CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • …€¦ · PM 40070230 R10969. Canada Post: Please return undeliverable address blocksAdvisor’s to Edge, Circulation Department,

Rogers Publishing Limited, One Mount Pleasant Rd., Toronto, Ont. M4Y 2Y5 • PM 40070230 R10969

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • MAY 2006 • WWW.ADVISOR.CA

NOT FITTING INWITH YOUR DEALER FIRM?

Consider making a switch.

CULTURESHOCK

IS THERE LIFEBEYOND TERM?

COMMERCIALREAL ESTATE’S

RELIABLE RETURNS

UNRAVELLINGEXECUTIVE PAY

AE05_OFC 4/19/06 10:53 AM Page 1

5Inside EdgeHow do you know when it’s time to saysayonara? By Deanne Gage

8FRONT END LOAD Not So DifferentThe IDA’s Alex Popovic talks aboutBrokerage Fraud: What Wall StreetDoesn’t Want You to Know; and introducing “How Things Work”—a one-page primer on top industry issues.

11TOOLBOX The Term RutTiming is everything when convertingclients from term to permanent insurance. By Michael Berton

14COVER STORY Culture ShockConsidering a mega move? Knowingwhen it might be time to leave yourdealer firm needn’t be a strain.Take thepressure from your decision down anotch by carefully weighing the pros andcons of a host of available alternatives.By Al Emid

23Special CasesHigh-level executives have unique problems and limited time to hear youradvice. So go the extra mile to showcasethe value of your services.By David Christianson

29Real ReturnsLooking for diversification optionsbeyond those offered in equities?Consider commercial real estate.By John Nicola

35Tax Break with Gena Katz

37Compliance Check with Ellen Bessner

38CLOSING BELL with Beasley Hawkes

THE

MAY • 2 0 0 6 •VOLUME 9NUMBER 5

ONCOVER

www.advisor.ca ADVISOR’S EDGE | MAY 2006 3

23BIG DEALS

11 Is There Life Beyond Term?

14 Not fitting in with your dealerfirm? Consider making a switch.

23 Unravelling Executive Pay

29 Commercial Real Estate’s Reliable Returns

14EDUCATED EXIT

AE05_003 4/19/06 10:53 AM Page 3

When I meet advisors for the firsttime, I’ll often ask them why they becameadvisors. The most engaging ones tendto see advising as a calling, helping others achieve a financial well-being (or some variation on that theme).

So when the conversation turns totheir dealer, advisors fall into one of twocamps: the ambassadors or the discon-tented. The discontented feel tornbetween helping others the right way andwhat I call practice politics. This cancome as a subtle pressure from a dealerto sell a particular kind of product orsimply a suggestion that they’re not fitting in with the company culture.

Some of the discontent can bechalked up to typical, everyday grum-blings. But once in a while, the advisor isdisenchanted enough to make a change.

They may tell themselves, “Myclients are terrific, I’m making a decentincome and only eight more years untilI retire. I can do this.” And that attitudemay work in the short term. But even-tually, they may wake up and realizethey need to make a switch.

One advisor’s breaking point camewhen her dealer, unbeknownst to her,fired some of her clients because theywere deemed to have too few assets.

This dealer’s dictating ways led thisadvisor to say See Ya, and the majority of her clients soon followed to her new firm.

So when is it time to investigate youroptions? When your philosophies arecompletely out of sync with those ofyour dealer. When you’re not getting thesupport you need to run the type ofpractice you want. When you no longerhave faith in your dealer’s strategy.

In some cases, advisors who are moreentrepreneurial-minded are tired offeeling like a cog in the machine, so theystart their own firms or join smaller,boutique firms that give them morecontrol and equity in their practices.

In other cases, advisors may crave thesupport of a big-name firm and believein-house specialists and superior train-ing, not to mention referrals, outweighthe stress of running their own firm.

There’s always a fear of clients notbeing supportive if you switch firms.Some advisors dread the conversation(and the ensuing client questions) thatcome with making a move, but the beststrategy is to be honest and give lots ofwarning. Talk about why you are mak-ing a move and why you think it will bein your clients’ best interests. Diplo-

macy and tact are necessary when youspeak to clients, so don’t bash the otherdealer (even if it’s well warranted)! Badtalk will just reflect poorly on you.

Also talk about what the move meansfor you personally. “I gained credibilitypoints by stating upfront what was in itfor me, as well as them,” one advisorrecently told me. “People are not naïve—even though there were advantages forthem, clearly there must be some for meas well, to make such a decision.”

Of course, you don’t want to leapfrom the fire into an explosion. Doesthis prospective dealer truly reflect your philosophy or is their pitch just marketing speak? Can you really dowithout the training and other supportyour current dealer offers? Are there anycompliance and technology issues?

This month’s cover story addresses thequestions you need to ask yourself—andyour dealer—to make an informed deci-sion. And sometimes, the decision isn’tto leave for greener pastures. Sometimes,after much investigation, it’s greenenough right where you are.

DEANNE N. GAGEEDITOR

[email protected]

INSIDEEDGEDEALBREAKERHow do you know when it’s time to say sayonara?


AE05_005 4/19/06 9:34 AM Page 5

FEE FESS UP ADVISOR’S EDGEDeanne N. Gage, Editor Steven Lamb, Bert Vandermoer(416) 764-3803, [email protected] Contributing EditorsPhilip Porado, Associate Editor Jennifer Molleson, Production Manager(416) 764-3802, [email protected] (416) 764-3928, [email protected] Staseson, Assistant Editor Marie Atkins, Executive Assistant(416) 764-3804, [email protected] (416) 764-3847, [email protected] Nicholson, Art Director(416) 764-3850, [email protected]

SUBSCRIPTIONSCornerstone, [email protected]

SALESDonna Kerry Gisela StephanyNational Account Manager Sales Manager, Eastern Canada(416) 764-3805, [email protected] (514) 843-2133, [email protected] Mooney, National Account Manager(416) 764-3809, [email protected] Murphy, National Account Manager(416) 764-3838, [email protected]

CIRCULATION AND RESEARCHKeith Fulford, Circulation Director Elizabeth Hall, Research ManagerCindy Younan, Circulation Manager Rosa Regula, Research AssistantTricia Benn, Director of Research

Garth Thomas, Publisher, ADVISOR Group (416) 764-3806, [email protected] Williams, Vice-President, Healthcare & Financial Services Group

EDITORIAL ADVISORY BOARDDavid Wm. Brown Jim RogersAl G. Brown and Associates Rogers Group FinancialDavid Christianson Kurt RosentreterWellington West Total Wealth Management Berkshire SecuritiesKathleen Clough Nancy ShewfeltPWL Capital Wellington West Capital Inc.Robert Fleischacker Thane StennerAdvocis, Stonehaven Financial Group The Stenner Group, CIBC Wood GundyJohn Horwood Lynne TriffonRichardson Partners Financial T.E. WealthCynthia J. Kett Terry ZiveStewart & Kett Financial Advisors Ltd. Gordon & Zive

ROGERS MEDIA INC.Anthony P. Viner, President and CEO

ROGERS PUBLISHING LIMITEDBrian Segal, President and CEOJohn Milne, Senior Vice-President, Healthcare & Financial Services GroupHarvey Botting, Marc Blondeau and Michael Fox, Senior Vice-PresidentsImmee Chee Wah and Larry Michieli, Vice-Presidents

, 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 issues of 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 assistance of the Government of Canada, through the Publications Assistance Programtoward our mailing costs. Contents copyright © 2006 by Rogers Publishing Limited, may not be reprintedwithout permission.

Advisor’s Edge receives unsolicited materials (including letters to the editor, press releases, promotional items andimages) from time to time. Advisor’s Edge, its affiliates and assignees may use, reproduce, publish, re-publish, distribute, store and archive such submissions in whole or in part in any form or medium whatsoever, without compensation of any sort.

MAY 2006, VOLUME 9, NUMBER 5

ADVISOR Group/Groupe CONSEILLER consists of Advisor’s Edge, Advisor’s Edge Report,Advisor.ca, Advisor Live, Objectif Conseiller, Conseiller.ca and Conseillers En Direct.

GOT A PROBLEMWith magazine subscriptions or address changes?E-mail: [email protected] orPhone: 1-866-236-0608

6 ADVISOR’S EDGE | MAY 2006 www.advisor.ca

LETTERSRe: “A Consumer’sPerspective” (March, page 5)You are so right about how we arepaid. Clients have no problem pay-ing a travel agent 5% to 10% for aone-week trip. The same goes for aninterior designer, car dealer or a real-tor but most just can’t get their

heads around paying for a financial plan that could change theirentire lives. I have been a fee- and commission-based plannerfor 20 years and I am always amazed at how true this is. A.R. (Andy) Glavac, CFP, president, Glavac Financial Planning Services, Welland, Ont.

