CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • … · Nobel Economics prize recipient...

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • AUGUST 2002

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

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FIXED ANNUITIES MAKE A COMEBACK

RE-EVALUATING THE FUNDAMENTALSOF INVESTING

PLUS

How to give life insurance to charity

24 RUNNING ON EMPTY

16 ASSOCIATION-LESS

13 A POLICY TO GIVEINSIDE EDGE

7 Mistrust, Cynicism, Fear and LoathingThere are many “refugees of bad advice” out there. But therealso has never been a better time to be a financial advisor.

TOOLBOX

13 Lifelong GivingYour client may wish to make a charitable gift in their estate plan.Consider gifting a life insurance policy.

COVER STORY / INDUSTRY

16 Targeting 9,000 CFPsAbout 9,000 certified financial planners in Canada currently don’tbelong to a membership or professional organization.Two associationsare working hard to capture their attention. Are they hitting the mark?By Deanne N. Gage

INSURANCE

24 The Ingenuity of the Annuity Chasing returns is not ideal in the best of times, especially in thisvolatile market. An annuity in your senior clients’ retirement portfoliosprovide guaranteed returns and may prevent their biggest fear of outliving their money. By Sheila Avari

TAX PLANNING

29 Property TaxUnderstanding the consequences of owning multiple properties and explaining it to your clients can significantly preserve and enhance their family’s wealth. By Evelyn Jacks

YOUR BUSINESS

33 Higher StandardsA new policy from the Investment Dealers Association of Canada to protect investors and boost confidence in the markets is forcing analyststo disclose what securities they own.

35 Tax Break with Gena Katz The current low interest rate environment has also led to reductions in“prescribed” rates, which can reduce your client’s tax burden.

37 Investment Matters with Pierre Saint-LaurentBuy low and sell high—go back to basics and remind yourself of thefundamental truths of this industry.

38 Ask Julie with Julie LittlechildAssistants can help create new business without making major changesto their daily routine.

41 Managing with Harvey SchachterFavouring only your top performers—especially in a small-office environment—can land you in a trap.

42 This ‘n’That by Andrew RickardAn arsonist’s consulting fee audited.Testamentary libel. Green thumb insurance. Rewarding the do-gooder.

AUGUST 20025

August 2002 Volume 5, Number 8

There was a sort of stunnedsilence in the room. The 200 financialprofessionals present paused to absorbwhat they had just heard—and toreflect on whether they truly believedit. Raymond Massa, an InvestorsGroup regional manager and thatfirm’s most-respected advisor coach,had just announced that advisors look-ing to grow their practice could notask for better conditions in which todo just that.

Massa’s message came during hispresentation at the Top PerformersConference held in Toronto this pastJune. His argument, simply put, is thatthe aftermath of the bull market of thelate 1990s and the subsequent burst ofthe technology bubble has produced awave of “refugees of bad advice.”

Massa noted that today there arethousands of damaged books out there,with thousands of clients who are ill-advised and are ready for a fresh start.

Fertile ground for any advisor willing to work it.

Nick Murray had delivered a sim-ilar message a few weeks earlier in his address to the annual CanadianAssociation of Financial Planners

convention in Edmonton. It was onlyabout two and a half years ago, Mur-ray noted, that investors cast asidediversification and long-term invest-ing so they could “dabble in CNBCstock picks.”

“The last five years were the babyboomers’ financial lost weekend,”said Murray. “They’re desperate tomake them up and they realize thatdo-it-yourself and buy-whatever-the-top-mutual-fund-is cannot bethe way to do it.”

The period of excess that producedbad advice “refugees” is also the envi-ronment that led to the numerous cor-porate accounting scandals now beingexposed. These scandals have produceda chilling effect on many alreadybruised and battered investors.

Mistrust, cynicism, fear andloathing—these words characterize thefeelings of clients and prospects today.This environment leads some advisorsto hide from their clients and avoidprospecting. Some will even considerleaving the business altogether. Tothose I say good riddance. If you arefearful of an environment that pro-duces masses of people in desperate

need of sound advice, you are proba-bly the same kind of order-taker mas-querading as advisor who exacerbatedthe problem in the first place.

But if you are truly an advisor—someone who can earn and deservethe trust of your clients, who canhelp them navigate through theirfears, who will work to understandtheir myriad financial needs and whocan craft a plan to achieve their goalsand help them maintain the disciplinerequired—then this is your time.

It’s going to be a lot tougher in themonths and years ahead for themediocre to prosper. As a result, therewill be a healthy culling of marginaladvisors. The demands of weary andwary investors will be met by thosewho remain in the business.

The words of Ray Massa and NickMurray are the clarion call to theindustry’s best to stand and be counted.Continue moving forward and you willwin new clients. Serve them well andgrow your practice. The weak andincompetent will fall in your wake.

DARIN DIEHLCONTENT DIRECTOR

[email protected]

INSIDEEDGEMISTRUST,CYNICISM,FEAR AND LOATHINGThere’s never been a better time to be an advisor.

AUGUST 2002 7

ADVISOR’S EDGE8

MAKINGPREDICTIONSIn response to “VariableForecast” (June 2002, page25), I would suggest thatCanadian financial advisorsadopt “stochastic modelling”when preparing financial pro-jections. It seems that 99.9%of the industry uses the standard deterministic models thatuse an unvarying rate of return based on an average. Thefact is that market returns vary widely and the flaw of aver-ages makes for a poor representation of future returns.Nobel Economics prize recipient William Sharpe refers tothis widely used methodology as “financial planning infantasyland” and advocates the use of stochastic simula-tions to more accurately reflect the range of possiblereturns rather than relying on a single data point (i.e., aver-age rate of return). Market returns over the last three years have demonstrated not only the utility of using stochastic modelling but additionally, the folly and dangers of the present modus operandi.

Mark C. Hebert, CFP, CIM, FCSIBarrie, Ont.

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

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

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

Dan Richards Sandra Foster Thane StennerCartier Partners Headspring Consulting Inc. CIBC Wood Gundy

Dan Thompson Lynne TriffonGeorge Brown College T.E. Financial

LETTERSAUGUST 2002, VOLUME 5, NUMBER 8

Clarification: The June cover feature “Out of Com-mission” (page 18), explained that Ryan Beebe, a finan-cial planner in Edmonton, charges fees in addition toearning commissions on the sale of mutual funds. Whilethe Alberta Securities Commission does not permitmutual fund licensees to charge additional fees, Beebeis one of the few exempt financial advisors able to chargeboth commissions and fees. Advisor’s Edge apologizes forany misunderstanding.

WE WOULD LIKE TO HEAR FROM YOU!Send your comments and letters

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Letters may be edited for clarity and space.

Continued from page 8 Paul WilliamsVice-President, Healthcare & Financial Publishing (416) 642-4848, [email protected]

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ADVISOR’S EDGE10

AUGUST 2002, VOLUME 5, NUMBER 8

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RUSSELL HANNON

KENNETH R. WILSON AWARD “Bracing for Tough Times” (November 2001)

Best Issue, Silver(presented by The Canadian Business Press)

AUGUST 200213

Friends said that Carl and LottieWenger had been lovebirds since they met28 years ago in the old country. They hadlived and worked together in perfect har-mony until this earlier year when Lottiewas diagnosed with cancer. The diseaseprogressed rapidly and she passed awayshortly after. Carl never expected to be awidower at age 57. Although the Wengershad been regular donors to the CanadianCancer Society, Carl became convincedthat he must do something significant toassist in the search for a cure for cancer.He also wanted to ensure that he couldpass on a reasonable portion of his estateto his two children.

Planned charitable gifts are becom-ing a popular estate planning strategyfor many Canadians. Changes in the taxtreatment of charitable donations in the1995, 1996 and 1997 federal budgetseach increased the tax relief for chari-table contributions made during a tax-payer’s lifetime and upon death.Improvements to the gifting of capitalassets (real property, stocks and bondsetc.), cultural property, gifts in kind,and the use of life insurance contractshave given Canadians further incentivesto give to charity as a tax-reductionstrategy. As a result, Canadians havestarted making “planned gifts” by effec-tively merging their philanthropicobjectives with personal tax advantages.

