. The ADVISOR Groupalso includes the award-winning magazines Advisor’s Edgeand Objectif Conseiller, and Advisor Forum, which organizesand stages numerous educational events for financial advisors.

AE01_010 12/02/2003 10:36 AM Page 10

IN

DU

ST

RY The CLU Institute is introducing a bridging program that

will allow experienced advisors to obtain the CLU desig-nation by writing a single exam.

The normal route to the CLU involves completion of theCFP program combined with three specialized courses. Thechallenge exam recognizes that many non-designated advisorshave acquired extensive skills and knowledge through hands-on career experience, says CLU Institute trustee Deborah Kraft.

“This will allow advisors who have many years of expe-rience in the industry, but who do not currently hold a pro-fessional designation, to effectively demonstrate their knowl-edge,” adds CLU Institute chair Kristan Birchard. “Our goalis to offer these veteran advisors a one-time opportunity toput their knowledge to the test and be recognized for thevaluable advice they offer their clients.”

Candidates must submit qualifying criteria, including rel-evant work experience and education programs, to write theexam. They must also be members of Advocis, which oper-ates in partnership with the CLU Institute.

The institute is offering optional prep courses in advanceof the first exam, scheduled for May 2004. The exam will “thoroughly test candidates on their knowledge of theconcepts taught in the CFP and CLU curricula,” the CLUInstitute said.

The CLU Institute will begin accepting applications forthe bridging program this month and the prep course willbegin in April. The last rewrite exam will be offered in Octo-ber. “Candidates will only have six months to participate inthis program,” says Terry Taylor, chief operating officer ofthe institute.

The exam will cost $500 and the prep course costs $295.There are currently 3,600 advisors in Canada with the CLUdesignation.

Advocis has been actively campaigning to change the present regulatory system in Canada so that designationslike the CLU become a requirement of advice-giving.

—Doug Watt

CHALLENGE THE CLU

FRONT

ENDLOADPeople, trends, events and analysis


Retirement ReservesCanadians had accumulated nearly

$1.15 trillion in the three main retirement programs by the end of 2001.

Source: Statistics Canada, November 2003

Cartoon by S

ue Dew

ar

1,400,000

Assets (in millions of dollars)

Public government plansRRSPsRegistered pension plans

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

1990 1992 1994 1996 1998 2000 2001

AE01_012-014 12/02/2003 05:40 PM Page 12


■ JANUARY 15 to 17, The Second World Critical

Illness Insurance Conference, Fairmont

Empress Hotel, Victoria, www.criticalinsurance.ca

■ JANUARY 19, 116th Toronto Board of Trade

Annual Dinner, Keynote: Michael Lee-Chin,

Sheraton Hotel, Toronto, www.bot.com

■ JANUARY 22 to 23, Finance for the

Non-Financial Manager, Toronto, www.epixtrain-

ing.com ■ JANUARY 22 to 23, Third National

Summit on Income Trusts, Hilton Hotel, Toronto,

www.canadianinstitute.com ■ FEBRUARY 23 to

24, 14th Annual Securities Super Conference,

Four Seasons Hotel, Toronto, www.canadianinsti-

tute.com ■ FEBRUARY 26 to 27, Canada/U.S.

Legal and Business Guide to Cross-Border

Financing, Metropolitan Hotel, Toronto,

www.canadianinstitute.com ■ MARCH 19,

2004 Ontario Congress, Sheraton Parkway

Conference Centre, Richmond Hill, Ont.,

www.advocis.ca ■ MARCH 21 to APRIL 2,

Annuity and Pension Conferences, Flamingo

Hotel, Las Vegas, www.limra.com/events

CA

LE

ND

AR

OF

EV

EN

TS

To submit an event, [email protected]

YOUDID

know?Women aged 25 to 64 contribute

about $10 billion to an RRSP. This

is up 8% from 1999, while men

contributed $16.5 billion, up .2%

SOURCE: STATISTICS CANADA, NOVEMBER 2003

2004:THE SWEET SPOT

he religious imagery of the title was

well suited, as author and business

coach Nick Murray delivered his lecture

Opportunism After the Apocalypse with

the zeal of a preacher in a revival tent.The

congregation at Advisor Forum in Toronto

in November soaked the sermon up in near

reverential silence.

“There are only two kinds of people in

the world:people with too much class to say

‘I told you so,’ and people like me,” said

Murray,an advisor favourite whose speeches

always attract large crowds.

Murray predicts that 2004 will be ripe

with opportunity and that advisors need to

actively pursue new clients before the mar-

kets instill complacency. “You will never

again find so many people, with so much

money, so consciously, actively desirous of

quality financial advice and so disappointed

with their previous advisor,” he says.

“Especially if their previous advisor was

themselves.”

He cautions that 2004 is only about

1,600 professional hours long,warning advi-

sors that the windows of opportunity will

start to close quickly. It will only take one

year of decent market returns, let alone

outstanding returns, he adds, for investor

complacency to creep back.

And one step behind complacency is what

Murray calls “the foul fiend,”do-it-yourself

investing.The year 2004 will be the “sweet

spot” for the advisor industry, the interim

between the horror and complacency.“Peo-

ple will still be chastened enough by the

experience of the past four or five years, to

be willing to listen to reason,to be willing to

listen to good counsel and to follow it.”

Murray says the reasons for a household's

financial success can be broken down into

55% planning, 30% asset allocation and

15% avoiding big mistakes, like ignoring the

advice of their advisor.

“All the rest is selection and timing,” he

jokes. “And what do you spend a third or

a half of your time working on? Stop it.

You can’t control it and it doesn’t contribute

anything.”

Murray says a financial plan reminds

the clients they are working toward a goal

and gives the advisor a document to point

to when the client starts to stray from the

plan. “My experience with people with

plans is that they can be induced to con-

tinue to act on the plan,” Murray says.

“Financial success is almost purely a

function of acting as opposed to reacting.

When I have a plan and I continue to act

on it through my life ... I achieve all my

financial goals.”

Murray says asset allocation is also

important,but that most people use the term

as a justification for market timing. Since

a proper financial plan is not only genera-

tional, but trans-generational, asset alloca-

tion under that plan should also be based on

an extremely long time horizon. He says

there is only one asset class that can his-

torically be shown to provide the returns

needed to offset this erosion of purchasing

power.It might make clients uncomfortable,

but advisors need to explain the real risk of

outliving their money.

“Tell your countrymen, without ceasing,

that if they think in retirement, that bonds

are safe and stocks are risky, it’s the other

way around,” he says.“How would you fail

to achieve all your long-term financial goals

in an asset class that’s been compounding

at 10% to 12% since Lindbergh flew the

Atlantic?” —Steven Lamb

I N D U S T R Y

T

AE01_012-014 12/02/2003 05:40 PM Page 13

FRONTENDLOAD

■ JOHN MOUNTAIN,IFIC’s vice-president ofregulation, is on a one-year leave of absenceeffective this month.His position will befilled by IFIC’s cur-rent vice-president ofcorporate affairs and general counsel, JOHN

MURRAY. ■ LESLIE BYBERG has left IFIC assenior legal counsel and has beenappointed manager of investmentfunds for the Ontario SecuritiesCommission.

■ DAVID SCANDIFFIO

left MRS as vice-presi-dent of marketing andhas been appointedpresident of Industrial

Alliance funds. ■ FRANK SWITZER, formerly withthe media relations division of theOntario Securities Commission, has joined Scotiabank as director ofpublic affairs.■ CLAUDE HUOT has been appointedas a director of the Canada DepositInsurance Corporation.■ JAN HOPKINS, former CNNanchor, has joined the Citigroup Pri-vate Bank as managing director andhead of client communication.

■ ROBERT S. BELL, president of R.S.Bell & Associates Ltd., and WilliamJ. Smith, president of W.J. SmithCapital Management Inc., are joiningforces to offer investment counsel andadvisory services.

FUND NEWS

■ INVESTORS GROUP’s InvestorsCanadian Money Market Fund,Investors U.S. Money Market Fundand Investors Canadian High YieldMoney Market Fund now include a deferred sales charge purchaseoption. ■ AIM TRIMARK has replaced KikiDelaney of C.A. Delaney CapitalManagement as manager of the Tri-mark Enterprise Fund. The fund willbe managed by Ian Hardacre, cur-rently manager of Trimark CanadianFund and Trimark Select BalancedFund.■ MACKENZIE FINANCIAL is makingthe Mackenzie Cundill CanadianSecurity Fund, Mackenzie UniversalU.S. Growth Leaders Fund, Macken-zie Maxxum Dividend Fund andMackenzie Maxxum CanadianEquity Growth Fund available in itstax-efficient Capital Class structure.The funds will also remain availablein their regular structure.