Re: “Advice For the Rest of Us” (January, page 5)I agree with your premise that everyone deserves financial planning. However, as someone coming from a bank settingI feel you have given a raw deal to the many employees of “thebank.”

You seem to be assuming that clients who see these bankemployees are not getting any advice. While initially manyemployees may have been thrown into a role in order to facil-itate the sale of mutual funds, things have changed dramati-cally over time. Now the major banks spend an enormousamount of money training these employees in order to helpthem to provide proper advice to every client, from the small-est to the largest. I have seen many cases where the financialadvice from the uncertified employees of the banks is a better fit for the client than what a “financial planner” hasadvised for them.Ian Griffiths, RBC Investments, Devon, Alta.

Re: “Beyond the RRIF” (November, page 33)I certainly agreed with many issues about RRIFs and annu-ities raised by Bruce Cumming. I have used annuities for partor all of RRIFs on many occasions, especially where clientsare very nervous about markets. However, when clients areresponding that they are looking for a return of between 7%and 10% per year, it represents a total income return and doesnot contemplate any drawdown of capital. So to suggest that an 8% total return, including capital from an annuity, is comparable is grossly misleading.Roger I. Coe, CA, Northwood Stephens Private Counsel Inc., Toronto

AE05_006 4/19/06 9:35 AM Page 6

YO

UR

PI

CK

S By Alex Popovic, vice-president, Enforce-ment Department, Investment Dealers Association of Canada, Toronto, as told to Heidi StasesonBook: Brokerage Fraud: What Wall Street Doesn’t Want

You to Know, by Tracy Pride Stoneman and Douglas J. SchulzThe book is American but it certainly informs registeredrepresentatives here about their worst-case legal risks.

I’d recommend it for Canadian clients, salespeople, brokers and advisors to see the similar types of issues thatare raised under U.S. litigation—issues we’re seeing more ofin this type of business as a result of class action.

The book is basically a primer on what can go wrong inthis business and what you should be aware of. Until recently,we didn’t have class action. But now that we do, and nowthat we also have contingency fees, I anticipate we’re goingto see a lot more litigation. So people should at least becomeaware of what some of the issues are.

Many of the American and Canadian laws on issues suchas suitability and discretionary trading are similar, so a lotof the book’s concepts are also similar. The reality is thatwhatever happens in the U.S., just wait six months and we’llprobably catch the cold.

Suitability is the most common complaint that we dealwith from clients. This book provides the principles behindsuitability and the things a U.S. broker needs to take intoaccount. And when we look at the Canadian principles,they’re not quite spot-on but they’re so darn close that unlessyou’re a legal expert it would be really difficult to discernthe differences.

It’s a very easy read and it’s in plain English. Althoughfairly comprehensive, it doesn’t use a lot of jargon or bro-kerage terms, and where it does, it explains them. You do have to be aware it’s taking an American perspectiveand that there are differences between how we regulate hereas opposed to the U.S., but there are a lot of parallels andsimilarities.

NOT SO DIFFERENT

FRONT

ENDLOADPeople, trends, events and analysis


Halfway ThereAmong women who started the retirement

transition at ages 55 to 59, roughly 50% hadretired within the next four years; this was true

for 40% of their male counterparts.

Source: Statistics Canada, New Frontiers of Research on Retirement, March 2006

Cartoon by S

ue Dew

ar

Men

Women

55 to 59 years 65 years and above0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Age when the transition began

AE05_008,009 4/19/06 9:36 AM Page 8

CA

LE

ND

AR

OF

EV

EN

TS

To submit an event, [email protected]

Dealing with a client who is grieving fol-

lowing the unexpected death of a spouse

is a trying task. But there is guidance you

can offer to assuage his or her devasta-

tion—if only by a fraction. Kevin Wark,

LL.B., CLU,TEP, is the senior vice-presi-

dent of business development at PPI Finan-

cial Group, and author of Everything You

Need to Know About Estate Planning (Key

Porter Books Ltd.). Although he notes the

best-case scenario is for these clients to

learn the after-death guidelines before a

death occurs, he acknowledges too often

this does not happen.Take a look at the fol-

lowing action points he suggests for clients

in this predicament.

Step 1: Locate specific documents.

• Will

• Death benefit-related items (There may

be benefits payable by the employer of

the deceased, or if a spouse was a U.S.

citizen he or she may be eligible for

social security death benefits.)

• Citizenship papers (if applicable)

• Birth certificate (also for dependent

children)

• Bank account information

• Marriage certificate

• Life insurance policies (The client can

obtain from the insurance advisor or go

to the insurance company if he or she

is entitled to specific benefits.)

• Trust agreements (The deceased may be

a shareholder or co-owner in a business

and there may be documents relat-

ing to what happens upon death.)

• *Certificate of discharge from the

military (If your spouse was in the

military, you may need this to collect

benefits.)

• *Complete list of all property ownership

Step 2: Notify relevant contacts.

• Specialists (lawyers, accountants, tax,

investment or estate planning advisors)

• Banks

• Insurance companies (Provide proof of

death to ensure policy payouts.)

• Beneficiaries (Disclose will entitlement.)

• Employer of deceased (Ensure he/she is

aware of employee’s death.)

• Clients (If the deceased was a business

owner, there may be outstanding pay-

ments or obligations, pension plan or

group life insurance to review; clients

may need to be referred elsewhere

unless succession plan in place, or told

by staff they can no longer assist with

their needs.)

Step 3: Complete these simple

but critical tasks.

• Destroy and cancel credit cards.

• Cancel social insurance.

• Review safety deposit boxes and create

list of contents.

• Re-direct mail.

• Change voicemail message.

• Determine what property was owned by

the deceased alone; what property was

in joint ownership; what liabilities exist.

• Re-register all assets in the name of the

estate or in the appropriate name of the

beneficiaries.

Estate planning is situational; neverthe-

less,Wark says the spouse of the deceased

should start working on securing the invest-

ments and reassuring creditors and things

like that as quickly as possible after the

death. And clients should be prepared for a

lengthy process. Even the most simple

estates can take a year or longer to final-

ize everything. —Heidi Staseson

*(Source:Visa, Practical Money Skills for Life, 2002)

■ MAY 8, 4th Annual Advanced Asset-Based

Lending, St. Andrew’s Club and Conference

Centre, Toronto, www.insightinfo.com

■ MAY 8, IFIC and ACCP 5th Annual

Compliance Forum, BMO Financial Group

Institute for Learning, Scarborough, Ont.,

www.ific.ca ■ MAY 16, Objectif Conseiller

Financial Intelligence At Work Series, Centre

Mont-Royal, Montreal, www.conseiller.ca/confer-

ences/ ■ MAY 16 to 17, 8th Annual Compliance

Readiness Strategies, Metro Toronto

Convention Centre, Toronto, www.strategyinsti-

tute.com ■ MAY 16 to 17, Hedge Funds, St.

Andrew’s Club and Conference Centre, Toronto,

www.insightinfo.com ■ MAY 18, National

Summit on Private Equity, Pantages Suites

Hotel, Toronto, www.canadianinstitute.com

■ MAY 18, Objectif Conseiller Financial

Intelligence At Work Series, Le Château

Bonne Entente, Sainte-Foy, Québec City, www.con-

seiller.ca/conferences/ ■ MAY 28 to 31,

CIFPs 4th Annual National Conference, Hyatt

Regency, Vancouver, www.cifps.ca ■ MAY 30 to 31,

Advanced Forum on Derivatives, Marriott

Bloor Yorkville, Toronto, www. canadian-

institute.com ■ MAY 30 to 31, IFB Spring

Summit, Toronto, Toronto Congress Centre,

www.ifbc.ca ■ JUNE 4 to 7, 9th Annual Asset

Securitization Forum (ABS 2006), The

Fairmont Banff Springs Hotel, Banff, Alta.,

www.insightinfo.com ■ JUNE 5 to 6, 5th

Annual Canada Cup of Investment

Management, Hilton, Toronto, www.imn.org

■ JUNE 7, Morningstar Investment

Conference, The Carlu, Toronto, www.morn-

ingstar.ca/conference ■ JUNE 7 to 9, Changing

Channel: The Next Generation of Managing

General Agencies, Westin Trillium House, Blue

Mountain, Collingwood, Ont., www.advisorlive.ca ■

JUNE 14 to 17, Advocis National Conference,

Victoria Convention Centre, Victoria, B.C.,

www.advocis.ca ■ JUNE 25 to 28, IDA 90th

Annual Meeting and Conference, Fairmont

Château Whistler, Whistler, B.C., www.ida.ca


HOW THINGS WORK ?

