DECEMBER 2003 PART 2 OF 4 - · PDF fileDECEMBER 2003 PART 2 OF 4 online edition Getting...

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DECEMBER 2003 PART 2 OF 4

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2RRSP Survival Guide - Online Edition / December 2003

o n l i n e e d i t i o n

contentsDECEMBER 2003 PART 2 OF 4

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Restoring investor confidence biggest challenge this RRSP season: Canadian CFPs

Four strategies to get your clients back in thegame

Dear Client/Prospect: Back on the equitiestrack (A template letter)

Modest optimism: Sidelined money poised toreturn to markets in 2004

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ith the year drawing to a close and anew RRSP season starting to buildmomentum, Advisor.ca contacted some60 CFPs across Canada to ask them

what their biggest challenge is heading into thisbusy time. Perhaps not surprisingly, one themedominated the responses.

"The biggest hurdle for all financial planners overthe next year is continuing to restore confidence inour financial markets and corporations," saidBeatrice Grant, a Surrey, B.C.-based CFP. "Therecent bear market, along with corporate fraud, hasreduced confidence and trust with many investors."

To help you face this challenge and others with yourclients in the coming days and months ahead, hereare some selected highlights of the insights and tipsthat arose from our informal poll of Canadian CFPs:

Investor confidence and reassurance

"There has been so much to be negative about forthe last three years that [investors] and the mediacan focus on nothing else. So our task is simple:Keep holding hands like we have been for the lastthree years, continue to reassure using the basicfundamentals of financial planning, buy low and hold

for the long term, divide, deduct, defer, duality. It isat these times the client or prospect needs to hearand see something positive, the proverbial light atthe end of the tunnel. So show it to them and focuson the positive side of everything. Manage the emotions and the relationship, not the money."— Michael Dumond, Barrie, Ontario

"We are focusing on our [clients] and asking theright questions to discover more about their wholelife, personal priorities and what is important tothem. Using this relationship and information, wecan reassure them [that] the balance of investmentsis right for them. We are also segmenting our membership to connect investors with more complexneeds to investment specialists to ensure theyreceive the best quality of advice." — Elaine Kelly, Virgil, Ontario

"One strategy I'm using fairly successfully withclients who didn't abandon their equities and fundsis to take them back to their absolute low of recentyears and then show them how much they haverecovered. Then I demonstrate how long it wouldhave taken them to recover to this same level hadthey abandoned their equities at the low in favour ofGICs. In most cases, the recovery time would havebeen at least double, if not longer. This helps clients

Canadian CFPs

Restoringconfidence

biggest challengethis RRSP season:

investor

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by ADVISOR Staff

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feel better about their decision tostick with the program and theirlong-term goals, and restorestheir confidence that the old balanced approach isn't 'broken.'" — Jonathan Sceeles, Toronto,Ontario

"I sent an 'open letter to all clients'with stats on the returns theyhave achieved since the marketlow on March 12, 2003. All of myclients [except the most aggressive] lost less than themarkets on the way down, and allof them [even the most conservative] have made muchmore than the markets in therecovery to date. I wanted to dispel the gloom, since I foundthat many clients are down abouttheir portfolios, even though theirfund managers have done theirjobs and returns are relativelygood. While the markets havebeen bad, I thanked them forsticking with their financial plans,told them it is okay to look at theirstatements again and asked themto call me if they want to reviewtheir portfolios, their risk toleranceor their financial plans." — Ed Rempel, Brampton, Ontario

"To regain the confidence and theoptimism that was so prolific inthe years that the marketsachieved their record-high levelsis not something that can be easily accomplished... We initiated the mending process inthe winter of 2003 with our 'stateof the markets' report and followed up again in the autumnwith a letter reiterating our prediction of a slow but steady resurgence in the months tocome. We plan to meet with ourclients in the coming months andto review with them the commentswe made in these reports andhow opportunities have unfoldedduring that time. Thus, we are

setting the tone for future planning and investment strategies to help our clients meettheir long-term objectives." — Mike Gentile, Waterloo,Ontario

"I have decided to join forces witha local chartered accountant intown to present a seminar on 'taxand investment planning.' Wehave invited our clients andprospects with the intent on educating the audience aboutproper financial planning. This willreassure our existing clients thatwe are doing a proper job forthem and will have the prospects

thinking of their own personal situation. This may in fact produce additional business forboth of us… I am finding that myclients are sick of hearing thesame advice over the last threeyears and would like anotheropinion, so why not an accountant's? The response sofar has been great." — Brenda Warpula, ThunderBay, Ontario

Client education and dispelling investment myths

"The general public jumped out ofequities last year during RRSPseason and sat on the sidelines,afraid of the markets — thisdespite the fact that 51% of fundsmade money in Canada in 2002.