&MOVERS SHAKERS

John Murray

David Scandiffio

John Mountain

oth the number of Canadians reporting investment income and the amount ofincome they received plunged in 2002, according to Statistics Canada.

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 investmentsfell 12.1% to $29.5 billion in 2002 from $33.6 billion in 2001. The median invest-ment income held steady at $500.

ST

AT

IS

TI

CS

5555....5555million members were participating

in 13,861 registered pension

plans as of January 2002.*

$$$$222299993333billion had been invested in RRSPs

at the end of 2001.*

$$$$66665555billion had been invested in

CPP and QPP at the end of 2001.*

2222....5555million female workers belonged

to a registered pension plan

at the end of 2001.*

9999%%%%

of tax filers used 95% or more

of their available RRSP room in

2001.*

44440000%%%%

of tax filers using most of

their RRSP room had an income

of $80,000 or more.*

SOURCE: STATISTICS CANADA, NOVEMBER 2003


Investment income divesB

AE01_012-014 12/04/2003 03:08 PM Page 14


Victor has been running his ownplumbing company for 25 years. In fact, hestarted his company at about the same timehis son, Christopher, was born. Now 60,Victor is thinking about retirement andwants Christopher to take a more active rolein the business. However, his businesswouldn’t have been as successful if hisemployee, Jim, hadn’t been part of the team.Losing Jim at this time of transition wouldbe a terrible blow to the company. Victorhas come to you, his advisor, for suggestionsabout how to keep this key person in thecompany while his son gets more involved.

When meeting with Victor, you explainthree 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;

and • strategies to make sure Jim does not feel threatened by

Chris’s arrival in the business.

What is a key person?A key person is an individual with unique skills, relationshipsor experience who makes a substantial contribution to thesuccess of a business. This may be a person who has grownwith the company into a senior management position. Theperson is key if the business will suffer a substantial loss ofincome, increase its risk exposure or lose valuable time if thisindividual left the business for any reason.

Yet, in a family business situation, this individual is oftencaught between their loyalty to the senior generation familymember who may be retiring and the younger generation fam-ily member who may be set on “changing things” once he is

established in his new leadership role.

What are the risks to the client and his company?In the event Jim was to depart from the business, due to death,disability or illness, a cost will be incurred by the company.Jim may have a unique ability to price out certain jobs accu-rately and efficiently, to work on specific client relationshipsor to close certain sales opportunities. If a job is lost or ispriced incorrectly, the impact to the business could be sub-stantial. The company may also have to hire temporary helpto pick up some of the workload or employ a nationwidesearch firm to find a replacement.

What would be the real cost to the business in the eventthat Jim passed away unexpectedly or became disabled? Agood rule of thumb is to take Jim’s annual wages and multi-ply by five. If he’s earning $100,000 annually, for example,

Protect your client’s small business succession plan with enhanced insurance coverage that can reward and retain key senior staff.

KEY TO THE BUSINESS

Illu

stra

tion

by

Chr

isti

ane

Bea

ureg

ard

TOOLBOXBy Douglas V. Nelson

Continued on page 19

Strategies for advisors from advisors

AE01_017-021 12/03/2003 10:47 AM Page 17

odds are that the company will need tospend one to two times this amount toreplace him. Based on this level ofincome, the company may also be atrisk to the tune of three times his salaryin lost sales, mistakes or mispricedquotes.

Consideration #1: Basic strategiesto protect the business.Victor could consider purchasing life,disability and critical illness insuranceas financial tools that will providemoney in the event Jim passed away, wasunable to work due to an accident or ill-ness and/or suffered from a critical ill-ness such as a heart attack, stroke orcancer. All of these insurance planswould be owned by the company, forthe benefit of the company. The pre-miums are paid with after-tax corporatedollars.

If Jim were to suddenly become dis-abled, the income received from the dis-ability plan would be received by thecompany tax-free. The company wouldtypically use this money to fund theongoing salary of the disabled keyemployee. This would reduce the finan-cial risk to the business and/or free upcompany cash to find a replacement.The money received by the employeewould be taxable as income.

Consideration #2: Enhanced strate-gies to tie the key person to the business.Victor may also seek out enhanced per-sonal security benefits for Jim to help tiehim to the business. These benefit pack-ages could include enhanced life, dis-ability, critical illness and long-term careinsurance as well as other income andbonus strategies. Jim will recognize thevalue he could receive from these bene-fits and thus feel it is important to staywith the business.

For example, a key employee with anabove-average income may be under-insured for disability insurance by theirgroup insurance program. To enhancebenefits for a specific “class” ofemployees, one approach is to establisha “wage loss replacement program.” Aslong as all individuals in the class haveaccess to the plan, and so long as theclass is not specific to the shareholders,the premiums may be tax-deductible tothe company. The individual disabilityplan would be owned by the keyemployee so he gets all the benefitsdirectly. He would be taxed on the ben-efits but the premium is not a taxablebenefit to the individual.

Another approach would be to estab-lish a critical illness plan in the samemanner, with three employees of thesame class, using a “group accident and

sickness plan” structure. The insuranceproduct would be owned by the indi-vidual so the benefits would be tax- freeto the employee when received. The pre-miums would be paid by the companyand therefore tax-deductible. A “privatehealth services plan” could be set up inthe same manner using long-term careinsurance.

Finally, a group accident and sicknessplan structure could also be used to cre-ate a combined benefit package using asingle insurance product. Today, thereis a product available whereby life, dis-ability, critical illness and long-termcare insurance can be combined on topof a universal life insurance chassis. Ina situation where the company is pay-ing a bonus to the key employee, theportion of the bonus received by theemployee that relates to personal dis-ability, critical illness and long-termcare insurance premiums would not betaxable to them on receipt.

For example, assuming Jim receives abonus of $25,000, and $10,000 of thisamount was used by the company to fundthe annual premiums for the living ben-efits, the net bonus of $15,000 would betaxable as income to Jim; the $10,000related to the living benefits premiumswould not. This strategy creates a fully deductible benefit to the company

Continued from page 17


TOOLBOX

AE01_017-021 12/03/2003 05:53 PM Page 19

(i.e., the bonus) and a partially taxablebonus to Jim. Jim would own and be thebeneficiary of the insurance product.

At this point in a meeting with Vic-tor, stress how important it is to con-sider the unique abilities, desires and ageof the key person. Recommend that thebest approach is to discuss these alter-natives openly with Jim so sincerity isclearly communicated.

Genuine interest in their personalwell-being will probably be the greatestbenefit you can provide to your key per-son(s). However, emphasize to Victorthat this discussion should includesome points regarding Chris’s involve-ment in the business.

Consideration #3: Strategies to usewhen the key person is trappedbetween two generations.You explain to Victor that it is commonfor a key person to feel trapped betweentheir loyalty to the senior generationand anxiousness about the plans of theyounger generation. The incoming generation may be motivated to makeinnovative changes to the company,while the key employee may feel thechanges are inappropriate. Unfortu-nately, in many situations a key personmay either undermine the new leader orleave for another job. It is crucial for the

younger generation to find ways towork with these key employees so thateveryone benefits.

For example, recommend to Victorthat when Chris enters the business, heshould work in a position that is basedon his skills and merit, rather than asupervisory position that may be con-strued by others as given to Chrisbecause he has the “right last name.” Itwill be necessary for Chris to establishhis own unique relationships and buildthe trust and confidence of the peoplearound him. Building confidence meanshaving and encouraging open and hon-est communication, being consistentand being dependable.

Over time, however, give Chris theopportunity to develop and lead a proj-ect on his own and build it in his ownimage. This will give him the opportu-nity to demonstrate his ability to meetdeadlines and overcome obstacles.Should Chris fail at this task, the expe-rience will demonstrate to Jim and oth-ers Chris’s ability to admit mistakes andbounce back to find solutions. Thesereal-life experiences will do a tremen-dous amount to build credibilitybetween Chris, Jim and other key sen-ior people.

Based on your professional guidance,Victor has decided to:• protect the cash flow of the business

by insuring Jim for life, disability andcritical illness insurance;

• meet with Jim to discuss his ongoingrole in the business and ways inwhich Victor can not only encouragehim to commit to the long-termgrowth of the business but to also bea mentor to Chris; and

• spend time with Chris assessing hiscurrent abilities and mapping out athree-year career path.By acting on these three steps, Victor

was able to ensure that the business wasprotected against the risk that Jimwould die, become disabled or suffer acritical illness. Victor can also be assuredthat Jim was part of the process ofdeveloping an enhanced benefits pro-gram and that both Jim and Chris willwork together to build the future visionof the company.

As years passed since these discus-sions, Jim and Chris have had their dis-agreements. However, because of theopen discussions about a career path foreach of them, Victor was able todevelop a strong new leadership teamthat ultimately helped him retire incomfort.

Douglas V. Nelson, CFP, CLU, is a partner ofNelson Financial Consultants based in Winnipegand author of Advising Family Businesses(The Knowledge Bureau).


