ADVISOR’SCANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • FEBRUARY 1999 D G EE

Mine?

The Aging ClientWhat to do if yourclient grows senile

RRSP CrunchStrategies tostay focused

Dollar CostAveraging

RoundTwo

Readers share theirtales of prospecting—and all

of its peaks and perils

WILLYOUBE

CONFebruary 1999

26 WILL YOU BE MINE?Whoever said the chase is better than thecatch was no financial advisor. Not to worry,Advisor’s Edge has a package of fresh clientprospecting inspiration for you—all done upwith a big Valentine’s bow.BY HARVEY SCHACHTER

38 PEACE OF MINDOne in 50 Canadians between the ages of65 and 74 will be affected by Alzheimer’sdisease or some related dementia this year.What’s your policy on clients who begin toshow signs of confusion?BY BEV CLINE

Features

Departments

Volume 2, Number 2 TEN

TS

9 INSIDE EDGEStromberg drops the bomb and the AE Editorial Advisory Board grows again.

11 LETTERSYour views on financial planning designations, mutual funds and FundSERV Inc.

13 ONE ON ONETerry Oehler’s desire to provide a moreholistic financial planning service led herfrom the accounting world to the advisoryworld. Sheila Wilson’s desire to work withsomeone who doesn’t act like a bull in achina shop led her to Terry Oehler.

SPECIAL REPORT18 Stromberg Two

What does Glorianne Stromberg’s report mean to you? By Harvey Schachter

23 MONEY TALKSIt used to be that February was to financial advisors what December is to toy store managers.Thank heaven forinvestor education.

PORTFOLIO

50 The Future of Probate FeesThe Ontario government has unveiled anew estate administration tax, as areplacement for probate fees.We explainwhat this means to you and your cohortsacross the country.

FEBRUARY 19995

ADVISOR’S EDGE6

53 Estate Planner with Sandra FosterHow do you feel about the stable of specialists you referyour clients to? Two groupswant to help you find the right people, with the rightexpertise.

55 Tax Break with Gena KatzOver-contributions, foreign con-tent and more. Before you takeeven one more client call, brushup on our RRSP tax tips.

56 Academic Eye with Dr. Moshe Arye MilevskyDollar cost averaging—taketwo. This icon of financial planning isn’t all it’s crackedup to be, he says.

58 Mutual Watch with ScottMackenzieDownside risk measures arewinning votes as an alternativeto the traditional mean-variance model. But they’re no panacea.

BUILD YOUR BUSINESS

61 Road WarriorBefore you go with that jumboseminar, why not ask yourclients what they’re interestedin learning about? The point isto stand out from the crowd,says wholesaler Andrew

Buntain.63 My Edge

Doug MacDonell’s most significant challenge is that he doesn’t get to spend asmuch time as he’d like with his clients. Still, he’s managedto earn a level of trust few can match.

65 Mentor with DavidThibaudeauIf you’re too busy to read thismonth’s Mentor column, youhave a problem.Take a breath,and revisit the three key elements of your business.

67 The Quest for Excellencewith Nick MurrayThree easy steps to excel-lence: who are you, what doyou want and how are yougoing to get it?

INTEREST

69 CIBC’s Financial Health Polland a look at the AEBookshelf.

COLD CALL

70 National Post columnist DianeFrancis says The Economist isthe best publication in theworld. Perhaps she’d like togive Paul Martin a gift sub-scription.

CO

NTENTS

Published in Canada by Maclean Hunter Publishing Limited since June1998. Maclean Hunter Publishing Limited, 777 Bay St., Toronto, CanadaM5W 1A7, (416) 596-5000, fax (416) 596-5071. Offices: 1001 deMaisonneuve West, Montreal H3A 3E1, (514) 845-5141; Ste. 900, 1130West Pender St., Vancouver V6E 4A4, (604) 683-8254.Full subscription price: Canada $59 per year, 2 years: $95, 3 years: $125,USA/Foreign: $120 (one year only). Single copy: $25. Published 12 timesa year. G.S.T. #R103439444.ADVISOR’S EDGE is indexed by the Canadian Magazine Index by MicromediaLimited, and the Canadian Periodical Index. Canadian back copies are avail-able in microform from Micromedia Limited, 20 Victoria Street, Toronto,Ontario M5C 2N8. Indexed by the Canadian Business Index and availableon-line in the Canadian Business & Current Affairs Database. CanadianPublications Sales Agreement 1280341. ISSN 0703-7732copyright © 1999 Maclean Hunter Publishing Limited.

A Maclean HunterPublishing LimitedPublication

FEBRUARY 1999

Caroline Nolan Editor(416) 596-5971 cnolan@mhpublishing.com

Kevin Press Associate Editor(416) 596-5958 kpress@mhpublishing.com

Lisa Machado Assistant Editor(416) 596-3564 lmachado@mhpublishing.com

David Heath Art Director(416) 596-5059 dheath@mhpublishing.com

James Ireland Consulting Art Director

Contributing Editors: Harvey Schachter, PeterBoisseau and Bert Vandermoer

■ ■ ■

Paul Williams Publisher(416) 596-5959 powmh@msn.com

Kori Kobzina Associate Publisher(416) 596-2662 kkobzina@mhpublishing.com

Stacey Mitsilios Executive Assistant(416) 596-5070 smitsilios@mhpublishing.com

Adrian Valks Production Manager(416) 596-5035 avalks@mhpublishing.com

Denise Brearley Director of Circulation and (416) 596-3470 Marketing Research

Kathryn Baus Promotions Manager(416) 596-5937

Editorial Advisory Board

Robert Fleischacker CAIFASandra Foster Equion Securities Canada Ltd.

James McGovern BPI Mutual FundsGlenn Lightfoot Royal Trust

Ian Niven Jones Heward Investment Management Inc.

Richard Suggitt Hirsch Asset Management Corp.

Scott Mackenzie Portfolio Analytics Ltd.Stephen Clarke Trimark Investment

Management Inc.Dan Thompson Institute of Canadian

BankersThane Stenner Merrill Lynch Canada Inc.

Jim Rogers The Rogers GroupFinancial Advisors Ltd.

Brian Phillips Phillips, Hager & NorthInvestment Management Ltd.

Lynne Triffon CAFP (B.C.) R.M. Paterson& Associates Ltd.

■ ■ ■

Maclean Hunter Publishing Limited

John H. Tory President and CEOTerry L. Malden Executive Vice President

Brian Segal Executive Vice PresidentJim O. Hall President, Medical PublishingJohn Milne Executive Publisher

Subscription inquiries: Call (416) 596-5248

15

agazine deadlines rarelywait for anything, letalone anyone. However,this month was different.

We were just about to put February, aswe say, “to bed” when, after months ofspeculation and false starts THEREPORT was released.

Of course, the report in question:Investment Funds in Canada and ConsumerProtection: Strategies for the Millennium,authored by, in case you haven’t heard,Glorianne Stromberg for IndustryCanada.

This sort of situation gives magazineeditors heart palpitations, trust me. Buta quick e-mail and phone call to Har-vey Schachter (an Advisor’s Edge con-tributing editor) produced a solution—a special report starting on page 18,entitled “Stromberg: The Sequel.” Wehave distilled a 230-page report intothree pages focusing on content that isimportant for you to be aware of.

Now I know many of you groan at themere sound of Stromberg’s name becauseof her 1995 report. If you are in thiscamp, you may decide to ignore her lat-est release completely. I have one sugges-tion—don’t! You may not agree witheverything Stromberg says, but her insightand ideas deserve serious thought anddebate. This report will likely change thefinancial services industry as we know it.

If you want the full report, youcan read it or download on-line at:http://strategies.ic.gc.ca. And in ourMarch edition, we’ll feature responsesfrom heads of various industry asso-ciations, as well as letters from read-

ers like yourself. We look forward tohearing from you!

HOUSE NOTESPublishing a monthly magazine requiresteamwork and, obviously, the bigger theteam the better. So thank goodness forthe arrival of Lisa Machado, our newassistant editor, a brand-new position.Lisa leaves a reporter position at therespected Investor’s Digest. Look for herbyline (and photo) in the Interest sec-tion of next month’s edition.

Also, you may have noticed anew name on our editorial advi-sory board listing on the mast-head. Lynne Triffon (right),CFP, RFP, is a senior financialplanner with R.M. Paterson &Associates Ltd. in Vancouver. Ask her whywe invited her to join the board, and she’llsay it was because she’s young, female, liv-ing on the West coast and working as anindependent financial planner.

Actually, we were impressed byTriffon’s commitment to the devel-opment of the financial planningindustry, as well as her reputation.She is currently serving her secondyear as president of the CanadianAssociation of Financial Planners(B.C.) and has been a dedicated vol-unteer for years. To see her latesthandiwork, attend the CAFP’snational conference in Vancouver, tobe held in late May—she has been akey organizer.

Welcome aboard!CAROLINE NOLAN

EDITOR

Stromberg speaks

FEBRUARY 19999

M

Photography by Joseph M

arranca

Glorianne Stromberg delivers a blockbuster with “Stromberg Two,”plus new additions to AE’s team and Editorial Advisory Board.

INSIDEEDGE

What Do You Think?• Should there be just one regula-

tor for the entire financial ser-vices industry?

• Should the February RRSPdeadline be scrapped andreplaced by individuals’ birth-dates?

• Do you feel “marketing pres-sures” have overtaken your fidu-ciary obligations?

Tell us what you think about theseand other points made inGlorianne Stromberg’s new reporton the mutual fund industry. We’llpublish your comments in anupcoming issue. Please limit yourcomments to 500 words so we canprint as many of our readers’ com-ments as possible. Here’s how tocontribute:• advisorsedge@mhpublishing.com• fax to (416) 596-5071• Advisor’s Edge, Editor,

Maclean Hunter Building, 777Bay Street, 5th Floor,Toronto,Ont. M5W 1A7

“DESIGNATIONS UPDATE”December 1998, page 32

take exception to DonaldLockey’s comments in thisarticle. In reference to how

best to gain an education relevant to thefinancial planning industry, he says: “A[university] graduate armed with atheory-based degree poses much moreof a potential hazard than someone

actively employed in the industry on a daily basis who isenhancing his or her skills via a correspondence course.”

Given two individuals with equal working experience, I’drather take the one with a relevant academic degree. I am cer-tainly biased towards this view since this was my path to theindustry. But I can confirm from first-hand experience thatmy degree, which included an emphasis on finance, taxationand economics, was extremely relevant and readily applica-ble when I started in the industry.

I’ve since complemented my university education with theCanadian Securities Course and the certified financial plannercurriculum (with the Investment Funds Institute of Canada),and am now registered in the chartered financial analyst pro-gram. I hold a position where I provide advice to other finan-cial advisors/planners and brokers, so I would say that my uni-versity education has not been a hazard in any way.