Given that Carl has decided to make

a significant charitable donation, henow must decide whether he wants todo this during his lifetime or on hisdeath. Part of his decision will be basedon the timing and effectiveness of thetax benefits. He could make an imme-diate gift of cash, a gift in kind, or a giftof an existing or newly purchased lifeinsurance policy. These gifts would all

result in an immediate tax benefit.Alternatively, he could make a deferredgift by way of a bequest in his will, des-ignating a charity as the beneficiary ofan existing or newly purchased lifeinsurance, using a “gift annuity” or acharitable remainder trust. Either way,Carl wishes to pass on his current assets

TOOLBOXBy Michael Berton

Your clients may wish to make giving a policy in their family.Why not make a planned charitable gift with a life insurance policy?

LIFELONG GIVING

Continued on page 15

Illustration by Shayne L

etain

FEDERAL TAX CREDITS

Effective since 1997Gifts during lifetime 17% of the first $200

29% of amounts greater than $200

Income limits while living 75% of net incomeFive-year carry-forward for unused donations

Income limits on gifts in 100% of net incomethe year of death Any excess can be carried back one year

In 1997, the federal government increased the tax relief for charitable contributions.

AUGUST 200215

to his two children and find another wayto benefit his charity.

He could consider establishing aninvestment sinking fund to provide for acharitable gift, but this strategy is rifewith potholes. For example, he mightpass away leaving a smaller gift thanintended, resulting in less tax efficiencythan he might have achieved with betterplanning. Income taxes will have to be paid on any income earned on theaccumulating funds, eroding the growthof capital intended as the gift.

Carl could gift an existing insurancepolicy, or he could consider purchasinga permanent life insurance policy withthe intention of making a gift. There arethree ways to gift a life insurance pol-icy to a charity: ❶ Carl could take out a life insurance policy and name thecharity the beneficiary on his death. ❷ Carl could take out a life insurancepolicy and name his estate as the bene-

ficiary and identify the amount of thedonation in the will (though thisamount may not be equal to the deathbenefit of the policy). ❸ Carl could takeout a life insurance policy and name thecharity both as the beneficiary and theowner of the policy. Carl would thenreceive a yearly tax credit for the premi-ums he paid for the insurance, whichwould result in a cash-flow benefit.

Assuming Carl wishes to make adeferred gift on death, option 1 wouldbe preferable. If Carl owns the policy,pays the premiums and names the char-ity as the beneficiary, the policy wouldremain in his control throughout hislife, and would pass directly to the char-ity on death. Such a direct gift avoidsproblems with potential creditors andprobate taxes (estate administrationtaxes in Ontario).

A review of Carl’s current financialsituation reveals that his current networth is $1,084,686, including a

residence valued at $194,670, invest-ment assets of $327,142, and regis-tered assets of $562,874. Assuming an inflation rate of 3%, minimumrequired RRIF withdrawals duringretirement and a growth rate of 6%,his assets would grow to $2,575,678at age 84, his life expectancy. A reviewof Carl’s will reveals that he has notmade any charitable bequests, normade any other provision for charita-ble gifts in the event of his death.

If Carl does no further estate plan-ning, the charity will lose a valuable andconsistent donor and his estate will bearthe entire tax burden without relief, con-siderably reducing the assets available toleave his children from his estate.

If Carl uses a permanent life insurancesolution, his estate value can be preservedfor his children, a significant charitablegift can be given, while ensuring that asmaller tax liability is paid at death.

TOOLBOXContinued from page 13


CARL’S GIFT PLAN2002 2020 2020 2020

Age 57 Age 84 Age 84 Age 84CURRENT SITUATION NO PLANNING Plan A Plan B

PRESERVE ESTATE* PRESERVE AND

INCREASE ESTATE*

Estate before Taxes $1,084,686 $2,575,678 $2,260,778 $2,067,321and Expenses

Charitable Gift 0 0 550,000 889,596

Estimated Income -$232,071 -$624,069 -$336,572 -$159,169Tax at death

Probate Fees (B.C.) -$14,836 -$49,705 -$49,298 -$42,590

Executor Fees -$32,541 -$77,267 -$67,823 -$62,020

Estimated Legal & -$5,423 -$12,878 -$11,304 -$10,337Accounting Fees

Total Tax and Expenses -$284,871 -$763,919 -$464,997 -$274,116

Net Estate after taxes $799,815 $1,811,759 $1,795,781 $1,793,205available for children

Net Estate tax savings 0 0 -$15,978 -$18,554due to charitable gift

Percent Estate Shrinkage -26% -30% -30% -30%due to taxes and expenses

*Net of insurance premium expenses

ndy Glavac has many expenses for his hard-earned money.Dual licences, errors and omissions insurance, designationrenewal and regulatory fees are all fixed costs for the

seasoned financial planner. Will he add the cost of a professional association membership to his expenses? Glavac is one of 9,000 certified financial planners who don’t currently belong to a professionalor membership association.

ABy Deanne N. Gage Illustration by Tom White

AUGUST 200217

Cover Story / Industry

It’s not mandatory for CFPs to join anassociation and most of the 14,000licensees have avoided membership.

But two recent events have height-ened CFPs’ interest in joining a profes-sional association. With a favourablevote on September 28, a merged asso-ciation between the Canadian Associ-ation of Financial Planners (CAFP)and the Canadian Association ofInsurance and Financial Advisors(CAIFA) will be one step closer to real-ity. Meanwhile, the Canadian Instituteof Financial Planning (CIFP) recentlyannounced their own plans to form amembership association exclusively forCFPs. Both associations will target the9,000 CFPs as potential new members.

Glavac, president of Welland, Ont.-based Glavac Financial Planning Services, believes many association-lessCFPs like himself have simply beenwaiting for some of the industryinfighting to stop before decidingwhich association to join. He has achallenge for the two proposed associ-ations: “Give me 10 good reasons whyI should pay a fee to you when I’m living under the terms and conditionsof my CFP. My values are there, mymorals are there and that’s how I chooseto run my practice.”

➾THE VETERANS➺

Before CAFP-CAIFA targets new mem-bers, its focus is creating a professionalassociation that is appealing to theircombined membership of 18,000, saysBrian Davis, chair of the CAFP, not-ing that the merger has 80% support.The name of the association has yet tobe determined but will have the tagline“Insurance, Investment and Financial


➾

SOUTHERN PERSPECTIVE

The Financial Planners Association in the U.S. shows how a merger can work.

Mergers are never easy but two professional financial planning associ-

ations in the United States were able to make one happen two years ago

by forming the Financial Planners Association (FPA).

The FPA drew its membership from the defunct International

Association for Financial Planning (IAFP) and the Institute of

Certified Financial Planners (ICFP).

While the IAFP (18,000 members) focused on financial planning,

it did not favour one designation over another. The ICFP (13,000

members) was strictly an association for CFP licensees and students.

About 4,000 people were joint members.

Merger talks started in 1998 when the IAFP officials had outgrown

their stance as being designation-neutral, says Janet McCallen, FPA’s exec-

utive director and CEO. On January 1, 2000, the FPA was officially born.

The FPA (28,000 members) bills itself as the association for the com-

munity of financial planners. McCallen estimates that 20% of members

are accountants, attorneys, insurance agents, trust officers and money

managers. But, she emphasizes, the FPA doesn’t support any designa-

tion other than the CFP.“We are about financial planning and we think

the public is best served by having one way to clearly identify who

a confident and ethical planner is,” McCallen explains. “We cited the

CFP as the highest mark for professional financial planning and we don’t

comment on how to find a good insurance agent.”

All CFPs abide by the CFP Code of Ethics and there are no additional

standards set by the FPA, says McCallen.

Non-financial planners are not eligible for certain member benefits,

such as advocacy, she adds. “If a consumer calls and wants a referral,

then we give out names of the CFP licensees. If you’re an insurance agent

and you’re not a CFP, then you’re not eligible for those things and we

make that clear as people join.”