It's just that many [people] stillpaint all mutual funds with thesame broad brush and get caughtup in only remembering the fearand the hype. People have a ten-dency to chase this year's hottestfunds and sectors, so I expectmany will be drawn back to thelure of technology and the NASDAQ with 50%-plus gains in2003. It's all about know-your-client, proper portfolio design andasset allocation, so this year'sreviews will include a back-to-basics education of risk/returnand time horizon." — Jim Augerman, Windsor,Ontario

"As an investment advisor andfinancial planner, the biggest hurdle in 2003 and what I expectto see in 2004 for RRSP seasonis the public's change of attitudein regards to the RRSP... I havenot experienced an impact fromthis through our existing clientsbut have definitely felt someresistance from new people whohave read or heard that RRSPsare no longer the way to go. Ialways revert to the planning andshow a person the advantages ofthe [RRSP] deduction today andthe benefits it will provide atretirement, such as income splitting or [how] the monies willbe taxed at a lower rate... Youcan always find ways to protectyourself or reduce taxes if you

"The greatest challenge isalways to keep the clientsfocused on the financial planand away from the ups anddowns of the marketplace.”

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have too much in RRSP savings, but you can't create additional monies if sufficient funds do notexist in the first place."— Scott L. Bjornson, Saskatoon, Saskatchewan

Global financial reality

"To deal with [the challenge of the realities andpotential consequences of the current global financial situation], I've been using historical examples as educational tools... Of course, one ofthe most powerful tools in the arsenal is playingdevil's advocate. Nothing puts a finer point on thematter than a question directed at some riskier element of the client's personal financial situation:'So, how would you continue to carry on with thislevel of debt if interest rates were to spike severalhundred basis points or so in the future, at more orless the same time your employer files for bankruptcy?' or 'What effect do you think anovernight sell-off of the U.S. dollar on currencyexchanges would have on financial markets in general and your portfolio in particular?'"— Steve Gould, Moose Jaw, Saskatchewan

Unbalanced portfolios and emotions

"The big challenge in review is to keep the specificaction consistent with the strategy. We all have aninherent tendency to 'chase winners.' In equity markets over the past year, currency fluctuationshave made Canadian equities bigger winners thanU.S. equities. This will predispose investors to over-balance geographic allocation toward Canada,which has probably already happened due to achange of values in the existing portfolio. Onceagain, as an advisor, I will be swimming against thestream of popular sentiment." — Ralph Einarson, Victoria, British Columbia

"Because I'm an independent financial planner, Idon't sell any products. The biggest challenge in myannual reviews with clients is to get their broker ormutual fund dealer to reallocate and maintain a balanced portfolio based on the client's risk profile...I have been holding discussion groups for differentsegments of my clients to address the 'big picture'and areas that are common to the client group. I willbring in experts to address specific areas that myclients require more information about, enablingthem to become more proactive themselves,through gaining knowledge about implementing theirown strategies."

— Mary Beth Harris, Montreal, Quebec

"The greatest challenge is always to keep the clientsfocused on the financial plan and away from the upsand downs of the marketplace. At each annualreview, I update the client's plan and address anyshortfalls and make adjustments to portfoliosaccordingly." — Al Nagy, Edmonton, Alberta

"Our biggest challenge is with the 10% of the clientbase that reads the papers and attends seminars inkeeping them focused on a long-range planningstrategy and not using hindsight to be a genius. Toovercome all the hindsight marketing, we positionourselves as professionals. If we are providing asecond opinion and the portfolio is not suitable forthe client, we will advise. But if the portfolio is suitable and performance is only a reflection of theeconomy and the client likes their current [advisor]we advise to continue with that [advisor]. This industry will never be a profession as long as [advi-sors] and head offices use commission as a motivating factor for their recommendations." — Doug Bolduc, Kelowna, British Columbia

A final note of inspiration and motivation

"This will be a fun RRSP season as I will have theopportunity to deliver good news to many clients.Those who stayed the course and stuck with equities through the past three dismal market yearswill see some very positive growth across all majorindices this year. Those who sought fixed incomeand steady returns will also be pleased; and ofcourse those clients who continue to dollar costaverage should be pleased with double digit gainsacross many asset classes this year." — Jim Augerman, Windsor, Ontario

What's your biggest challenge this RRSPseason and what are you doing to over-come it?

Share your thoughts or ideas with your peers inthe "Free for All" forum of the Talvest Town Hall onAdvisor.ca.

http://forum.advisor.ca

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"Market timing doesn't work; it's timespent in the market that counts, not timejumping in and out of the market." That'sthe message Brian Katz, vice-president

of BMO Nesbitt Burns, had for his audience whenhe appeared as part of the Exchange SpeakerSeries in Winnipeg earlier this year.