SUDDENSTEPS

AE05_008,009 4/19/06 9:36 AM Page 9

You’ve just finished gathering and ana-lyzing the financial and lifestyle informa-tion for a new client, Sarah, and made theinitial determination she should acquire alife insurance policy worth $500,000. Butwhat type?

You get some quotes from the life insur-ance companies for a 40-year-old femalenon-smoker and they present you with twooptions: a $500,000 Term 10; or a Term100 permanent policy of equal value (seechart on page 12).

Obviously, if Sarah’s need is temporary,(20 years or fewer) she’ll pay less for theterm policy. But if her needs are longer-term, the permanent solution becomes lessexpensive over time and will last as long asshe continues to pay the level premium. IfSarah can’t currently afford the $2,513 permanent premium,she could choose a term policy containing an option to con-vert to a permanent policy of equal face value at a later date.But the premium on that policy would be priced at futurerates and not the $2,513 currently being quoted. To evalu-ate the two options, simply look at what she’ll pay over time(see table on page 13) and compare the total premiums paid;net present value of those premiums; and the death benefitdifferences between Term 10 and Term 100 policies.

Even though permanent insurance makes good sense in alot of situations, many advisors still aren’t selling it. Why not?Simple. Clients inherently dislike talking about death and arereluctant to have the discussions necessary to make properplanning decisions. Further, many of today’s advisors werenot trained in the traditional life insurance industry, and arenot strongly tied to a life insurance company that offers formal training.

While these advisors readily see the importance of assist-ing clients with risk management issues, they often find thedazzling array of permanent products complex. Even if theydevote the time to understand the products, the job of clearlyarticulating the concepts to clients can be daunting. In addi-tion, the insurance industry continues to assail advisors withan array of new, non-traditional products that compete for ashare of the client’s wallet, such as long-term care (LTC) andcritical illness (CI) coverage. Being out of touch for even ayear or two can leave an advisor far behind his competitorsin product knowledge, new features, investment options, taxation issues and the like.

If the advisor sold a permanent product, he or she mustmonitor the client account continually to ensure the policyperforms as anticipated. For example, a universal life (UL)policy may originally have been issued with yearly renewable

Timing is everything when converting clients from term to permanent insurance.

THE TERM RUT

Illu

stra

tion

by

Jaso

n S

chne

ider

TOOLBOX

Continued on page 12

Strategies for advisors from advisors

By Michael Berton


AE05_011-013 4/19/06 9:36 AM Page 11

term (YRT) to allow greater cashdump-ins with an eye toward a laterswitch to level cost of insurance (COI).Advisors will have to monitor the pol-icy to ensure the planned cash dump-ins are actually made, and to properlytime the switch to level COI to containthe rising premium costs. If this isn’tdone right, the policy may be under-funded and unable to support level COIwithout significantly increased premi-ums, a huge cash dump-in, or a reduc-tion of the death benefit. If the prob-lem remains undetected, the policycould lapse and expose the client to areinstatement application, higher pre-miums, or if his or her health has dete-riorated, a possible declined application.

It’s also hard to balance the advisor’sneed to book securities purchases with

the client’s need for appropriate insur-ance coverage. The old adage “buy termand invest the rest” conveniently suitsthose who must meet sales expectationson the investment side. The problem isallocations often tilt toward securities, soclients end up raiding the investmentportion to meet increased expenses orpay for emergencies—when it wouldhave been easier to borrow against insur-ance policies with built-up cash value.Further, the investment portion will besubject to ongoing capital gains taxation,eventually to probate tax, and possibly towills variation if the heirs get into a dis-pute. Advisors need to show clients thereis value in the forced savings, tax shelterand estate bypass that a permanentinsurance plan provides.

Of course, for many clients, term isthe ideal product. It certainly is easierto understand and our primary job is toensure the right death benefits are avail-able. Younger clients, who are cash-strapped while raising families and pay-ing mortgages, have a critical need forthe right amount of life insurance at the lowest possible premium. As withSarah, we can provide a bridge to futureneeds by including a conversion optionallowing for a later switch to a perma-nent policy without having to take amedical exam. The strange thing is thatsuch plans are rarely converted, accord-ing to Judy Simpson, regional vice-pres-ident of insurance brokerage HUBFinancial in Vancouver. “They are fre-quently terminated or replaced by moremodern, often cheaper term policies,rather than being converted to perma-nent plans,” she says.

The best place to start is by fullyassessing the client’s current and futureneeds, and how they’ll relate to risk tolerance over time. The exercise willproduce a modular financial plan that

includes the client’s goals, assets, liabil-ities, family income sources and lifestyleexpenses. Determine if the client’s risksare short- or long-term, or combined.

Temporary needs might include coverage for a mortgage, car loan or key person in a business. Permanentneeds would include providing for capital gains tax, disabled dependants,final disbursements (including taxes),bequests, funding a business succession

Continued from page 11



Annual premiums for the permanent

policy are an even $2,513

for life, while the Term 10

policy premiums vary.

Source: LifeGuide, 2006

PREMIUM COMPARISON

$500Years1-10

Years11-20

Years21-30

Years31-40

Years41+

$2,513

$2,513

$2,585

$6,575

$18,225

$2,513

$2,513

$2,513

Term 10

Permanent

Charles Guay, President andCEO of Altamira InvestmentServices, is pleased toannounce the appointmentof James Whitman as SeniorVice President of Sales.

Mr. Whitman will oversee thestrategic aspects andmanagement of Altamira’stwo lines of business: thedirect to consumer market, as well as the businesswith independent brokers and financial planners.

Mr. Whitman has over 18 years investment industryexperience. He spent the last four years at BrandesInvestment Partners & Co. as a regional director,where he was a consistent leader in businessdevelopment activities and sales results. Prior toBrandes, Mr. Whitman spent nine years with FidelityInvestments in a succession of senior businessdevelopment roles.

Altamira Investment Services is a leading providerof financial and retirement planning services. Weoffer a wide range of investment solutions includingmutual funds, savings accounts, principal-protectednotes and managed portfolio services. Award-winning client service, product innovation andexpert advice define Altamira’s distinctive approachto investment management. The company isheadquartered in Toronto with offices across thecountry, and is a subsidiary of the National Bank ofCanada.

James [email protected]

AE05_011-013 4/21/06 9:59 AM Page 12

or passing down the family cottage.More affluent clients, like business

owners or wealthy retirees, have differ-ent insurance needs. They have to thinkabout coverage for debts, taxes andoften income replacement. Will theclient have the same requirements at age65 as they did at age 40? Likely not, soa base level of permanent insurancewith a temporary term insurance ridermay best do the job.

You may have studied the basics ofthe permanent policies and be inexpe-rienced with the product details andhow to present them. Or perhaps yourskills are just rusty. If that’s the case,you’ll need to hit the books and gain abetter understanding of the productsyou sell and what your illustration soft-ware can and cannot do for you.

All three main permanent plans havetheir place: Term to 100; whole life; and UL. In the case of the latter two, donot allow the added dimension of thecash value to cloud your analysis. Youmust investigate the costs and risks asso-ciated with the potential growth of thecash value in those plans, as well as theactual cost of insurance and the admin-istration and other fees within the plans.

A plan with cash value will allow youto support the cost of insurance overtime, but that cash only becomes avail-able to the client if you terminate thepermanent insurance. Keep in mind thatwhat you’re actually building is a risk-management program, so use a conser-vative rate of return in the range of 3%to 4%. This is especially important ifyou plan to “quick pay” the policy.Using lower expected returns alsoavoids the notorious conditional per-formance bonuses lurking in many illus-tration programs—these can producean overly optimistic outlook and lead

to disappointments for clients and liability risk for the advisor.

Many advisors who are uncomfort-able with the higher insurance costs andriskier investment options of a UL con-tract choose whole life, especially for15- or 20-year pay plans. Removinginvestment options in favour of insur-ance company policy dividend per-formance will take away investment anx-iety for many clients and advisors. Italso makes the product presentationeasier. There is still some risk, but it’smuch less than a stock index. T-100removes all investment risk, but alsoleaves no cash value if the plan is ter-minated. Ultimately, the anticipatedtime span, premium level and deathbenefit will determine which plan ismost efficient.

Learn or review the various market-ing concepts available, such as the estatebond, insured retirement plan or pen-sion maximization strategies. To gainease with these plans, consider workingwith an experienced insurance advisoror a marketing specialist with yourMGA or manufacturers.

Many won’t even make you share the commissions. If you don’t have a management system for your insurance

business to equal the one you have forsecurities, get one. There are a numberof client management software prod-ucts, such as CPU Tracker, that willbring discipline to your practice. Digthrough your file drawers and reviewyour clients’ coverage. Some MGAs willeven refer a marketing specialist to helpyou get started.