Non-planners join the FPA for networking opportunities with

planners and to understand the financial planning process, she says.

There is no competing association for financial planners that is similar

in size, says McCallen, noting that 49% of CFPs in the U.S. belong to the

FPA.“There is an association for fee-only financial planners that has 700

members but most also belong to the FPA,” she says.

— D.G.

Planning Professionals.”The initial merger proposal called for

two categories of members—planner

members, for those focused on finan-cial planning and advisor members, forthose who don’t follow the six-stepfinancial planning process. But a revisedplan suggests one class of memberswho have equal voting rights. Memberswho don’t have a designation will be expected to earn either the CFP, Pl. Fin. or CLU. The financial planningdesignation of choice will be the CFP,says Davis.

One of the things CAFP andCAIFA officials hope CFPs will findattractive is the rigorous standards thatthey must hold themselves to, whichgo beyond the CFP Code of Ethics set by the Financial Planners StandardsCouncil (FPSC). The new CAFP-CAIFA association will ensure that

these standards are being adhered to, says Steve Howard, CAIFA’s chiefexecutive officer.

For example, members who haveplanning designations can voluntarilybecome “plan certified” by undergoing

a practice assessment and periodicreview of their financial planningprocess. “What we stand for is a com-mitment to service at the highest lev-els,” Howard explains. “This approachis not the easiest way to gain new

Continued from page 17

ANDY GLAVAC

Give me 10 good reasons why I shouldpay a fee to you whenI’m living under the terms and conditions of my CFP.

PRESIDENT AND CERTIFIED FINANCIAL PLANNER,GLAVAC FINANCIAL PLANNING SERVICES,WELLAND, ONT.

members and retain our current mem-bers but it is the right way because it hasconsumer interest in mind.”

But what worries some CFP licenseesis the fact that the CAFP-CAIFA asso-ciation seems to be upholding itself asmore important than the CFP markitself—a designation internationallyrecognized in 17 countries. “Themerged group is following up on ten-dencies that both organizations had inthe past,” says Robert MacKenzie, a cer-tified financial planner at ProfessionalInvestments in Ottawa. “The CAFP hasbeen saying for years, ‘if you want thebest in financial planners, talk to ourmembers because we have our own codeof ethics and standards.’ Meanwhile itcasts doubt on the rest of us who havethe CFP designation and follow theFPSC’s code of ethics. What they’rereally doing is devaluing the CFP. Theymake it seem as though the CFP is not

as rigorous as it is and that’s wrong.”It’s this stance that initially caused

Susan Mandeville not to join eitherCAFP or CAIFA. “I didn’t think thatelitist attitude was very professional,”says Mandeville, a certified financialplanner at the Bank of Montreal in Sarnia, Ont. “Once you have your CFP,you are at one level already.”

➾THE ROOKIE➺

The CIFP announced its intention tostart a membership organization rightin the midst of merger talks betweenCAIFA and the CAFP. CIFP managingdirector Keith Costello calls the timinga “coincidence,” as the continuing edu-cation provider has been exploring thepossibility of an association for years.“Their plans were on and off over theyears so we certainly weren’t going todelay our own plans,” he says, notingthat like CAFP-CAIFA, CIFP will offer

advocacy, conferences, and errors and omissions insurance.

But unlike the CAFP-CAIFA associ-ation, the CIFP’s effort would notrequire any more standards than theCFP currently provides. “If you haveyour CFP, this is your mark of profes-sionalism,” says Costello. “We want todevelop something that is grassroots.Members will come together and we’llsay, ‘what do you want in an association?We’ll give you the framework, infra-structure and guidance.’ ”

The CFP organization will be drivenby members, have its own board ofdirectors and will be kept separate fromCIFP and its industry association arm,the Investment Funds Institute ofCanada. Costello says the CIFP hopes toattract their thousands of graduates,most of whom hold the CFP.

At least one certified financial Continued on page 20

➾

planner who is currently a member ofthe CAFP sees some merit in the CIFP’sidea. “There’s ultimately going to be anorganization of just CFPs and I’ve been saying this for a long time to theCAFP,” says Lyle Atkins, also a regis-tered financial planner at IndependentFinancial Counsellors in Winnipeg.“There’s a huge number of CFPs—likeaccountants and those that work forbanks—who would rather be associatedwith just CFPs.”

But Howard calls the CIFP initiative“redundant” as CAFP and CAIFAalready endorse the CFP and offermembership services. He would like tosee the CIFP align with them to avoidcreating more consumer and advisorconfusion. “We have the toughest sellwe can make—come into a voluntary

organization, voluntarily commit your-self to a higher standard than the FPSCso you can demonstrate your value,” heexplains. “The CIFP is setting up acompetition but it’s not to achieve anobler purpose of advancing standardsthroughout the industry.”

Costello sees the CIFP’s strategy asfundamentally different. “The facts arein the numbers. Lots of CFPs haven’tjoined anything, so obviously there’s amissing ingredient,” he notes. “TheCAFP-CAIFA proposal may say CFP,

ADVISOR’S EDGE20


In order to stay in good standing with

the Financial Planners Standards

Council,CFP licensees must complete

30 hours of continuing education

credits annually.Professional associa-

tions offer seminars, workshops and

annual conferences. But what are the

alternatives if CFPs don’t belong to

a professional association?

One of the more expensive CE

choices is to pay a non-member fee

to attend the annual conventions

organized by the Canadian Association

of Financial Planners and the

Canadian Association of Insurance

and Financial Advisors.

But some find they don’t have to

look further than their own firm.“I do

workshops and seminars through

RBC,”says Kasha Piquette,a certified

financial planner at Calgary-based

RBC Investments.“There’s no need to

go anywhere else.”

Sarnia,Ont.-based financial planner

Susan Mandeville also takes CE

courses through her employer, the

Bank of Montreal. But she also

teaches the second course of the CFP

designation at the local college,which

more than fulfills her requirements.

There’s also a wealth of information

available at the fund companies, who

host their own seminars and road-

shows. Michael Collins, a certified

financial planner at Cartier Partners

in Waterloo, Ont., says he attends

“Mackenzie University” and does

some courses online.

Mike Poulin emphasizes that join-

ing a professional association is not

necessary for continuing education

anymore. “There are lots of ways

to complete CE like company confer-

ences, industry courses,product launch

meetings, insurance company train-

ing,” says the Cambridge, Ont.-based

certified financial planner.“Most can

be accessed for free. Joining a profes-

sional association can help but that

is not the main purpose to belong to

one today.” —D.G.

THE CE CHALLENGEHow do CFPs who don’t belong to a professional association

get their continuing education credits?

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

report that takes a closer look at continuing education. Included in this package is:

• An update on the looming CE deadline for advisors of IDA firms• Continuing education roundup: What’s the best bang for your buck?• Thoughts on the state of continuing education from advisors on the frontlines• Your own CE contact list and Web resource cheat sheet

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

INTERACT ON


but it’s not exclusively CFP. As long asadvisors have their CFP, I don’t see whythere needs to be a monopoly amongprofessional associations.”

And it’s not what you provide but how well you provide services at a value to the advisor, Costello adds. He says the CIFP will have a lowermembership fee than the CAFP-CAIFAassociation. The CIFP’s fee is still to bedetermined but annual membership forCAFP-CAIFA is expected to cost $350,plus $100 for the local chapter. All theCIFP workshops, seminars and courseswill also be available to associationmembers for no additional cost, makingit easier for CFP advisors to fulfill their30-hour CE requirements, says Costello.

Regardless of how good the intention,the CIFP may confuse advisors and waterdown the power of the industry, saysGord Hunte, a certified financial plan-ner with Calgary-based Partners in Plan-ning, who is leaning towards joining theCAFP-CAIFA association. “They canprovide the lobby we need because theywill have the numbers,” he says.

➾LOBBYING FOR ADVISORS➾

When asked what, besides profession-alism, would make an associationappealing to join, Doug Thomson, acertified financial planner at AssanteCapital Management Ltd. in Kelowna,B.C., summed it up by saying: “I wantmore of a feeling they’re actually lobbying for financial planners.”