To support his argument, Katz used the example ofsomeone who invested $10,000 in the TSE 300(now TSX composite) index for the 10-year periodfrom 1991 to 2001. Provided he rode out all the upsand downs and remained fully invested, this investment would have grown to $26,677.

However, had that same investor tried to time themarket and ended up missing just 10 of the besttrading days of the decade, his or her gains wouldhave been cut in half. If they missed the 30 besttrading days, Katz pointed out that they would haveactually lost money.

The point of Katz's illustration is to show that sincenone of us — not even the savviest of investors —can predict when those "best days" will fall, the onlyway to catch them is to get into the markets andstay in. If you have clients who claim to be long-term

investors but are still sitting on the sidelines waitingfor the "right time" to buy in, try some of the following strategies:

Prove it

Having suffered through a bear market, manyinvestors aren't just going to take your word for itwhen you tell them they're missing out by stayingaway from the markets. You're going to have to uselogical and concrete examples to prove it to them.Charts can be great tools in circumstances likethese, since you can point to an actual event like the"Black Monday" stock market crash in 1987 andshow clients that the only people who lost moneywere the ones who panicked and sold.

You might be able to get some historical graphs forfree from fund companies, but if you're looking forsomething that hasn't got logos smeared all over,buy one from Andex (www.andexcharts.com).

Modern Portfolio Theory

In 1952, an economist named Harry Markowitzchanged the way we think about investing. Hispaper, titled "Portfolio Selection", laid the

BACKby Andrew Rickard

M

your clients

in the game

FOURstrategies

to get

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groundwork for what is nowknown as Modern PortfolioTheory (MPT) by showing thatthose who diversified their hold-ings over a variety of investmentsand sectors could reduce volatilitywithout sacrificing returns.

Spend some time first researchingand then talking with your clientsabout MPT and how diversification can help to managerisk. They may be more comfortable investing if they knowthat rough spots can be smoothedout through proper asset allocation.

Consider segregated funds

Segregated fund investing is a bitlike buying an investment with aninsurance policy attached. Inreturn for paying a premium (inthe form of higher managementexpenses than they would pay ina regular mutual fund ) at least75% of a seg fund investor's capital is guaranteed, provided heremains invested for a 10-yearperiod. Although few mutual fundshave ever lost money over a 10-year period, clients may need thatpeace of mind to feel comfortablein the equity markets again.

Stocks at sale prices

Challenge the way clients thinkabout a low point in the markets— instead of something to avoid,they should consider it a buyingopportunity. Short-term, emotionalinvestors may have panicked andpulled out, but those with longertime horizons should consider abear market a blowout investmentsale, with prices of high valuegoods radically reduced.

Once again, it's important to useresearch to prove your point —for example, a company with aprice-to-earnings ratio that's muchlower than the industry averagemight be undervalued and worthsnapping up.

Emotional rescue

Above all, remember that whileemotions shouldn't play a role ininvesting, they often do. At theend of the day, your clients haveto feel comfortable with their

portfolio and their portfolio mustmatch their goals and their risktolerance. You need to truly convince them of the logic behindyour arguments — pushing theminto a decision will probably justresult in another panic attack during the next market downturn,and that won't do anyone anygood.

Andrew Rickard is a freelancewriter and translator in Toronto,Ontario. A CFP with G.P. CapitalManagement, he's also managingeditor of the Canadian Journal ofLife Insurance and FinancialServices (www.canadianlifeinsur-ance.com). He can be reached [email protected].

“Challenge the way clientsthink about a low point in themarkets — instead of something to avoid, theyshould consider it a buyingopportunity.”

Do you have clients who arehesitant on getting back intothe investing game?

What strategies are you using toget them back on track? Let usknow in the Talvest Town Hall onAdvisor.ca.

http://forum.advisor.ca

Sales commissions, service fees, management fees and expenses all may be associated with mutual fundinvestments. Please read the prospectus before investing. Mutual funds are not guaranteed, their valueschange frequently and past performance may not be repeated. ©2003 Guardian Group of Funds Ltd.

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Dear [Client/Prospect name here],

After enduring a three-year-plus bear market, some encouraging signs are pointing to better days ahead. As the economy continues to improve, I've talked to many investorswho are wondering if this is the right time to get back into the stock market, either directlywith stocks or indirectly through mutual funds.

If you've been asking yourself the same question, I'm writing to suggest that, rather thanpulling money in and out of the stock market based on emotional impulses, the most profitable long-term strategy historically has been to simply buy into the market andremain invested.