If the process doesn’t fit the approachof your practice, then refer clients to aninsurance specialist who may sharecommissions and the analytical load.Make sure the risk management strat-egy is implemented and that you haven’tleft an opening for a competing advisor.Whether you use someone else or do ityourself, double-check that properinsurance recommendations are made.You can’t just blow this off, since theliability for non-action can be consid-erable. Finally, remember your clients’heirs are relying on you as well.

Michael Berton, CFP, CLU, R.F.P., FMA, isa financial planner with Assante FinancialManagement Ltd. and a part-time instructorat the B.C. Institute of Technology (BCIT) inVancouver. The opinions expressed are those ofthe author and not necessarily those of AssanteFinancial Management Ltd. or BCIT.

CASH ACCUMULATIONPermanent insurance becomes cheaper than term over time.

DEPOSITS DEATH DEPOSITS DEATHBENEFIT BENEFIT

Age 60 (20 years) Raw accumulation $30,850 $500,000 $50,260 $500,000Present value @ 3% $21,293 $276,838 $38,509 $276,838



Age 85 (45 years) Raw accumulation $278,850 $0 $113,085 $500,000Life expectancy Present value @ 3% $119,248 $0 $63,464 $132,219

Source: HUB Financial


TOOLBOXContinued from page 12

AE05_011-013 4/19/06 9:47 AM Page 13

NOT FITTING IN WITH YOUR DEALER?It may be time to make a switch. By Al Emid

Does this sound

familiar?You got through the hectic tax seasonand you’re now busy re-evaluating yourpractice. But this year, your dealer ispart of the reassessment since you

notice significant differences in theirvision and your own. You find yourselfwondering if you are still getting valuefor the fees paid. Is the firm the rightcultural fit? Or, more important, willyour dealer even be around over thelong term?

If you’re in this situation, it may betime to consider your options. But be

warned, shopping for a new dealer canbe as rigorous as due diligence for a newinvestment product.

First, you need the security of know-ing that compliance, administrativecosts and technological complexities arebeing handled efficiently. And these re-assurances can be readily provided bylarger operations.

CULTSHOCK


AE05_014-020 4/19/06 9:48 AM Page 14

URECover Story


Between December 2004 and March2006, 11 MFDA-licensed dealershipsfolded or merged with others. One for-mer dealer estimates that an MFDAaudit requires huge amounts of stafftime to prepare for an audit and to beavailable to answer auditors’ questions.And he says he’s getting tired of runninga dealership because of all the proce-dures and paperwork. “There’s way toomuch bureaucracy and expenses to becost-effective,” he says.

This ongoing dealer consolidationmeans that size does matter, says JoeCanavan, chairman and CEO of

Toronto-based Assante Wealth Man-agement, a dealer with 1,000-plus advi-sors. “I think advisors are scared to deaththat [some] dealers aren’t going to bearound,” he explains. “Many of themhave gone out of business or beenmerged or acquired because the eco-nomics are terrible.”

Dual-licensed advisors could be for-given for pondering cost issues evenmore seriously since in the insurance sec-tor, some managing general agents oper-ate on narrow margins and, like funddealerships, provide expensive services ina world where survival seems question-

able for smaller players.Indeed, the advisor who opts for a

small dealership definitely needs a com-fort level with top executives, suggestsDan Hallett, president of Dan Hallett& Associates in Windsor, Ont. “You’regoing to be more concerned with yourrelationship with the head of a dealer-ship that has 100 advisors versus a largerfirm that is bigger all the way around,”he says.

The dealerships we profiled provideassurances of some or all of the follow-ing: efficient compliance; state-of-the-


AE05_014-020 4/19/06 9:48 AM Page 15


art technology; proprietary products; andsoftware. Most provide assistance withtransition costs but on different terms.Except where indicated, advisors leavinga dealership face no restrictions on tak-ing their books of business. Bank-owneddealerships have varying arrangementsfor commission-sharing for clientsreferred from branch personnel.

BOUTIQUE MODELBoutique firms offer advisors control torun their own practices with the supportof in-house specialists, compliance andtechnology. They generally offer equityin the firm as part of the advisor com-pensation. Since they are looking togrow, they tend to recruit advisors whofocus exclusively on high-net-worthclients.

Wellington West Capital supportsboth the MFDA and IDA platforms.On the MFDA side, advisors receive60% of their revenues while the firmcovers most overhead costs. WhileWellington West’s payouts may be lowerthan elsewhere, the firm has a hugerange of advisor tools, chairman andCEO Charlie Spiring notes.

On the IDA platform, WellingtonWest offers up to 80% of revenues toadvisors as well as a stock plan. Theseadvisors pay their own expenses.

Another benefit may be the fact thatWellington West advisors can helpclients save money on American invest-ing. The firm has a California arm andits capital markets operation facilitatestheir business financing requirements.

Wellington West currently has 125advisors and is interested in advisorswho have a minimum of $40 million inassets under administration.

Although by some definitions Win-nipeg-based Richardson Partners Finan-cial Limited (RPFL) qualifies as a bou-tique, president Sue Dabarno prefers tostyle it as a specialized niche player. “Ialways think of the word boutique asvery small and I just want to say thatwe’re growing,” says Dabarno, who isbased in Toronto.

RPFL’s niche is high-net-worthinvestors. Dabarno says RPFL advisorscurrently have an average of $119 mil-lion in assets under management whilethe company has about $5.5 billion onits books.

The company also offers access toprivate equity pools investing in com-panies that have not yet listed on a stockexchange. Also, there are estate, tax andretirement planning specialists provid-ing solutions designed for high-net-worth clients.

RPFL has 58 advisors in both theMFDA and IDA platforms and is inter-ested in growing that number to 150.The ideal advisor currently has a mini-mum of $100 million in assets. Advi-sors moving to RPFL are awardedequity in the firm and receive anallowance to offset transition costs.

They receive 52% of revenues intheir first year, while the company pro-vides overhead, technology and compli-mentary access to specialists such aslawyers, accountants, estate planners andinsurance consultants. Advisors alsoparticipate in strategic planning andmay become eligible for membership onthe company board and investmentmanagement and portfolio managementcommittees. “They can also help buildthe firm from the ground up,” Dabarnosays.



1.What do you charge advisors?

2.What services do you provide to

assist me in building my practice,

attracting new clients and retaining

current clients?

3. Can you show me proof of the

dealership’s financial security?

4.What kind of transition allowance

do you provide? How do you calculate

the amount?

5. Can you give me the names and

contact information of the last two

advisors who have left your dealership?

6.What are the mechanisms

for advisor input?

7. Are you now, or have you recently

been in talks with any other party about

a potential merger, acquisition or

takeover? If so, what is the status of

those talks?

8. If you choose not to tell me with

whom you are discussing a merger,

acquisition or takeover, what kind of fit

is there between the two dealerships?

Alternatively, how can I be assured

there is no takeover in the near term?

9. How large is your compliance

department and have there been any

recent audits by the MFDA? Have

there been any contacts and/or audits

by any other regulator or the CRA?

10. Do you base your growth plans

and projections mainly on organic

growth or growth by acquisitions?

GRILLthe dealerMake sure you ask dealersthe following questions—and are satisfied with theiranswers.

AE05_014-020 4/19/06 9:48 AM Page 17

SHARED COMPENSATION MODEL: NON-BANK FIRMSIn this model, the dealership offers apercentage-based division of revenues.

At Assante Wealth Management, forexample, advisor compensation is onaverage 83% of revenues. The dealer alsohas a stock plan under consideration.Assante generally attracts advisors whohave $30 million to $50 million in assets.

Under certain circumstances, Assantewill co-sign a loan for an advisor requiring cash to buy another book ofbusiness.

Meanwhile, advisors will get coach-ing from Assante’s national network ofregional vice-presidents on issues suchas maximizing profitability, best prac-tices, wealth plan creation and manag-ing people. The firm also has a largeroster of legal, accounting, investment,tax, estate planning and insurance spe-cialists. “Our model is a very robust plat-form and is best suited for the larger-book advisor who wants to continue togrow,” explains Canavan.

Toronto-based Investment PlanningCounsel Inc. can claim financial stabilitysince it is 75%-owned by IGM Finan-cial, which in turn is owned by Winnipeg-based Great West LifeHoldco, according to Anthony Koves,vice-president of corporate development.

IPC operates under a national branchstructure. Within the structure, there’san 85%/15% payout level. The dealeralso has a comprehensive suite of prod-ucts and is known for its innovations,such as a recent 10-year advisory agree-ment with the Canadian Association ofRetired Persons.