Is it the best and only way to go? That answer depends onspecific individual goals. However, I know that I wouldn’thold the position I do (in my young career) were it not formy academic achievements.DAN HALLETT, B.COMM., CFP,

FUNDMONITOR.COM CORPORATION

WINDSOR, ONT.

ith one foot squarely in the securities biz (Cana-dian Securities Course), and another in financialplanning (certified financial planner studies), I

found your “Designations update” interesting.My intentions are to do both over the next five years. The

way the world of finance is changing, the one sure thingabout keeping yourself marketable is to have as much edu-cation—theory and practical—as possible.MARK FYNN, CRANBROOK, B.C.

“SERV AND PROTECT”By Kevin Press

December 1998, page 26

r. Divitt is exactly right. In the fall of 1994 thiscompany—as a small mutual fund dealershiplocated in British Columbia—was introduced to

administrative automation by either good fortune or coinci-dence. First, we installed CCB software provided by the Win-sted Group in Mississauga, Ont., and second, shortly there-after, started accessing FundSERV.

In the early stages we received commission data only.This was followed in an orderly fashion by transactiondata, account reconciliation, order entry and daily pric-ing. Our entire experience has been very positive, to saythe least.

The data processed through FundSERV is like Ivorysoap—99 44/100% pure. Our auditors have in fact suggestedthat our infrastructure will enable us to dramatically increasevolumes, while containing our administrative costs. Theresulting benefits obviously will flow to net income.

We are convinced that technology and automation notonly ensure our financial fitness for the next decade, but infact provide a window of opportunity. The financial titansare not really a threat, because the investor public likesnarrow-casting compared to catering to the masses.

The proposed FundSERV fee schedule is a bargain. Asa matter of fact, we would gladly pay double the amountif we could become a paperless dealership tomorrow. Theresulting savings in labour and increased efficiency wouldbe substantial. I would encourage the skeptics to endorsetechnology and automation. Simply said, even change ischanging!

Finally, the founding fund companies of FundSERVdeserve heaps of accolades for their willingness to suppresspartisan egos and recognize the need for more standard-ization and automation on the independent side of the finan-cial services industry. That in itself will ensure our con-tinued financial viability. Imitation is a form of envy indisguise, and the banks are working desperately to catchup. Organizations such as FundSERV will advance ourcause.REID M. LISKE, ASCOT FINANCIAL SERVICES LTD.

SALMON ARM, B.C.

I

W

LETTERSM

FEBRUARY 199911

FEBRUARY 199913

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by

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umen

y Terry Oehler, of Oehler & Associates Financial Man-agement Ltd., is a Regina, Sask. financial advisor whohas used her position as an accountant—and a love ofthe good life—to attract the business of a good pro-portion of Regina’s professional class.

The 44-year-old Oehler became a chartered accoun-tant in 1979, and spent most of her career workingfor large accounting firms, specializing in tax planning.

But corporate tax work was too impersonal for hertastes. And she found that a lot of her clients askedabout other financial issues—investments, registeredretirement savings plans, etc.

Wanting to focus on the whole picture, she earnedher registered financial planner designation in 1995, andbecame a chartered financial analyst in 1996. She—andher two employees—now manage around $10 million.

If you’re going to tap into a community, make it a well-heeled

one.Terry Oehler’s (left) success with some of Regina’s most

elite professionals led her to Sheila Wilson and family.

ONEONONEInterview by Richard Skinulis

Sheila Wilson, 51, has worked as a nurse, in managementconsulting and sold real estate for 16 years. She is now study-ing for a master’s degree in religious and women’s studies atthe University of Regina. She also works part-time as her hus-band’s assistant.

Cameron Wilson, 55, is a nephrologist. With Cam’s chil-dren from a previous marriage grown, the couple are sharingan appreciation for the finer things in life—wine, food andtravel—while planning for a comfortable retirement.

TERRY: Like a lot of my clients, I started out doing theWilson family’s taxes. Sheila Wilson was working with a stock-broker but didn’t feel she was getting the level of advice shewanted. They are very private people, and don’t want toexplain all the facets of their life to different people. Theyexpect a high level of professionalism, expertise and theutmost confidentiality.

I won their business by doing their taxes and by explain-ing things to them that other people hadn’t. People also seeyou in a social setting, and how you are respected in the com-munity. Because of the accounting, the Wilsons don’t see meas a salesperson, but as client-oriented. And the fact that

I can handle both the tax and the investment end simplifiestheir lives.

When the market took a significant downturn, I had a chatwith Sheila. I mentioned that the market hadn’t been good,and that their investment statements were going to reflect that.We looked at the history of their asset allocation, and whathad happened wasn’t as bad as the worst year for such an assetallocation. So that put it into perspective.

I asked them: “Are you comfortable enough with yourstrategy to not want to bail out at the bottom?”They under-stand that if they want to achieve their retirement goals, andcontinue their lifestyle, they have to hang tough. The marketwill come back.

Sheila’s husband, Cam, is 55. But he’s not planning toretire in the next five years. I just finished doing a com-prehensive insurance review for Cam, and I referred themto a specialist—someone I respect very much. I really wantto position myself as a “financial coach.” So even if I can’tdo everything for my clients, they will look to me for rec-ommendations. High-net-worth people won’t make a movewithout a personal referral. This carries over to their invest-ments. They trust me.

FEBRUARY 199915

ONEONONE

The Wilsons are very busy people. Theywant to know that things are on track. Butother than that, they pretty much trust myjudgment. Doctors work such long hoursthat often I meet with them at theirhomes—at nine at night or whenever it’sconvenient for them.

They need personal contact, so I don’tdelegate. I visit their home four or fivetimes a year to go over their investments.But I’m also involved with them right nowin a charity [on the board of directors].

The Wilsons treat their finances as oneunit. But you have to make sure you aretalking to both of them. I have anothercouple as clients. The broker they hadbefore never addressed the woman’s ques-tions, but would always speak to the hus-band.

Retirement isn’t right around the cornerfor the Wilsons, and they want to enjoytheir lifestyle. So we are emphasizing long-term growth, but with enough balance tomake sure their capital won’t be lost inmajor downturns.

I feel that my mission as an advisor is totruly understand the values, concerns andgoals of my clients, so they can live theiractive lives without worry.

SHEILA: We’ve worked with Terry forabout five years. We’ve known her socially,and we’ve been there for a lot of herachievements. Terry and I work together onthe same women’s organization, so I knewof her commitment to anything she turnsher hand to.

Our investments are long-term. We arelooking for some growth, but we’re con-servative right now. We have some foreignmutual funds, but the majority is in Cana-dian mutual funds and bonds. We reviewthat every year.

When there is a downturn, we know itwill pick up again. But if it got really bad,we know Terry would call and advise us.She is helping us right now by inspiringconfidence.

Realistically, we would like to make

ADVISOR’S EDGE16

10% on our money. Until this [recent correction] happened,we were delighted with our [up to 17%] return. But we knowthat can’t last forever, and in the end it all balances out.

We like the fact that Terry is always accessible. I have neverhad to wait more than half a day for her to return a phonecall. And she has incredible attention to detail.

Once, on a day off, we were in the mountains together. Wewere surrounded by spectacular scenery, but Terry was buriedin the newspaper reading the stock prices. I felt like saying:“Can’t you stop for even a minute?”

Also, we live in a very sexist society. But Terry’s knowl-edge and expertise crosses all of these gender boundaries.My husband has as much confidence in her as in any of hismale colleagues. And Terry will never push the boundariesabout what could be claimed on income tax like somefinancial advisors do.

Cam and I got married 11 years ago. Our philosophy isthat it’s our money. Fortunately we have similar philosophiesin many areas of life. We like to travel, to eat good food with

nice wines and to entertain at home. We enjoy a nicelifestyle, but then doctors don’t get a pension. So we aresolely responsible for our retirement. We try to strike a bal-ance between preparing for the future and living happily andcomfortably today.

Both of us have seen too many people who poured somuch into their life savings by denying themselves every-thing—from trips to long-distance telephone calls—and thenone of them had a heart attack. We believe life is to be lived,not saved up.

I don’t normally hand out her card, but I did introduce Terryto a couple of women I know. She doesn’t come in like a bullin a china shop. It’s always: “This is how I can help you.”

There is nothing that turns us off more than someonewho is selling a product—and you’re the next target. That’simportant, because these kinds of relationships are built onpersonal and professional trust and respect. If you don’t havethat with your financial advisor, you had better find some-body else.

ONEONONE

“I don’t normally handout her card, but I did

introduce Terry to a coupleof women I know. She

doesn’t come in like a bullin a china shop.”

STROMBERG:

ADVISOR’S EDGE18

hen Glorianne Stromberg speaks, the financial community listens.

Four years after her report on the investment fund industry that is still

prompting discussion and reforms, the securities lawyer and ex-commissioner for

the Ontario Securities Commission has weighed in with a new study that is likely

to spark wide-ranging changes in the activities of all financial planners and the

mutual fund industry. In the nearly 230-page report for Industry Canada’s consumer affairs department, she

covers everything from improving seminars, to changing the RRSP deadline to an individual’s birthday to

eliminate the February frenzy and allow time for an improved client-advisor relationship.

Glorianne Stromberg’s new report calls for a massiveoverhaul of the mutual fund industry. Here is whatshe has to say about your role. BY HARVEY SCHACHTER

W

SPECIAL REPORT

The core of her concern are those clients, or, as she labelsthem, “consumer/investors,” who have been drawn in largenumbers to the industry in the past decade and don’t neces-sarily have the skills of the classic investor of the past. Shefeels they are hurt by the increased blurring of product, func-tion and advice as the different segments of the marketplacecompete. “It is difficult for consumer/investors to identifywhen they are being provided with independent advice, andwhen they are simply being sold a product which may beadvice packaged as a product, a proprietary product, or aproduct in which the seller/advisor has a substantial finan-cial interest,” she says.

Stromberg also points to the difficulty consumer/investorsface distinguishing between competing products that seemsimilar but have quite distinct attributes, such as the flood ofindex-linked securities and guaranteed investments beingadvertised recently. As far as she’s concerned, currently “thereis no transparency” since “it is virtually impossible for con-sumer/investors to identify the cost of (1) the advice; (2)the service; (3) the product; and (4) the guarantee.”

Stromberg believes “one of the fundamental challengesthat the investment industry faces today is how to ensurethat the exigencies of marketing pressures do not prevailover the fiduciary obligations of the investment advisoryactivities. . . .Where once portfolio management skills werethe most sought-after skills for mutual fund managementcompanies, marketing skills are now perceived as an evenmore essential asset. As one fund manager expressed it tome, the fund management industry is becoming a homefor marketing personnel who have left the consumer prod-ucts industry.”

She views financial education as the improvement thatwould most help the consumer/investor. It should begin inschools, where youngsters would be taught the basics theyneed for handling their finances, from a curriculum devel-oped by a group of educators and industry leaders whowould identify the key competencies and the indicatorsneeded to measure them. Adult education initiatives—fromseminars to pamphlets to full courses—would convey thesame knowledge to adult consumer/investors.