Beyond fine-tuning codes of ethicsand consumer protection, some certi-fied financial planners would like to seetheir association of choice lobby thegovernment about advisor issues andhelp members to understand regulatorychanges, for example. The newly created

Mutual Fund Dealers Association(MFDA) is causing great concern andconfusion to advisors right now, saysPaul Beck, a certified financial plannerat Ross Dixon Financial in Hamilton.“If an association is able to cut throughsome of the tape of the MFDA tomake my job easier, then that’s a valueworth paying for,” he says.

Hunte notes that advisors need seri-ous representation, particularly in his home province of Alberta. He’dlike to see an association press the government and regulators about whylicensed Albertan advisors can’t chargefees for services rendered to clients.“We need a lobby group that allows usto provide our clients with a flexiblecompensation structure that will suitthem,” he says.

Ultimately, Kasha Piquette, a certifiedfinancial planner at RBC Investments inCalgary, would like the association shechooses to provide more clarity aboutwho can become a financial planner.“There needs to be more information inthe marketplace about who is qualifiedbecause clients are very confused,” she

says. “Consumers need to know what ittakes to get the CFP and keep it.”

After all, it’s the designations thatclients are likely to ask about, not affilia-tions with professional associations.According to surveys from the FPSC,77% of 750 consumers surveyed saidhaving a designation is an importantrequirement for financial planners. Sixty-eight per cent said their advisor had a des-ignation, although few could actuallyname the designation. In terms of whereconsumers found an advisor, 68% saidthrough a friend and 60% said throughanother professional they were workingwith. Only 26% mentioned calling amembership or professional association.

The goal for most advisors is to havethe best of both worlds: a recognized designation and a professional association.As Andy Glavac puts it: “I look to joinan organization that would give me exclu-sivity to say, ‘I’m living up to these stan-dards and if I don’t keep up the standards,then I can lose my designation.’ ”

Deanne N. Gage is managing editor of

Advisor’s Edge. [email protected]

AUGUST 200223


KEITHCOSTELLO

As long as advisorshave their CFP,I don’t see why there needs to be a monopoly among professional associations.

MANAGING DIRECTOR, CANADIAN INSTITUTE

OF FINANCIAL PLANNING, TORONTO

➾

Illustrations by Sandy N

ichols

ADVISOR’S EDGE24

ANNUITYhe unimpressive performanceof the stock market over thepast two years has recharg-ed interest in an insurance

product that until now has sat on the sidelines.

Annuities are one of the oldest,safest and most reliable retirementincome products available in Canada.And they are making a comeback asa sound retirement investment in thesedays of depressed interest rates.

An annuity is a contract usuallypurchased from a life insurance com-pany that provides monthly payments,typically to a retiree, in exchange for a lump-sum investment. LIMRAInternational reports increasing salesin these risk-adverse investment vehi-cles. “Fixed annuities have exhibiteddouble-digit growth in the last five

quarters in the U.S.,” explains EricSondergeld, corporate vice-presidentof LIMRA in Hartford, Conn.“Compared to the first quarter of2000, sales of fixed annuities grew by19%. But in the fourth quarter of2001 fixed annuity sales grew by 82%compared to Q4 of 2000, so it reallyhas been driving up.” Sondergeld addsthat the numbers and trends are sim-ilar in Canada.

This current sales growth reflectsclients’ frustration with the uncer-tainty of the current market condi-tion. Senior clients, to whom annuitiesare directed, are tired of the volatil-ity and would rather see the prospectof a guaranteed positive return in anannuity, says Sondergeld. CurrentGovernment of Canada long-termbond interest rates are around the 6%

mark. Also, advances in medical sci-ence are increasing the chances of alonger life, requiring more money tofund a longer retirement.

So when clients reach age 69 andmust decide the fate of their RRSPs,it would be wise for advisors to casttheir eye back on these zero-volatil-ity products and spread the word totheir 60-something clients dreamingof a financially safe retirement. Anannuity ensures a guaranteed source ofincome to cover fixed expenses such ashydro, property tax, electricity andother bills, says Bruce Cumming, a chartered life underwriter at Cumming & Cumming Wealth Man-agement Inc. in Oakville, Ont. Ifclients already receive a guaranteedincome from registered pension plans, CPP and OAS, then perhaps

TSingle-digit returns from the current shaky market are causing advisors and

clients to turn their attention back toward annuities.The guaranteed monthly income from an annuity can assure your clients they will never be up the creek in retirement.

INGENUITYBy Sheila Avari THE

OF THE

an annuity is not required. Cummingadds that a RRIF also produces retire-ment income but the volatility may leadto some financial losses. If seniors findthemselves in a long-term care facility andneed money to fund it, the last thing they

want to do is look attheir chequebooksand see a low orzero balance star-

ing them in the face.An annuity dispels the fear of outlivingtheir money since payments are guaran-teed for the life of the annuitant (theowner of the annuity).

“In a world that has gone mad, an annuity is the silver bullet,” says Cum-ming. “Annuities give confidence, safetyand security. They are a tremendous alternative to providing fixed income aspart of a senior’s asset allocation.”

Show Me the MoneyEven though they are still suggesting andselling annuities, advisors say there arelogical reasons why annuities are not thefirst choice. One reason is the paltrycommission. “I had a 57-year-old clientwho retired early from being a teacherand pulled out all of his pension—$483,000—from the Teachers PensionPlan,” explains Angus Gray, chartered lifeunderwriter with Hutcheson, Reynoldsand Caswell Insurance Ltd. in Brace-bridge, Ont. “I put it into an annuity for him and made just over $8,000 incommission.”There is no trailer fee likein a mutual fund, plus he is relinquish-ing control of the money. To make matters worse, advisors who charge feesbased on the assets they manage wouldactually lose money by recommendingan annuity.

Advisors may find clients disregardannuities altogether,believing they cantolerate the riskin exchange forhigher interest.But, as Gray says,“advisors are in the cheque deliverybusiness” and the volatility that comeswith chasing returns, which exists out-side an annuity, could mean the wellmay run dry prematurely.

“The rate of return is not as sexycompared to mutual funds, seg funds,stocks and bonds,” says David Wm. Brown, a chartered life under-writer with Al G. Brown & Associatesin Toronto. “It is a lot more exciting ifyou say, ‘the market may generate 10%to 12% over the next decade [if you putyour money in funds and stocks].’ Itlooks nice on the graph.”

MisconceptionsThe other problem is advisors don’talways know when to suggest annuities.It is understandable if clients don’t wantto lock into low-interest rates but thecommon misnomer is advisors andclients think they can wait for a year forinterest rates to spike before rethinkingthe purchase of an annuity. It doesn’twork that way, says Michael Ondercin,product manager, guaranteed interestrate products with Manulife Financialin Waterloo, Ont. “There is an indica-tion that short-term interest rates aregoing to go higher in the next year or sobut that doesn’t necessarily translateinto higher long-term rates,” he says,noting that long-term rates haveremained steady for the past four years.“This is a common misconception with

a lot of advisors and clients.” Ondercinsuggests advisors extend their time hori-zon back to 1920 when determiningwhether the purchase of an annuity iswarranted. Before the boom time in the1980s the average interest rate between1920 and 1970 was around 4.5%,according to the federal long-term Gov-ernment of Canada bond rates, makingthe current rate of 6% tempting.

Clients also misconceive the conceptof an annuity. The basic belief peoplehave about annuities is that when theydie the money is gone, says Brown, whomanages several millions of dollars inannuities. But the annuity guaranteesthat when the client is enjoying retire-ment he will never find himself running

on empty. “Mostannuities have alife contingencyplan that says it

will pay for therest of your life, no questions asked,” heexplains. “If the client dies the insur-ance company guarantees the monthlypayments to continue to the benefici-ary or a residual value in a lump sum.”