However, Koves does emphasize aless tangible benefit: the firm is advisor-driven. IPC developed its current poli-cies and procedures manual with helpfrom branch managers and advisors, hesays, emphasizing that IPC does not setpolicies and procedures unilaterally. IPCis “a firm built by advisors for advisors,”he notes.

Meanwhile, Raymond James Ltd. has two arrangements on the IDA plat-form, according to Kevin Whelly, senior vice-president for growth anddevelopment. In the independent con-tractor arrangement, the firm has an85%/15% policy with a $25 chargeper transaction.

Also offered are branches that arestaffed by advisors whose working con-ditions resemble those of traditionalemployees with a grid payout based onthe previous year’s revenues, regardlessof transaction size. It ranges from 40%for the previous year’s volume at$250,000, up to 55% for the previousyear’s volume at $500,000. For advisorsreaching $550,000 or more, the com-pany adds up to 5% in shares of theAmerican parent. Individual transactionsize is not used to calculate the com-mission.

SHARED COMPENSATIONMODEL:THE BANKSTypically, bank-owned dealerships haveinvestment advisors in their securities

operations and other advisors handlingmutual funds at their branches. Thereare also compensation arrangementswhereby a branch employee refers aclient to the securities operation. Bothbanks profiled here suggest their invest-ment advisors will receive a continuousflow of referrals.

TD Waterhouse has a 14-level pay-out grid ranging from 20% to 52%,plus a stock plan for those in the upperlevels.

The firm has approximately 510 experienced investment advisors,according to Dave Pickett, senior vice-president, practice management for theTD’s wealth management division. TDalso has a Developing Investment Advi-sor (DIA) program which attractsemployees from its branches, otherfinancial institutions and individualspursuing a second career.

The wealth management division islooking for 48 full-fledged investmentadvisors and between 60 and 80 for itsDIA program. In the investment advi-sor category, TD wants what Pickettcalls “high integrity, no compliancerisk” individuals, with $80 million inassets.

Departing investment advisors areallowed to take their books of businesswith them, in principle, but TD willassign other investment advisors tothose accounts. Generally, advisors willfind it more difficult to move clientswho were referred from their bankingpartners, notes Pickett.

HSBC Securities (Canada) Inc. isrecruiting advisors already running apractice with a minimum of $50 mil-lion in assets. In addition to providingthe services that Canadian dealers can




At a bank,there are also compensationarrangements whereby a branch employee refers a client to the securitiesoperation.

AE05_014-020 4/19/06 9:48 AM Page 18

offer, its worldwide operations meanthat its advisors can offer clients invest-ments such as hedge funds or principal-protected notes in foreign currencies,says Lorne Harper, executive vice-president and national director, privateclient services. Harper says advisors canalso assist with investment needs ofclients relocating from foreign countrieswho want to continue to hold assets inforeign currencies.

The commission grid ranges up to 52%, plus a stock participation plan. As with other bank dealerships,HSBC covers office and administrativecosts.

HSBC owns the book of businessand if an advisor leaves, his book willbe reassigned to another HSBC advisor.“If the departing advisor retires orleaves the business, we have a businesstransition program that the departingadvisor participates in. If the advisorleaves to go to a competing firm, theusual outcome is a competition for thebook of business,” Harper explains.

FLAT-FEE MODELIn this model, the advisor pays a fixed feeregardless of volume and receives com-pliance and a minimum of other services.Sterling Mutuals Inc. has a 100/100plan in which the client (or advisor) pays$100 for each account, leaving the advi-sor with 100% of revenues.

In a hybrid of flat-fee and sharedcompensation, Sterling offers an80%/20% plan in which the advisorpays up to $16,750 annually and thenreverts to 100% payouts. That setupcontinues for up to 500 clients with a$33.50 charge per account [transaction]thereafter.

Sterling has 130 advisors and is inter-ested in advisors with a minimum of$10 million in assets, says Rocky Ieraci, senior vice-president for the Windsor,Ont.-based firm. He notes that such anadvisor often hits the $16,750 cap inthe third quarter of the year.

Other dealers who use this modelinclude FundTrade and FundEX Invest-ments. Bruce Cumming has his advisorypractice, Cumming & Cumming WealthManagement, with FundEX since itsuits his business approach. “FundEXis the organization for the person whois completely independent, needs nospoon-feeding and doesn’t have anytrouble getting clients,” he says.“They’re not giving you anything.They’re not helping you with market-ing. They’re not helping you understandproduct and teaching you what theflavour of the day is.”

In many respects, advisors are spoiledby choice. That’s not a bad thing, but itdoes mean taking a good hard look atexperience levels, preferred ways ofdoing business and compensation needsbefore selecting the dealer platformthat’s right for them.

Al Emid is a writer specializing in financial

services. [email protected]


1.What services do I need most—and

anticipate needing—in the near term

and which dealership best fulfills them

at the most reasonable cost?

2.What impact do I expect if current

predictions of an eventual merger of the

MFDA platform and the IDA platform

prove correct?

3. How important is it to me to have

large support systems or am I just as

happy to handle these areas myself?

4. If I join a flat-fee arrangement

with no obligation to pay 15% or

more for some of the services not

provided by flat-fee dealerships, am I

prepared to orchestrate those services

on my own (or with some colleagues)

and commit to all of the administration

tasks involved?

5. Do I view forgivable loans for transi-

tion costs as help or handcuffs?

6. Do I figure I can assemble a client

roster on my own or should I be

considering a dealership with an active

referral program?

7. Do I already have a great client ros-

ter? If I make a move, how many of

them do I believe will come with me?

Can I hope to replace lost clients and

lost revenues at the new dealership?

8. How do items like the cost-savings of

a flat-fee basis or accumulating bank

stock mesh with my own retirement

plans? —Al Emid

SOULsearchingYou have your answers fromprospective dealers. Now, hereare some questions to askyourself before jumping ship.

If you’ve decided to change dealers,what comes next? For a specialreport that looks at everything fromthe legal aspects of making a switchto client retention, please visitwww.advisor.ca/interact/ beginningMay 9th.

More online

www.advisor.ca/interact@


AE05_014-020 4/19/06 9:49 AM Page 20


SPECIALCASES

iane Mellencamp* is a successful executivewho could have retired in 2000, if she’d

cashed in all her chips. Instead, she owes the government $437,000 in taxes and her remainingcompany stock is worth only $40,000. How didthis happen?

Diane and her husband, Jack, made a big deci-sion, without tax advice or a sober second opinionfrom a financial advisor, and then failed to reactquickly when their situation changed. Diane was atop executive with a high-profile technology firmand exercised options to buy 21,818 shares of hercompany’s stock. But, instead of immediately sell-ing the stock and banking the profit, she held,expecting the stock to rise further. It didn’t.

When the share price first dropped, she assumed(like many investors) that it was just taking a breakin its growth cycle and continued to hold. By thetime she and Jack realized much of their net worth

had disappeared, it was too late to sell out forenough to even cover her taxes.

Why the tax bill? Why not a capital loss? Well,that’s how exercising a stock option works. Theholder must pay tax on half the value of the optionexercise. If the option allows purchase of the stockat $10 and it’s worth $40, then the option’s valueis $30. Half of that is taxable on exercise of theoption. It’s not taxed as a capital gain, but rather asan employment benefit with a 50% offset. Unfor-tunately, there’s no gain to offset with capital losses.


High-level executives have unique problems and limitedtime to hear your advice.

By David Christianson

D

*All client names have been changed.

Illu

stra

tion

by

Pet

er F

ergu

son

AE05_023-026 4/19/06 9:49 AM Page 23


The exercise is a separate transactionfrom selling the stock. Had Diane soldthe stock for its fair market value of$2.4 million ($110 per share) when sheexercised her options (at $22.92 pershare), her tax obligation wouldn’t havechanged—but she would have had thecash to pay her taxes. She also wouldhave had lots of money to put into adiversified portfolio, after paying offany loan she might have taken to pay for the stock she’d purchased at the$500,000 exercise cost.

Instead, she’s stuck with a $437,000tax bill, based on the value of theoptions at the time of exercise. If shesells the stock now at a much lowerprice, she has a capital loss but can’t useit to offset the stock option incomebecause the two transactions come

under separate sections of the IncomeTax Act. No offsets allowed.

Sounds far-fetched? How about theexecutives with a national trust companywho were offered millions of dollars inloans to buy company stock at $30 or$40 per share, and then watched theprice decline to 50 cents per sharebefore the assets (but not the company)were sold? Those executives still owe onthose loans, and even if the loans wereforgiven, they’d still have a taxable ben-efit for the entire amount. Or, if theysold the stock to book the capital loss,the CRA could argue the tax deductibil-ity on the loan interest would disappear.