FEBRUARY 199919

But a better-educated client and the continuing sophisti-cation of investment products would necessitate more edu-cation for financial advisors as well, which she wants over-seen by a Non-Partisan Standards Council. The educationalrequirements, she points out, “need to be based on what theintermediary is actually doing,” which, in the future, will likelybe more advisory portfolio management services for anincreasingly knowledgeable consumer/investor. And that willmean breaking away from the current course offerings, whichhave essentially been geared to the different products of thetraditional four pillars.

“These separate courses are a major source of revenue forthe industry associations that sponsor them. Accordingly,sustaining these courses and the need for them is of majoreconomic significance to the industry associations. Unfor-tunately, the underlying desire to protect this revenue sourcehas been the predominating, unspoken factor in ongoing dis-cussion about the need to adopt enhanced education andproficiency standards as well as a contributing factor to therelatively sudden formation of the Financial Planners Stan-dards Council of Canada (FPSCC) and to the subsequentnegotiations that took place to settle the dispute over theright to use the CFP (Certified Financial Planner) trademarkin Canada,” she says.

She recommends that current courses be reviewed and,where necessary, redesigned. Graduates would be general-ists in financial planning and investment advisor services.And she warns that the CFP standard is not necessarily thestarting point for developing a recognized designation, asit originated in the days prior to financial deregulationand includes many courses that have an inherent prod-uct-category bias based on transactions rather than the moreintegrated, client-needs focus of today.

While a non-partisan group identifies competencies anddevelops improved education programs, Stromberg wants amoratorium placed on the use of the term “financial plan-ner” and like terminology because it has become very mis-leading. The Non-Partisan Standards Council would ulti-mately approve courses, ensuring a common standard. But

she stresses that it would be bad for both client/investorsand the industry if a monopoly was granted to any one orga-nization in the field to actually offer an educational program,such as the CFP.

Stromberg wants a uniform regulatory regime for moneymanagement that would be achieved through agreement ofall levels of government. A key component would be therequirement for membership in a single, national self-regu-latory organization that would focus on the advice-givingactivities of intermediaries. Equivalency education and pro-ficiency would be taken into account in the requirements formembership, as with other self-regulatory bodies like the LawSociety of Upper Canada.

“The objective of the exercise would be to ensure that itdoes not make a difference to consumer/investors (at leastfrom the perspective of adequate regulatory oversight andsupervision) with whom they deal in terms of there beingminimum requirements that must be adhered to and mini-mum redress remedies available in the event of problems.Membership by intermediaries in other industry associationswould continue to be voluntary. The functions of these otherorganizations would be confined to those of an ‘industry’association,” she says.

A redesign of the reward system would accompany theregulatory change. “For the most part, the current systemrewards product sales as opposed to rewarding the abilityto meet the client’s integrated needs. Part of the realignmentof the reward system needs to focus on ways to encouragereferrals when this is the proper thing to do from the client-needs perspective. Otherwise, the normal tendency of theintermediary will be to select whatever reflects the particu-lar niche of the intermediary, including a tendency to select(or be tempted to select) the product that will offer the high-est revenue stream,” she says.

Stromberg doesn’t make clear how such a referral rewardsystem would operate. She does say, however, that it will flowmore naturally from a regime in which all intermediaries mustbe registered. And she wants the new reward system toinclude clear disclosure to the client of the revenue stream

THE SEQUEL

ADVISOR’S EDGE20

flowing to the referring firm and representative.Disclosure, she observes, is a key consumer protection

strategy and must be beefed up. And she argues that infor-mation which is only deemed to have been delivered to con-sumer/investors but which has not actually been deliveredcannot be considered to have been disclosed to them. Forproper disclosure, information—clearly and simply pre-sented—must be available before a decision is taken.

She starts with the prospectus, wanting it written in non-repetitive, plain language and pruned, with only the essen-tials included. Generic and educational information wouldbe stripped out and placed elsewhere. Only summary finan-cial information would be included with full financial dataleft for an accessible web site. Marketing material would notbe included in the prospectus or in a wrapper around it. Andperformance information would be displayed on a year-by-year calendar basis with comparison to the relevant indicesfor the security.

Confirmation forms would clearly detail the intermedi-ary’s compensation, together with the impact of this com-pensation on the investor’s total return over a period of years.As well, the form would advise the consumer/investor

whether the investment fund is a proprietary fund or third-party fund; is insured by CDIC or covered by other customerprotection funds; and what the period is for withdrawal rightsto be exercised.

Stromberg also wants account statements treated as anessential part of the disclosure process. The statements wouldinclude individual internal rates of return, risk-adjusted ratesof return and appropriate benchmarks for comparison.Charts and graphs would correlate these performance num-bers and benchmarks. As well, the statements would showafter-sales-charges returns and report the amount of com-pensation—including trailing commissions—received by thedealer or representative during the account period.

Finally, Stromberg wants more formalized know-your-client suitability procedures when an advisor starts doingbusiness with a consumer/investor. She suggests adoptingthe model used by pension funds and other institutionalaccounts, in which an agreed-upon statement of investmentgoals is signed, identifying goals, benchmarks for assessingperformance, frequency of reporting, and the method as wellas frequency of revisiting the goal-setting stage.

Stromberg dismisses calls for regulatory intervention toensure that fees, charges and management expenses are bet-ter disclosed to consumer/investors, preferring voluntarymeasures first by the industry. And although the many rec-ommendations in her report would mean substantial changefor the industry, she is concerned with the regulatory impact,notably for her proposed registration system. She offers var-ious proposals to ease registration delays that currently exist,while at the same time calling for stricter rules for trans-gressions and tougher penalties so that, for example, when arepresentative’s or firm’s registration is suspended and ter-minated, trailing commissions don’t continue to be paid.“The focus of the rules should be on consumer protectionrather than on the right of the registrant to earn a living inthe ‘securities’ industry,” she states.

The report is comprehensive and Stromberg warns againstcherry picking, calling for wide-ranging reform. She endswith a plea for collective action: “This is a community prob-lem. No one sector or regulatory group acting alone has theability or power to do this. We need to act together. We needto remember that it is people who make things happen andthat it is people who prevent things from happening. Thereis a positive role for everyone to play. Our well-being dependsupon it.”

Harvey Schachter is a contributing editor for Advisor’s Edge and a free-lance writer living in Kingston, Ont.

“”

It is difficult for

consumer/investors to identify

when they are being provided

with independent advice, and

when they are simply being

sold a product which may be

advice packaged as a product,

a proprietary product, or a

product in which the

seller/advisor has a substantial

financial interest.

SPECIAL REPORT

FEBRUARY 199923

ranco Lombardo says he’soptimistic about this year’sregistered retirement savingsplan (RRSP) season, but he

doesn’t expect to be as busy as he hasbeen in years past. The seven-year vet-eran of the financial planning busi-ness—who works with a partner out ofVancouver-based Great Pacific Man-agement Ltd.—says 1999 will be slower,but for all the right reasons.

“I’ve changed my practice this year,”says Lombardo. “We went from 750clients down to 250. I want to focus onthe best relationships. [The other 500]actually represented 16% of assetsunder management. And those were theones that took up the most time.”

Lombardo’s decision is interesting fora couple of reasons. First, it helps bringinto focus an important trend at theclose of this year’s RRSP buyingbonanza. Canadian advisors, in signifi-cant numbers, are shedding low-net-worth or otherwise troublesome clients.The emphasis isn’t necessarily on well-heeled professionals, but rather on thosethat offer a financial advisor the bestprofit potential for his or her practice.

The message is simple—teach yourclients well, and cut the problematicones loose.

“I remember one [RRSP season] Icalled a client and said: ‘I’ll be by at12:30,’ ” says Lombardo. “She asked: ‘Isthat after lunch?’ I said: ‘No, no, that’safter midnight.’That’s how insane it was.I got home at 1:30 that night, and Iremember, it was a cheque for $2,350. Isaid to myself: ‘Nope, I’m not doing thisanymore.’ ”

This, in turn, is leading to a secondshift in the business. As advisors severthe ties of inefficient client relation-ships, RRSP season is growing calmer.For example, fewer clients are makingtheir annual contributions in one lumpsum just before the deadline. The ideaof monthly instalments is now main-stream.

Daniel Pliskow, of Dardan CapitalFinancial Planning Ltd. in London,Ont., is a financial advisor who haspieced together a client base he cancount on. He works with primarily pro-fessional, high-income earners. Eventhough many of them—about 75% by

his estimation—still make one-timeFebruary RRSP contributions, they allhave well-designed, year-round financialplans in place.

“I’m probably just as busy in Juneand July as I am in January and Febru-ary,” says Pliskow. “Busy for other rea-sons—portfolio reviews, tax planning

The best relationships

“I remember one [RRSP season]

I called a client and said:

‘I’ll be by at 12:30.’ She asked:

‘Is that after lunch?’ I said: ‘No,

no, that’s after midnight.’ ”

Franco Lombardo,Vancouver, B.C.

“It’s amazing how many people

think that’s the only time that

they can make a contribution—

January and February.”

Brenda Banbury, Saskatoon, Sask.

There was a time when the month of February meant a whole lot of work for few returns. But the mad dash to the RRSP finish line is not what it once was.

Photography by Joseph M

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Advisor’s Edge invited four Canadianfinancial advisors to share the lessons

they’ve learned in RRSP seasons past. Onehad to cancel at the last minute because hewas too busy. RRSP burnout? Not at all.

ON THE LINE

Brenda BanburyBrian Mallard & Associates

Saskatoon, Saskatchewan

Franco LombardoGreat Pacific Management Ltd.Vancouver, British Columbia

Daniel PliskowDardan Capital Financial Planning Ltd.

London, Ontario

MONEY TALKSB y K e v i n P r e s s

FEBRUARY 199925

and other things.”January and February are not packed

with the long days and nights they usedto be. “I do very few evening appoint-ments during the RRSP season—prob-ably on average about two a year,” saysPliskow. “Talking to some of the peoplewho work in the bank branches and thetrust companies, [they say that] in the lastyear or so it’s been a lot calmer. It’s noth-ing like it was in the 1980s. I rememberthen you’d see lineups out the door.”

Pliskow’s experience with last-minute RRSP shoppers is becomingless common. Lombardo says onlyabout 20% of his current clients stillmake one-time RRSP contributions.Brenda Banbury, a financial plannerwith Brian Mallard & Associates inSaskatoon, Sask., estimates only aboutone-quarter of her clients do so.

Chalk it up to investor education,according to Banbury. “There is so muchinformation out there right now,” shesays. “They’re more knowledgeable. Andthat’s good. It helps us with our business.”

Banbury stops short of saying theRRSP rush as we know it is a thing ofthe past, though. While there is a movetoward monthly contributions amongmany Canadians, that 25% of herclient base remains stubborn.

“Some of them are dependent on a[year-end] bonus,” she explains. “Withsome, it’s just a really hard sell to shift

their behaviour. It’s a pattern. They’vealways done it in February. And it’samazing how many people think that’sthe only time that they can make a con-tribution—January and February.”