TOOLBOX

AE01_017-021 12/03/2003 10:48 AM Page 21

Cover Story / Practice Managementnoplan?

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


AE01_022-027 12/02/2003 05:52 PM Page 22


AS AN ACCOUNTANT, I have theprivilege of working with a number offinancial advisors who refer clients to me. From time to time, an advisor willask me to do a business plan for a client.When I, in turn, ask if the advisor has abusiness plan, the answer is usually “no.”

All advisors need business plans,period, since they are in the business ofmanaging their client bases. Just becausethe advisor doesn’t need to find capitalor source product from China doesn’tmean it’s any less of a business.

A business plan goes beyond simplyarticulating your goals. It’s a written sum-mary of your business, where it is goingand how it is going to get there. It con-tains information from the past and pres-ent and expectations for the future. Italso provides an early “reality check”—a way to minimize surprises in the futureand to handle the stumbling blocks now.

Without a business plan, it’s difficultto reach your goals. Instead of taking the straightest path, you’ll take the sce-nic route. Worse, you won’t realize youhave strayed from the path. You maymiss an opportunity that would havemoved you ahead of the game.

By writing down your plan, you

can pinpoint where things go wrong, and because you have a step-by-stepapproach, correcting an error may justmean taking one step back versus start-ing from scratch.

The plan should be written by you.Who else knows your business, your pri-orities, your goals, your strengths andweaknesses better than you? Only you cantake responsibility for following (or fail-ing to follow) the plan. Third-partyauthors of business plans, such asaccountants, have preconceived notions.They may be too optimistic or morelikely pessimistic. However, once you fin-ished drafting your plan, consider hav-ing a business advisor critique it. Theycan point out matters that may have beenoverlooked, are unclear or have beenglossed over.

A proper business plan is made up ofnine standard components.


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BIZ PLAN ASSISTANCEHere are some URLs that provide more relief on how to

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?AE01_022-027 12/04/2003 10:59 AM Page 23


1.Your Mission StatementWrite down a sentence or two thatdescribes what you do (or what you aregoing to do) and how you are differentfrom others. This is the shortest part of your business plan but the most difficult to write. Marketers call this“branding yourself.”What message andimage do you want to communicate?

Your mission statement may becomeyour opening line in meeting a prospec-tive client.

Your personal mission statement explains how you are going to undertakethe mission and how you will differfrom your competitors.

2.Your BackgroundWho are you and what have youaccomplished? Better, what have youdone lately that supports you being afinancial advisor and how it will helpyou in the future? Consider:• your specific strengths and weaknesses;• what you have accomplished to date;• your experience, education and train-

ing as a financial advisor;• how you focus on sales and/or client

relationship management; and• your experience in marketing yourself.

3.Your DirectionSimply put, what are your specific goalsin being a financial advisor? Your goalsneed to be challenging yet realistic—and measurable. Ask yourself:• Why the financial advisory business?• What are my short-term, mid-term

and long-term goals?• What will be my area of concentra-

tion? (financial planning, securities,insurance, etc.)

• What is the desired value of my

book at the end of the coming year?What is my target for growth? Whatdo I need to put in place to reachthese goals?

• What are my client target groups(e.g., business owners, families, etc.)?

• Are my goals realistic?• Is there an industry or firm guideline

I can compare myself to?• What is my most critical success fac-

tor (e.g., technical skills, marketing,client service, etc.)?

• What is my most critical failure fac-tor (e.g., rejection, intimidation, etc.)?

• Do I accept that people will notbreak down my door to see me justbecause I think I have exceptionalinvestment/insurance knowledge?

• What constraints do I have?• What obstacles do I need to get over?• How can I be the best I can be? • Do I have a contingency plan? (Note:

This is not a sign of weakness orplanned failure, but a sign of reality.)

4.Your Target MarketDescribe your target market, why it isyour target market and what is the out-look for this market (current, short,mid or long term). Be wary of genericcomments that we all could read in anewspaper (baby boomers inheriting,less kids per family being born, etc.) andfocus on your specifics (you are from awealthy graduating class, etc.)

Also describe your ultimate clientand why they would be your ultimateclient. Then, as a reality check, describethe next best client.

5. MarketingHow do you intend to get your nameout there, attract a client and retain thatclient? What is your marketing strategy?

Consider the following.• Compensation: There are different

ways to be compensated, includingcharging commissions, fees or a com-bination of both. What control doyou have over pricing? Would you becharging hourly and how much? Howare you going to communicate yourpricing policy to your clients andhow will you deal with objectionsclients will have about your compen-sation?

• Education: You need to keepexpanding your professional knowl-edge—how will you keep up with thenew products and new regulatory andtax laws? Will you be working towardadditional designations or degrees?Consider how much time you willdedicate to readings and continuingeducation. If you need additionalexpertise, who will you turn to?

• Serving clients: Great service is agiven in a client’s mind. Will you meetwith them in the office, visit them athome, limit them to phone conversa-tions or exchange e-mails? How oftenwill you be in contact? How quicklywill you return phone calls or e-mails?How often will you review anaccount? Is there a special treatmentfor ultimate clients? What tasks willyou handle personally and what willyou delegate to your assistant?

• Marketing: How much money andtime per day will you dedicate tomarketing? Will you purchase a blockof clients? After you have contactedall your relatives and friends, thenwhat? What types of advertising andpromotional ideas do you have? Willyou do bulk mailing, article writing,cold calling, write articles or distrib-ute newsletters?


AE01_022-027 12/02/2003 05:52 PM Page 24

What will be your daily routine?Morning: Read paper? Networkingbreakfast club? Answer e-mails? Follow-up phone calls? Cold calls—how many?

Afternoon: Meet clients? Meetprospective clients? What will you do atlunch? Cold calls—how many?

Evening: More reading? Writenewsletters? Seminars? Meet clients?Home visits? Service club meeting?Recreational sports? Evening network-ing club? Cold calls—how many?

6.Your CompetitionDetail your competitive advantage andhow you will maintain or acquire it. Askyourself:• Who are my current and expected

competitors?• Specifically, how will I differentiate

myself ? How will I communicatethat I am different?

• What puts me ahead of the others inreaching and securing clients in mytarget market?

7. Support StaffThe growth of your business willrequire help. The most successful peo-ple in business have a great skill—theydelegate well and delegate often. So howdo you find the right support staff ? • Write a detailed job description

for the position. You need to be ableto communicate your requirements.

• Be involved in the interviewprocess. If time is tight, you can hirea recruiter or use a hiring agency.Use the recruiters to narrow downthe number of applicants but thefinal decision is up to you. In theend, you are the one who will beworking with and relying on the newemployee.

• Design an orientation program toevaluate the abilities of the assistant.This will benefit even the most experienced assistant.

• Be patient. Take your time to findthe person you want, not just whohappens to be available.

• Relate your staffing needs to yourbusiness growth expectations. You’llhave to figure out how many assis-tants you think you will need,whether they should be at differentexperience levels and how the respon-sibilities should be shared.The assistant will only become what

you allow him or her to become. Makethe commitment to orient, educate andintegrate your assistant into the prac-tice. Without commitment, expect toaccept a lower level of performancethan you desire.

8.Your Personal FinancesHow much money is realistic for you toearn? How much money do you need tolive on? Ask yourself:

• When do I come off an employer’ssalary and really “go on my own”?

• What is my break-even point?• Do I have other sources of cash? • Do I have an “emergency fund” for

the slower times?• Do I have access to a line of credit?• Have I arranged my financial affairs

to ensure any interest I incur is taxdeductible?

• Am I looking after my own retire-ment savings?

9.Your Executive Summary Sum up your whole business plan—inone paragraph. The executive summaryhighlights the major points of yourbusiness plan—your purpose, a cleardescription of your business, an analy-sis of the market and the competitiveadvantage that will bring you success.Ask yourself:• Is my summary too technical or does

it have too much jargon?• Is it attractive enough for the reader

to continue reading?• Does it communicate my enthusiasm?• Does it really communicate me?

A business plan is like a road map.It provides you with a level of confi-dence that you know where you aregoing and how to get there. However,one usually looks at a road map morethan once during a trip. The same goesfor a business plan. It needs to belooked at continually to confirm you areon the right track.

Brian J. Quinlan, CA, CFP, TEP, is a partner

at Campbell Lawless Professional Corporation,

Chartered Accountants.


A business plan is like a road map. Itprovides you with a level of confidencethat you know where you are going and how to get there.