These are the kinds of extreme issuesthat can face top executives as well asthe advisors who help them plan theirfinancial lives. There are other specialconcerns ranging from tax issues to

stock-ownership concentration, benefitprograms, and special personalities andjob demands faced by top executives.

I recently canvassed senior financialadvisors who have substantial experienceworking with executives. Here’s a par-tial list of issues to consider when youtake on such clients:

ConcentrationMost of us believe diversification is oneof the best ways to control risk.Although many fortunes have been builtthrough ownership of stock in one ortwo great companies, let’s agree our goalis to avoid the type of disaster outlinedearlier. It’s enough the executive’sincome will be tied to the fortunes ofhis or her company, so the investmentportfolio really should be concentratedin a negatively correlated industry.


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Yield – each Citadel fund has the structure and assets to achieve attractive yields now and long term for your clients.

Consistency – every Citadel fund has met its distribution payment schedule since inception and three have SR-I stability ratings.

Growth – each Citadel fund has a growth component to deliver capital appreciation potential.

Experience – every one of our lead managers has successfully invested large portfolios for at least 20 years.

So if your clients need income, they need Citadel Group of Funds. For more information, contact Citadel at 877 261 9674 or visit www.citadelfunds.com.

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AE05_023-026 4/21/06 10:01 AM Page 24


Top executives have many incentive programs throughwhich they acquire stock, including stock options, share purchase plans and phantom stock plans. Lynne Triffon, vice-president at T.E. Financial Consultants in Vancouver,notes, “Many corporations have enacted share ownershipguidelines, which require the executives to own one to twotimes their salary in company shares. Executives are oftenreluctant to reduce exposure below these levels, as they feelit might send the wrong message to higher-ups.”

Triffon suggests once targets are met, prudent executivesshould have a systematic program to reduce exposure. Thiscan be done by exercising stock options at regular intervals,then selling and taking other incentive shares, such as restrictedshares, in cash, rather than in kind. “Executives need to be realistic about setting a target price at which to exerciseand sell shares,” she adds. Extreme situations may demandmonetization of the stock, using techniques like options.

Phantom stock plans, out of favour for a number of years,now appear to be making a comeback, says Warren Baldwin,Triffon’s Toronto-based colleague. These can take the form ofdeferred stock units (DSUs) or restricted stock units. “Theyare notional accounts that track movement of the companyshares and allow participation in the growth and dividends,” hesays. “They are based on the value of the shares at the time ofgranting, and then re-calculated at the time of sale.”

There is no tax on the initial awarding of these units. Taxonly applies when they’re turned into cash. Baldwin pointsout many corporate directors are now compensated in DSU’s,rather than cash. This defers tax and ties the director into thefuture success of the company.

Tax IssuesSince executives are employees of the firm, their tax flexibil-ity is limited. In addition to the special tax treatment of stockoptions, the executive likely has very restricted RRSP roomdue to a high pension adjustment figure. Income and capitalsplitting with a lower-income spouse (Spouse B) will alwaysbe a big challenge. Baldwin always recommends Spouse B saveand invest 100% of income in his or her own name, in orderto accumulate assets that are free from CRA attribution rules.If substantial capital is available, then it’s wise to set up aspousal loan at the CRA-prescribed rate (currently 4%), ora gift, or interest-free loan. This siphons off the second-generation income into a non-attributing account in the

lower-income spouse’s name. Triffon points out if Spouse B has equity in the family

home or other tangible assets, it may be possible to “sell” theequity to the executive spouse. This effectively transfers non-income-producing assets into the hands of the executive.Simultaneously, the executive can transfer income-produc-ing assets into the lower-income earner’s hands. “When alower-income spouse receives an inheritance and there is afamily mortgage or other non-deductible debt, care should betaken to loan the funds to the executive spouse,” she suggests.“This can be a demand loan at zero interest. As the funds arebeing used to reduce debt rather than generate investmentincome, the income attribution rules will not apply. In the future, the loan can be repaid (perhaps from a stockoption exercise) and the funds invested in the lower-incomespouse’s hands.”

BenefitsThere is a lot of flexibility with benefits and it’s importantto negotiate the best deal. Larry Jacobson, a senior advisor


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at Macdonald, Shymko & Company inVancouver, is a master at this. Cafeteria-style benefits plans are the norm, hesays, whereby an executive can selectfrom a fixed annual allowance to spendon dental and life insurance, extendedhealth care, golf or social club dues, carallowances, custom medical checkups

(where allowed) and financial planning.“Obviously, don’t let them take a second club membership instead offinancial planning,” Jacobson jokes.

And remind clients that retirementplanning is not a taxable benefit, but taxpreparation is. Jacobson, Triffon andBaldwin each have executive clients whonegotiated higher levels of salary or

benefits, so their companies are effec-tively paying for the taxable portion ofbenefits, like luxury cars.

There may also be a concern with so-called “top hat” retirement incomeschemes. The CRA maximum allowablepension is less than $100,000 per year,and that’s only after 30 years of service.Therefore, highly paid management willoften have separate, enhanced retire-ment funding through a senior execu-tive retirement plan. However, as Jacob-son and Triffon both point out, theseare not segregated pensions and areusually funded from the general assetsof the company. A failed companymeans no plan, so more executives areinsisting on security for these payments,through letters of credit or retirementcompensation arrangements, whichrequire segregated funding each year.

When dealing with busy client exec-utives, the normal level of respect youwould pay for his or her time may notapply. “My usual 60-minute face-to-face meeting might become 15 minuteson the phone,” Baldwin says. “You haveto be prepared and get to the point.”

Another hurdle to establishing agood relationship is the fact the com-pany is paying for the advisory servicesrather than the client. In some cases,this means the executive won’t perceivethe service to have the same value. AsBaldwin reminds us, sometimes youhave to give a little upfront, to demon-strate value to these special, and verybusy, clients.

David Christianson, CFP, R.F.P., TEP, is a

fee-only planner and investment counsel with

Wellington West Total Wealth Management,

and a professional speaker with The Knowledge

Bureau. [email protected]

26 ADVISOR’S EDGE | MAY 2006


AE05_023-026 4/19/06 9:51 AM Page 26


REALRETURNS

Traditional asset allocation typically divides a client’s portfoliobetween stocks, bonds and cash, withsome fine-tuning around allocations ofglobal versus Canadian, small cap ver-sus large cap, and growth versus valuestocks.

Most advisors design their recom-mended portfolios around thisapproach for both funds and securities.What we tend to overlook is the oppor-tunity to earn strong, reliable returnsfrom commercial or multi-family resi-dential real estate. That’s a mistakebecause investment-grade real estateshould form a significant part of aninvestor’s overall portfolio. The focusshould be on commercial real estate andnot housing. Historically, this asset classhas been limited to high-net-worthindividuals and institutions, but the

emergence of real estate investmenttrusts (REITs) during the past 15 yearshas changed that. Many REITs havedone quite well over the last five ormore years because of low interest rates,a strong overall economy, reducedvacancy rates and a desire by investorsto acquire assets that provide relativelyhigh cash yields, as well as options forportfolio diversity.

We’ve done a great deal for ourclients over the past decade to createinvestment vehicles that allow them toparticipate in both commercial realestate and mortgage pools. Outside ofREITs, there are not a lot of liquidreal estate funds available to investors.Globe HySales reports only 11 realestate funds with a five-year trackrecord and only three that have beenaround 10 years or longer. The Globe

Peer Real Estate Index (made up ofthose funds) has averaged returns of8.41% for 10 years and 10.52% forthe five years ending in December of2005. Interestingly, the 10-year resultsfor the real estate index are almost thesame as the returns for the Globe PeerCanadian Equity Index (9.27% yearly)but with less than half of the volatil-ity. The Globe Peer Real Estate Indexhas a 10-year standard deviation of6.15%, versus a 14.27% standarddeviation for the Canadian Equityindex.

A visit to the National Associationof Real Estate Investment Trusts web-site (www.nareit.com) will provide youwith data that shows overall returns inpublicly traded real estate investmentvehicles averaged 10% annually between1971 and 2006. And they did thiswhile offering relatively low levels ofvolatility. Let’s look at the investmentvehicles we use for real estate. We do not


Looking for diversification options beyond those offered by equities? Consider commercialreal estate. By John Nicola

AE05_029-032 4/19/06 9:37 AM Page 29


use funds but we have acquired REITsfor our own pooled fund. These includereal estate limited partnerships (LPs),and mortgage investment corporations(MICs).