An Ideal ClientIt is unreasonable to suggest that Jan-uary and February will ever run assmoothly as the other 10 months ofthe year. They will always, it seems

likely, be at least a little bit busier thannormal. Don’t think that if you are run-ning harder than usual in the weeksleading up to the deadline, that yourbusiness is in some way troubled.

That said, financial advisors—likeany professionals—sometimes need toset boundaries. “Pick a minimum ac-count size, develop an ideal client,” saysLombardo. “What kind of person ishe or she? What are his or her values?Do they match your values and beliefs?The best thing is to set an ideal clientprofile and stick with it.”

It’s not just about who you will workwith either. It’s about what you’re pre-pared to do. “In 1995, my partner and

I had about 78 evening appointmentsin January and February,” says Lom-bardo. “In 1996 we had four. Last yearwe had none . . . The amazing thingwas, when we asked our larger clients tocome in to the office, they didn’t [haveany problem with that].”

Banbury has the same advice. “Setsome expectations with your client inthe beginning,” she says. “If you startgoing out and picking up that cheque,they expect that every year. And theyexpect the evening appointments. I willstay until 5:30 p.m., or I’ll see some-body in my office after they are finishedwork. But I will not do an eveningappointment. I would rather work aSaturday morning because I have somecontrol over that. There are expecta-tions that need to be set between theclient and the planner.”

Perhaps that’s the key word: “Con-trol.” It’s not about avoiding a busy Feb-ruary. It’s about being in control ofwhat you’re prepared to do for yourclients, and in many cases when you’reprepared to do it. Sure there will be hec-tic days. Daniel Pliskow still says hisfavourite time of every year’s RRSP sea-son comes on “the day you finish.” Butthat finish line is a lot easier to reachwhen you’re setting the pace.

Kevin Press is associate editor of Advisor’sEdge.

“I do very few evening

appointments during the RRSP

season—probably on average

about two a year.”

Daniel Pliskow, London, Ont.

MONEYTALKS

ADVISOR’S EDGE26

FEBRUARY 199927

I N T E R V I E W S B Y H A R V E Y S C H A C H T E R

P H O T O G R A P H Y B Y G R E G H O L M A N

WILL YOU BE

MINE

Prospecting for clients can become terribly routine, even

humdrum. But every so often, things turn interesting. Some-

times it’s because the advisor has displayed extraordinary

determination. Sometimes, a new A+ client just drops in

out of nowhere. Advisor’s Edge asked five readers to tell us their

favourite prospecting stories. Some were funny. Others were

heart-warming. All were inspiring and instructive.

?

I

OONE DAY I WAS OUT SKIING SINGLE AT A LOCAL SKI HILL.It was quite crowded on the lift. In that situation, you skiup and yell “single,” and then team up on the chair lift withsomebody. It’s a pretty easy way to meet people.

There was a taller, older gentleman, about 55. We skiedabout the same speed, so we ended up skiing together forabout two hours. And, of course, on the chair lift going up,we chatted. He told me that he was retired from a schoolboard, and I remarked that I was a financial planner. He said:“Oh, I think I might be needing the services of a financialplanner. Do you have a business card?” So there I was in myski bunny outfit, checking for business cards, which I natu-rally didn’t have.

He told me that he would be selling his house in thespring, and would probably have about $100,000 to investthen. I told him my name and that he could reach me atInvestors Group. But I figured that would be the end of it.

Of course, I completely forgot about the incident. I meeta million people in a million places. But my phone rang inthe spring, and this gentleman reintroduced himself—GuyDrolet was his name—asking if I remembered him. I said:“Oh yeah,” but of course I didn’t.

When he came to my office for his appointment, I foundout it was $130,000—and the money was sitting in his bankaccount. I was a little surprised, but naturally I completed a fullfinancial review and at the end I told him: “Here’s where I’mheading with this. How about I prepare a proposal and youcome back.”

He agreed to come back the following week. But it was nowgolf season. He skis all winter and in the summer he golfs.

So he asked if he could skip making an appointment, andinstead just come in some day when it was raining.

I replied: “No, you can’t. I work by appointment. Howabout coming in at 4 p.m., and by then you can have finishedyour golfing for the day.”

So on the scheduled day, I had my full-colour proposal ready.It was, essentially, much the same as I proposed verbally. But Ihad given it more thought, and it looked more impressive.

At 4 p.m., he walks in looking like a storm cloud. Whenhe sat down, I asked how his golf game went. He launchedinto a tirade about some hole, and how his game was so awfulthat day that he took one of his clubs and threw it away. Andthen, still in a fury, he stormed from my office. He just tookthe proposal and stormed out.

I didn’t know what to do—whether to call or not—so Idefaulted into inaction. About three days later, I finished anappointment and the receptionist said: “A very nice gentle-man was in and he left this cheque for you. He said to justdo what you said.” The cheque was for $130,000. So Iinvested the money, and the relationship has gone on fromthere. But I’ve learned never to book him after a golf game.♥

EILEEN REIBLING, CAMBRIDGE, ONT.

I STARTED WITH ROSS DIXON IN DECEMBER 1985.The company had begun eight years earlier,and they had never had a female financialadvisor in the Kitchener, Ont. officebefore. Naturally, the clients were used toan all-male office.

In February 1986, in came one of ourclients—an older gentleman who was then in

I asked how his

golf game went.He launched into a

tirade about howhis game was so awful

that he took oneof his clubs and threw it away.

Kathy McMillan,Investors Group, Ottawa, Ont.

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KATHY MCMILLAN, OTTAWA , ONT.

ADVISOR’S EDGE28

ADVISOR’S EDGE30

his mid-70s (he’s now deceased), namedChester. I had met him before. He was a

very interesting, old-fashionedgentleman who was always veryoutspoken. His normal advisor

was Jake Loewen, who is nowretired.

Chester came in and was wait-ing at the front reception for Jake. But Jake had a client, andI knew he would be held up. Since we operated with a teamapproach—and it was RRSP season and we wereswamped—I came up to the front and asked Chester if Icould help him.

He looked askance at that suggestion. “I don’t see how youcould help me,” he said, looking longingly at Jake Loewen’s deskwhere this other client was sitting. Then he looked at me again,very dubiously. So I said: “Why don’t you give me a try. I’msure I can help you.”

He grudgingly agreed and followed me to my desk. I hada computer on the sideboard and he kept looking at the deskas if something was horribly wrong.

“What’s the matter?” I asked.“Where’s your typewriter?” he said.

“Why would I have a typewriter?”“Every good secretary has a typewriter.”Well, that was it. I already had a bit of a chip on my shoul-

der being treated as a rookie, even though I had previousToronto brokerage experience. I clenched my fist under thedesk, but I kept smiling.

“I am not a secretary,” I told him.“You’re not?”“No, I’m an account representative, just like Jake.”“You are?”“Yes I am. Plus, I have credentials.”“You do?”Well, I couldn’t help myself. “As a matter of fact, I’ve

worked at Wood Gundy in Toronto for six years and NesbittBurns before joining this company. I have more backgroundon Bay Street and the brokerage industry than any man inthis room.”

He thought about that, and then said: “Well, maybe youcould help me.” He started asking his questions, and we did areview. He kept looking at me in amazement throughout. Buthe was asking all sorts of questions, about market cycles andeverything, and he could see that I knew what I was talkingabout and was dedicated to taking care of his needs. After half

I clenched my fist under the desk,

but I kept smiling.Eileen Reibling, Ross Dixon Financial Services, Cambridge, Ont.

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ADVISOR’S EDGE32

A

an hour he stood up, thanked me, and shook myhand.

About two weeks later, he came in againwith a GIC that was nearly due. Jake Loewensaw him at the front reception, came up to

him, and began to lead him to his desk. ButChester was hesitant. Sheepishly, he said: “Jake,

I hope I’m not going to hurt your feelings. ButI really would prefer to deal with Eileen from

this point on—if that’s all right with you.”Jake’s mouth dropped. But he was a great guy. He told

Chester that was all right and led him back to my desk. That wasthe beginning of my relationship with Chester. He stayed withme for about four years, until I opened my own franchise in Cam-bridge, Ont. But he would continue to call me occasionally outof the blue to chat, and even came to visit me once.♥

BRUCE TEMPLETON, ST. JOHN’S, NFLD.

ABOUT 14 YEARS AGO, AS A ROOKIE IN THE BUSINESS,I was going through a very tough time. It was a bear marketin 1984, and I was off salary and on commission. I receiveda letter from the local cable company saying that if I didn’tpay $6—my monthly charge—they would cut off the cablecoming into my house. I found $6, got into the car and wentto pay the cable bill.

But I was angry. So I vowed that on my way back to theoffice I would stop at a driveway, somewhere, go up thatdriveway and make $6 before I returned to the office.

One of the first driveways was a business, and I went in.After about 35 minutes of waiting and pacing, I was allowedto meet the owner. I noticed when walking into his office thateverything was green, gold and brown—the furniture, hisclothes, the car that he drove. He even had a brown marking

pen that he was signing letters with. I was dressed, on theother hand, in my typical blue and white.

I spoke with him briefly. I didn’t get more than two orthree minutes to talk about treasury bills. I left, found another98¢ in my ashtray, and I bought myself a brown marking pen.I sent him a quick note of thanks on cream-coloured paperand signed it with the brown pen. “Thank you very much,”I wrote. “I’ll see you next week.”

When I returned the following week, I was transformed.I had on a pair of brown shoes that I didn’t know I owned,a brown suit that was 10 years out of style, a cream-colouredshirt and an ugly green tie. I looked like his twin brother.

On the second occasion, he opened an account for hiswife with me. That started out at $250,000. After about ayear and a half or two years, there was $6 million trans-ferred in.

The story reminds us that every rookie, every day, mustget out and pound the pavement. This is a contact sportthat we’re in. You’ve got to look under every rock, and younever know what you’ll find. You also have to be veryattuned to the people you meet. When you get into anoffice, you can’t just “show up and throw up.” You’re notthere to sell stuff. You’re there to observe and to listen topeople’s needs.♥

WILLIAM ANDERSON, MARKHAM, ONT.

THIS STORY IS ABOUT A COUPLE—I’LL CALL THEM

Brenda and Jim—who I first met in the fall of 1995. Theyattended one of my seminars after being telemarketed. Theyfound the seminar very interesting, and wanted a follow-upmeeting. That took place a week later, starting the data-gathering phase.

It turned out they had about $350,000 in financial assets,

I had on acream-coloured

shirt and an ugly green tie.I looked like his

twin brother.Bruce Templeton, RBC Dominion Securities Inc., St. John’s, Nfld.

Photography by S

cott Courage

ADVISOR’S EDGE34

a house in Unionville, Ont., and an empty lot in Colling-wood, Ont. They had a couple of daughters—one of whomwas mentally challenged—living in the community, and obvi-ously needing some support. They planned to retire in a yearor so, build a home on the Collingwood lot, move up thereand sell the Unionville house.

