CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • …€¦ · apprised of key market trends that affect their product. Add value:Many manufacturers now offer more than just product

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • JUNE 2005 • WWW.ADVISOR.CA

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

ADVISORS ROCK,LITERALLY.SEE PAGE 14

A SPECIAL PULLOUTInsurance Edge

OUTConfessions from the high net worth: why they leave their advisors

+

BAILING

AE06_OFC 05/17/2005 11:34 AM Page 1

7Inside Edge with Darin DiehlThe relationships you build with whole-salers are as vital as those you fosterwith your centres of influence.

12FRONT END LOAD Random ActsRare and random events can blindsideus when we’re trying to do our jobs well.CFP Sean Melrose discusses the

message behind Nassim Nicholas Taleb’sFooled by Randomness: The HiddenRole of Chance in Life and in theMarkets. And, a new section is unveiled:“Your Community” highlights advisorsdoing what they do best—being upstand-ing citizens of their regions.

INSURANCE EDGE (Special Supplement)Living benefits plans are complex andrequire advisors to do their homeworkbefore trying to sell them to clients andemployers.

18COVER STORY Bailing OutAre you paying enough attention to yourclients? Are you explaining your fees?Are you making sure trades are alwaysin their best interests? You ought to be.Many wealthy clients are leaving theiradvisors in response to lax service.By Philip Porado

31Compensating HeirsCertified financial planner MarkLajambe helps find a way to the will that satisfies heirs and protects contingent beneficiaries.By Michael Berton

35Tax Break with Gena Katz

37The Bowen Report with John J. Bowen Jr.

38CLOSING BELL with Beasley HawkesBeasley takes on Advocis’ proposed all-inclusive membership policy.

THE

JUNE • 2 0 0 5 •VOLUME 8NUMBER 6

ONCOVER

www.advisor.ca ADVISOR’S EDGE | JUNE 2005 5

18BAILING OUT

14 Advisors Rock, Literally

18 Bailing Out Confessions from the High NetWorth:Why they leave their advisors

Insurance Edge

INSURANCE EDGE

31FRENCH CONNECTION

SPECIAL PULLOUT:

AE06_005 05/17/2005 12:16 PM Page 5

Over the years, I’ve heard storiesfrom many of you about the variousdysfunctional relationships you havehad with individual wholesalers.Recently, I asked a wholesaler, whomI’ve known many years (and whom Iknow has the respect of the many advi-sors he serves), for his perspective onwhat exactly you should expect—makethat demand—from your wholesaler.

He says great wholesalers:❶ Know their stuff: Wholesalers need

to have a deep understanding of theproducts they represent. But don’texpect this to be true of every whole-saler. Investment and insurance prod-ucts are subject to change and a greatwholesaler will make sure the advi-sor is never taken by surprise.

❷ Follow the markets: A greatwholesaler will keep advisorsapprised of key market trends thataffect their product.

❸ Add value: Many manufacturersnow offer more than just product toadvisors. Firms are offering a smor-gasbord of practice management, or“value-added” programs from whichto choose.

❹ Take the heat: From time to timewholesalers are going to be wrong—

their firms are going to be wrong.You want your wholesaler to bringyou good ideas but if somethingdoesn’t work out, a great wholesalerwill keep you informed about thefacts of the situation and offer helpwhere he can.

❺ Possess wisdom and integrity:Great wholesalers have an under-standing of the strengths and weak-nesses of their firms’ product lineupand will guide the advisor accord-ingly. The best wholesalers won’tpush products they don’t think fit the needs of advisors and theirclients.

❻ Are a resource: Seasoned whole-salers are valuable to top advisors forjust that reason. These wholesalersare exposed to the successful prac-tices of many advisors and can be aconduit of best practices to all theadvisors with whom they work.There are, of course, two sides to any

relationship. And if the above accuratelyrepresents what you should expect ofyour wholesaler, then that begs thequestion: What should a wholesaler reasonably expect of you?

I can find no better answer than theone put forward by Nick Murray in his

legendary tome, The Excellent InvestmentAdvisor. Murray suggests advisors cre-ate an informal advisory board of greatwholesalers so they can better leveragethe information, skills and talents theyoffer. Wholesalers who agree to helpadvisors build their businesses have aright to expect some business in return.

In Murray’s words, “you’re notgoing to recruit a wholesaler to youradvisory board, no matter how extra-ordinary her personal skills, if youdon’t also believe that her product isa genuinely superior fit for the kindsof clients you want.”

Individual wholesalers can be veryreal partners in your success. It’s in nei-ther of your interests to waste eachother’s time.

So when you meet with wholesalers,be ready to clearly articulate your ownneeds and ask that they come preparedto explain just how they can help. Give your relationships with them the attention and thought they deserve. Be demanding, but be fair.

DARIN DIEHLEXECUTIVE EDITOR &

ASSOCIATE [email protected]

INSIDEEDGEWHOLESALE ADVICEHow to make the most of your relationship with wholesalers.


AE06_007 05/17/2005 11:48 AM Page 7

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

ADVISOR’S EDGEDeanne N. Gage, Managing Editor Harvey Schachter(416) 764-3803, [email protected] Contributing EditorPhilip Porado, Associate Editor Jennifer Molleson, Production Manager(416) 764-3802, [email protected] (416) 764-3928, [email protected] Staseson, Assistant Editor Maggie Sicilia, Administrative Assistant(416) 764-3804, [email protected] (416) 764-3822, [email protected] Nicholson, Art Director(416) 764-3850, [email protected]

ADVISOR’S EDGE REPORT / ADVISOR.CAJohn Craig, Editor Steven Lamb, Investments Editor(416) 764-3811, [email protected] (416) 764-3961, [email protected] Blythe, Managing Editor Kate McCaffery, Senior Reporter(416) 764-3810, [email protected] (416) 764-3959Doug Watt, News Director [email protected](416) 764-3815, [email protected] Andrew Gregory, Manager, Web Production &Opal Patel, Practice Management Editor Special Projects, (416) 764-3817(416) 764-3818, [email protected] [email protected]

OBJECTIF CONSEILLERYves Bonneau, Editor Christian Benoit-Lapointe, Assistant Editor(514) 843-2142 James Wagner, Art Designer

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, established 1998, is published by Rogers Publishing Limited, a division of Rogers Media Inc. Advisor’s Edge subscriptions include 24 issues per year, consisting of 12 issuesof Advisor’s Edge in magazine format and 12 issues of Advisor’s Edge Report in tabloid newspaper format.