Annuities can come in as many com-binations and permutations as needed.There are different options that can beadded to annuity contracts to make the guarantee even more comforting,although they come at a cost. Annuitiescan be bought on a term-certain basis,single life basis, or a joint and last sur-vivorship life basis where the survivingspouse would receive the same orreduced payments, explains Ondercin.Term-certain annuities must specify aperiod of guaranteed payments and typ-ical life annuities can offer a guarantee

AUGUST 200225


Insurance

of payments of between five and 25years. If the annuitant dies, any remain-ing guaranteed payments would go tothe beneficiary or the estate. If theannuitant lives past the guarantee periodof a life annuity, the insurance companywill continue to make payments untilthe annuitant dies (no matter how longthey live). On a term-certain annuity,the insurance company makes paymentsfor a specified period of time, as cho-sen at the time of purchase. Once thelast guaranteed payment is made, thecontract expires. Also, to ease againstinflation, advisors can tack on theappropriate indexing option so themonthly amounts increase accordingly.There are also immediate and deferredannuities, which describe when the pay-outs begin and annuities can be boughton a prescribed or non-prescribed basis.

Prescribed annuities:The paymentsfrom a prescribed annuity are made up ofprincipal and interest. The owner of theannuity is taxed only on the interest por-tion of each payment received during acalendar year. It effectively spreads the taximpact out over the life of the contractby keeping the taxable portion levelthroughout. Investment income from anannuity is taxed at the highest rate.

Non-prescribed annuities: Themonthly amounts are still comprised ofprincipal and interest and remain the samebut the taxable portion of those pay-ments—the interest—declines each yearof the contract. Investment income froman annuity is taxed at the highest rate.

The Insured AnnuityOn their own, annuities are not an estate-planning tool. While annuities are flexi-

ble in design, they are absolutely inflexi-ble as soon as the contract is signed. Oncethe money is locked in, the estate getsnothing upon the death of the annuitant(unless the above options are in place).That is why the concept of the insuredannuity, also known as the back-to-backannuity, is so common. If a client buys anannuity and wants to guarantee the capi-tal goes back to the estate on the annui-tant’s death, then he or she should use aportion of each annuity payment to payfor premiums on a life insurance policy.

Paul Grimes, vice-president of sales

and a chartered life underwriter withToronto-based Industrial AllianceInsurance and Financial Services, sayshis firm has seen tremendous interestfrom advisors about back-to-back annu-ities. He recommends they take a three-step process if selecting the insuredannuity for their clients.

Know how much the client wishes to annuitize, say $300,000, so youknow the amount of life insurance toapply for. Apply for life insurance for $300,000.Do this early because medical under-writing can take time. Note: the clientmay not qualify for the full amount.As soon as the insurance is in place,

annuitize the amount the client qualifies for.By electing the insured annuity, a

client does not need to pay extra to havethe guarantee options on the annuitycontract, resulting in larger monthly pay-ments. “The beauty of this concept isyou retain 100% of the capital to theestate,” says Grimes, also the author ofThe Facts of Life (Stoddart). “You get thebest of both worlds. If clients who are69 or 70 are worried that the market willtank further why not hedge [their] betsa bit and invest in an insured annuity andput some into a RRIF where it can be ina more volatile market?”

The big trick is how you advise clientsin a way that makes them comfortablewith investing in certain vehicles. If youhave a client who believes a sizable allo-cation in equities makes sense, he shoulddo that regardless of what the market isdoing today, says Sondergeld.

In 1999 The Economist noted, “by providing financial protection againstthe 18th and 19th century risk of dyingtoo soon, life insurance became the biggest financial industry of thatcentury. Providing financial protectionagainst the new risk of not dying soon enough may well become the nextcentury’s major and most profitablefinancial industry.”

If this is true, with the first of thebaby boomers nearing retirement, annuities may offer great opportunitiesfor advisors.

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


AUGUST 200227

1

2

3

he new risk ofnot dying soon

enough may becomethis century’s

most profitable financial industry.

—The Economist

T

Are your clients suited for annuities?

Go to the Product Zone at Advisor.ca to

find the questions you need to ask.

inancial advisors areoften called upon toinclude the acquisi-

tion and disposition ofreal estate in the preparationof financial plans. That’sbecause real estate ownershipis a major cornerstone of thewealth of Canadians. In1999, of those Canadianswho owned non-financialassets, 60% had a principalresidence averaging $148,000in value, and 16% owned other realestate averaging $117,000 in value,according to Statistics Canada.

It follows that advisors must under-stand and communicate the tax con-sequences to clients, particularly whensuccession issues arise—like the pass-ing of family residences to the nextgeneration. In addition, importantleveraging and diversification oppor-tunities can arise when there is a change in ownership of family real estate.

TAX CONSEQUENCES OF PRINCIPAL

RESIDENCE OWNERSHIP: Since 1982every household unit in Canada mayown one tax-exempt principal residence.(Before this, each spouse could own onetax-exempt residence.)

Today, it is not unusual to own onetax-exempt and one taxable property—a home in the city and a cottage. Designating the right property as thetax-exempt principal residence can sig-nificantly enhance a family’s wealthwhen the property is disposed of.

To qualify as a principal res-idence, the property must be“ordinarily inhabited” by thetaxpayer, the spouse, a formerspouse or a child at some timeduring the year; even for a couple of days. If you stay at your family cottage during the summer you can designatethat property as your principal residence for the year. Otherpersonal residences such as avacation property can be treated

the same way, as long as there is only onetax-exempt property in a given year.

Normally, it makes sense to designatethe residence that has appreciated themost (and which would have the highestcapital gain if sold) as the exempt prin-cipal residence. This designation can be made annually. However, the paper-work is not required for tax purposesuntil actual or deemed disposition of the property (use Form T2091Designation of Principal Residence).

AUGUST 200229


Tax Planning

TAXOwning multiple properties—a cityhome and a cottage—is more common nowadays.You shouldexplain these real estate tax consequences to your clients and helpthem preserve their family wealth.

By Evelyn Jacks

F

PROPERTY

TRANSFERS TO FAMILY MEMBERS:When real estate is transferred to achild during the owner’s lifetime, thetransfer occurs at the property’s FairMarket Value (FMV) in every case,except the transfer of farm property,which can be transferred at any amountbetween the FMV and the AdjustedCost Base (ACB). When property istransferred to a spouse, a tax-freerollover is possible, although upon elec-tion, one can choose any amountbetween the ACB and the FMV.

WHAT HAPPENS WHEN ONE SPOUSE

DIES? When a taxpayer dies, a tax lia-bility will arise because assets owned bya taxpayer at death are treated as if

they’ve been disposed of or sold at theFMV immediately before death. If acapital gain results from this so-calleddeemed disposition, 50% of it is addedto the taxable income on the deceased’sfinal return. However, there are provi-sions that allow taxable assets to be rolledover to the surviving spouse or common-law partner on a tax-free basis. That is,the value at which the asset is disposedof on the deceased’s final return may beeither the ACB (cost of the asset plusimprovements), the FMV of the prop-erty at the time of the first spouse’sdeath, or any amount in between.

The choice of the valuation figuresreported as the deceased’s proceeds ofdisposition and the survivor’s cost basedetermine current and future taxation lev-els. In short, the survivor would pay lesstax in the future as a result of a high costbase while the tax liability of the deceasedmay be minimized with a low cost base.

So, if the taxpayer died early in theyear, leaving little or no taxable incometo report, it might make sense to gen-erate a higher deemed dispositionvalue (and capital gain) on taxable realestate on the final return, in order tobump up the cost base for the secondsurviving spouse. This strategy willsave money for family members in thefuture, on the occasion of an actual ordeemed disposition by the survivingspouse. Bumping up the cost base alsomakes sense when the deceased hasunused capital losses of prior years,which can be carried forward and usedto offset capital gains in the finalreturn. Note: A previous capital gainselection on the 1994 tax return mayreduce taxable gains. Ask your clientfor form T664.

DEATH OF THE SECOND SURVIVING

SPOUSE: When the second surviving

spouse dies, a deemed disposition ofassets must again be reported at FMV.Any gain on the disposition of onequalifying principal residence willagain be considered tax-exempt on thefinal return of that spouse. Once theexempt principal residence is trans-ferred to a child (or children), theproperty may become that child’s tax-exempt principal residence, or if thechild has another principal residence,the inherited property would becomea taxable second residence.