At the end of the first meeting, we had some good newsand bad news from my standpoint. Yes, they wanted to moveahead with some financial planning—especially retirementplanning. But they had this good friend who was handlingthe bulk of their portfolio, which was in RRSPs.

About 10 days later, we went through a retirement plan,which looked good. They both had pensions coming whenthey retired. I mentioned we had to do some risk manage-ment assessment and estate planning. A couple of things

were pointing us towards that—the mentally challengeddaughter and the fact that Jim wasn’t the healthiest indi-vidual I’d ever seen.

They were to give me a call, and I didn’t hear from themfor about three months. I called them, but they told me tobe patient. The plan was in place, and edging forward. AboutJune of that next year, they called, asking if they could seeme that evening.

When they walked in, they had a bit of a jaunt in theirstep. They were carrying a piece of paper, a cheque. Theyput it on my table and said: “There’s a $200,000 chequefrom the proceeds of the house. We’ve done it.”

They had built the house in Collingwood, and were liv-ing there—with Jim commuting to work in Toronto. Hewould fully retire at the end of the summer. Aug. 31 wasthe special day. The golf, for him, would begin Sept. 1.

I made it clear there was more work to be done in get-ting the risk management and retirement plan in shape. Butthey said the summer would be too busy with the commut-ing and everything.

Aug. 31 came and I gave them a call. In fact, the golf hadalready begun for Jim. And they were making plans to expanda multilevel marketing business so they could have some extramoney.

I mentioned that now that they had more time, we shouldput together a meeting for the risk management and estateplanning. I suggested we should definitely meet when the golfseason tailed off.

On Sept. 23, a Sunday, I came into the office and therewas a message from Brenda. Jim had collapsed getting out ofthe car in the driveway, and passed away. She was in tears—but actually in better control than I was—as she told me ofthe funeral arrangements.

Now I had to work with Brenda as she was facing up tothe problems of living alone, in Collingwood, an area thatwas picked more by Jim than her. The risk management wasnot as good as it should have been for this situation, whichgoes to show perhaps that it should be done first. Some insur-ance options from work, that Jim could have converted intohis retirement, hadn’t been completed because he and thecompany had still been doing the paperwork. We hadn’t putany other programs in place.

We have Brenda’s estate planning tied up now. I had metthe other financial advisor at the funeral and he was a niceguy. But a few months afterwards, I again brought up theimportance of having a single financial coach. There weremore tears—I was somewhat flabbergasted that issue wouldbring tears on—and she said: “Sorry, it was the way Jim

You have to be acounsellor

on life issues as well ason finances.

William Anderson, Equion Securities Canada,Markham, Ont.

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wanted it, and I guess that’s the way I will keep it.”This experience has created a stronger bond with

Brenda. When she is down from Collingwood, we’lloften get together and have lunch, even if there’s nobusiness. She tells me how she is developing her life,and the dilemmas she faces a year after Jim’s death.She looks upon me as a friend and a counsellor.

The story sticks with me because it shows that youshould be doing things sooner, rather than later, withpeople. It’s also a reminder that in dealing with theretirement crowd, you have to be a counsellor on lifeissues as well as an advisor on finances.♥

STEPHEN SHOSTAK, CALGARY, ALTA.

THIS STORY TOOK PLACE WHEN I WAS FIRST STARTING

out, in the mid-1990s. I was prospecting, andstarted talking to this lady. I discovered she waselderly, widowed and in the dark about invest-ments. She certainly needed help. She didn’t knowwhat she had, how much or where.

I figured it was probably a mistake, but I decidedto go out and help her. She lived in a small town,about an hour’s drive away. She volunteered to takea cab into town, but she was on a fixed income anddidn’t have a whole lot of money. So I went out tosee her.

She brought out shoe boxes of bank books andbank slips dating back to 1960. I tried to develop apaper trail. Some accounts were merged and closed. Then Ilooked at a Revenue Canada statement from her deceasedhusband, with a figure of $300,000 on it. She was wonder-ing what it was. I had to tell her that it was $300,000 of busi-ness losses her husband had racked up.

During the three hours I was there, she would forgetthings and I would have to tell her again and again—particularly that the $300,000 was really nothing. Then,back in the office, I had to carry out a property search.She thought she might have some property in her hus-band’s name. Nothing came of that. I called the bank to rec-oncile those old accounts. Maybe in all, I did 10 hoursof work.

I went out to see her again. She had a little bit of moneywe could do something with, sitting in a savings account get-ting 0.75%. Inflation was probably 3%, so she was losingmoney. I went over the Revenue Canada material again, aswell as the bank accounts.

There wasn’t a lot I could do for her, but I did recommend

she move from the savings account to a money market fund.It is risk-free, pays five times the rate and is still very liquid. It’san absolutely conservative investment—as simple and straight-forward as you can do.

She agreed. I came back to town, and sent everything off.It was done. I had worked hard to get the client.

But two days later, she called to say she had been talkingto her friend, and didn’t want to go through with it anymore.So I asked about her friend—is he an advisor? “Oh, no.” Doeshe know about investments? “Oh no.”

The friend doesn’t know anything about anything. Still, Icould see this wasn’t going anywhere. Eventhough it was a done deal, I called the bankmanager, stopped everything at that endand reversed it. This is not a happy story—no Valentines here—but there is still a messagefor us. The story shows us the impor-tance of establishing trust. If you don’thave that, you won’t get anywhere.

If you don’t have trust,you won’t get

anywhere.Stephen Shostak, Great Western Financial Corporation,

Calgary, Alta.

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FEBRUARY 199935

Your clients aregetting older. Intime, some willbegin to show theeffects of thataging process andtheir capacity tomake decisions orunderstand the services you provide may diminish. It isamong the mostimportant issuesfacing Canadianfinancial advisors.It is also one of the least discussed.

By Bev Cline

FEBRUARY 199939

Peace ofMINDDavid Baskin has been a proponent ofmulti-generational financial planning sincehe entered the investment industry in 1980.It’s a philosophy that has served the presi-dent of Toronto-based Baskin Financial Ser-vices Inc. well. And it continues to do so—occasionally in less-than-obvious ways.

Consider the story he tells about one ofhis senior clients. This gentleman, who hadbeen with Baskin for two and a half years,was beginning to show some signs of con-fusion. “We had a client who increasinglydidn’t seem to understand what we werereporting to him,” says Baskin. “The reallydisturbing part was that two or three daysafter we talked about his investments, he’dcall me and we’d have exactly the same con-versation again. Which made me suspectthat, at the very least, he had some prob-lems with short-term recollection.”

Fortunately, Baskin also works with theclient’s son. He was able to take his con-cerns to him. Together, they are ensuringthat the client’s investment strategy remainson track.

Almost every financial advisor hasreceived, at one time or another, what could

Continued on page 41

be considered dubious instructions.Direction that in the advisor’s opinionsuggests the client doesn’t recognize thepotentially negative effects those instruc-tions could have on his or her overallinvestment strategy.

Generally, a phone call resolves thematter. Either the client, after discus-sion with the advisor, changes his orher mind or stays the course. In the lat-ter case, the advisor—for the record—may ask for the instructions in writing.If nothing else, the process requires theclient to think the matter through onemore time.

But what if the client doesn’tappear to understand? What if theclient leads you to suspect that he orshe is, in some way, losing his or hercapacity to make decisions or under-stand the ramifications of the direc-tion you offer? If it is your sense thatthe client is unable to process theinformation, or that his or herinstructions or responses to yourquestions are completely out of char-acter, how should you proceed?

“In one word—carefully,” says

Carmen Theriault, a partner specializ-ing in estate law and litigation at Bull,Housser & Tupper in Vancouver. “Theonus is on the advisor to try to ensurethat the client is competent to under-stand instructions. Otherwise there is arisk that the advisor could be held liablefor any losses incurred as a result of tak-ing those instructions.

“In fact, while every case is unique, itcan be said that potential liability restswith any person financially advising a per-son who may be incompetent [sometimesreferred to as a person without mentalcapacity]—his or her financial advisor ina brokerage house, bank manager in thelocal bank, insurance agent or investmentcounsellor who visits clients in theirhome,” says Theriault.

Worse, it may not even be the clientwho sues the advisor. Morris Cooper, aToronto-based civil litigation lawyer, hasacted for clients in cases involving com-petency. “It can well be the phantomclient who sues the advisor,” he says. “Bythis I mean the children or grandchildrenof your client, who later discover losses

FEBRUARY 199941

Continued on page 43

“We had a client

who increasingly

didn’t seem to

understand what

we were reporting

to him.”

David Baskin,

Baskin Financial Services

Photography by Joseph M

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FEBRUARY 199943

incurred as a result of those instructions issued by your client.”What’s an advisor to do? “Advisors ought not to pro-

ceed as if this is a risk-free transaction. After all, finan-cial advisors are expected to be experienced in these mat-ters—the same as analysts—and so they need to beinformed about the [competency] issue and be very care-ful about the risk of liability,” says Theriault. “They needto educate themselves.”

An Issue in the FutureCompetency is a timely subject, one that’s likely to becomeeven more of an issue in the future. According to the

Alzheimer Society of Canada, one in 50 Canadians betweenthe ages of 65 and 74 will be affected by Alzheimer’s diseaseand related dementias in 1999.

As Canadians age, the statistics become even more dramatic—one in nine in the 75-to-84 age group will be affected this year.One in three Canadians over the age of 85 will suffer.

Meanwhile, your clients are living longer. There is every rea-son to expect that you will eventually—if you haven’t already—work with a client who is no longer capable of making sounddecisions regarding his or her own financial affairs.

National Trust is an example of an organization already

Jay Chalke, deputy public trustee for the province of

British Columbia, says calling the office of the public

trustee for advice when you think a client may be losing

capacity “can’t hurt, and can really help. It can save a

ton of headaches later on for both the client and the

advisor.”

The role of the public trustee is not the same in

every province. “Typically, we are the financial substi-

tute decision maker where there is no family member or

committee [in Ontario a committee is known as a

guardian] who is willing to do so for an incapable per-

son,” says Chalke.

The public trustee can also get involved when there

are suspected problems of undue influence. “This is

a difficult area,” says Chalke. “When does advice

become overbearing? In order for financial advisors to

protect themselves and their clients, if an advisor is

unsure or concerned that an individual is unduly influ-

enced by a third party, then the advisor should contact

our office.”

How to ProceedSo what can a financial advisor do when he or she is

concerned about a client’s capacity, but is unsure how

to proceed?

“Ask us for advice,” says Irene Hamilton, public trustee

for the province of Manitoba.“We’d much rather hear

from you, and have a possible problem brought to light,

than deal with the fallout from it later.”

Hamilton explains that once an advisor calls her

office, a referral is made to an appropriate community

resource person.The worker will then go to meet with

the client, if needed, or talk to family members.

“Calling us is doing a service for your client,” Hamilton

says. “It doesn’t mean that the advisor has to actually

be involved in any assessment, follow-up or time-

consuming communications with us.