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We acknowledge the financial support of the Government of Canada, through the Canada MagazineFund, towards our mailing and editorial costs. Contents copyright © 2005 by Rogers PublishingLimited, may not be reprinted without permission.

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JUNE 2005, VOLUME 8, NUMBER 6

ADVISOR Group is a division of Rogers Publishing Limited that consists of Advisor’s Edge, Advisor’s Edge Report, Advisor.ca, ADVISOR Live,

Objectif Conseiller, Conseiller.ca and Conseillers En Direct.

EDITORIAL ADVISORY BOARDElaine Andrew John OrdInvestors Group BMO Nesbitt BurnsDavid Wm. Brown Jim RogersAl G. Brown and Associates Rogers Group FinancialDavid Christianson Nancy ShewfeltWellington West Total Wealth Management Wellington West Capital Inc.John De Goey Thane StennerAssante Capital Management The Stenner Group, CIBC Wood GundyRobert Fleischacker Lynne TriffonAdvocis, Stonehaven Financial Group T.E. FinancialCynthia J. KettStewart & Kett Financial Advisors Ltd.

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8 ADVISOR’S EDGE | JUNE 2005 www.advisor.ca

AE06_008 05/17/2005 11:48 AM Page 8

YO

UR

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CK

S By Sean Melrose, CFP, Union SecuritiesLtd., Edmonton, as told to Heidi Staseson

Book: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, by NassimNicholas Taleb

Taleb is a humanities scholar and scientist, and he takes thatbalanced approach in his book. He suggests random eventsare often mistaken for trends. For example, he says, “Whatis truly luck is often misperceived as skill; what’s actually abelief or conjecture is taken as knowledge or certitude . . .Lucky idiot as skilled investor.”

Most Wall Street traders make their money incrementally,and because they perceive their regular and ongoing successesas part of a pattern that somehow is real, they continue todepend upon it, until then they are completely sideswipedby a significant, rare event. And what they’ve made over thosesmall increments is usually much smaller than the amountthey’ll lose in that one rare event.

Taleb refers to a number of examples where financial pro-fessionals he’s worked with were all very successful for peri-ods of time, until each was wiped out by some event theycould never have anticipated. Once the event started to occur,they refused to acknowledge it. He suggests this is a patternthat extends across market professionals as much as it extendsacross individual investors.

If someone could take anything away from the book, itwould be to recognize randomness for what it is and to tryto pull back the curtain on what’s often perceived as a best-bet system or something that’s foolproof. They use the term“masters of the universe” on Wall Street, [referring to] thesemarket traders or fund managers who are infallible becausethey have some inner sense of what’s going on.

Much of that is just a misunderstanding of the laws ofprobability, and a misunderstanding of the hidden role ofchance in markets and in life. By understanding that, if you’rean investor, you’ll have a better understanding of the peo-ple who are running your money. If you’re a market profes-sional, you’ll be more capable of doing your job.

RANDOM ACTS

FRONT

ENDLOADPeople, trends, events and analysis


Counting DollarsCurrency fluctuations can cause

asset returns to vary. MSCI World Index annual returns, in percent.

Source: Morgan Stanley Capital International Inc.

Cartoon by S

ue Dew

ar

YEAR Measured Measured inin U.S. Dollars Canadian Dollars

1994 5.58 10.16

1995 21.32 19.67

1996 14.00 13.36

1997 16.23 21.77

1998 24.80 34.90

1999 25.34 19.74

2000 -12.92 -10.02

2001 -16.52 -13.50

2002 -19.54 -20.47

2003 33.76 12.62

2004 15.25 7.02

AE06_012-014 05/17/2005 11:49 AM Page 12


■ JUNE 8 to 9, Mutual Fund Management,

InterContinental Hotel Bloor Yorkville, Toronto,

www.canadian-institute.com ■ JUNE 9 to 10,

Changing Channels: Managing General Agen-

cies at the Crossroads, Queen’s Landing,

Niagara-on-the-Lake, Ont., www.advisorlive.ca

■ JUNE 14 to 15,Taking Your Practice to the

Next Level: Maximize Your Bottom Line with

John Bowen, Queen’s Landing, Niagara-on-the-Lake,

Ont., www.advisorlive.ca ■ JUNE 16 to 17,

Operational and Compliance Best Practices for

Hedge Funds,The Marriott East Side Hotel,

New York, N.Y., www.americanconference.com

■ JUNE 21 to 22,Third Annual Elite Advisor

Summit, Paramount, Vaughan, Ont.,

www.strategyinstitute.com ■ JUNE 22 to 23,

5th Annual Conference on Managing and

Litigating Insurance Coverage Disputes,

The Sutton Place Hotel, Toronto, Ont.,

www.canadianinstitute.com

■ JUNE 26 to 29, IDA 89th Annual

Meeting and Conference, Fairmont Banff

Springs, Banff, Alta, www.ida.ca,

1 (800) 465-9670 ■ JUNE 27 to 28,

National Forum on Privacy Information &

Security in the Insurance Industry, Marriott

East Side, New York, N.Y., www.american-

conference.com ■ SEPTEMBER 27 to 29,

IFIC 19th Annual Conference, Metro Toronto

Convention Centre, Toronto, www.ific.ca

CA

LE

ND

AR

OF

EV

EN

TS

To submit an event, [email protected]

UNDER THE 49THanadian advisors need to be

aware of changes in rules that

affect their southern trading

partners.

The National Association of Securities

Dealers (NASD) is telling all industry

players to wipe off the sneer and eat their

greens. After years of debate, the NASD

ended a policy whereby people who were

considered securities industry veterans

were exempt from some Continuing Edu-

cation (CE) requirements.

CE requirements at U.S. firms are

divided into two tracks.The Regulatory Ele-

ment is administered in a computer-based

format and designed to determine whether

personnel are up to date on new regulations

and compliance requirements. Each regis-

tered person has to be tested every three

years. The separate Firm Element track

requires compliance departments to each

year review complaint letters,as well as any

disciplinary actions from regulators,and to

create courses to address deficiencies.