Both are exempt products issued withoffering memorandums and designedfor accredited investors. The MICs weoffer have a minimum initial investmentof $25,000 and the real estate partner-ships require $100,000. These mini-mums are not based on compliance, butcost considerations. For clients who donot meet the British Columbia require-ments for accredited investors, the min-imums are $150,000. An accreditedinvestor is defined as an individualwhose net income before taxes exceeds$200,000, or $300,000 when com-bined with a spouse, in each of the twomost recent years and who reasonablyexpects to exceed that net income in thecurrent year. Rules are similar in other

provinces, but discuss these productswith compliance before proceeding tooffer them to clients.

Currently all our MICs are RRSP-and pension-eligible, and we use themprimarily in registered accounts sincetheir entire return is interest income.They’re also ideally suited for donor-advised accounts.

The key features of MICs we use areas follows:• They traditionally lend money for

construction financing (usually assecond mortgages). This makes thema higher-risk investment, althoughpooling the mortgages significantlyreduces risk. Further, many newerMICs have developed lower-risk first-mortgage pools and other types ofloans that provide greater diversifica-tion (with lower returns to reflect thereduced risk). One MIC we’ve usedsince 1996 invests in second mort-gages and has produced an average

net return after fees of 10.8% peryear, with the lowest annual returnbeing 5.6% in 2002.

• We work with two external man-agers who have created a number of mortgage pools with varyingdegrees of risk and return (see tablebelow).

• We acquire units in those pools—one of the pools was designed exclu-sively for us and the other three areopen to outside investors.

• The shares are priced at a fixedredemption rate (often $1 or $10).Interest is credited monthly or quar-terly and can be reinvested automat-ically or distributed.

• Fees on these MICs are similar to F-class mutual fund shares at about 1%to 1.25%. The manager often has ahurdle rate, essentially a yield relatedto government bonds and the risk ofthe pool. If the net return is abovethat rate, then the manager can earn


MORTGAGE INVESTMENT CORPORATIONSThese instruments allow diversification of real estate holdings in registered and donor-advised accounts.

Type of MIC

Types of mortgages

held

Anticipated returns

in current interest

environment

Bancorp Select

Income

First mortgages on

income-producing

properties with a

maximum loan to

value (LTV) of

75%

5% - 6%

Bancorp One

First mortgages on

land being devel-

oped for various

construction objec-

tives, with a typical

LTV of 70%

7.5% - 8%

Harvard MIC

Second mortgages

on income-produc-

ing properties, with

an LTV up to 85%

8% - 9%

Bancorp Two

Second mortgages

(mezzanine

financing) on

development

projects

10% - 12%

Source: Nicola Financial Group, 2006

AE05_029-032 4/19/06 9:38 AM Page 30


a percentage (often as high as 25%).For example, say you’ve invested in afirst mortgage pool with a hurdle rateequal to a five-year Canadian gov-ernment bond (assume that rate is4%), plus 200 basis points (2%).That makes the hurdle rate 6%. Ifthe manager earned 10%, then he orshe would earn an additional fee of1%, that’s 25% of 4% (which equalsthe 6% hurdle rate, subtracted fromthe 10% gross return). In manycases, if they fall below the hurdlerate their base management fee drops,in some cases by as much as half.

• Most MIC managers put a lot oftheir own capital in these pools andalso are dependent on both relativeand absolute performance for part oftheir compensation.We also periodically offered specific

syndicated mortgages from the MICmanagers that clients would participatein directly. These are typically limitedto minimum investments of $100,000.They offer both higher yields and riskand are therefore recommended for verysophisticated clients who have experi-ence in this type of real estate lending.Typical current returns range between12% and 20%, net of fees, and in most cases, the loans are for fewer thantwo years.

It can be argued that mortgage poolsaren’t a true real estate investment anymore than corporate bonds are anequity investment. These mortgagepools often provide higher returns rel-ative to corporate bonds that have asimilar risk level, but they also provideless liquidity. One advantage of mort-gages is they’re secured by a specificasset that can be foreclosed upon in theevent of default.

In February 2000, we put togetherour first real estate limited partnershipwith an outside partner who managedthe project for our investors. Since then,we’ve acquired seven more commercialassets. Recently, we created a new lim-ited partnership that has acquired twoassets within one partnership and alsomanages a portfolio of mortgages withour MIC advisors.

We don’t consider commercial realestate to be a superior asset to a value-based equity portfolio, but it is com-plementary and often non-correlated.While we’ve acquired a total of eightdifferent assets over six years, we havealso sold four of them because we wereoffered excellent prices. A client whobought an interest in each asset wouldhave realized a net compound rate ofreturn since February 2000, of 26%per year. Obviously this result was far in excess of what we’d hoped for andunlikely to repeat—another reason wesold some of the assets. However, we dolook for buildings we can structure thatmeet the following criteria:• Valued between $10 million and $40

million.• Minimum client investment of

$100,000 per LP (the largest singleinvestment has been $1 million).

• Up to now we’ve focused on retailshopping centres and mini storagefacilities but we would look at other

assets, especially medical and dentalbuildings.

• Net income after all expenses (caprate) between 7% and 8% in aninterest environment where we canlock in mortgage rates for roughly2% less. Our last project had a caprate of 7.5% and a 10-year mortgagerate of 5.4%.

• Leverage between 65% and 70%,which allows us to earn a 7% to 8%cash return on invested equity andamortize the mortgage. This adds anadditional annual return of between3% and 4% of the original equity.We further project that over timerents will rise at 1% to 2% per year(lower than the anticipated inflationrate). Overall that gives us a netlong-term Internal Rate of Return,after costs, of between 10% and13%. While returns over the lastfew years were much higher, close to25%, it’s always better to temperclient expectations by telling themto expect 6%.

• We have partners who work with usto find the right assets, manage theproperties and upgrade the quality oftenants (and by extension theincome). We invest alongside ourclients in every project.

• We have not considered individualhousing, condos or multi-family


Syndicated mortgages offer both higheryields and risk and are therefore recommended for very sophisticatedclients who have experience in this type of real estate lending.

AE05_029-032 4/19/06 9:38 AM Page 31

residential because in virtually everycase we’ve examined, the cap rates arebelow the cost of financing. Thismeans we’d have to count on priceappreciation to earn a return and weprefer to rely on cash flow.Commercial real estate will go

through performance cycles just like anyother market. We view the assets we’renow acquiring as long-term holds. Ifcap rates rise and prices fall, then we’rewell protected on our current buildingsbecause we’ve locked in the financing.The key is the spread between cap ratesand borrowing rates. We will notacquire an asset if the difference fallsshort of at least 2%.

We just created a new LP which hasalready acquired two buildings and several mortgages. From now on this

partnership will acquire all future realestate assets for our investors (think ofthis as a type of private REIT). Thepooling helps us reduce operational andlegal costs, increase diversification, andallows for a limited form of liquidity asannual redemptions. (With our originalLPs, liquidity was realized when an assetwas sold.)

Real estate and mortgage pools areeffective asset classes. Client needs dif-fer, but overall there should be no dif-ficulty placing between 20% and 40%of a portfolio in these types of assets.If you are considering offering suchinvestments, you’ll have to be licensedto provide exempt offerings based onthe requirements of your province ofresidence. If you aren’t licensed, you’llneed to work with individuals or firmsthat are and can provide the expertise

you and your clients will need.

John Nicola, CFP, CLU, Ch.F.C., is

chairman of Nicola Wealth Management,

a Vancouver-based firm.

[email protected]



Check out:• Coverage of the latest real estate

investments, from equities and trusts to trends among institutional investors

• Lively debates on industry issuesin our online discussion forum

• The latest market news, in ourtwice-daily e-mail bulletins

More online

www.advisor.ca/interact@

AE05_029-032 4/19/06 9:41 AM Page 32

BREAKTAX

Make sure clients know about the CRA’s informal procedures for appealing assessments. By Gena Katz

GOING TO COURT

Your client, Marvin Elliot, hasexhausted most of the avenues forappealing what he believes is an incor-rect income tax assessment, stemmingfrom a 2004 claim for travel expenses.He started with a call to the CRA,followed with a letter, and even filed aformal notice of objection. But theagency isn’t budging and continues toinsist Elliot hasn’t proved his 65%business usage claim. When you tellhim the courts are an option, he sayshe’s concerned about the costs, timeand energy involved.

In cases like these, it’s best toinform clients about a relatively sim-ple judicial remedy provided by theTax Court of Canada (TCC). TheTCC launched this Informal Proce-dure in 1991 in response to the pub-lic’s request for speedier, easier and lessexpensive settlements, and by follow-ing a process similar to that used insmall claims court.

In terms of speed, a judgment mustbe rendered 270 days after the CRA’sreply to the appeal, and costs includeonly a $100 filing fee for an appealnotice—and that’s refunded if the tax-payer wins.