“The worker who does the assessment will probably

want to talk to the advisor to ask what he or she has

noticed about the client or the person holding the

incompetent person’s power of attorney,” says

Hamilton. “But if advisors are worried about the

client’s reaction [that the advisor called the trustee],

we will try to hold this information confidential.”

Above all, use “lots of caution,” says Chalke. “We

see the consequences from the failure to be careful—

sometimes expensive and unsatisfactory litigation. An

ounce of prevention is worth a ton of cure. It’s much

easier to sort out before, rather than later, if the person

had capacity.”

Continued on page 44

The public trusteeProvincial public trustees can play a vital role when there is need of a substitute decision maker. There are offices across the country.

ADVISOR’S EDGE44

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“I believe

I have a fiduciary

duty to my

clients.They

depend on

me, and my

judgment, to

protect them.”

Donna Molby,

ScotiaMcLeod

dealing with the problem. Many of its clients are elderly andhave discretionary accounts, says Glenn Davis, national man-ager of will, trust, and estate development in Toronto.

Davis remembers one incident in his office during whichhe had real concerns for his client and her ability to act inher own best interests. In this case, an investment account,Davis actually refused to take action that he thought wouldharm his client in the long run.

“I remember one particularly vigorous interview wherethe client, an older lady, came in attended by her clergyman,”he says. “She wanted a cheque for five figures to give to him,not the kind of request she normally made. My personal viewwas that she was, at the time, probably not totally competentand not completely aware of the ramifications of her request.So I turned down her request and declined to give her themoney to hand over.”

In the end, Davis was able to persuade his client to seea lawyer about making a loan to the clergyman, rather

than giving the money to him.

Advisors’ ResponsibilitiesFinancial advisors do have a responsibility to ensure that theirclients are capable of giving instructions, and understandingthe ramifications of their decisions. And that responsibilitymay well get tougher, says Hilary Laidlaw, managing direc-tor, estate and trust development at Canada Trust in Toronto.

Although she stresses that she doesn’t want to instil anyundue fear, it is her belief that a recent Ontario court deci-sion (Re Koch) could affect the way financial advisors are judgedwhen it comes to their liability in regard to competency.

In the Koch case, the court held that the capacity asses-sors (the people hired to assess Linda Koch’s competency tohandle her own affairs) failed to “probe” and “verify” theinformation provided them, and that they used in makingtheir assessments.

Continued on page 45

The decision could be indicative of the responsibilitytaken on by someone making a determination of a person’scompetency. The Koch decision may have implications forfinancial advisors.

The decision won’t have a direct application to financial advi-sors, says Laidlaw. It deals with people whose function is capac-ity assessment. Nevertheless, the underlying message is relevant.

Which raises questions: • Should a financial advisor probe and verify what his or her

client says about his or her own competency?• Is there an obligation to probe and verify information regard-

ing a client’s competency if it is provided by a third party?There appears to be no clear answer to either question. AsLaidlaw puts it, “the depth of inquiry will clearly dependon the circumstances.”There are, in fact, few guidelines or laws to deal with these

sorts of situations, according to Jennifer Jenkins, a partnerin the Whitby, Ont. law firm of Jenkins & Newman. TheAlzheimer Society is her client.

Warning SignsPerhaps the client wants to make a substantial change to a finan-cial plan that has been in place for several years—that’s a com-mon warning sign. Sometimes, advisors see clients (whom theyfear may be incompetent, or close to it) being unduly influ-enced by a third party. And then there are those situations inwhich the person holding a power of attorney for an incom-petent person is not acting in the client’s best interests.

Keith Stefanick has seen third parties try to intervene, in away that he considers detrimental to his client. “A daughter ofone of our clients, who was not competent, was particularlycritical of the amount of money we were spending on hermother’s medicine and medical care,” says Stefanick, manager,personal trust department for National Trust in Edmonton.

“In fact, the daughter said: ‘You’re wasting my inheritance.’In this case, as in nine out of 10 of our accounts, we holdthe mother’s power of attorney. So we could do as we saw fit.I told the daughter: ‘I’m spending money in the best inter-est of my client, since our mandate is to take care of the per-son—end of story.’ ”

Unfortunately the issue may not always be that clear-cut.In many cases where a client has already been assessed by aprofessional as incompetent, a third party who holds thepower of attorney comes into the equation.

This means new challenges for the advisor. Amongthem: what is the financial advisor’s responsibility, interms of ensuring that the third party is acting in the best

FEBRUARY 199945

Continued on page 47

ThedemonstrationtestDon’t jump to any conclusions about your client’s competency.

This simple test will help you be proactive.

Dr. Michel Silberfeld is a psychiatrist and head of the

Competency Clinic at the Baycrest Centre for Geriatric

Care in Toronto. Although he urges financial advisors

not to back away at the first sight of a client with

potential competency problems, he suggests advisors

take a proactive stance.

If you suspect there may be a problem, do a

“demonstration test,” says Silberfeld. You don’t have to

be a medical expert.

During this test, the client must be able to demon-

strate that they can:

• retain the relevant information;

• use this information to deliberate; and

• appreciate the impact this information and/or

decision will have on his or her life in the future.

The financial advisor should then make a judgment—

to the best of his or her ability—about the client’s

competency. Ask yourself two questions, says Silberfeld:

❶ Would you enter into a transaction if you were the

client with those demonstrated abilities?

❷ Would you be comfortable choosing an advisor if you

were the client with those demonstrated abilities?

If, after the test, you have any suspicion that the

client may not be competent, take action right away,

says Silberfeld. Set in motion the process to determine

whether the client really is competent, and when or if

other people should be brought into the situation. (See

“Seven steps forward,” page 48.)

FEBRUARY 199947

interests of the client?Donna Molby, an investment counsellor with ScotiaMcLeod

in Vancouver, has dealt with the issue of client competency andthird-party power of attorney. “As an investment advisor, I believethat I have a fiduciary duty to my clients,” she says. “They dependon me, and my judgment, to protect them.”

Molby has experienced several situations in which the clientseems to be incompetent. But while there are potential prob-lems, she says, the current situation appears to be under control.

“I’ve had a few cases where the clients seemed to be los-

ing their competency,” says Molby. “Some of [the clients]have older children who are not terribly responsible withmoney, and this can be a real dilemma. In the end, theclient has relented and let their children become part oftheir financial dealings. My clients trust me to guide theirchildren. I haven’t had a child do what is contrary to myadvice.”

But if that were to happen? “I would make extensive notes

Gary Reamey, principal, Edward Jones,Mississauga, Ont.The average age of an Edward Jones client is 52,

says Gary Reamey. But it is a safe bet, he adds, that

the majority of the chain’s revenue comes from

clients who are past their early 50s.

They target the conservative individual investor, and

its advisors do most of their client interaction face to

face. So its advisors can often tell if a client seems

appreciably different compared to prior meetings.

“In our training sessions, we make it very clear that

our representative doesn’t have to make the investment,

and is under no obligation to do so, if he doesn’t think it

is in the client’s best interest,” says Reamey. “In the

111/2 years I was an investment counsellor, not a month

went by that this [competency] issue didn’t come up,

and I had to make a judgment call. If the instructions

didn’t make sense, or I didn’t think the client under-

stood, I didn’t make the transaction.”

At Edward Jones, representatives ask clients about

power of attorney, get the spouse’s name or that of

another family member and do, on occasion, issue a

risk letter to the client. It’s a harsh sort of letter, says

Reamey. It states that the advisor is against the trans-

action. The client is asked to sign it. “But even if they

sign it, and the broker thinks they still don’t under-

stand the deal, our advice from head office to the

broker is ‘don’t go ahead with it.’ ”

Howard Fergusson, president, Howard J. FergussonInsurance Agencies, TorontoFergusson, a Toronto-based advisor with the Mutual

Group, has strong views about the advisor’s role

should there be a concern that a client may be

incompetent.

“If a client’s competency could be in question, keep

your hands off any transactions until the situation is

clear,” he says.

Fergusson, who has been working with some clients

for decades, believes it’s incumbent upon him to talk to

a client about competency, even if he just has a feeling

that he or she is not all right.

Fergusson encourages clients to have a power of

attorney, simply as a part of their basic financial plan-

ning. If there is no power of attorney, and he thinks

competency is an issue, he asks to talk to the client’s

family or refers him or her to a lawyer.

If the client will not give him permission to talk to

someone on his or her behalf, or see a lawyer, he

refers the client to the province’s office of the public

guardian.

“I consider [competency] to be a really serious

issue,” says Fergusson. “As an advisor, I would not take

on a client’s power of attorney or be their trustee in any

way. I get compensation from the investments the client

makes, so for me to take on a power of attorney role

would be a huge conflict.”

First-hand knowledgeSo what does all of this mean to you? Two financial consultants offer insight into how they deal with competency issues.

Continued on page 48

to my file. As a last resort I would go to the province’s officeof the public trustee,” she says.

That is “absolutely the right action to take,” says Jay Chalke,deputy public trustee for the province of British Columbia. “Ifa client, or someone holding an incapable person’s power ofattorney, starts cashing out $20,000 a month when the patternhas been $2,000, then it’s worth a look at why.”

Chalke’s office can act as a substitute decision maker forincapable persons, if there is no suitable family member orother person willing to do so.

While calling the public trustee’s office is one way a finan-cial advisor can protect the client, it can also demonstrate—in the case of litigation surrounding the advisor’s role in themanagement of an incompetent client’s investments—anattempt to deal with the situation.

But Chalke cautions that it is not enough to just call thepublic trustee’s office, and then ignore your own suspicions.The advisor still has a duty to the client.You might want tostop, reconsider and perhaps not carry out the transaction.

“If the advisor was concerned enough to call the publictrustee, then later it could perhaps be said that the advisorshould not have carried on with the status quo,” says Chalke.

Financial advisors need to ensure that their clients are capa-ble of giving and understanding instructions, says MorrisCooper. “There is always a fiduciary duty on behalf of thefinancial advisor to ensure that the client who is giving instruc-tions understands those instructions and is competent to givethem,” he says. “There’s just no way around this.”

Bev Cline is a Toronto-based freelance writer.

ADVISOR’S EDGE48

“The issue of client competency is a developing area,”

says Barry Grant, managing partner and head of the

estate and trust department at the Toronto law firm

Blaney, McMurtry, Stapells, Friedman.

The laws that pertain to the degree of responsibility

of the financial advisor—and the advisor’s potential lia-

bility—are still evolving. So if a financial advisor thinks

there may be a problem with a client’s competency, do

not hesitate, says Grant. Follow these steps.

❶ Talk to your client about competency. If you don’t

know, or don’t have it on file, ask if there is a power

of attorney in existence.

❷ If you have your client’s permission, talk to the

person who holds the power of attorney.

❸ If there is no power of attorney, talk to your client

about having one executed. If you suspect the client

does not have the capacity to deal with the matter,

consider asking the client if you can talk to a family

member, the family doctor or refer the client to an

independent lawyer.

❹ With your client’s permission, arrange a competency

assessment.

❺ Document your discussions with your client.

❻ Consider having a colleague sit in on your meetings

with your client.