Last month, NASD nixed all exemp-

tions from the Regulatory Element com-

ponent of its CE requirements. Before the

CE program was enacted in 1995, those

who had been registered and had clean

disciplinary histories for 10 years did not

have to take the exam.

Compliance officers frequently com-

plained the grandfathering of certain peo-

ple within the registered populations at their

firms made it difficult to track the com-

pletion of Regulatory Element exams, and

that many older registered persons would

claim they were exempt when, in fact, they

were required to complete Regulatory Ele-

ment CE. NASD requires suspension of

reps who don’t complete Regulatory Ele-

ment,so the exemptions were a bone of con-

tention between compliance and staff.

NASD says it has updated its regis-

tration database so that it will automat-

ically remind compliance officers when

testing windows open for personnel who

formerly had been exempt.

In a related development,on May 2, the

New York Stock Exchange (NYSE) ruled

that persons who perform administrative

roles at securities analyst firms will not be

subject to the qualification exam that full-

fledged analysts must pass to work in the

business. The rule change also exempts

employees of foreign firms who work

as securities analysts,when the Big Board

can determine appropriate registration

requirements are in place.

—Philip Porado

U.S. COMPLIANCE AT A GLANCE

C

FRONTENDLOAD

YOURTHOUGHTSMonthly QuestionHow do you help your senior and

baby boomer clients sort out nasty

credit card debt?

ADVISOR: Credit card debt is definitelya common problem, even among thosewealthy baby boomers. When doing

financial planning I like to ask, “Withinreason, what would your absolute idealfinancial picture look like?” I advise thatany debt against assets that lose valuesuch as cars, furniture, computers etc., isbad debt and should be attacked to payit off as soon as possible.

A common misconception is it’s moreimportant to pay off the mortgagequickly. This is a debt that is usually at

an attractive rate (relative to credit cardsor other borrowing)—due to the homebeing pledged as security—and is againstan asset that actually grows in value,albeit slightly above inflation over thelong term.

My advice is to complete a compre-hensively written financial plan to determine any areas where cash flow

Continued on page 14

AE06_012-014 05/18/2005 07:53 PM Page 13

FRONTENDLOAD


On April 14, Winnipeggers witnessed rock rivalry at its finest.

But unlike fisticuff forefathers The Rolling Stones versus

The Who, this showdown highlighted bands of a more compli-

ant nature, featuring such fiduciary acts as Soul Beneficiaries,

Disposable Income, Mutual Fun and The Disclaimers. In the same

vein as Toronto’s Baystock and Vancouver’s Vanstock, the

inaugural Financial Services Battle of the Bands was aptly

named Winnstock. Raising more than $20,000 for The Arthritis

Society, this rock out surely won’t be the Wintry City’s last.

Soul Beneficiaries bass player and advisor David Christian-

son says the gala held at Cowboys Bar exceeded expectations,

with a packed crowd of 700 swaying fans—“everybody from

Wawanesa Insurance Company to underage kids who heard

about it and snuck in the back door.”

Winnstock founding member Al Jacks said the evening allowed

financial players to doff the pinstripes and let loose in this very

highly regulated industry.“Golf tournaments are starting to wear

thin,” he adds. “I thought this was a great way to let their hair

down, pick up some instrument that’s probably been rusting

around in the basement, and show what they can do.”

The winning band, Disposable Income, included rockers from

Pricewaterhouse Coopers LLP and Investors Group Inc.

—H.S.

YOURCOMMUNITY

Playing in the Peg

Advisor PrideEdmonton Northern Lights Rotary Club charter member Sean

Melrose reads to Ms. Duncan’s grade one class of York Acad-

emic School. The CFP with Union Securities Ltd. says his

favourite read is Roald Dahl’s classic James and the Giant

Peach. Of his bi-weekly book banter, Melrose says:“Reading is

such a big deal to me, and I know how much it has benefited my

life in general that it would seem ridiculous for me to not try to

pass it along.”

may be freed up. Then use the differ-ence to attack all the bad debt first.This should seem obvious, but it’s sur-prising how few people actually do it!

As for seniors, sadly I’ve seen them getinto credit card trouble by falling prey to

the numerous telephone and televisionsolicitations that target them. This crimeshould be taken very seriously given itoften targets more trusting seniors.

Scott M. YatesPartners In Planning Financial Services Ltd.Calgary

What value-added client appreciation

events do you host?

YTContinued from page 13 Month’s QuestionNEXT

Please send your responses to Heidi Staseson

[email protected]. com

AE06_012-014 05/18/2005 09:58 AM Page 14

INVESTORS ARE PROVING INCREASINGLY

WILLING TO WALK AWAY FROM ADVISORS WHEN

THEY FEEL IGNORED OR MISTREATED.

By Philip Porado

AE06_018-028 05/18/2005 09:59 AM Page 18


Cover Story

They’re well educated, have loads ofmoney, but don’t like to use financialadvisors. And they feel they have goodreasons not to bother.

They charge their former advisorsignored requests to invest more conser-vatively and consistently say advisor feesare too high and not adequatelyexplained. They also don’t take kindlyto “one-size-fits-all” asset allocationmodels. Often, they’ve watched as closefriends lost money in poorly managedportfolios. And certainly, the recentmedia scrutiny of various fund compa-nies is top of mind.

Another major beef: Their formeradvisors didn’t bother to understandtheir concerns beyond money mat-ters—things like hobbies and family.How did these investors react to whatthey perceived as indifferent treatment?They severed relations with those advi-sors and either moved to self-directedtrading or opted for money managerswho were willing to form closer part-nerships.

You may think these well-to-doinvestors are ignorant, crazy or both.But you’d be wise to take note of theirconcerns because people who are simi-larly disenchanted could be among yourpresent clients. It’s human nature to beemotional about money, even in stablemarkets, so it’s important to understandwhat drives these investors’ choices.

Jim Grant fired his advisor five yearsago. The 45-year-old, semi-retired com-puter professional now manages his owninvestments. “I was very dissatisfiedwith my advisor’s attitude on investingand the commissions he was earning forhimself given the amount of work hewas doing,” Grant explains. “I stoppeddealing with him as things were crest-

ing in June of 2000. One person I know had quite a lot of money in

Nortel with him andlost it.”