More online


AE01_022-027 12/02/2003 05:52 PM Page 25

PART 3 OF 4: PORTFOLIO CONSTRUCTIONJANUARY 2004

A S p e c i a l S u p p l e m e n t o f

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

2 Creating a process for selecting funds

8 Tuition transfer

10 TPSPs: changing thelandscape?

ALSO INSIDE

Tune-up

AE01_SOFC 12/02/2003 05:37 PM Page s1

uilding powerful and well-performing portfolios is a keycomponent of your overallservices to your clients. It’s

actually the groundwork that allows advisorsto build their businesses on solid ground to weather the market cycle through highsand lows.

But how do you actually go about select-ing portfolio components, particularlymutual funds?

According to The ADVISOR Group’ssecond Annual Dollars & Sense Survey, 80% ofadvisors use a fund’s track record as theirselection criterion. Seventy-three per centsee investment style as another importantparameter, while the fund’s manager scoredhighly with 57% of surveyed Canadian advisors.

At the same time, though, advisors are under pressureto increase their business. The same survey has shown that an advisor’s greatest challenges are attracting newclients, time management, client fear of investing and client servicing.

In other words, you as an advisor not only feel huge pres-sure to increase your business, and be efficient at it, you also need to address client fears and questions, andstreamline the communications that this requires. So what’s

a good advisor to do? Efficient practice management needsto be based on methodologies that add value. In your jour-ney to success, it’s not possible for you to dwell on any spe-cific point, so you need to be consistent and purposefulabout your business processes.

Value-Added DocumentsOne of the most value-adding items in portfolio managementis the investment policy statement (IPS). Although obvious,it’s surprising how few advisors use these with their clients.

RRSP Survival Guide / January 20042

Behindscenes

Apply a consistent, scientific methodology when building aportfolio for clients. By Pierre Saint-Laurent

the

B

Illu

stra

tion

by

Ott

o S

tein

inge

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AE01_S002-S010 12/02/2003 06:16 PM Page s2

RRSP Survival Guide / January 2004 3

An IPS is a well thought-out and systematic process whichevidences the client’s characteristics: investment horizon, liq-uidity preference, investment knowledge, risk tolerance,favoured or off-limits asset classes or investments and the like.

Although know-your-client forms fulfill an advisor’scompliance requirements, they typically fall short of evi-dencing investment needs—that is, what the client shouldactually have in her portfolio (what asset classes, and ulti-mately what products). I’m talking about the real thing:selecting between stocks and bonds and between differentfunds, in a consistent fashion. The benefits of using an IPS?The client sees the plan (and hence the value added by you)and more important, the client is proactive and can anticipate constructively any market downturn, as has beendiscussed previously with the advisor.

Building the PortfolioSo you’ve assessed your client’s needs and devised the right allocation among different asset classes. The time hascome to select the actual building blocks of the portfolio:the funds.

How can you optimize this part of the process? Clearly,going for the brand-name funds is a huge time-saver. Butit’s only one way of proceeding and it could prevent youfrom accessing excellent products that may be more appro-priate for your client. In fact, being systematic about fundselection entails a bit of analysis. Here are some ideas:

❶ Use a good fund database. Ones to keep in mindcome from Morningstar Canada, GlobeFund or a sim-ilar comprehensive source. Make sure you have access toModern Portfolio Theory items such as Sharpe ratios.

❷ Crunch the numbers. Look closely at the track record:Is it at least three years long (a necessary condition toobtain statistically meaningful data, such as standarddeviations, Sharpe and Treynor ratios, and the like)? Ifso, sort funds according to different metrics, with noallegiance to brand name. If not, have a good reason toretain this fund without any metrics. Also, use calendar-year data to gain a sense of real-world fund behaviour.

(Compounding tends to bury return and risk eventsthrough averaging.)

❸ Look at style. Narrow Canadian markets make it diffi-cult to remain style-consistent. So look for consistencyin the manager’s top 10 list, validate the manager’sapproach and look at the evolution of asset-holdingthrough time. The pattern that emerges will tell you if themanager is consistent in his investment style. Don’t justlook at banner years from the fund. Check to see ifthe manager is doing what’s expected (e.g., a small-capmanager remaining focused on that market segment).

❹ Beware of correlations. Although individual fundcorrelations with a market index are widely available,fund correlations with an investor’s specific portfoliomay not be. Ask yourself, “When I add a new fund tothe account, what return-risk effect is this triggering?”

➎ Create a peer group for each asset class. Withinthe database, and according to your fund sorting, cre-ate a short list of funds that are up to your standards.And maintain the list: you’ll need substitutes andreplacements later, plus be able to justify fund choicesas you move forward. Beware of bumping off funds forone spurious piece of data. Look at the bigger pictureof risk-adjusted returns, volatility and its role withinthe portfolio.

➏ Revisit your short list periodically. Add soft knowl-edge (e.g., your personal appreciation of the manager)to the process through notes or your own template.

❼ Hire and fire managers. They’re there to help yougrow your business—not the other way around. So askyourself, “What has this manager done for me lately?”and then be ready to substitute superior players throughyour short list.

Pierre Saint-Laurent, M.Sc., CFA, is the president of AssetCounsel [email protected]

Going only for the brand-name funds could prevent you from accessing excellent products

that may be more appropriate for your client.( )

AE01_S002-S010 12/02/2003 06:16 PM Page s3

ith financial mar-kets apparently outof the woods aftermore than a halfyear of positive

returns, many investors coming out of the woodwork are facing myriad problems that only a bear marketcould cause.

Whether it’s an overweighting inbonds because they became too scaredto hold equities or an overweightingin equities because they felt the mar-ket couldn’t possibly go any lower,many advisors are finding someclients’ portfolios are in serious needof a tune-up.

Gord Sherven, an advisor inWellington West Capital’s Calgaryoffice, says many clients have main-tained their pre-bubble-bursting assetallocation through the last four yearsin the belief that the bull market wasmerely on a hiatus for a few months.And then a few months more.

He says an obsession with aggres-

sion has resulted in many people near-ing retirement with a portfolio make-up that would be more appropriatefor their children or even grandchil-dren, in the range of 85% equitiesand 15% fixed income. “If I factor ina 6% annual rate of return for theportfolio, I can show clients they don’tneed to be 85% in equities,” heexplains. “It’s very achievable with a60% equities, 40% fixed incomesplit. The clients will have a greaterpeace of mind knowing there’s moredownside protection.”

So, Sherven is reviewing all of hisclients’ current portfolios, checking thattheir goals and objectives are still thesame, and whether there have been anysignificant changes in their situations.But, he says, if you ask clients theywouldn’t be able to tell you what theirrisk tolerance is. “We are reviewingtheir risk tolerance, and asking ‘Is thisstill where you want to be?’ Then weadjust accordingly. It’s the kind of thingthat should be done each year,” he says.

Sherven just came over to Welling-ton West from BMO Nesbitt Burnslast summer and says discussions aboutthe merits of joining the new firm pres-ent a prime opportunity to revisit theirclients’ portfolio breakdown.

On the flip side, Leigh Cunning-ham, a vice-president at RBC Domin-ion Securities in Winnipeg, says it’squite common for retired or soon-to-be retired investors to consider thebond market as an alternative given thelength of the bear market. While arebalancing into bonds would havemade sense during the bear market, itcan prove problematic for people whonow think this one vehicle is the onlyanswer, particularly with interest ratesat 45-year lows.

“In a proper portfolio, bondsshould always have some representation,even in the past bull market,” Cun-ningham explains. “They should not,however, be the entire portfolio.Investors have preconceived notions.Because they’re now hearing that stocks


Portfoliotune-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

(

w

)

AE01_S002-S010 12/02/2003 06:16 PM Page s4


are bad and bonds are good, they’reassuming bonds to be the only solu-tion.”

Cunningham adds it’s the duty ofadvisors everywhere to counsel clientson the risks of using one type ofinvestment even if it offers them theability to sleep. “It is not my intentionto disrupt their pillow factor but it ismy intention, in fact, my responsibil-ity, to educate my clients as to the risksassociated with what they believe to bethe perfect solution,” she says, addingthat she finds it perplexing that manyinvestors are now so conservative thatthey are unwilling to consider any

investment except one which comeswith a guarantee. “They were willingto take the risk in a crazed bull mar-ket. But now, having been burnt, theyno longer want to accept risk and arelooking to an investment they believeto be the port in the storm.”

Cunningham notes that the conse-quences can be serious particularly for

investors who have entered the RRIFzone and are required by law to with-draw a certain percentage of theirfund each year. If they have become soaverse to equities that they’ve put themajority of their portfolio in bonds,they are liable to spend their principalmuch faster than they might other-wise. “If they’re earning 4% on aportfolio made up predominantly ofbonds and they have to take out 7%annually, where does the differencecome from?” she asks. “It comes fromtheir own principal and they’re forcedto spend their own money sooner.We’re trying to keep that at bay.”