❼ Put in writing the instructions your client has given

you, and have the client sign off.

Above all, use common sense, says Grant. Don’t try

to handle the matter yourself. Bring in your supervisor

or company lawyer.

Seven steps forwardIf you suspect your client may not be competent, follow these key investigative steps.

“A daughter of one of our clients, who was not competent,

was particularly critical of the amount of money we were spending

on her mother’s medicine and medical care.The daughter said:

‘You’re wasting my inheritance.’ ”

FEBRUARY 199955

t’s the final month of the1998 registered retirementsavings plan (RRSP) sea-son. Here are a few tips you

can pass on to your clients.Last month I wrote about borrow-

ing for RRSP contributions when cashis not readily available. Another cashcrunch alternative is to contribute non-registered investments.

Keep in mind though, these contri-butions represent dispositions of theinvestment at fair market value for taxpurposes. If there is an accrued gain, itwill be taxable. If a loss is realized, itwill be denied for tax purposes. In thecase of loss investments, your client isbetter off selling the securities, realiz-ing the loss for tax purposes and con-tributing the cash proceeds.

If your client has a non-working orlow-income spouse, recommend theuse of spousal RRSPs to gain access toincome splitting on retirement.

Foreign PropertyYou are likely aware that the limitationon foreign content for RRSPs is 20%.This limitation is based on the costamount of investments in the plan.However, there are a number of waysthat this 20% can be increased.

As long as a mutual fund is investedat least 80% in Canadian investments,it is considered 100% Canadian. So if80% of a client’s RRSP is invested inCanadian mutual funds that hold some

foreign assets, the 20% limitation cango as high as 36% (20% of the 80%,which is 16%, plus the other 20% for-eign content).

There are synthetic index fundswhich will invest some portion of theircapital in index futures, with the bulkof the funds invested in fixed incomedeposits. The investment is consideredCanadian, but your clients will gainexposure to foreign indexes.

Investors can buy additional foreigncontent for an RRSP by investing insmall businesses. Small businesses, inthis case, include labour-sponsoredventure capital corporations and sharesof Canadian private corporationsengaged in an active business. The addi-tional foreign content is $3 for each $1of eligible small business investment,up to a maximum of 40% foreign con-tent. However, when clients hold a sig-nificant interest in the corporation, theshares will not be RRSP-eligible.

Contribution LevelsIf 1998 was a low-income year for yourclient, he or she may decide to makeless than the maximum contributionavailable, hoping to make it up nextyear when the tax benefit will begreater. In this case, suggest that yourclient make the maximum contributionfor 1998, but only claim a portion ofit as a deduction—saving the remain-der for next year when the tax benefitwill be greater. This way, the tax-free

compounding will begin immediately.Suggest that your client over-

contribute to his or her RRSP by the$2,000 permissible over-contribution.Although there is no tax deduction, theearnings on that over-contributiongrow tax-free. In the year your clientturns 69, he or she can use that $2,000as part of the final year contribution.

If your client has left a companypension plan in 1997 or 1998, he orshe may have a pension adjustmentreversal that restores lost RRSP con-tribution room relating to accumulatedpension adjustments in excess of thelump-sum commuted amount. Theseindividuals have until the end of Aprilto make an RRSP contribution—butonly for that portion of the contribu-tion that is represented by the pensionadjustment reversal.

One final note. Encourage yourclients to make their 1999 RRSP con-tributions now, instead of waiting untilthe beginning of 2000. The tax-freeaccumulation of income for the 12-month period compounded over the lifeof the plan could amount to significantadditional retirement funds.

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

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Trade secretsIt’s that time of year again. These

must-read RRSP tax tips will help youand your clients throughout 1999.

By Gena Katz

PORTFOLIOTax Break

ADVISOR’S EDGE56

y October 1998 columnon dollar cost averaging(DCA) created a bit of astir, since I criticized this

holy grail as being dynamically ineffi-cient. Various phone calls (and e-mails)led me to conclude that I may nothave been successful in conveying theessence of the problem. So, I wouldlike to revisit the topic and set therecord straight—this time around withthe help of an example.

Let’s start with a simple case. Yourclient—we’ll call him Bill—justreceived his year-end bonus of$10,000. He wants to invest it in aparticular equity-based mutual fund.Question is, should he invest it all—right now, in one lump sum—orshould he DCA the money into theequity fund over the next 12 months?

The DCA strategy entails splittingthe $10,000 into 12 portions, witheach invested into the equity fund atthe beginning of the month. In themeantime, Bill’s uninvested money sitsin a money market or bank accountearning 5% interest.

Now, let’s further assume that theequity fund is expected to earn 12.5%per year, but with a variability or stan-dard deviation of 20% on either side.In plain English, two-thirds of thetime, this fund earns between negative7.5% and positive 32.5%—but thelong-term average return is 12.5%.

Technicalities aside, the practicalquestion is: how does lump-sum

investing the $10,000 compare withdollar cost averaging the funds overthe year? More specifically, let’s exam-ine Bill’s investment profile at the endof the year—once the money is fullyinvested in the equity fund—underboth strategies.

The table (see “The choice is Bill’s,”page 57) provides anindication of what thepayoff is. It comparesthe expected value ofBill’s portfolio at year-end, under various assetallocation strategies.

If Bill invests theentire $10,000 in theequity mutual fund, atyear-end he can expect(of course there are noguarantees) to have $11,250. This isbecause the equity mutual fund isexpected to appreciate by 12.5% peryear. That $1,250, added to the$10,000 investment, will give him$11,250.

But of course, equity fund returnsare variable. That means, at year-end,that Bill’s actual return will be in thevicinity of $11,250, plus or minus$2,000. The $2,000 corresponds withthe 20% variability of the underlyingmutual fund. So, in all likelihood (actu-ally two-thirds of the time), he willhave between $9,250 and $13,250 atyear-end.

If Bill allocates nothing to theequity mutual fund, and puts all of the

$10,000 into the bank account, he isassured (and can obviously expect) toreceive $10,500 at year-end—with novariability. This is simply the 5% inter-est rate which is guaranteed.

Now, what happens if he puts themoney in the 5% bank account ormoney market fund, and gradually—

using the DCAapproach—investsthe $10,000 in themutual fund on amonthly basis? Inother words, what canhe expect his wealthto look like at year-end?

The table indicatesthat Bill can expect tohave $10,875 at year-

end, but with a variability of plus orminus $1,121. This means that if heDCAs his $10,000 into the mutualfund over the next year, most (two-thirds) of the time he will have between$9,754 and $11,996.

The Inefficiency of DCAHere is where the inefficiency of DCAbecomes evident. You can see from thetable that if Bill immediately allocated$5,000 to the equity mutual fund, andthe remainder to the bank account ormoney market fund, he could expect toreceive the same $10,875 as DCAwould have provided.

However, the variability of hisinvestment would be lower at year-end.

M

Photography by Joseph M

arranca

Re-examiningdollar cost averaging

Readers didn’t buy the argument featured inthis column last October that DCA is inefficient. Take acloser look, says author. You may be missing the point.

By Dr. Moshe Arye Milevsky

PORTFOLIOAcademic Eye

The variability of the $5,000-in-fundscenario is plus or minus $1,000, whilethe variability of the DCA strategy isplus or minus $1,121. Of course, the lessvariability, the better off Bill is.

What this shows is that you cangenerate the same expected return pro-vided by DCA—but with lower vari-ability and lower risk—by splittingBill’s money in half. One part goes intothe mutual fund, the other goes intothe bank account.

At year-end, Bill will have the sameamount—on average—as he wouldhave had with DCA. But the level ofuncertainty is reduced. This is whyDCA is sometimes viewed as a half-and-half strategy. Over time, themoney is in the equity market half thetime. A true half-and-half strategy isbetter.

In the same manner—but from adifferent angle—if Bill were to invest$5,600 into the mutual fund, hecould expect to have $10,920 at year-end, but with a variability of plus orminus $1,121. This is the same levelof variability that the DCA strategywould have created. But it provides abetter return. Bill can expect to earn$45 ($10,920-$10,875) more than

he would have using DCA.Now, it may be that you and Bill

don’t regard the $45 difference as sig-

nificant. In fact, you might be asking:“if all my client stands to lose fromDCA is $45 on $10,000, whocares?”

I can’t argue with that. The point isthat there was, and is, nothing specialor magical about DCA. You can do justas well, and even a bit better, without

DCA—by simply buying and holdingimmediately.

Only you can judge whether the

non-monetary psychological gain fromDCA is worth the financial cost toyour client.

Moshe Arye Milevsky, PhD, is a professor offinance at York University’s Schulich School ofBusiness in Toronto and is co-author ofMoney Logic (Stoddart).

Amount allocated What to expect The investment’s

to equity fund* at year-end variability

$10,000 $11,250 +/- $2,000

$7,500 $11,062 +/- $1,500

$5,600 $10,920 +/- $1,121

$5,000 $10,875 +/- $1,000

$2,500 $10,688 +/- $500

$0 $10,500 +/- $0

DCA $10,875 +/- $1,121

*The remaining portion, not allocated to the equity fund, is invested in the

5% account.

You can do just as well, and even a bit better,without DCA—by simply buying and holding immediately.

The choice is Bill’sBill has $10,000 to invest over the next year. He can choose any

allocation between an equity mutual fund and a 5%-interest-bearingbank account.The fund is expected to earn 12.5%, but in any year canfluctuate by 20% either way. Does dollar cost averaging make sense?

ADVISOR’S EDGE58

ast month we looked at acommon tool used inassessing historical mutualfund volatility—standard

deviation (mean-variance model). Crit-ics of this model point to the standarddeviation measure’s inability to differ-entiate between upside and downsidevolatility. Using volatility as a proxy forrisk, it seems unreasonable to charac-terize one fund as being riskier thananother, just because it happened toexperience more dramatic upsideswings. Your clients are probably moreconcerned about the downside swingsin a fund’s performance, and hencedownside risk measures can be useful.

Over the past several years, down-side risk measures have been gainingacceptance as a substitute for the tra-ditional mean-variance model. Sinceyour clients intuitively view investmentrisk as the probability of an undesir-able outcome (losing money, notattaining one’s investment objectives,etc.), the various downside risk mea-sures available are both relevant andeasy to digest.

These measures, as with others, arenot without their own problems andmisinterpretations though. If the riskprofile of an investment could bedescribed in one or two numbers, your

clients would probably not need manyof the services you provide. Also, sincemany of these measures are based onpast performance, their predictive abil-ity is limited, if not non-existent.

In downside risk jargon, there existsa concept known as minimum accept-able return (MAR). It represents a levelof performance below which aninvestor becomes uncomfortable. TheMAR could be reasonably set at 0%—meaning that all negative returns areconsidered undesirable.

Alternatively, the MAR could be amoving target—such as the current five-year guaranteed investment certificaterate or the government treasury bill rate.If your client can earn these rates withno risk, then any properly diversifiedinvestment that exposes them to addi-tional risk should at least do as well asthese guaranteed rates (over time).