Grant, who residesin Calgary, says he’s confident enoughin his own investing skills that he feelsjustified eschewing his six-figure job fora part-time, lower-paying gig teachingcomputer skills to recently landedCanadian immigrants. His mortgage ispaid off, as is his portion of a vacationhome he shares with relatives, and hehas six figures invested. He and his wifecarry no insurance because assets areavailable to let the other maintain theircurrent lifestyle in the event one ofthem dies.

He still consults with a money man-ager from time to time. It’s a personalfriend of his with whom he’s entrustedhalf his money to invest. And althoughGrant stresses he does better with hisown stock and fund selections, he keepsthe manager’s account active in the eventhe and his spouse decide to travel exten-sively or opt for another situation whereself-management isn’t feasible. Grant’swife also generally handles her owninvestments.

The couple shares an account forjoint projects, such as buying anothercottage or a motor home, but they alsohave individual RRSPs, which theymonitor closely as a team. “We eachmake sure we know what the other hasdone with personal investments in caseanything happens,” notes Grant. “Imanage my stuff, she manages hers, butwe talk about what we’re investing inand why.”

Kelly Rodgers, a chartered financialanalyst and president of Rodgers Invest-

Continued on page 20Illu

stra

tion

by

San

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icho

ls

FIRED!YOU’RE

AE06_018-028 05/18/2005 10:00 AM Page 19

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ment Consulting in Toronto, makes herliving helping people axe their advisors.Clients come to her to either have exist-ing portfolios evaluated or to get helpfinding a discretionary money manager.

INFORMATION PLEASEThe most common complaints Rodgershears? Clients never know how they’rereally doing because their advisors don’tprovide enough information. “If [advi-sors] want to go after the million-plusmarket, they have to give them credibleinformation. They have to give realnumbers,” she explains.

When Rodgers reviews portfolios,she finds striking similarities in the wayassets are allocated—similarities that

stem from the fact brokerage houses arerun too much like sales operations,instead of wealth management servicesgeared to individual client needs. “Thething I see frequently in the $1 millionto $3 million range is that portfolios arestructured to maximize fee revenue,”Rodgers says. “There might be$100,000 to $200,000 in the managedaccount and another $100,000 to$200,000 in mutual funds and$500,000 in laddered bonds. Every-thing’s set right before you get to thetapers. And they’ll often have a bunchof new issues thrown in. You can see theadvisor thinking, ‘Let’s put some of thatin so we can pick upthe new issue com-mission.’ ”

Rodgers explains advisors need toremind themselves the efficient frontieris supposed to belong to the client.“The biggest frustration clients have asthey acquire knowledge is the feelingthey’ve been scammed,” she says. “Thedifference between high-net-worth andmedium-net-worth people is that high-net-worth people have options.”

Those options include firing anyadvisor who doesn’t pay genuine atten-tion to their needs or myopically driveshis own agenda. Jill Peskowitz* canrelate. She recalls the time an investmentadvisor suggested that her elderly father-in-law get into equities. “I’m sorry. Theman is 90! He doesn’t need growth.He’s not on that kind of time horizon,”says Peskowitz, a Toronto accountantwho took on management of her family’s investments several years ago.

“I hear about people who are gettingbad advice and it’s for the benefit of theadvisor,” she notes, acknowledging how-ever, that a few bad eggs don’t neces-

sarily make the basketrotten.

Bill Greenaway, a63-year-old, seven-figure investor inGuelph, Ont., recently ended a long-time relationship with an advisorbecause the firm’s orientation seemedtilted too much toward younger babyboomers. “The closer I got to retire-ment the more I determined they


Continued from page 19

*This client’s name has been changed.

FIRED!YOU’RE

FIRED!YOU’RE

AE06_018-028 05/18/2005 10:04 AM Page 20

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weren’t giving me the answers I neededabout my future,” he says. “They weren’tright for my times.”

He doesn’t consider himself a tirekicker but over the past 40 years, Green-away changed advisors and ended rela-tionships with two financial profes-sionals who didn’t listen or gave what heconsidered overly simplistic advice. Inone case, an advisor’s practice grew solarge that he handed Greenaway off toan associate with whom he didn’t see eye to eye. Another time he severed arelationship with a fee-for-service planner, because her retirement plan-ning advice started to sound like a bro-ken record. He recalls, “It reached thepoint where all she was saying was, ‘Takeout RRSP money in a tax-efficient way.’

Well thanks, I alreadyknew that.”

Whether a client ishappy about the fees paid hinges largelyon how well those fees are explained bythe advisor and understood by theclient. Grant views his relationship withhis money manager as a partnership andhe happily pays her top dollar. “I’mpaying a 15% participation fee. If theportfolio goes up $10, then $1.50 goesto the manager. I feel it’s well managedand the person is 100% answerable andhas fairly disclosed to me why she’smaking trades,” Grant explains. “Andshe’s not making a commission, whichwas my biggest complaint.”

Peskowitz, on the other hand, oftenfelt her advisor didn’t take the time toexplain the costs associated with trans-actions made on her behalf or to alert



“I was very dissatisfied with my

advisor’s attitude on investing.”

—Jim Grant

Semi-retired teacher, Calgary, Alta.

Pho

togr

aphy

Joh

n S

alus

FIRED!YOU’RE

AE06_018-028 05/18/2005 10:04 AM Page 21


her to fees that would be incurred whenshe bought and sold funds. “I’ve hadsome bad experiences where I felt likeI’d been snowed. They’d call me and sug-gest a move. And then at the end of theday it turned out to be a move from afront load to a deferred load,” she says.“So I had the potential to end up pay-ing two load charges for the same fund.I was only half listening because it wasa busy day. It was my fault for not pay-

ing attention, but this is why people areconcerned about being ripped off and

wonder if advisors areworking in their bestinterests.”

BLAME THE MEDIABefore starting a family, Kim Schwartz,*37, and her husband both worked for thesame high-tech company and found they



As a group, do-it-yourselfers (DIY-ers) are intensely interested in research. Many say they

listen in on institutional calls, as well as the quarterly financial calls put on by compa-

nies.They also devour the business sections of daily newspapers and read websites where

people trade opinions about companies and discuss investment strategies.