Brad Rice, an investment advisorand executive vice-president of sales atRice Financial Group in Winnipeg,says many of his rural clients wouldgladly trade for such problems. Mostof his clients live in the Brandon area,90 minutes east of the Manitoba-Saskatchewan border, and have expe-rienced an unenviable financial dou-

ble-whammy of late. Not only havetheir portfolios taken a huge hit but most of them are in the farmingbusiness and have seen their incomessideswiped by mad cow disease,drought and flooding, depending on their location. “Whereas (urban)clients have cash flow and can keepaveraging into the markets, (farmerclients) can’t because their cash flowisn’t there,” he explains. “Some ofthem are being forced to take moneyout of their RRSP to subsidize theirincome or to keep their farm going.”

Rice believes there’s no use hidingfrom the facts so he’s been completelyupfront with his clients about trying tomake the best of a bad situation. First,he says he looks to improve their cashflow management. Then he’ll examinewhether it makes sense to restructuretheir existing debt and then which assetsshould be sold first to generate theincome they need. Generally, fixedincome instruments are the first on theselling block, giving downtrodden equi-ties extra time to recover on the beliefthat the worst is over, he explains. “It’snot a fun time dealing with theseclients, they are difficult meetings,” hesays, noting the situation is the samewith clients in other struggling indus-tries, such as manufacturing.

Rice says another scenario he’s run-ning into lately is older, primarily fixedincome clients whose cash positionshave become inflated but they’re reti-cent to invest in bonds when interestrates are so low. Instead, they’ve lefttheir cash in savings accounts ormoney market funds while they waitfor the Bank of Canada to tightenmoney supply and raise rates. Thismay have been a passable strategy inthe short term but some of them havebeen sticking to it for more than three

“You’ve got to say to clients, ‘There is risk in being

too conservative.’”( )Brad Rice, investment advisor, Winnipeg

AE01_S002-S010 12/02/2003 06:17 PM Page s5


years now, he says, and it’s time to getoff the sidelines.

Equities are out of the question formost of them so he’s trying to coaxthem back with products such aslinked notes which provide both aprincipal guarantee plus some expo-sure to the markets. “You’ve got to sayto clients, ‘How long are you going tostay here? You need to generateincome. We did your planning assum-ing a 6% or 7% return but you’re sit-ting on a lot of cash now earning nextto nothing. It’s impacting your nestegg and your ability to generateincome in the future.’There is risk inbeing too conservative,” he explains.

There is also more risk in being inthe income-streaming stage during amarket downturn, says Daryl Dia-mond, president of Diamond Retire-ment Planning in Winnipeg. He triesto provide income to clients by cullingprofits in stocks but he’s also had tocollapse bond holdings to keep someclients flush from month to month.“We’ve tried to give the equity posi-tions some chance to heal,” he explains.“The more we have in fixed income ina portfolio, given current yields, theharder that remaining equity portionhas to work to give the portfolio yieldthat you want.”

He notes investors who broke evenduring the past three years but with-drew 7% annually are down 21%since 2000. And somebody who lost7% annually and withdrew an equalamount has used up a whopping 40%of their retirement savings after justthree years.

Diamond says just sticking to thebasics is often the best strategy. “Tenyears ago, we had Canadian bondfunds, money market funds, Cana-dian equity funds, U.S. equity funds

and balanced funds,” he observes.“It’s pretty tough to mess clients upwith that. As advisors, we got caughtup in return being king as opposedto capital preservation. We wereadvising going into science and techfunds, Far East funds, emerging mar-kets, all to say we could provide a bet-ter return than the advisor down thestreet,” he says. “Many advisors andclients lost sight of the risk factorand many advisors were pushed byclients to do so.”

Jim Rogers, a senior advisor andchair of Vancouver-based RogersGroup Financial, says many advisorswouldn’t be facing some of these chal-lenges if they had their clients completean investment policy questionnaire.Providing a broader framework thanknow-your-client (KYC) documents,investment policy statements (IPS) area superior way to gauge a client’s risktolerance and goals because they aretaken home to be completed by theclient. KYCs are usually completed bythe advisor, who simply asks the clientquestions and checks off boxes, he says.

“It’s so facile as to be virtually use-less in its practical application,” Rogerssays. “The better advisors say to theirclients (through the IPS), ‘Supposeyou were presented with this oppor-tunity, a real-world situation. Whenyou get that back as an advisor, clientsreally told you about themselves.”

Rogers has some clients who thinkthey would be investing conservativelyif they continue to increase their expo-sure on the fixed income side, despiterecord-low interest rates. In an attemptto appeal to their rational side, Rogerspoints to the portfolios of two orthree major pension funds.

Designed to give employees of theparticipating companies a sense of

long-term peace of mind, their allo-cations are generally 40% fixedincome, 50% equities and 10% cash,with the first two categories varyingby 5% to 10% depending on themarkets. “You can take those per-centages to the bank,” Rogers says. “Ifprofessional money managers, in theirattempt to meet the needs of all thesepeople, invest their money in thisway, is there a message here for you?I say, ‘Tell me again why you shouldhave 90% in equities or 90% in fixedincome?’ ”

Geoff Kirbyson is a writer based in [email protected]

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AE01_S002-S010 12/02/2003 06:17 PM Page s7

tudents” and “income tax” are words thatare seldom used in the same sentence, sincemost students have so little income thatthey don’t have to pay any tax. But there arestill some significant tax planning oppor-

tunities advisors can discuss with students (or their parents).

Tuition and Education CreditsNon-refundable tax credits are available for tuition fees paidfor post-secondary level education. Education credits are

also available for each month of either full- or part-timepost-secondary studies.

Some students may find they don’t need to claim all oftheir tuition and/or education credits to reduce theirincome tax to zero. As a result, students can transfer theunused amounts to a spouse or common-law partner(CLP), parent, grandparent or carry forward unclaimedamounts indefinitely. The parent (which includes a naturalparent, a step-parent, an adoptive parent or even a spouse’sor CLP’s parent) need not be the one who paid the tuitionto entitle the credits to be transferred to him.

Limitations on TransfersThe student must first use the tuition and education cred-its to reduce his or her tax payable to zero before carryingforward 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 amountclaimed on the student’s return. In addition, amounts car-ried forward from previous years must be used before thecurrent year’s amounts, and any carried-forward amounts thatare not completely used by the student in the current yearcan only be carried forward by the student and cannot betransferred in a subsequent year.

The student needs to complete Schedule 11, FederalTuition and Education Amounts to determine the amountsthat must be used in the current year and the amounts thatcan be carried forward by the student and/or transferred


TransferringTuition

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

By Jamie Golombek

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AE01_S002-S010 12/02/2003 06:17 PM Page s8


to a spouse, CLP, parent or grandparent.To transfer the unused part of tuition and education

amounts to a spouse or CLP, the student needs to completethe applicable areas on the back of Form T2202, Educa-tion Amount Certificate, or Form T2202A, Tuition andEducation Amounts Certificate. The spouse or CLP needsto complete his or her own Schedule 2, Amounts Transferred From Your Spouse or Common-Law Partner,to calculate the transfer amount.

The chart above illustrates these complex rules and how they work.

As a financial advisor, sit down with your student clients(and their families) to determine who should be claimingthese credits. That being said, many parents who help fund their children’s education often do so on the condition that the student transfers the tax credits backto the parent.

Interest on Student LoansThe other non-refundable tax credit that applies to stu-dents is for interest paid on student loans. A student, orsomeone related to the student, can claim the interest paidon loans made for post-secondary education under theCanada Student Loans Act, the Canada Student FinancialAssistance Act, or similar provincial or territorial laws. Ifthe student or relative doesn’t need to claim all of the inter-est in the year it is paid, it can be carried forward andclaimed in any of the next five years.

But a recent tax case, Vilenski v. the Queen, illustrates aproblem. During Vilenski’s university studies, he received var-ious student loans, including a loan under the Canada Stu-dent Loans Act (the “qualifying loan”). Vilenski learned ofa bank’s “Professional Student Plan,” under which he couldobtain a line of credit at a rate of interest that was 2% lowerthan the rate of interest payable on the qualifying loan. Heopened up a line of credit and issued a cheque of almost$25,000 to repay the balance outstanding on the loan.

On his tax return, Vilenski claimed approximately$4,300 of interest paid on the line of credit over three yearsas qualifying for the tax credit. CCRA denied the tax creditbecause the interest paid on the line of credit was not technically paid on a qualifying loan.

The judge agreed with CCRA and found the interestwas not deductible. Vilenski argued that the line of creditis “essentially the same money” as the qualifying loan. Sincethe qualifying loan was subject to the Act, “therefore (theline of credit) should qualify in the same manner as if itwere interest on the qualifying loan.”The judge went on toexplain that the Act says interest is deductible when it ispaid on a loan, which is made “under” the Canada StudentLoans Act. Since the line of credit was not subject to theprovisions of the Act, the interest is not deductible.