Planning for the beneficiary childmust be carefully considered. Now theowner of more than one residence, thechild would need to decide which todesignate as the principal residence. Asubsequent disposition would be sub-ject to normal tax rules. That is, someor all of the capital gains on the property could be taxable, dependingwhether it qualifies as a principal resi-dence during the ownership period.

LEVERAGE REAL ESTATE INHERI-TANCES. Those who inherit real estatecan use that equity to expand theirinvestment horizons, an option thatshould be carefully explored. For exam-ple, the inherited property can becomea rental property, and/or the equity inthe property can be leveraged in orderto make other investments in the mar-ketplace. Interest on any loans resultingfrom the use of that equity to producetaxable income or the potential for tax-able income will be tax-deductible.

ACQUISITION OF RENTAL PROPERTY:When any real estate is acquired, it isimportant to record the cost base (plusany legal and transfer fees). If the prop-erty is being used as a rental property, thevalue of the land and building must be allocated separately, so that capitalcost allowance can be calculated on the


ADVISOR’S EDGE30

Tax treatment generally depends

on how the propertyis classified—whether it’s a tax-exempt

principal residenceor revenue property.

building. (Land is not a depreciable assetfor tax purposes.) The easiest way to dothis is to look at the property tax assess-ment bill, which will allocate the assessedvalue of land and building.

OPERATIONS AND MAINTENANCE:Any expenditure that improves the use-ful life of the asset such as the replace-ment (rather than repair) of carpets or aroof or the addition of a deck or fencemust be recorded and receipts saved untilthe time the property is sold. Theseexpenditures increase the cost base andwill later reduce capital gains (or increasecapital losses, in the case of revenueproperties). Note that losses on “per-sonal use properties” (family residences,cars, boats, etc.) are not deductible at all.

Expenditures incurred to earn incomefrom the property will be deduct-ible—provided there is a reasonable expectation of profit from the venture.This can include repairs and mainte-

nance, interest, insurance, property taxes,etc. Should a net profit result, it can bereduced by a Capital Cost Allowance(CCA) deduction on buildings and/orfurnishings. However, this CCA claimcannot increase or create a loss.

AVOID CCA CLAIMS ON PRINCIPAL RES-IDENCES. The CCA deduction, which istaken at the taxpayer’s option, should notbe claimed if the property will or may beclaimed as a tax-exempt principal resi-dence. Such a claim will eliminate theexempt status from the building or a por-tion thereof, upon which CCA is claimed.

The disposition of taxable propertyhas several tax consequences that shouldbe explored with the client in detail. Taxtreatment generally depends on how theproperty is classified—whether it’s atax-exempt principal residence or rev-enue property, where it’s located, andwhether the property is rolled over tothe spouse or children during the

owner’s lifetime, or upon death. Theproperty may also be instrumental indiversification activities; that is, theequity in the property may be leveragedfor business or investment purposes.

One way to maximize these opportu-nities is to control the timing of dispo-sition or transfer from one generation tothe next. Taxable timing via inter-familytransfers may make sense now, particu-larly if it is anticipated that future growthin real values will be substantial.

Should the taxpayer have that dreambuyer at his or her doorstep now, con-sider whether it is possible to split capital gains income over two tax years,or whether taking back a mortgage andreporting a capital gains reserve over aperiod of up to five years makes bothtax and fiscal sense.

Evelyn Jacks is president of Evelyn Jacks

Productions Inc.

PLAN A:Preserve EstateCarl could purchase a single life, faceplus, universal life policy for $375,000and fund it so that it grew to $550,000by age 83. Assuming that he could earnan annual average rate of return of 6%,he would need to fund the policy withsix annual payments of $19,102.10 or10 annual payments of $12,874.06.Given his relatively young age, and thefact that he is still working, Carl choseto fund the policy over six years, havingit fully funded before he retires at age 65.

PLAN B:Preserve and Increase EstateIf Carl were to use the same policy andassumptions but contribute $20,000each year for 10 years, the policy value

would increase to $889,596 by age 83.Thus the impact on his estate at lifeexpectancy would be as follows:

Currently, at Carl’s life expectancy histax liability will be $624,069 with otherestate expenses of $139,850. Under PlanA, a life insurance benefit of $550,000at age 84 paid to the charity would giverise to a tax credit sufficient to pay abouthalf of the estimated taxes. This wouldreduce the tax and expenses to $464,997while producing a $550,000 donation,essentially at a cost of only $15,978 tohis heirs. If Carl had chosen Plan B, thecredit would have further reduced his tax liability to only $274,116. The$889,596 gift would have been createdat a cost of $18,554 to the estate (See“Carl’s gift plan,” page 15).

Like Carl, our clients will face signifi-cant income taxation on death. The use

of life insurance as a planned gift createsthe ability to redirect a significant por-tion of what would otherwise be incometax to a deserved charity while largelymaintaining an estate for the heirs. Alter-natively, a present gift of a policy will create smaller immediate and ongoingincome tax benefits. Another method,known as an insured annuity, can offerboth benefits. Many of our clients havecharitable intentions among their goals,it is up to us to help them find the besttools to accomplish them.

Michael Berton, CFP, R.F.P., F.M.A. is a

part-time instructor at the BC Institute of Tech-

nology and senior financial planning advisor with

Assante Financial Management Ltd. in Vancouver.

The opinions expressed are those of the author

and not necessarily those of Assante Financial Man-

agement Ltd. or the BC Institute of Technology.


AUGUST 200231

Investor confidence has takena beating in the wake of numerouscorporate scandals. But there’s at leastone initiative advisors can point to asa sign the industry is making an effortto protect investors and boost confi-dence in the markets.

The Investment Dealers Associa-tion of Canada (IDA) recentlyapproved a new policy aimed atincreasing disclosure and addressingconflicts of interest within theresearch analyst community.

“Investors have a right to know thatthey can trust the motivation of thepeople they turn to for analysis,” saysIDA president Joe Oliver. “They needto know that analysts are objectivelyassessing stocks, not touting them.”

The IDA’s Policy 11, based on the recommendations of the Securi-ties Industry Committee on AnalystStandards (chaired by Purdy Craw-ford), would force disclosure of ananalyst’s ownership of securities andrequire brokerage firms to introduceconflict of interest guidelines. “Theinvesting public needs to be aware ofshare positions and compensation

practices that could influence an ana-lyst’s recommendations,” Oliver says.

Julie Boyer, executive benefits advi-sor with AON Reed Stenhouse inCalgary, says she was shocked tolearn that there are no current stan-dards for research analysts. “Howmany times have analysts been actingin a manner that enhanced their ownholdings, with no disclosure and norecourse?” she asks.

Still, Boyer welcomes the IDA’s ini-tiative. “Analysts should be allowedto make a profit but their readers,who rely on them for unbiased infor-mation, should be well aware of theirbiases,” she says.

The policy addresses compensa-tion practices that could encouragebias, or the appearance of bias, Oliversays. For instance, it prohibits com-pensation based directly on a specificinvestment banking transaction.

Tom Caldwell, chairman of Cald-well Securities in Toronto, likes theintent of the policy and calls it a stepin the right direction. But Caldwellsays he’s worried about increasedcosts, especially for smaller firms.

“I looked at this business with Mer-rill Lynch and [Henry] Blodget inNew York and knew right away it wasgoing to cost me more money in reg-ulation in Toronto,” he says. Blodget,a former high-profile Internet analystwith Merrill Lynch, fell from graceafter the tech bubble burst, amid accu-sations that he overhyped the sector.

Oliver admits the new rules willimpose a cost burden on analysts andtheir firms. But the benefits outweighthe negatives, he says, noting thatresearch analysts will still be allowedto trade in a security they are cover-ing, but must obtain approval fromtheir company director. The newguidelines also include tougher edu-cational standards, requiring analyststo obtain the Chartered FinancialAnalyst designation, or an equivalent.

The policy now goes to the Cana-dian Securities Administrators forpublic comment and final approval.Oliver hopes the guidelines will be inplace by the end of this year.