Technology also plays heavily into the DIY equation. Internet sites give investors access

to research along with the tools needed to make securities trades.Keith Sjögren of Tadding-

stone Consulting Group has seen studies showing 40% of millionaires have online bro-

kerage accounts but “that doesn’t mean they don’t have an advisor,” he notes.“They could

be doing some on their own and some with an advisor. People are using multiple chan-

nels. Even on the banking side, people use both Internet banking and branch banking.The

same is true on the investment side.”

Indeed, those DIY-ers interviewed were

consistently tech savvy and credit the

Internet with allowing them to buy and sell

stocks, bonds, and funds efficiently.“I used

to manage a group of people creating tech-

nical documentation. I’m comfortable with

the web,” says Kim Schwartz*. “I studied economics at university and that involves a

lot of calculus. And calculus and algebra are used in trading stocks. It helps you under-

stand the different trading theories.”

Other common traits include living well within their means and carrying little debt.

Nearly all the people interviewed had paid off their mortgages or were close to doing

so. Often, they had worked in remote parts of Canada or in smaller towns, where they had

few options to spend the cash they were accumulating.They then relocated to larger urban

areas with large sums prior to deciding how best to make investments. In the case of

married couples, one salary was often used to cover living expenses while the other

went straight to the bank. -P.P.

*This client’s name has been changed.

THEY’RE TECH SAVVY, CARRY LITTLE DEBT AND LIKE TO READ—A LOT.

DEFINING DIY-ERS

Other common traitsinclude living

well within theirmeans and carrying

little debt.

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AE06_023BAL only 05/18/2005 07:59 PM Page 23

were putting too much money into com-pany stock simply because it was easierthan developing an investment plan. Inthe years before the tech bubble burst, thecouple was in debt and carrying a largemortgage. Given their high salaries andaccumulated assets, they began question-ing their approach to cash management.

Then her husband changed jobs andSchwartz left the workforce to take careof a growing family. Her husband’s newcompany provided a lot of perks,including a home visit from a financialanalyst who confirmed their suspicionsabout how their debts were structured.That visit led to them diversifying theirassets—and prevented them from get-ting caught up in the tech stock crash.With money in hand, they paid offtheir mortgage and other debts. Thetwo then put the remaining money,around $1 million, into RRSPs,RESPs, GICs, mutual funds and stocksusing the services of an advisor at RBCDominion Securities.

Then things got interesting. “I wasthinking about going back to work andmy husband said, ‘Why don’t you starttrading stocks?’ ” The Schwartzes hadthree blocks of cash sitting in GICs

with RBC, each of which representedone year’s living expenses. The GICsweren’t earning great returns, so theydecided to close one of them and haveSchwartz use the cash to embark onsome self-directed trading. By puttingthe GIC money into the equity markets,the couple was able to ensure itremained liquid in the event theyneeded emergency cash. The experimentwas a success and more money wasmoved into Schwartz’s trading accounts.“Right now, I’m managing $100,000and we’ve got a further $900,000 ininvestments that I will eventually bemanaging. We’re basically looking atmoving $100,000 a year to home man-agement over the next nine years.”

As her husband moved up the cor-porate ladder, he became privy to infor-mation about his company and was ableto see how a good face was put onfinancial information distributed toadvisors. The experience made the cou-ple skeptical about the spin they weregetting from financial professionals.“It’s taught us not to have full confi-dence in our advisor because we knowthe information hasbeen tweaked downthe chain,” she says.

Wooing potential clients away fromdo-it-yourself investing isn’t a hopelesscause, though. Several do-it-yourselferssay they would use an advisor if theyfelt the person was truly in partnershipwith them to build a strategy for man-aging and growing wealth. “I needsomeone to give me something I can’tget myself. It would have to be someonewho wanted to point out errors ofomission and commission in order tohelp make the right decisions,” saysJason Soroko, a 32-year-old program-mer from Ottawa with six figuresinvested. “I’m even making sure thatcertain long positions I have are bal-anced. I play market-neutral positionswith options. If I were to pay someonethey’d have to make sure my marketneutral balancing is bang on, based ona proprietary model.”




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Those choosing to manage their ownmoney still represent the smallest per-centage of wealthy Canadians, accordingto Keith Sjögren, who leads the wealthmanagement practice at TaddingstoneConsulting Group in Toronto. Rightnow, the wealthy are still more likely toeither delegate financial management toan advisor or work in partnership withan advisor on their portfolios. That said,he notes the do-it-yourself cohort isgrowing. “The retired wealthy, who havemore free time, are starting to go out ontheir own,” Sjögren says. “It’s isolated tothe investment side, and not so much inareas like creation of trusts or estateplanning. You do need a lawyer for that.”

HOW ARE THEY DOING?Do-it-yourselfers obviously don’t have toworry about hidden agendas, but is itwise to invest with little or no profes-sional help? Rodgers notes there’s noth-ing inherently wrong with investorsdoing it themselves, so long as they keepa disciplined approach. Otherwise theirplans might backfire. “Typically do-it-yourselfers don’t do well because theylack that sounding board to prevent themfrom buying high and selling low. You

can look at the cash flows of mutualfunds and see people tend to buy whenit’s high and sell when it gets low. That’sbeen documented,” she explains.

But many of them are disciplined.Even when they don’t have formalfinancial plans, do-it-yourselfers set spe-cific goals regarding how much cashthey expect to accumulate in their port-folios, how and when they’ll diversify(in cases where they’re currently stockpicking), and how and when to movefunds into sheltered vehicles to fundtheir retirements.

Investing started out as a hobby forSoroko but he quickly got serious. “OnceI had an income of my own, I found Iwas saving a lot. I wanted to do smartthings with that money and I was willingto do the homework and get the most outof it,” he says. He also wasn’t impressedwith what he perceived as a formulaic

approach most advisors took to allocat-ing investments. “I don’t need someoneto say 30% in bonds and whatnot,”he says. “I found what [advisors] were

selling people was a bittoo simplistic for whatI wanted to do.”