All students should do the math before immediatelypaying off a student loan. Whether it makes sense willdepend on the interest rate differential between the quali-fying and non-qualifying loans. Assuming that the taxcredit is worth approximately 22% (combined value of thefederal and provincial tax credits), as long as the interestrate on the new loan is at least 22% lower than the rateon the qualifying loan, it makes sense to refinance.

Jamie Golombek, CA, CPA, CFP, TEP, is vice-president of taxationand estate planning at AIM Trimark Investments in Toronto.

The student’s taxable income is reduced by certain amounts, such asthe basic personal amount, CPP contributions, employment insurancepremiums, etc.

Does the student have any tuition or education amounts carried forward from a previous year?

Does the student have any taxable income remaining?

Unused tuition and educationamounts carried forward from the previous year will be appliedagainst any income that remainsafter STEP 1.

STEP 1

STEP 2(A)

Tuition and education amountsfrom the current year are appliedagainst any remaining taxableincome.

STEP 2(B)

YES NO

No amount can be transferred orcarried forward.

STEP 3(A)

Lesser of:a) $5,000 andb) Current year’s tuition and edu-

cation amounts minus amountsused to reduce student’s incometo nil in STEP 2(B) can be transferred to a spouse,CLP or a (grand)parent.

Any tuition and educationamounts remaining after STEP3(B) can be carried forward.

STEP 3(B)

YES NO

AE01_S002-S010 12/02/2003 06:18 PM Page s9

RRSP Survival Guide / January 2004 10 9

IN THE2003 federal budget,Ottawa signalled that it may add a newretirement savings option that will workbetter than RRSPs for many low-income Canadians: tax prepaid savingsplans (TPSPs).

Like RRSPs, TPSPs allow individ-uals to contribute annual amounts fortheir retirement. Unlike RRSPs, con-tributions to TPSPs would not be taxdeductible. Instead, savings and invest-ment income in those plans wouldgrow tax-free. TPSPs would likely besimilar to Roth Individual RetirementAccounts (IRAs) in the U.S.

Roth IRAs were introduced in1998. Eligibility to make Roth IRAcontributions is restricted to individ-ual taxpayers with income under$110,000 and joint-filing coupleswith income under $160,000. Thecontribution limit for 2004 for RothIRAs is $3,000 (plus an extra $500for those age 50 or over). The contri-bution limit will be further increasedin 2005 and 2008.

Within Canada, the TPSP conceptwould be similar to RESPs. RESPcontributions do not create a taxdeduction, and withdrawals for edu-cational purposes are attractive from

a tax point of view because the accu-mulated investment income is taxedat the low tax rate of the studentrecipient, instead of the parent’s orcontributor’s higher marginal tax rate.

TPSPs aren’t available yet but hereis my wish list for how they shouldwork.❶ TPSP contributions should belimited to a $10,000 annual limitwith a $100,000 lifetime limit. Thisstructure recognizes that for manyCanadians, the funds available for sav-ings will often come not from earn-ings, but through windfalls such as amaturing life-insurance policy or amodest inheritance. ❷ Contribution limits for TPSPs,after adjustments for their “after-tax”status, should be added to the exist-ing RRSP/pension limits with theTPSP amounts. This may easeadministration by taking advantage ofthe tracking system for contributionsalready in place. ❸ Funds should be able to movefrom RRSPs and employer pensionplans to TPSPs easily with fewadministrative hassles.❹ When funds are withdrawn froma TPSP, the investment income should

be included in taxable income. The potential advantages of

TPSPs are not limited to low-incomeCanadians. Those who have maxedout their RRSP contribution roomwill also see TPSPs as a useful invest-ment tool. TPSPs will provide a morepreferable tax treatment for invest-ments than is currently available fornon-sheltered investments.

Some economists complain theeconomic growth in Canada is ham-pered by a low savings rate, in partbecause of high tax rates on investingoutside an RRSP. TPSPs may encour-age savings and investing by those liv-ing in the highest income and wealthpercentiles.

When TPSP legislation is intro-duced, low-income Canadians shouldconsider switching funds from theirRRSP to a TPSP gradually beforethey turn 65. More important, with-drawals would not trigger massivelosses in health, income and socialsupports.

Richard Shillington is an independent researcherconcentrating on the quantitative analysis oftax and social policy. [email protected]

RRSPalternative

How will TPSPs change the retirement landscape?

By Richard Shillington

)(

AE01_S002-S010 12/02/2003 06:18 PM Page s10


Tax Planning

By Jamie GolombekNewLOSSRULES

THE

New tax laws coming in 2005 could affectclients who are borrowing to invest.

October, the Department of Finance intro-duced new draft legislation on the deductibil-ity of losses, including losses created largely dueto deductible interest expenses. The introduc-

tion of the new rules did not come as a surprise, since the Feb-ruary 2003 federal budget stated that two recent court deci-sions (specifically Ludco and Stewart, discussed below) hadraised uncertainties that could lead to inappropriate tax resultsand were inconsistent with the appropriate tax policy. The newrules could affect clients who are borrowing to invest.

The Ludco CaseThe Ludco decision in 2001 questioned whether the interestpaid on a loan for purchasing shares was deductible. During theperiod in which the taxpayers held these shares, they deductedapproximately $6 million in interest expenses and received div-idend income of only $600,000. The Supreme Court ofCanada (SCC) held that the taxpayers had a reasonable expec-tation of income from this investment notwithstanding thatthey only received $600,000 in dividends. The court alsoreviewed in the Income Tax Act, which states that interest isdeductible where the borrowing was made “for the purposeof earning income.”The SCC concluded that income does notnecessarily mean “profit” or “net income.” In other words, thequantum of income that was actually received was not rele-vant and, therefore, did not need to exceed the amount of inter-est paid. As a result, the taxpayers were successful in having theinterest be fully deductible.

The Stewart CaseIn 2002, the SCC released its decision in the case of BrianStewart. Stewart purchased condos that were highly leveragedand which would generate losses for a 10-year period beforebecoming profitable.

Stewart claimed losses of over $58,000 which occurredprimarily as a result of significant interest expense on themoney borrowed to acquire the condos. CCRA disallowedthese losses on the basis that Stewart had no “reasonableexpectation of profit” (REOP) and therefore no business wasbeing carried on. If no business existed, then business lossescannot have arisen to be claimed against other income.

The SCC found in favour of Stewart, allowing the deduc-tion of the losses. According to the court, “the REOP testshould not be accepted as the test to determine whether a tax-payer’s activities constitute a source of income” (i.e., a busi-ness). The SCC continued, “The motivation of capital gainsaccords with the ordinary businessperson’s understanding of‘pursuit of profit’ and may be taken into account to deter-mine whether the taxpayer’s activity is commercial in nature.”

As a result of Stewart, the denial of deductions by theCCRA of losses generated by many tax shelters because of“no REOP” was put on hold and the doctrine of REOP isdead—until 2005.

Under the new rules, a taxpayer will only be allowed todeduct a loss for a given year if, in that year, it is reasonable toassume that the taxpayer will realize a cumulative profit from


IN

AE01_027-029 12/02/2003 05:46 PM Page 27

the investment during the time the taxpayer holds (or can rea-sonably be expected to hold) the investment. The new rules alsoexplicitly state that profit does not include capital gains, whichessentially reverses the SCC’s comments in Stewart.

Cumulative Profit Test“Cumulative profit” means the aggregate profit over the entireprofitability time period. It is not necessary that an investordemonstrate an actual profit in any particular year to be con-sidered to have a reasonable expectation of cumulative profit.

Many business owners, for example, often realize a start-up loss from the business for one or more years before the business begins to generate a profit. The business owner wouldbe able to claim the loss provided his expectations for a cumu-lative profit over the entire relevant time period were reason-able. But what is reasonable? It must be reasonable, given thefacts of a particular situation, for an investor to expect to profitfrom the property or business. Consider this fictional case.

Jack’s rental property purchase produces revenue in excess

of related rental expenses and might be seen as an invest-

ment that should provide Jack with an REOP. However,

InterestShare Dividend Rate on Cumulative Cumulative Cumulative

Investment Increase Investment Yield Loan Income Expense ProfitYear 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%.


Jay’s Analysis

AE01_027-029 12/02/2003 05:46 PM Page 28

this wouldn’t be the case if Jack were to take on a large

mortgage to finance the purchase of the property because the

interest expense associated with the mortgage means Jack can-

not profit from the rental activity. This was the issue in the

Stewart case.The difference in Stewart was that the SCC found

the opportunity for profit upon ultimate sale can be considered

as part of the profit. Under the new rule, even if Jack intends

to profit by reselling the rental property itself at a gain, this

will not count toward cumulative profit, since income from a

business does not include a capital gain.