Doug Watt is a reporter for [email protected]

Illustration by Isabelle Cardinal

Wealth and practice management strategies

BUSINESSYOUR

Tax Break . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Julie Littlechild . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Harvey Schachter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

AUGUST 200233

HIGHER STANDARDSWith the introduction of Policy 11, advisors can reassure their clients to invest again with confidence.By Doug Watt

AUGUST 200235

BUSINESSYOUR

The current low interest rateenvironment can certainly be advan-tageous for those who are in themarket to borrow to buy a home,investments and for business. Thebonus is these low interest rates havealso led to reductions in “pre-scribed” rates. These are the inter-est rates used by the CCRA to com-pute interest charges and benefits.

The CCRA defines three pre-scribed interest rates for the follow-ing purposes:• Interest charged on underpay-

ments of tax, CPP and EI; • Interest paid on overpayments of

tax, and • The application of the attribution

rules with respect to certain inter-family loans and the taxablebenefits relating to interest-freeand low-interest employee/share-holder loans.The prescribed rates are deter-

mined quarterly based on the 90-dayGovernment of Canada Treasury Billrate for the first month of the imme-diately preceding quarter. The ratesfor the third quarter of 2002—Julyto September, for the purposes justmentioned—are 7%, 5% and 3%per annum respectively. The 3% ratecan create tax-planning opportuni-ties to reduce the family tax burden.You can reduce your client’s familytax burden through income splittingand employee home purchase loans.

Income SplittingUnder the current attribution rules,the income arising from an invest-ment funded by a loan made to aspouse, minor children and/orgrandchildren, or to a trust forminor children and/or grandchil-dren is generally taxable in the handsof the lender. However, attributiondoes not apply where the interestrate charged on the loan is at leastequal to the lesser of:• The prescribed rate at the time

the loan is made; and• The rate that would be charged in

similar circumstances to an arm’slength party.As a result, if an individual makes

a loan before October 1, 2002, to aspouse, minor children and/orgrandchildren or to a trust for minorchildren and/or grandchildren, withan interest rate of 3% per annum,and the loan recipient reinvests thosefunds at higher rates of return, thedifference will be taxable in thehands of the recipient.

Assume that a top marginal ratetaxpayer loans $100,000 to a spousewith no income and the recipientspouse invests the funds to earn 5%.In the first year, $2,000 of income(investment income less interestexpense) that would otherwise betaxed at the top marginal rate, say46%, will not be taxed at all—$920of tax savings. The savings increase

in subsequent years as the interestcompounds and will of course begreater if the investments earn morethan 5% annually.

Keep in mind that in order to avertattribution, it is necessary for theinterest charged on the loan to be paidwithin 30 days of the end of the cal-endar year for each year that the loanis outstanding. Failure to meet thisrequirement will result in all incomeearned on the investment of the loanproceeds being taxable to the lender.

Employee Home Purchase Loans The 3% prescribed rate also appliesto determine the taxable benefit in relation to no or low-interestemployee loans. The taxable employ-ment benefit is the interest computedat the current prescribed rate lessinterest paid by the employee in theyear or within 30 days thereafter. Thebenefit will fluctuate as quarterly pre-scribed rates change. However, in thecase of home relocation loans, theprescribed rate in effect at the timethe loan is made will apply for fiveyears in determining the taxableemployment benefit, making now agood time to negotiate or renegoti-ate an employment home relocationloan.

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

Low prescribed interest rates can reduce your client’s tax burden through income splitting and employee loans. By Gena Katz

PRESCRIBED RATES

TAX BREAK

AUGUST 200237

BUSINESSYOUR

INVESTMENT MATTERS

Stick to the investment policy.Diversify. Buy low, sell high.

Can anyone be against suchvirtues? Of course not. But it can be healthy to review some of thepractices typically applied in ourbusiness.

Investment policy statements.Since “high net worth” is the newstandard, and with an ever-increas-ing number of advisors busy tieringtheir books, you’d think an invest-ment policy statement would beone of the most prevalent docu-ments around. I’m not talkingabout KYC forms but about a sys-tematic process that assesses clientneeds and then invests accordingly.With increased liability charges laid upon advisors, increasinglysophisticated investors with ever-increasing accounts, and competi-tion for top market tiers getting more aggressive, implementing aconsistent, systematic investmentpolicy process to all your top-tierclients is a serious consideration for many advisors.

Besides, an investment policystatement allows you to do remark-able things. You will always have apertinent angle on your clientaccounts, as you create consistencybetween financial markets andinvestor goals. You will develop atop-down rationale for advising yourentire client base, and streamliningportfolio changes and client commu-

nications will allow you to spendmore time with existing clients andfinding new ones. You will have a sci-entific reason to revisit your clients’portfolios on a regular basis (not justat RRSP or tax time) and reconfig-ure the portfolio, thus justifying yourrole as an advisor. All this, in turn,will help you maximize your chancesof attaining your client’s objectives.

If you haven’t gotten your invest-ment policy process, your competi-tion is already ahead of you. Getyourself into an investment policyprocess, now. Your clients are start-ing to demand it. Uncertain marketsjustify it. And you don’t have to gonuts implementing it: Several well-established tools already exist to helpyou streamline the process.

Diversification. Although it is amost noble goal, there is such a thingas too much of it. Classic researchby professors Evans and Archer*shows that market diversification isattained with less than 20 securities.So why are there so many portfolioswith 40 or 50 funds (with 25 to100 securities each)? It’s cleanuptime! Now don’t get me wrong: I’mall for style purity and style diversi-fication. Let’s just bring it back toreasonable proportions.

Buying low, selling high. Whata great idea! The problem is, anygiven investor is trying to do just thatat any given moment the markets areopen, which, nowadays, is just about

all the time. Most investors are reallytrying to time the market, which isa tricky game at best. When to buy?When to sell? There can only be twoanswers: First, buy when you arestarting your portfolio and sell whenyou need the money (and in themeantime construct the appropriateportfolio). Second, buy top-qualitysecurities on impeccable corporatefundamentals and stick to the knit-ting for the long run; sell when youfind a better investment, much, muchlater. In both cases, you’ll need to bepatient to the point of being oblivi-ous to shorter-term market move-ments that don’t fit the pattern.Investments are the tools in our tool-box: They can only do so much, andyou can’t build a skyscraper with ahandsaw and a hammer. Be realistic,and take the time needed.

These can constitute valuableguidelines as we move into the falland into the 2002-2003 RRSP season. We will see national roadshows, manager Web casts and conferences, client meetings, andappreciation dinners. Other variedvenues will also compete for our precious time and attention. Let’skeep those basics in mind. They’reall we’ve got, really.

Pierre Saint-Laurent, M.Sc., CFA, is the president of AssetCounsel Inc. *Many thanks to Susan Ann Ryan, CFA,for the source.

Buy low, sell high and other fundamental truths.By Pierre Saint-Laurent

BACK TO BASICS

BUSINESSYOUR

ASK JULIE

My team works very hard at

servicing our clients. Are there ways

to get the team to help me build the

business as well?

One of the ways to increase theprofitability of your practice is toensure you are maximizing the valueof your fixed investments (such asteam or technology).

For the average financial advisor,the team represents about half ofthe total investment in the practice,so this is a great example. Your sit-uation is very typical: the team isused to facilitating client relation-ships but not necessarily to growingthe business. To leverage that assetyou’ll need to create a culture inwhich new business development isthe role of the entire team. Ourresearch shows that only about 6%of the average team’s time (exclud-ing the advisor’s) is devoted toattracting new clients.

Since assistants are usually hiredto service clients and not to “sell,”they may not have natural sellingskills. Find simple ways to integratenew business development into theroles of all team members withoutfundamentally changing their roles.

Here is a simple example. If yourassistant sets all client meetings, thencoach him or her to maximize thevalue of each call by focusing onmarketing opportunities. Review thelist of clients you will meet in the

next month and set specific objec-tives for each client meeting withrespect to the introduction of newproducts or services. At that point,if your assistant knows that youwant to discuss estate planning withan individual client, he or she can setthat up during the call, identify whatthe client should bring and e-mailthe client some information on thetopic. The presentation and closewill still be your job, but your teamcan increase your chances for success.