What Soroko does is rotate sectors.He’s analyzed market trends and deter-mined moving his holdings among eco-nomic sectors provides better returns.“It’s not a ‘buy, hold and prosper’ modelyou should work on,” he says. “It’s morelike buy, shift when you need to, andprosper. I haven’t had a down year in 10years. I played the crash nicely.” So nicely,in fact, he says he’ll be able to decidewhether or not he wants to keep his soft-ware job in five years. He admits thereare no guarantees and acknowledges a lotof work and time goes into doing theresearch leading to his investment decisions. “It’s a second job,” he says.

Schwartz and her husband use Excelspreadsheets to create income-streamanalyses and have established a budgetfor every year so they’ll know how muchthey’ll need to save to make retirementincome last through age 90. They’vedetermined the husband will be able to



“I found what [advisors] were selling people was a bit too simplistic for what I wanted to do.”

—Jason Soroko

FIRED!YOU’RE

AE06_018-028 05/18/2005 10:09 AM Page 27

retire at his present income level, plusthey’ve factored in downsizing theirhouse, inflation, and changes to incomeneeds such as sending their three childrento university. “Our spreadsheet also tracksthe adjusted cost base of every stock sowe know how much tax we’ll have to payon each. I set aside enough in savings tocover that off,” Schwartz notes, addingthey also hired an estate planner to imple-ment wills and powers of attorney.

Peskowitz says another hurdle to fly-ing solo is the lack of impartiality on cer-tain investments. “You get attached toyour decisions and it makes you reluctantto get out of something when it goesdown. You can be too emotional aboutyour personal choices,” she says. “Youcan also be reluctant to sell when a stockis going up because you start expectingit to go through the roof. Both the upsand the downs can be problematic.”

That need for perspective hasprompted Greenaway to continue usingadvisors, even though he’s sometimesdissatisfied with their work. “I hungonto Royal Group as it went down.That was my decision, not the broker’s,”he says. “You need someone objective.You can fall in love with a stock.”

Andrew Burton, an investment advi-sor at RBC Dominion Securities inToronto, started his career at a discount

brokerage eight years ago. He says it’sdifficult to lure do-it-yourselfers backonce they cross over because they tendnot to see the value in what advisors dofor their clients. “They don’t want topay fees and they seem to feel deepdown they can do it themselves,” hesays. “I’d argue they can’t because theydon’t have the time. They already havefull-time jobs and they don’t have timeto do the necessary research.”

In Burton’s experience, a lot of do-it-yourselfers were simply after cheapcommissions so he offers two pieces ofadvice for advisors who think a clientmight be ready to bail. First, ask theclient what he thinks he’ll be getting ata discount firm, other than a $29 trade.“When I worked at a discount firm,people kept asking for my advice on cer-tain stocks or bonds but my hands weretied because you’re essentially an ordertaker,” he says. “When somebody wantsresearch or an opinion, they’re not pay-ing for it so they don’t get it.”

Then, explain the value of whatyou’re offering. Show your clients you don’t just give them buy-and-sellrecommendations, or research. The relationship is also about the monthlycontacts, or weekly if the client is moresophisticated. It’s about your desire toforge a partnership and develop a realistic financial plan based on theclient’s income needs and time horizons.“It all comes down to service. I want allthe clients to be involved in what they’redoing,” says Burton. “I don’t just wantthem to hand me the money and say,‘Go at it.’ ”

Philip Porado is associate editor of

Advisor’s Edge.

[email protected]



“They don’t want to pay fees and they

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—Andrew Burton

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2004 ADVISOR OF THE YEAR HONOURABLE MENTION


COMPENSATINGHEIRS

Marie Smith* could neverhave foreseen the trouble thatwould ensue upon her death inlate 2001.

She had carefully crafted the termsof her will, and instructed her executorsto divide the estate equally into fourparts and then purchase four 25-year,term-certain life annuities on “the mostfavourable terms” for her beneficiaries:three adult nieces and one adultnephew. The will insisted the annuitiesdefer any income payments until eachbeneficiary was 50 years old (the oldestwould soon be 50; the youngest was39). The will also named contingentbeneficiaries for each of the annuities.

When the lawyer acting for the

executors sent out a general request forproposals for the annuities required bythe will, Mark Lajambe stepped in. Heprepared a report for the lawyer, includ-ing a CANNEX financial survey ofcompetitive annuity rates. He alsoexplained how the use of the mandateddeferred annuities would create unequaltax consequences for the beneficiarieswhereby the three younger beneficiarieswould be taxed annu-ally on the growth ofprincipal on depositwith the annuityprovider prior to thestart of the incomestream at age 50.

Additionally, Lajambe suggested theuse of a corporate trustee to own and paytax on the three deferred annuities untilownership could be transferred to thebeneficiaries when they began receivingincome. The lawyer was impressed andthe products were secured.

However, in June 2002, the benefici-aries contested the estate. They had sep-arated into two groups and engaged

lawyers to represent their interests. First,they wanted an immediate lump-sumpayment (rather than a deferred annu-ity). Second, they were concerned aboutinterest owed on a loan unaddressed in


*All client names have been changed.

An advisor sorts out complicated taxproblems created by a will.

M A R K L A J A M B E

BBA, MBA

THE LAJAMBE GROUP INC.Sault Ste. Marie, Ont.

HONOURABLEMENTION

Beneficiarieswanted an immediatelump sum.

By Michael Berton

The Advisor of the Year Awards cel-ebrate advisor excellence in helpingclients achieve their financial goals.We awarded Mark Lajambe an hon-ourable mention for his solution toone client’s estate planning needs.

AE06_031-032 05/17/2005 11:50 AM Page 31


the will, that unless resolved, wouldreduce the funds available for thedeferred annuities.

Lajambe simplified the case into fourseparate challenges:❶Structure the annuities with respect

to the income tax liability.❷Structure the annuities to let the

executors obtain a clearance certifi-cate from the CRA and close offtheir involvement in the estate assoon as possible.

❸Ensure the four beneficiaries couldnot access the principal on depositwith the insurance company at anytime, as required by the will.

❹Arrange the proper signing of allappropriate documents with the pri-mary beneficiaries, contingent bene-ficiaries and various professionals.Working in concert with the execu-

tors, lawyer, accountant and the CRA,Lajambe produced a package and pre-sented it to the beneficiaries and theirlegal counsel. He proposed four distinctoptions:❶ Immediately purchase four deferred

annuities, with the attendant tax bur-den placed on the three waiting ben-eficiaries as the will originally directed.For the youngest annuitant, this wouldresult in roughly $28,716 in addi-tional taxable income (without receiv-ing any money to pay the taxes owing)over his 11-year waiting period.