The informal procedure is designedto take care of specific types of claimsand can only be used if:• the disputed amount of federal tax

and penalties does not exceed$12,000 per assessment;

• the disputed loss does not exceed

$24,000 per determination; or• the only matter in dispute relates

to the interest on federal tax andpenalties.If the disputed amount exceeds

these limits, a taxpayer can still use theprocedure by restricting his or herclaim to a lower amount.

So how can your client file an appeal?First, complete the form “Notice ofAppeal Informal Procedure,” or writea letter stating the reason for the appealthat includes all relevant facts. Theappeal must be filed with a TCC officewithin 90 days of the date of CRA’sresponse to the related Notice ofObjection. The notice itself can bemailed, faxed, or completed online toexpedite the process. TCC, however,does require that a hard copy be mailedalong with the filing fee.

A taxpayer may choose to representhimself or herself in the court, or berepresented by an agent. Since proce-dures are informal, the court has thediscretion to ignore the normal legaland technical rules of evidence. Thisgives the judge flexibility in render-ing decisions, and helps shave offtime. In the case of a self-representedtaxpayer, the judge will often act as afacilitator, helping him or her presenttestimony in an accurate and efficientmanner.

The judge may interpret tax law ina way that is favourable to the clientand allow deductions that might not

otherwise stand up to regular, eviden-tiary procedure. Still, he won’t ignorethe law, so a taxpayer can’t expect towin merely because he believes a taxlaw is unfair. The taxpayer’s spokenword is never enough and the onusremains on him or her to convince thecourt that the CRA’s assessment isincorrect. It’s an advisor’s job to pre-pare the client and make sure he or shebrings sufficient supporting evidenceto the hearing.

In expense cases, receipts are best;and in valuation cases, professionalappraisals would be ideal. When thosedocuments don’t tell the whole story,other corroborating materials shouldbe brought. For example, in Elliot’scase, a logbook of his business travelhelped support his claim. But evenwithout it, he could have submittedhis appointment book indicatingwhere and when his out-of-officemeetings took place. This type ofpaperwork, along with a persuasiveoral argument, can be sufficient toconvince the court.

Finally, when an informal appeal issuccessful, a judge can order the CRAto pay a portion of a taxpayer’s legalcosts if they represent more than halfof the amount under appeal.

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


AE05_035 4/19/06 9:42 AM Page 35

CHECKCOMPLIANCE

You do the crime, you pay the fine—and get banned from the industry. By Ellen J. Bessner

BAD BEHAVIOUR

When faced with a charge from aregulator, advisors tend to be mostconcerned about the prospect of los-ing their licences. Although penaltiesreally depend on the severity of theinfraction, the IDA’s disciplinaryguidelines confirm that almost everyinfraction contemplates the possibil-ity of a permanent ban or suspension.The MFDA does not have any disci-plinary guidelines whatsoever. Whileconsistency is lacking for imposedpenalties, here’s what you can expect.

If you are guilty of fraud against aclient, a permanent ban is almost cer-tain. Robin Anderson (MFDA case#200508) and Robert Hart (IDABulletin #3513) each misappropri-ated several hundreds of thousands ofdollars from elderly, unsophisticatedclients by forging signatures anddepositing proceeds received into theirpersonal accounts. The MFDA andIDA banned the respective advisorsfrom the securities industry, and eachadvisor was fined significantly.

But fraud is not the only way to bebanned from the industry. Failing tocooperate with regulators during theirinvestigations can also result in a ban.Anthony McPhail, for example,(MFDA case #0152) was dismissedfrom the securities industry and fined$60,000 for failing to attend hisMFDA examination and refusing toproduce documentation.

What about unsuitable transac-

tions, the more common regulatoryinfraction? The IDA guidelines rec-ommend a minimum fine of $10,000,a period of strict and/or close super-vision, and a period of suspension inthe most egregious cases involvingdeception and misrepresentation.

Consider the case of David Yanor(IDA Bulletin #3478). Yanor per-suaded a 51-year-old single woman toopen both cash and RRSP accounts.Yanor sold all mutual funds trans-ferred into these accounts, attractinga DSC of $4,611.

A few weeks later, the womaninstructed Yanor to sell $5,000 worthof her shares to pay off a personaldebt. But Yanor advised her to open amargin account instead, borrowing themoney from the dealer. Even after the$5,000 was paid off, Yanor continuedto purchase securities on margin. Healso recommended the woman buyaggressive growth securities. Theresult: the client’s account plummetedfrom $100,000 to $25,000.

The IDA fined Yanor $30,000 andwithdrew his right to seek re-approvalas a registrant for one year. Addition-ally, the IDA placed him under a strict,12-month supervisory period, whileordering that he re-write his CSI andCPH courses.

In another case, Janet Kim (IDABulletin #3520) received a six-monthsuspension, along with a host of otherpenalties, for making 22 discretionary

trades and promising to reimburse theclient for any losses. At first, Kimdelivered on her promise, depositingher own money into the client accountto cover a margin call. But after notbeing able to extricate any moremoney from Kim, the client com-plained to the IDA.

Why did Kim receive a six-monthsuspension for infractions which seemmore serious than Yanor’s unsuitablerecommendations? It may be becauseKim negotiated her penalty with theIDA, while Yanor put the IDA to thetrouble and expense of a three-dayhearing. Most of the bulletins are pur-suant to negotiated settlements asopposed to hearings. The regulatorstend to impose a more severe penaltyin a hearing than in a negotiated set-tlement.

It doesn’t make much differencewhether your licence is suspended forsix months or indefinitely becauseyour name will be tainted within awebsite bulletin for seven long years.It would be difficult to find a dealerto register you after any infraction thatled to a suspension.

Ellen J. Bessner is a lawyer at Gowling,Lafleur, Henderson. She practises in the areaof advisors’ liability and offers compliancetraining. The above is intended for a generalaudience and should not be considered legaladvice. “Compliance Check” appears everyother issue.


AE05_037 4/19/06 10:54 AM Page 37


You should be celebrating, but your ego thinks it’s been kicked in the teeth. My advice is for you to get over it and real fast! Better yet, pop open a bottle of

bubbly—something special like Lucky Lager, vintage last Thursday—and make it anoccasion.

Now that you’re in a celebratory mood, step back and look at your practice objec-tively. Ignore all the years of sweat and toil you’ve had with those small, labour-intensive client files. Forget about the fact they saved your ass during those survivalyears. If you can dismiss factors that are now irrelevant, how many clients wouldyou choose to refer to another advisor?

We all have lots of clients who appreciate what we do for them. And they showthat appreciation by staying out of the way and letting us do what we do best, keep-ing us up-to-date on life changes, and candidly revealing how they feel about theirlives, their families and their investments—so we can do a better job. They’re theclients who make what we do worthwhile, both emotionally and financially.

But we also tend to spend 80% of our time on those 20% who continually tryus by providing some combination of bad information, short notice, misunder-standing, negative attitudes and bad karma.

And let’s not forget all the last-minute scrambling you’ve done for these clients—the times they’ve been rude to your staff, or their numerous phone calls insistingtheir investments aren’t performing well enough, when they are actually compar-ing their portfolios to the one or two top-performing funds or stocks last year.(Wouldn’t it be great if we could put some kind of notice on that client’s permanentrecord, which would go with them to any new advisor? The equivalent of an IDA sanc-tion would give any future advisor pause before accepting them as clients.)

I don’t know about you, but I wish I could say to those clients, “You can’t fireme—I quit!” But when I’m feeling a little more grown-up, I actually just wish I hadpolitely and professionally disengaged those clients and found them a better, andmore appropriate, home years ago.

Which bring me to this point: How do we avoid taking on clients who are going

to be trouble, and how do we extricateourselves from bad situations?

Sometimes it’s a fine line, and a lotdepends on experience. Some of mybest clients seemed quite difficult atfirst, and even my assistants warned meto “stay away.” But I had the feelingthat once they had their questionsanswered and had developed trust they would be loyal to the death andlet us do our jobs. This has usuallybeen the case.

On the other hand, clients whoabsolutely forget there’s a forest behindthe trees and steadfastly fixate on thesmallest details, constantly insisting onignoring the big picture, are bound tobe trouble, unless you yourself are aprofessional engineer with too muchtime on your hands.

The biggest warning signal I’ve everseen is a prospective client who haschanged advisors frequently. Either thatperson is never satisfied, has been hellto work with or has consistently chosenloser advisors. In all cases, you want toavoid them.

Think about that before you say yesto another client. Discriminate—you’reworth it.

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

WIN SOME, AVOID SOME!

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

closingBELLHere’s the paradox:

Your obnoxious, low-value, pain-in-the-ass client announces

he’s moving his investments elsewhere.

AE05_038 4/19/06 10:54 AM Page 38

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