The TSX Composite index is the benchmark index that follows the fortunes of the 300largest firms on the Toronto Stock Exchange. If someone had put $10,000 into the TSX(previously called the TSE 300) and left it there during the 10-year period between 1991and 2001, they would have seen their investment grow to $26,677.

However, had that same investor moved in and out of the market trying to guess when itwould rise and fall and missed just 10 of the best trading days of the decade, his or hergains would have been cut in half. If they missed the 30 best trading days, they wouldhave actually lost money.

The point of this illustration is that none of us, not even the savviest of investors, knowswhen the market is about to take off or when those "best days" are going to occur — theonly way to catch them is to get into the markets and stay in. As I write this note, the TSXis up almost 18% for 2003, meaning those investors who hung in with their equities investments have already enjoyed a significant bounce back.

If you pulled money out of the stock market in the past few years and are looking to getback onto the investment track or if you are curious whether you have an appropriateamount of equities in your investment portfolio to reach your financial goals, please contact me at the number above so that we can set an appointment and begin to construct — or re-construct — a portfolio that better suits your needs.

Sincerely,

[Your signature]

[Your name]

Dear Client/Prospect: Back on the equities track (A template letter)

To open this letter as a word document, please go to:

www.advisor.ca./practice/your_practice/tmpl_letters/article.jsp?content=20031128_112603_3592

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erhaps you remember reading thisSeptember 16 headline in the Report onBusiness: "Investors dump funds inSeptember." It reflects the general view

among the media that we continue to see a dramatic hemorrhaging of fund assets.

In my experience, the media gets it right more oftenthan most advisors give credit for. In this casethough, the Globe and Mail got the story fundamentally wrong.

The fund industry is made up of two parts. About85% of fund assets in Canada are in equity andbond funds — what most Canadians associate withmutual funds. The remainder is made up of moneymarket funds, almost entirely held at banks. Thesemoney market funds really function like premiumsavings accounts rather than long-term savingsvehicles.

Money market funds also tend to be extremelyvolatile. This is partly because of the short-termmindset and partly because there is no deferred

sales charge at banks to create disincentives towithdraw money.

So what happened in September? If you read thearticle, you learned that net redemptions before reinvested dividends were $380 million.

But the real story is that what makes up that negative $380 million are net redemptions of $885million in money market funds and positive net salesof over $500 million in equity and fixed incomefunds. This reflects the pattern in recent months.Short-term interest rates are at historic lows andbanks have responded with new GIC and premiumsavings products that offer higher interest rates thanmoney market funds. As a result, money marketfunds in the nine months ending in September 2003have seen a net outflow of over $5 billion.

Meanwhile, long-term funds have seen positive netsales of almost $2.5 billion for the same period. It'snot quite time to break out the champagne. Fueledby an abysmal RRSP season, 2003 has seen saleson long-term funds well below historical levels. Net

MODEST

by Dan Richards

P

2004

optimism:Sidelined

moneypoisedto return

to marketsin

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sales of long-term funds to theend of September were 70%below the levels of the comparable periods for 2001 and2002.

But there are at least three reasons to be modestly optimisticgoing into this RRSP season:

Momentum picked upstrongly in the third

quarter.

While 2003 started out as a verytough year when it came to fundsales, the third quarter marked areal turnaround. Net sales of long-term funds in July to Septemberof this year were $1.3 billion; thiscompares to net redemptions of$1.7 million in the same periodlast year and sales of only $300million in 2002.

Fund assets are closeto an all-time high.

As of the end of September, totalfund assets in Canada were $409billion; excluding money marketfunds, they were at $353 billion.Fund assets hit their all-time highin September 2000. At that time,total fund assets were $438 billionand long-term assets were $396billion. So, in the face of the worstbear market since the 1930s, fundassets are within 10% of their all-time high.

Investors have resisted the temptation

to dump their investments.

Redemptions levels are right within the historical range. Part ofthis is due to low interest ratesand the lack of clear alternatives.But credit should also go to advisors who worked hard to convince their clients to hang inthere. It also goes to investors

who maintained a long-term view.

Disappointing net sales in 2003 isalmost entirely due to lack of newmoney than any increase inredemptions.

For 2004, there's reason tobelieve that some of clients' sidelined money will find its wayback into the market. When thathappens, advisors will be rewarded for all of the hard,thankless work of the past threeyears.

Did you like this article? There'smore where it came from in theDecember issue of Advisor'sEdge. And this month's RRSPSurvival Guide section shifts fromtax help to an investment theme.To view archived Advisor's Edgearticles or to subscribe, please goto www.advisor.ca/edge/.

Dan Richards is CEO of CartierPartners Financial Group and acolumnist for Advisor's Edge.

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“So, in the face of the worstbear market since the 1930s,fund assets are within 10% oftheir all-time high.”

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