❷Use a corporate trustee as an interimowner of three deferred annuities.Under this scheme, the corporatetrustee would pay the taxes on thedeferred amounts and equalize thetax burden among the waiting bene-ficiaries.

❸Make a partial lump-sum payment to

each of the four beneficiaries repre-senting each person’s estimated tax lia-bility during the waiting period. Theoldest would receive a $100,000immediate annuity, while the youngestwould receive an $86,791 deferredannuity and $13,209 in cash to fundhis taxes during the waiting period.

❹Purchase four 25-year, term-certainimmediate annuities, thus eliminat-ing the issues (both tax and owner-ship) around the waiting period.Lajambe’s proposal included a revised

CANNEX survey of annuity rates togive the beneficiaries an idea of howmuch income they could expect in eachinstance. He also provided credit ratinginformation for each annuity providerto help assuage concerns about any cap-ital risk the annuities might represent.

The beneficiaries were obtainingcompeting quotes from their own advi-sors, so Lajambe provided a detailedquote from one company which illus-trated the levelled income and taxationof a prescribed annuity.

His proposal was the subject of ayear-long legal wrangle that ended whena judge amended the will’s provisions toallow for immediate annuities ratherthan the original deferred ones.

By early 2004, the executors advisedthe four beneficiaries of their entitle-ment amounts. The beneficiaries’ advi-

sors then came forward with their ownannuity quotes. However, after revisingthe CANNEX survey, Lajambe wasable to demonstrate how these quotesin fact provided less income than thehighest provider.

In order to prevent the beneficiariesfrom cashing out the annuities (and thusprejudicing the contingent beneficiaries’interests), Lajambe had the estate pur-chase the annuities and named irrevoca-ble beneficiary designations. Once issued,ownership would be transferred to theprimary beneficiaries. However, Lajambelearned that ownership could not betransferred without the contingent ben-eficiaries signing off. So, he had the annu-ities issued with revocable designations,with the stipulation that when ownershiptransferred from the estate to the primarybeneficiaries, the contingent beneficiarydesignations would become irrevocable.

The ongoing tax liability was trans-ferred along with the annuities to thebeneficiaries, and the income interestsof the contingent beneficiaries wereprotected with irrevocable designationsconsistent with the requirements ofSmith’s will. Lajambe also protected theexecutors by providing them with a finalreport which included the annuity ratesurvey (confirming the superiority ofthe contracts chosen), copies of theoriginal annuities, and copies of thetransfers of ownership and irrevocablebeneficiary designations.

Michael Berton, CFP, CLU, R.F.P., FMA,

is a financial planner with Assante Financial

Management Ltd. and part-time instructor at

the B.C. Institute of Technology (B.C.I.T.) in

Vancouver. The opinions expressed are those of

the author and not necessarily those of Assante

Financial Management Ltd. or B.C.I.T.


A judge amended the

will’s provisions to allow

for immediate annuities

rather than the original

deferred ones.

AE06_031-032 05/17/2005 11:50 AM Page 32

BREAKTAX

Income trusts are the new hot product, but they’re not tax efficient for everyone. By Gena Katz

TRUST BUT VERIFY

During the past year, income trustshave been the IPO darlings in Canadaand now represent around 10% of theToronto Stock Exchange’s total currentvolume.

Resource royalty trusts and realestate investment trusts have beenaround since the 1980s, but businesstrusts are a more recent phenomenonand currently represent in excess of$125 billion in market capitalizationacross 175 issuers.

Why the recent surge in popularity?Today’s economic environment facesinvestors with low interest rates andvolatile stock markets. They’re look-ing for instruments with higher poten-tial returns but remain nervous abouttraditional equities. What they read inthe papers makes it look as if incometrusts are the answer to their woes.

But watch out, they’re not appro-priate for everyone. It’s important foryour clients to understand exactlywhat income trusts are, and to beaware of their associated risks.

Typically, business income trustshold a combination of commonshares and high-yield debt of theiroperating companies. Substantially allthe cash inflows of the operating busi-nesses are distributed to the trust,which in turn disburses funds to unitholders. The combination of thetrust’s equity and debt holdings allowsthe income to flow through toinvestors with little or no underlying

tax, resulting in higher payouts—typ-ically ranging between 8% and 15%.In addition, the cash distributions oftenexceed the income allocated from the trust and this excess, or return ofcapital, is tax-free but reduces the costbase of the investment.

Income trusts are intended to pro-vide investors with regular, steady, tax-efficient and generous returns.And for many, they appear to be theperfect fixed-income alternative. Butit’s important for advisors to point outto clients, especially if they’re conser-vative investors, that income trusts aremore like equity investments, ratherthan bonds or other debt securities.

There are two fundamental and sig-nificant differences between tradi-tional fixed-income investments andincome trusts. Unlike interest pay-ments on debt, an income trust has noobligation to make fixed regular dis-tributions. Instead, payments dependon the performance of the underlyingbusinesses and can be reduced or sus-pended at any time. When a fixed-income debt matures, the principal isreturned. But with income trusts thereis no guaranteed return of capital. Theinvestor’s disposition proceeds willdepend on the market trading value ofthe income fund.

So, despite the potential for supe-rior returns, income trusts may not bethe answer for a conservative investorwho counts on fixed cash flows and is

concerned about capital preservation.Income trusts are also not ideal invest-ments to hold in an RRSP. Many ofthe tax benefits are lost and regularcash flows don’t necessarily providebenefits to a registered plan.

When evaluating income trusts rel-ative to other investment vehicles for aclient, advisors must keep in mind thequoted returns represent cash distribu-tions, some of which represent a returnof capital while others do not. There-fore, a direct comparison of yields with other dividend or interest-payinginvestments may not be fair. In theevent a client is looking for growth, butnot regular cash flow, traditional equi-ties might be more appropriate.