Another “unreasonable”assumption might be an investor whoborrows funds at a fixed rate of 8% and uses those funds to makean investment that has a fixed annual return of 5%. Assumingthat the investment itself cannot increase in value, then there isno reasonable expectation of profit and the taxpayer will notbe allowed to deduct the loss. On the other hand, given that theinvestor may have greater expenses than he has revenues gener-ated by the investment, the Department of Finance also con-cedes that it would be “inappropriate” to tax any amount of thatrevenue. This would seem to permit the deduction of expensesup to the amount of revenue earned from the investment, butno more (i.e., a loss could not be created in this manner).

The jurisprudence before the draft legislation supported theview that as long as an investment has the potential to earnincome, interest on such borrowings should be tax deductible.The draft legislation introduces a new test: whether or not it isreasonable to expect a cumulative profit from the investment,excluding any potential capital gain on ultimate disposition.

Interest on Money Borrowed to Purchase Common SharesInterest on money borrowed to purchase common shares ormutual funds is generally tax deductible, but whether CCRA’sposition will be maintained in light of the proposed changesremains to be seen. The main problem concerns investors whoborrow to purchase common shares that do not pay dividendsor whose dividend yield is lower than the interest rate on theloan. In this case, a taxpayer would have to argue there is stilla reasonable expectation of cumulative profit. This argumentcould be supported if the taxpayer plans to pay the debt downover time such that eventually the cumulative dividendsreceived during the profitability time period exceed theamount of cumulative interest paid on the debt. Or an investorcould argue that he plans to hold the shares for a long periodof time so that as the shares appreciate the dividend yield will

ultimately exceed the interest paid. This would produce acumulative profit by the end of the profitability period. Thisconcept is best illustrated the following case study.

In 2005,Jay borrows $10,000 at 5% to invest in shares that

are not expected to pay dividends until at least 2008. Based

on his analysis of the company’s financial statements and eco-

nomic operating environment, Jay predicts that the share price

will increase, on average, by 8% compounded annually.

It is therefore quite likely that Jay will realize a significantcapital gain when he sells his shares. Under the new draft leg-islation, however, this capital gain is irrelevant when deter-mining whether or not he can deduct the $500 of interestpaid in 2005, 2006 and 2007. Instead, Jay would have todemonstrate that he has a reasonable expectation of cumu-lative profit over the time period he plans to hold the shares.

Jay prepares the analysis (see chart, page 40) which showsthat if he plans to hold the shares for at least 15 years, he willindeed realize a cumulative profit.

Jamie Golombek, CA, CPA, CFP, TEP, is vice-president of taxation and

estate planning at AIM Trimark in Toronto.

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AE01_027-029 12/02/2003 05:46 PM Page 29

BREAKTAX

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

THIRD-PARTY PAYMENTS

Ordinarily, only payments madedirectly to a former spouse or partnerwould be considered as support pay-ments. However, it is not uncommonfor payers to make payments to thirdparties as part of a separation agree-ment. As a result, there is a specific taxrule which deems an amount paidunder a court order or written agree-ment to a third party for the benefitof a former spouse and/or childrento be received by the former spouse orpartner. This alone is not enough tohave the payment considered to besupport; the amount must be payableas an allowance on a periodic basis andthe recipient must have discretion asto the use of the amount.

The recipient doesn’t necessarilyhave full discretion of the use ofmonies that go directly to a thirdparty, and often, such as the reim-bursement of medical expenses, third-party payments would not be periodicin nature. However, for certainexpenses, where the order or agree-ment explicitly provides that the third-party payments are to be consideredsupport amounts for tax purposes,such amounts are deemed to bepayable or receivable as allowancespaid on a periodic basis, making themdeductible by the payer and taxable to

the recipient. However, in the case ofagreements entered into or alteredafter April 1997, only those amountsthat are not child support will bedeductible and taxable. Payments willbe treated as child support unless theycan clearly be identified as being onlyfor the benefit of the recipient spouse.

Payments specifically excluded fromthe application of this rule include: • Amounts paid for home expenses

where the payer resides andamounts paid for the purchase oftangible property unless it relates toa medical expense;

• Education expenses;• Maintenance of the home in which

the former spouse or partnerresides; or

• Principal and interest on a homepurchase or improvement loan (upto 20% of the original principalamount of the loan).

Deducting Legal Fees Until recently, only those legal feesrelating to obtaining an order for childsupport or fees relating to the enforce-ment of support payments, or todefend against a reduction of supportpayments (child or spousal) specifiedin an agreement was deductible. Thischanged about a year ago. CCRA nowconsiders legal costs incurred toobtain spousal support to have beenincurred to enforce a pre-existing rightand therefore deductible. CCRA now

also accepts that legal costs of seek-ing to obtain an increase in support orto make child support non-taxable asalso deductible. This change onlyapplies to assessments or reassess-ments issued after October 10, 2002. Legal fees incurred by the payingspouse or partner, whether to reducespousal support or to contest anapplication for increased support, arenot deductible. Nor are fees relat-ing to custody or lump-sum capital payments.

Cross-Border PaymentsGenerally, spousal support payments(and child support for pre-May 1997agreements) to a U.S. resident isdeductible by a Canadian payer. Sup-port received by a Canadian from aU.S. resident payer is taxable forspousal support only. However, underU.S. rules, spouses may designate sup-port payments as neither deductiblenor taxable and if this designation ismade, there will be no income inclu-sion in Canada. This can provide taxsavings where the recipient spouse issubject to higher tax rates in Canada.And where the payer is Canadian, thepayment continues to be deductible inCanada even though it’s not taxable tothe U.S. recipient.

Gena Katz, CA, CFP, is a senior principalwith Ernst & Young’s National Tax Practice in Toronto.


THIS IS THE SECOND OF A TWO-PART SERIES ON SUPPORT PAYMENTS.

AE01_031 12/02/2003 05:18 PM Page 31

CHECKCOMPLIANCE

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

A PLANNER’S OBLIGATION

Bravo to the Financial PlannersStandards Council (FPSC) for beingthe first to set out, in a comprehensivemanner, ethical and professional obligations for CFPs.

Regulations and policies establishedin the past have left advisors unin-formed and confused about their obli-gations, especially as they relate to“knowing the client.”The FPSC willhave none of that. Know your client(KYC) is not a form, it is a process. Ihave begged advisors to think of KYCin five steps. The first three steps areeffectively communicating with theclient (active listening, questioningyour client to understand her betterand identifying problems). It is notuntil the fourth step that any forms(including the KYC) are completed.Step five includes updating the formson an ongoing basis to ensure theprocess part of the KYC continues.

The draft of the Canadian Finan-cial Planning Practice and Standardsmakes me feel like I have an ally. The KYC obligations are laid outclearly instead of in convoluted, vague language.

In several comprehensive para-graphs, the draft standards set out aplanner’s obligation to:❶ Discuss the client’s goals, needs

and priorities (draft standard200A). Goals should be “measura-ble, specific, realistic” and a timeperiod established in which such

goals are to be achieved. Question-ing the client and listening to theclient’s answers are exercises that arecrucial to fulfilling KYC obliga-tions.

❷ Collect the client’s data andinformation that may be rele-vant to the client’s financial sit-uation (draft standard 200B).Such information must be “com-plete, current and accurate.” Manyadvisors report that clients com-plain such information is privateand they refuse to impart suchpersonal information to advisorsthey have just met for the firsttime. The FPSC addressed thisissue with a practical solution:“Communicate to the client howthese limitations will impact theengagement and the recommenda-tions.” This is both clever andpractical because advisors want todo the best for their clients butwill be limited if the client holdsback relevant information. Fur-thermore, if the advisor is lateraccused of failing to have fulfilledKYC obligations by the client orthe regulator, the advisor can pres-ent his copious and thoroughnotes and explain the limitation inthe “engagement letter” (see draftstandard 100). The regulatorand/or judge will more likely findin the advisor’s favour. An advisorcannot learn aspects of a client’s

background if the client refuses toshare the information. Therefore,the advisor should not be faultedif he can prove he made the req-uisite inquiries. This requirementalso reinforces the necessity forgood communication and the ability to reduce it to writtenform, to prove that the advisormade the inquiries.

❸ Clarify the client’s financialposition, income and cash flowand identify problems andopportunities (draft standard300). This is another call for goodcommunication with the client,analysis and note taking, particu-larly if the client refuses to impartimportant personal information.Evidence of comprehensive ques-tioning by the advisor will supportthe advisor’s evidence that he/shefullfilled professional obligations.All financial advisors should take

a page out of the FPSC’s book. The draft standards reflect commonsense.

Ellen J. Bessner is a lawyer at Gowling,Lafleur, Henderson. She practises in the areaof brokers’ liability and offers compliance train-ing to brokerage firms. The above is intendedfor a general audience and should not be considered legal advice.