I know a minimum account size is

a good idea, but how do I deal with

clients who refer friends who don’t

meet the minimum?

Our research shows that abouthalf of financial advisors set a min-imum asset level for their clients.That said, almost all advisors willoverlook that minimum if a referralis made by a top client.

The problem with accepting allclient referrals is you may be settingexpectations with the new client thatyou cannot meet. You can avoid thatsituation by making your servicecommitment clear to your client andlet him or her decide if it is appro-priate for you to meet the prospect.For example, you could say, “I’d behappy to meet with John. Now Iobviously don’t know his circum-stances at this point, but it’s fair tolet you know that we do have a min-

imum investment level of $100,000.That allows us to offer him the service level that you would receive.We do accept smaller accounts, butmy associate is the main contact for those clients.”

Julie Littlechild is the president of Toronto-based Advisor Impact. Send your questionsto [email protected].

Assistants can help generate new business without makingmajor changes to their daily duties. By Julie Littlechild

TEAM PLAYERS

ADVISOR’S EDGE38

A

Q

A

QAdvisor of the Year AwardsEntries are now being accepted

for the 4th annual Advisor of

the Year Awards. Nomination forms

can be found in this issue of

Advisor’s Edge and online at

www.advisor.ca. Submit yours

early and good luck! Deadline is

August 16. For information, e-mail

[email protected].

CAIFA 2002 National ConferenceSept. 28 to Oct. 1Ottawa Congress CentreThe Canadian Association of

Insurance and Financial Advisors

(CAIFA) is convening for seminars,

continuing education and its 96th

Annual General Meeting.The

fate of the merger between CAIFA

and the Canadian Association of

Financial Planners will be

determined at the end of the

conference. For more information

visit www.caifa.com.

Mark your calendar

AUGUST 200241

BUSINESSYOUR

MANAGING

Years ago, I had an unusualopportunity to roam through theclassrooms in a Toronto elementaryschool for a few months, and I wasstruck by how teachers tended to fallinto two camps.

Some devoted themselves to students who were lagging behind,funnelling whatever extra time theycould into giving them extra atten-tion. Others tended to get their sat-isfaction by paying special attentionto their best students, providingthem with added knowledge andchallenging them.

It’s the same with managers. Evenin a small office, managers tend toinstinctively be attracted to one ofthose two groups. The general argument from management gurusis that you concentrate on the topperformers. Eighty per cent of yourfirm’s performance will be deter-mined by 20% of the staff, so that’swho should draw your attention.Inspire them. Motivate them. Givethem the resources they want. Theywill carry you to greater heights. Anycoaching or training you devote tothem will have a bigger bang,because they are keeners.

That’s a harder philosophy to fol-low in a small office, however. If youonly have two or three staff mem-bers, the 80-20 rule doesn’t seem tofit as comfortably. And if a staffmember isn’t performing up to par,

ignoring his or her situation whileconcentrating on the A players canstill hold you back significantly.

Tied to this is the danger ofbeing perceived to play favourites. Iknow that peril well, having oftenbeen accused of it. I tend to fall intothe second camp I described earlier,getting my enjoyment from workingwith high flyers or potential high fly-ers. They inspire me. I try to inspirethem. Sparks fly. It’s boisterous andoften quite productive.

But in the background, some sub-ordinates feel diminished. Even ifyou give them the same amount oftime and attention, they sense thesparks and enthusiasm aren’t there.And that makes the job less appeal-ing for them, with the inevitable neg-ative impact on performance.

Equal AttentionIn a smaller office, whatever yourpredisposition, you have to treateveryone as an individual and devotesufficient energy to each. That startswith understanding each of them asan individual. What motivates eachperson? What do they want toaccomplish at work? How’s theirself-esteem? What kind of boost dothey need from you?

Write their names on a list andanswer those questions. On thesame list, rate how much you likeworking with each employee on a

one to 10 scale. You don’t have tolike working with each of themequally—but when you admit thedifferences on paper to yourself,you can start contemplating how to compensate.

I’m jaundiced on formalized per-formance evaluations, a techniquebig organizations promote thatdoesn’t translate easily to a smallbusiness. But a colleague has a moreinformal technique where he meetswith each employee annually andasks them, based on their jobdescription, what their five goals arefor the year.

One of the goals has to be devel-opmental: Something the person isgoing to do (and the company willfinancially support) that could helphim or her to do a better job. Itcould range from attending a con-ference to taking a quit smokingprogram.

That system forces you to giveequal attention at the start of theyear and in the subsequent follow-ups to each staff member. It’s a vehicle for avoiding the trap ofonly concentrating on your stars or the people you like to work with and making sure all are getting proper attention and developmentopportunities.

Harvey Schachter is a contributing editor ofAdvisor’s Edge.

In a small office environment managers should be especially careful not to favour their top performers. By Harvey Schachter

AVOID THE TRAP

THIS‘N’THATBy Andrew Rickard

Illu

stra

tion

by

Rus

s W

illm

s

GONE UP IN SMOKE Bankrate.com, a personal finance

Web site in Palm Springs, Fla.,

recently published an article summa-

rizing odd (and unsuccessful) tax

write-offs. Herb Wakeford, an

accountant in Raleigh, N.C., sent in a

story involving a Pittsburgh man who

owned a furniture business. After

years of trying to sell off his furniture

store, the man gave up and paid an

arsonist to burn it down—generating

a $500,000 insurance payment. The

man reported the benefit on his

income tax return but, said Wakeford,

“along with taking the proper deduc-

tions for the building, its contents and

the usual business expenses, he also

deducted the $10,000 consulting fee

he had paid the arsonist.” An audit

uncovered the crime, and both the

storeowner and the arsonist found

themselves in jail. The “consulting

fee” was disallowed, and another

$6,500 was charged for additional

taxes, penalties and interest.

DEATH BECOMES HERThose who would like to badmouth ex-

spouses from beyond the grave might

want to think again. In 1917, having

been married for over 15 years, John

Brown, a New York insurance agent,

divorced his wife Florence after she

had an affair. Florence nursed hard

feelings until the very end and wrote

in her will:“I have made no provision

for John H. Brown, my husband. I do

so because during my lifetime he

abandoned me, made no provision for

my support, treated me with complete

indifference and did not display any

affection or regard for me.” When

Florence died in 1951 John success-

fully sued her estate for libel and was

awarded $5,000 in damages—about

one half the value of her estate. The

case set a precedent for what is now

called “testamentary libel.”

PLANT PROTECTIONThe New Zealand Web site, Stuff

(www.stuff.co.nz), reports that AIG

Insurance and the country’s Nursery

and Garden Industry Association have

introduced a “Keen Gardeners’ Acci-

dent Protection Plan.” Jeremy Ken-

nerley, the association’s CEO, says the

product is designed to protect pas-

sionate gardeners. A sprained green

thumb could warrant a lump-sum ben-

efit of about $112 Cdn. More serious

cases would receive payments of up to

$1,123 Cdn, allowing the injured gar-

dener to hire someone to tend the rose

bushes during his or her recovery.

LOST AND FOUNDEarlier this year, an absent-minded

75-year-old German man left his brief-

case on a train. Luckily, it was found

and handed over to the authorities.The

briefcase contained his life savings:

50,000 Euros in cash, gold bars and

jewellery.“It’s good to know that there

are still people like that,” Kai Scholl,

spokes-man for the Munich Federal

Border Police told Reuters. The hunt

is on, however, for the 38-year-old do-

gooder. Under German law, the owner

is obliged to pay the finder 3% of the

value of the lost property.

ADVISOR’S EDGE42

END QUOTE: XXX XXXXXX XXXXXXXXX

Progress always involves risks.You can’t steal second base and keep your foot on first.

FREDERICK B. WILCOX

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • … · Nobel Economics prize recipient...

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Transcript of CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • … · Nobel Economics prize recipient...