Ultimately, the investment decisionshould be based on the merits of theunderlying businesses. The companiesshould have healthy, mature opera-tions with long-term stability. Thereshould be limited need for capitalreinvestment to maximize cash flow toinvestors. Sustainable cash flows arevery important and therefore, investorsshould consider the risks associatedwith fluctuations in market demandand prices of the underlying com-modities or services provided by thebusinesses.

Gena Katz, CA, CFP, is a senior principal with Ernst & Young’s NationalTax Practice in Toronto. “Tax Break”appears monthly.


AE06_035 05/17/2005 11:50 AM Page 35

REPORT

Leveraging existing contacts helps you build a more profitable client base. By John J. Bowen Jr.

RELATIONSHIP MARKETING

Attracting new clients comeswith plenty of options. There are somany, in fact, your real challenge willbe to sort through the marketing tech-niques that don’t work and zero in onthe most effective handful.

Consider the three major channelsfor marketing to prospects:• Mass marketing, which relies on

things like mailings to reach largenumbers of prospects. This shot-gun approach sends thousands ofmarketing messages in hopes onewill hit its target.

• Credibility, which opens doors bybuilding your reputation withinyour target market. Techniques forthis channel include writing articles,making presentations, and appear-ing on radio or television.

• Relationship, which leverages yourcontacts with key clients and otherprofessional advisors, such asaccountants and lawyers, whoalready work with the people inyour target market.The mass marketing channel rarely

attracts affluent clients. The credibil-ity channel is useful for introducingyourself to a community of affluentinvestors. But a good reputation alonewon’t bring in qualified prospects. Toensure a steady stream of pre-qualifiedreferrals for prospects you can servewell—and profitably—you must turnto the relationship channel.

That channel is aligned with theway affluent people want to find theiradvisors: through referrals. Thewealthy simply don’t choose an advi-

sor based on advertisements that arrivein their mailboxes. They seek recom-mendations from people they trust.

Advisors who use the relationshipchannel understand a fundamentaltruth about the affluent: To successfullyreach prospects, you must contact themin the ways they want to be contacted.Accordingly, these advisors focus theirattention on key relationships that willlead to qualified referrals. Their effortsgenerally centre on two things: usingsystematic referral-request processeswith existing clients, and formingstrategic alliances with accountants andlawyers who serve the wealthy.

As the chart shows, client referralsare important to nearly three-quartersof Canadian advisors earning netincomes greater than $200,000. How-ever, fewer than 60% of those earn-ing less than $100,000 rely on clientreferrals to bring in prospects—a substantial difference.

The relationship channel can betime-consuming, because it requiresyou to methodically build contactswith future clients and their profes-sional advisors. But it’s also the mosteffective way to draw in wealthyclients, so its rewards can be signifi-cant.

John J. Bowen Jr. is founder and CEO of CEG Worldwide, a U.S.-based globaltraining, research and consulting firm. “The Bowen Report” appears monthly.


THE BOWEN

LESS THAN

$100,000

$100,000 TO

$200,000

MORE THAN

$200,000

0%

20%

40%

60%

80%

58.8%

18.6%

64.7%

35.7%

73.7%

44.7%

Annual Net Income

Client referrals

Referrals from centresof influence, such as lawyers or accountants

PROSPECTING STRATEGIESCanadian advisors at higher-income levels consistently

make more use of referrals.

Source: CEG Worldwide, 579 Canadian financial advisors surveyed.

AE06_037 05/17/2005 11:35 AM Page 37


Clearly some of this drop-off is due to rising membership fees and the requirement that every member have a professional designation by 2010.

The proposed solution? Create a new category of membership for non-accredited salespeople. Bad plan.

When Advocis first floated this idea, I assumed it was to give would-be advisorsaccess to better educational opportunities, exposure to the benefits of a profes-sional designation and to a more committed group of advisors. This would, in turn,motivate them to aspire to higher standards.

However, I was wrong. Advocis now seems to be saying they have room for trans-action-based salespeople, simply because they are also “professional.” I know thatmany of them are experts in their fields and conduct themselves in an exemplarymanner. That’s not the point. An organization of “advisors” has to be just that—an organization of advisors, with all the requirements and trappings of a profes-sion, or else morph into a trade association. You can’t have it both ways.

Providing comprehensive advice is different than professionally selling or pro-viding transaction services. We really need to ask ourselves the following questions: • Is giving financial advice an important activity for Canadian society? • Does what we do make a significant difference in peoples’ lives? • Can we mess them up badly if we screw up? • What if we focus on selling instead of advising—can we do a lot of damage?

I hope you answer yes to all of those questions. We do not work with life anddeath daily like emergency surgeons, but short of that, don’t we have as much impacton peoples’ lives as any other profession?

Why would we even consider allowing under-educated, unaccredited and possiblyunsupervised practitioners into our associations? If regulators want to allow suchpeople to sell investment and insurance products, that’s their business. A profes-sional association, on the other hand, makes sure people cannot call themselves“advisors,” “planners” or any other term that suggests a fiduciary responsibility,without first obtaining a professional designation, following a code of ethics and

making a commitment.By allowing membership of non-

accredited advisors, Advocis is playingright into competing associations’ hands.R.F.P.s have maintained their designationbecause the Institute of Advanced Finan-cial Planners’ standards have continuedto rise, most recently with the new Professional Standards of Practice for R.F.P.s.

The Financial Planners StandardsCouncil is trying to do the same thing,and credit to them.

If we are in a serious business, thenit behooves us to make serious moves inthe right direction. Let’s look to theAustralian model as proof it can bedone. As of 2002, all financial servicesthere are regulated by one group, theAustralian Securities and InvestmentCommission. All participants need anAustralian Financial Services Licence,which requires suitable education andcompliance for each class of licence.One class covers all “financial productadvice.” Over 30% of “planners” leftthe business when this requirementcame in, so the part-timers and dilet-tantes are now gone. That sure soundspositive to me.

Beasley Hawkes is a pseudonym. He is apractising financial advisor with a firm he’drather not name. Hawkes can be reached [email protected]

LOWER HURDLES,MORE ADVISORS?

B Y B E A S L E Y H A W K E S

closingBELLAdvocis, our largest advisor organization,

is facing a serious dilemma. Its membership

has fallen off sharply (from 16,000 to

around 13,000 members in the last year).

AE06_038 05/17/2005 11:35 AM Page 38

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