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AE01_033 12/02/2003 05:26 PM Page 33

WEALTHTRUE

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

TALKING HEDGES

Let’s talk about hedge funds. Orrather, let’s talk about how you shouldbe talking about hedge funds with yourhigh-net-worth (HNW) clients. Overthe past several years, hedge funds havegenerated more than their share ofbuzz from analysts, pundits and finan-cial journalists. If your HNW clientshaven’t yet asked you questions abouthedge funds, they will soon.

How you answer these questionscould have a significant impact onyour ability to attract and retainHNW clients. Over the next fewyears, hedge funds are likely to becomea standard feature in a HNW portfo-lio. If you don’t know how to com-municate the pros and cons of hedgefunds effectively, you could lose clientsto those who can.

If you’re talking about hedge fundsthe same way you talk about otherinvestment products, you’re missingthe point of hedge funds. Ultimately,hedge funds are more than a product:They are an idea, a way of thinkingabout how one should control riskand return in the portfolio. Here’show to train clients to think abouthedge funds in this way.

❶ Educate early, educate often.The complexity of hedge fundsdemands an ongoing educationaleffort from advisors. Ideally, thiseffort should begin at the initial clientmeeting: Introduce hedge funds as a

HNW extension of the philosophy ofdiversification, which is one of yourcore investment principles. Over time,you’ll want to back up your case withcharts, reports and articles that explainwhat hedge funds are (and moreimportant, what they aren’t). Be cau-tious about bombarding clients withjargon and technical documents,though. Your goal should be to initi-ate a running dialogue about hedgefunds rather than pitch product. Thiswill encourage clients to becomeenthusiastic advocates of the centralidea behind hedge funds, rather thansimply consumers of a product.

❷ Emphasize protection as wellas performance.Hedge funds have a reputation forhigh-octane performance. That’s onepotential aspect of hedge funds, but itshouldn’t be the sole focus of your dis-cussion. Explain to your clients that theprimary role of hedge funds in aHNW context is to protect wealth. Per-formance is a welcome by-product.Explaining the benefit of non-corre-lated returns will keep the focus onstrategy rather than on product, andallow you to steer clear of the percep-tion that hedge funds are simply thehot investment du jour. More important,this “security first” emphasis will rein-force your primary role with clients asa trusted steward of client wealth, nota stock (or hedge fund) picker.

❸ Present real-life examples.Before you discuss hedge funds withyour clients, prepare a few detailedexamples to back up your case. A“compare and contrast” presentationwith two model portfolios (one withhedge funds; one without) can workwell. The basic idea looks like this:Chart the historical performance andthe volatility of both portfolios, anddemonstrate how the hedge fundportfolio achieved higher returns withlower volatility. Another possibility isto take a closer look at some of thehigh-profile institutions that use hedgefunds to protect their portfolios andenhance returns. We use the Yale andHarvard endowments in our examples(they are well known, and details forboth are readily available), but I’m surethere are others.

At the end of the day, hedge fundspresent an opportunity to reinforceyour core principles, demonstrate yourdistinct value, and build strong clientrelationships.

Thane Stenner, CIM, FCSI, is a first vice-president and invest-

ment advisor with The Stenner Group™ of CIBC Wood

Gundy. The views of the author do not necessarily reflect those

of CIBC World Markets Inc. This article is for information

only. CIBC Wood Gundy is a division of CIBC World

Markets Inc., a subsidiary of Canadian Imperial Bank of

Commerce and Member CIPF. [email protected]


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AE01_035 12/02/2003 05:26 PM Page 35

FRONTLINESMARKETING

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

PROSPECTING PERSISTENCE

I recently talked to a successfuladvisor who had lost a substantialclient. Over a year ago, this clientbegan getting monthly calls from abroker with one of the bank-ownedfirms, informing the client about newor existing products or services pro-vided by his firm. After a year of thesecalls, the client finally agreed to meetwith him and ultimately moved hisaccount over.

The advisor felt he had done all theright things—he’d put a solid plan inplace and had communicated regu-larly. This hadn’t been good enough,however, as disappointment over mar-ket returns had made this particularclient vulnerable.

There are three realities we’re allgoing to have to contend with in theperiod ahead.

First, we’re unlikely to see the kindof supercharged market performanceanytime soon that will automaticallybond clients to us.

Second, we’re in an environmentwhere clients are becoming increas-ingly fickle—not just in our businessbut in every business. More and more,we’re all open to new relationships andmethods of doing business if we thinkthey’ll provide better value.

Third, we’re going to be facingincreasingly intense competition fromother advisors and institutions goingafter our clients—particularly ourbiggest and best clients.

Going forward, you’ll need to havethree strategies to prosper.❶ Stay the course. In the immedi-

ate period ahead, stick with a disci-plined investment process andproactive client communication.This will minimize client defection.(Notice that I said “minimize,” not“eliminate.”)

❷ Differentiate yourself from others. Show clients they can’t easily replicate the benefit bundleyou’re offering. (I will write moreabout this in a future column.)

❸ Recruit new clients. If a certainlevel of client loss is inevitable,regardless of how effectively youcommunicate or the quality ofwork you do, then you need a planto replace those defecting clientssimply to keep your business on astable footing.

Start by identifying 10 people youalready know and, more important,who already know you, who you see asthe kind of clients you’d like to have.These prospects could be peopleyou’ve met in the past who didn’t signon at the time. Or possibly it’s sim-ply people you went to school with or

know through a common communityactivity.

Once you’ve identified who youwant to pursue, then you need to con-tact them—and keep contacting them.The idea is not to become a pest (say-ing “It’s me again, calling to see ifyou’re ready to buy yet”) but to findan opportunity to introduce newinformation or an idea each time youcall. If the prospect seems interested,suggest you send him or her someinformation, or that you meet brieflyto discuss it further.

There are many variations on thisapproach. Some advisors send an e-mail or letter first and make the callto follow up. Others prefer to call firstand send the information second. Thekey is to find the approach that worksfor you.

Ultimately, the object of these callsis to position yourself, in a profes-sional fashion, as an advisor who isinterested in your prospect’s businessand who provides an interesting alter-native to whomever they are currentlyworking with.

After you identify those 10prospects, carve out an hour eachmonth to contact them (let’s say, thefirst Friday of each month). You, too,can be the beneficiary of today’sincreasingly fickle client mood.

Dan Richards is CEO of Cartier PartnersFinancial Group.


Position yourself as anadvisor who provides an alternative towhomever prospects arecurrently working with.

AE01_037 12/02/2003 05:27 PM Page 37

By Andrew RickardIl

lust

rati

on b

y R

uss

Will

ms

BABY BONUSWhen Toronto lawyer Charles Millar

died in 1926, he left a strange

legacy—something he described as

“proof of my folly in gathering and

retaining more than I required in my

lifetime.” He bequeathed his estate to

whichever woman gave birth to the

greatest number of children in the 10

years following his death.

The Urban Legends pages at

www.snopes.com says Millar’s rela-

tives tried to invalidate the will and

went to the Supreme Court of Canada

before being resolved.

Four women showed nine properly

registered live births apiece during the

specified 10-year period. Each mother

received $125,000.

LUNAR LIFESTYLEA real estate agency in Melbourne,

Australia, is selling one-acre sections

of the moon for CDN$55 and 10-acre

“lifestyle blocks” for CDN$278.

The Herald Sun newspaper says

that a businessman named Paul Jack-

son has bought the Australian rights

to sell lunar property from business-

man Dennis Hope.

Hope filed a declaration of owner-

ship for the moon in San Francisco in

1980, taking advantage of a loophole

in the 1967 United Nations Outer

Space Treaty that forbids any country

from owning the moon.The treaty says

nothing about companies.

Jackson told the paper that every

new moon landholder would receive a

land deed, a certificate of mineral

rights, a lunar map and a lunar con-

stitution logged on an international

database held in Switzerland.

BURIED TREASUREIn 1995, two security guards in the

southern U.S. stole from their own

armoured car. Although they had tied

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.”

RETIREMENT FUNDJ. L. Hunter Rountree, better known

as “Red,”has found an unconventional

source of retirement income. In

August, the 91-year-old walked into an

Abilene,Texas, bank, handed the teller

a manila envelope and told her to fill

it with cash.

The Abilene Reporter says that the

bank employee thought he was joking

but eventually handed over $1,999 in

cash—all of which was recovered 20

minutes later when police caught up

with Red on the edge of town.

This is Red’s third holdup in five

years. He was asked what he would do

when he got out of prison. “I might

rob another bank,” Rountree said. “I

might need to.”

END QUOTE: XXX XXXXXX XXXXXXXXX

Wealth stays with us a little moment if at all:Only our characters are steadfast, not our gold.

EURIPIDES (480?-406 BC), GREEK PLAYWRIGHT

THIS’N’THAT


AE01_038 12/02/2003 05:27 PM Page 38

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