The beauty of the MAR is that it isdifferent for each client. You will haveclients for whom you have deter-mined—after analyzing retirementgoals, savings rates and spending pat-terns—a minimum rate of return thatmust be achieved over time in order toreach these goals. Some clients mayrequire less of an MAR than others.

For example, your capital preserva-tion clients may be more than satisfied

with simply meeting the current T-billrates. On the other hand, there is littlecomfort in achieving an annual returnof 4% with no volatility (standarddeviation=0%), if you have determinedthe MAR to be 5% (average short-fall=1%).

There are numerous downside riskmeasures—ranging from the most sim-ple to ones that will require you to dustoff your old calculus textbooks. Someare more common than others—thefollowing are used widely in Canada.

Downside FrequencyThis is one of the simplest descriptionsof a fund’s downside performance his-tory. As with most implementations ofdownside risk measures for mutualfunds, the data being described aremonthly returns over a certain periodof time.

Downside frequency simply mea-sures the frequency in which a fundfailed to meet the client’s MAR. Forexample, if the MAR was set at 0%,then this measure would simply statethe percentage of times a fund pro-duced a negative monthly return.

The problem with this measure isthat it does not convey the magnitudeof the downside swings. There is a bigdifference between Fund A which loses

Downsiderisk measures

It’s official—a measurement ofyour client’s fear of risk is finally partof the fund evaluation process. It hadbetter not be the whole story though.

By Scott Mackenzie

Mutual Watch

L

Photography by Joseph M

arrancaPORTFOLIO

15% of its value every other month,and Fund B which loses 0.5% everyother month during the same period.

For both of these, assuming theremaining months either met orexceeded the MAR, the downside fre-quency would be 50%.

Shortfall MeasuresShortfall measures attempt to addressthis magnitude problem. Instead ofjust measuring the number of times afund fails to meet the client’s MAR,these add up the absolute value of eachshortfall.

The total is then usually divided bythe number of months being examined,to arrive at an average monthly short-fall. This term can be a little confusing,since there can be months where thereare no shortfalls. In fact, the averagemonthly return is often positive, andmay well exceed the client’s MAR.

Using the example above, and assum-ing a 12-month period, Fund A’s averagemonthly shortfall would be 7.5%( [15% x 6 months]/12 months exam-ined). Fund B’s average monthly short-fall would be a mere 0.025% ( [0.5% x6 months]/12 months examined).

Semi-Variance MeasureSemi-variance plays off the mean-

variance model. Standard deviation is,technically, the square root of the vari-ance of a fund’s returns around itslong-term average.

In the semi-variance measure, thevariances below the monthly MAR arethe only ones used. That answers thecriticism that funds with upside volatil-ity can be penalized. Note that theMAR in this case could be set to thelong-term average (mean).

Standard Deviation vs.Downside RiskLet’s try an example. Fund A and FundB have, over a three-year period, pro-duced the same cumulative rate ofreturn—36.5%. They both have anaverage monthly return of about0.87%. If the MAR for this clientcalled for an average monthly return of0.5% (6.2% annually), then, on bal-ance, both funds would have served theclient well.

However, let us further assume thatFund A earned a steady 0.87%—withno variation in monthly returns. Onthe other hand, Fund B earned 0.5%monthly, except for June of each yearwhen it earned a full 5%.

Both funds end up in the sameplace, but Fund B experienced somevolatility (standard deviation=1.3%).

This volatility, however, only occurredin the form of three welcomedupswings (June of each year).

If you were to produce a risk-adjusted figure (such as the Sharperatio mentioned in last month’s col-umn) that adjusts the return by the riskmeasure, then it could be argued thatthe standard deviation method wouldpenalize Fund B unnecessarily.

On the other hand, the downsiderisk measure would be 0%. Any risk-adjusted measure that utilizes down-side risk, instead of the standard devi-ation measure, would not penalizeFund B for the upside volatility it expe-rienced each June.

Just as is the case in the mean-variance model, downside risk mea-sures should not be used in isolation.At the very least, they should be usedin conjunction with the overall returnof the fund.

Moreover, as with standard devia-tion measures, these risk measures arejust an assessment of the past perfor-mance of the fund. Having a lowdownside risk profile in the past doesnot necessarily indicate the same forthe future.

Scott Mackenzie is vice president, mutual fundswith Portfolio Analytics Ltd. in Toronto.

FEBRUARY 199961

BUILD YOURBUSINESSSales and marketing strategies that work

ndrew Buntain travelled50,000 kilometres last year,and the one thing he kepthearing from advisors was

that business has taken a detour.“Advisors, like their clients, had

enjoyed a 20% tail wind for the lastseveral years, but the main message Istarted getting was: ‘This isn’t as easy asit used to be,’ ” says Buntain, a whole-saler and regional sales manager formost of central Ontario for Dundee

Mutual Funds. “Referrals weren’t com-ing in like they used to.”

Most of those advisors knew it wasimportant to crank up the marketingmachine again, says Buntain. But whereto start? To get them going, Buntainpasses along a thumbnail marketingschedule they can customize to meettheir own needs. “The name of thegame is to be different,” he says.

It all starts with a questionnaire,designed to gather information aboutthe client’s family, job, hobbies andmoney. That allows the advisor to keepmeticulous files on the client’s personalinformation. It is valuable informationyour competitors won’t know.

Select ClientsFor example, the advisor may discoverhe or she has a cluster of clients whoenjoy a certain hobby, such as antiquerefinishing. So the advisor arranges aseminar by a local expert, and invites ahandful of select clients that are inter-ested in the subject, suggesting theybring a friend if they like.

“I’m really against the idea of hav-ing a huge seminar because it’s a veryexpensive proposition to fill a roomwith 300 bodies you don’t know,” says

Buntain. “But if you get someone toput on a presentation about wine mak-ing, all you have to cover is expensesand the cost of a case [of wine]. Youcan invite a group of 12 to 15 well-to-do clients and a few of their friends,and you know you’re spending that$150 or $200 on the right people.”

Such events also allow an advisor tomeet his or her clients’ friends in a casualatmosphere, “and that’s a good way toget to know anyone,” says Buntain.

He encourages advisors to get out intheir neighborhoods, and meet othersmall business owners. Chances are, thelocal mechanic or travel agent will beinterested in coming to a seminar abouthis or her specialty.

Even simpler gestures, such as send-ing a bag of candy to a client with acute note saying how much you appre-ciate his or her business, are the kind oflittle random acts of kindness that canmake a world of difference.

“I think it’s really come down tothat,” says Buntain. “The difference is,what you know about your clientsbeyond their investments.”

Peter Boisseau is a Toronto-based freelance writerand a contributing editor to Advisor’s Edge.

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Stand outBuilding your book is getting tougher. Setting yourself apart

from the competition means developing a personal touch.By Peter Boisseau

ROAD WARRIOR

WHO Andrew Buntain

wholesaler, Dundee MutualFunds,Toronto

Photography by Joseph M

arranca

FEBRUARY 199963

Photography by G

erry Kopelow

AFTER NEARLY 20 YEARS IN FINANCIAL

planning—half of it riding shotgunover a small army of advisors—DougMacDonell has seen his share of thegood, the bad and the ugly.

MacDonell not only handles about400 of his own clients from his Win-nipeg office, but manages about 65reps in the field for Balanced PlanningInvestments. “That’s pretty onerous,especially when you’re trying to mon-itor compliance and ethical issues,” saysthe 55-year-old MacDonell.

But the experience has cemented theveteran planner’s belief that if you doright by your clients, the rest will takecare of itself.

“I’ve seen examples of guys tryingto take the short route, and it hasn’tworked out,” says MacDonell. “A lotof people have the knowledge, but they

don’t put their clients’ interests first.Their careers tend to be fairly short,thank goodness.”

MacDonell is adamant his clientsstick to their plans, instead of jump-ing on the latest bandwagon. Whenmarkets peaked in late 1997 and earlylast year, he was flooded with callsfrom people who wanted to leverage.He talked most of them out of it.

“Sometimes they’d go across thestreet and do it elsewhere. It was unfor-tunate for them and for me, because alot of those loans were later called,” hesays. “But I’ve walked away from com-missions many times, because it wasnot the right thing for the client.”

MacDonell is proud of the fact thatso few of his clients called in a panicwhen the markets turned choppy. Hesees that as proof of his success in edu-

cating them to ignore short-term fluc-tuations and focus on long-term trends.

He rarely pays attention to what themarkets are doing on any given day.“The most embarrassing moments Iever have is when someone asks mewhat I think of the markets, and I getthis funny look on my face and say:‘Gee, I don’t know.’ ”

MacDonell relies on the trust he hasbuilt, since the demands of his supervi-sory role mean he only spends about25% of his time on his clients. “I basi-cally don’t see my clients very often,” hesays. “Although I talk to them, and com-municate by phone and computer. It’snot enough time, quite frankly.”

He’d like to eventually drop his man-agement duties and concentrate on clients,while drifting into semi-retirement.

“Family time is a relief, ” he says.

MYDOUG MACDONELL, CFPBALANCED PLANNING INVESTMENTS CORP.,

WINNIPEGCLIENTS: 400

AGE RANGE: 45-65ASSETS UNDER MANAGEMENT: $30 MILLION

STARTED ADVISORY BUSINESS: 1980

MY TIPS

• You need two things in this busi-ness, honesty and knowledge.Neither is sufficient by itself.

• Don’t become a product sales-man. Be a financial planner—that will look after your career.

• Read enough to be able to talk toyour clients about their interests,whatever they are.You should befully conversant on any subject.

• Mutual funds are not the answerto everything. Don’t forget aboutthings like insurance and GICs.

• Don’t let clients mix their long-term and short-term moneytogether.

PHILOSOPHY“A good reputation is hard to build

up, but easy to destroy.”

By Peter BoisseauEDGE

FEBRUARY 199965

he registered retirement savings plan (RRSP)stampede has begun. From now until Feb. 28,you will be juggling your time trying to reassuremarket-shy clients, developing new investment

strategies and reducing overall tax burdens. It is, as they say,crunch time.

Not to worry though. Come March you will be about aspopular as a year 2000 computer programmer—one monthinto the new millennium. Which is to say you will have timeon your hands. Take a vacation. Clean up your office (thatwilted Christmas plant should probably be tossed out). Or,better yet, finish reading this article.

RRSP season is the zenith of an illogical cycle whichdefies all efficient business practices. After all, would youadvise investing in a business that carried out the bulk ofits annual production during a frenzied two-month period?

It is time for financial advisors to break free. It is in yourbest interest to smooth out the peaks and valleys of theRRSP calendar. There is no reason for your clients to waituntil the new year champagne has gone flat to start think-ing about their investment portfolios.

There is plenty of evidence to support year-roundinvesting. Convince your clients, and you will help putthem in a position to maximize available tax and com-pounding advantages.

There are internal considerations too. If the majority ofthe RRSP workload could be spread out over 12 months—instead of crammed into two—you would not have toincrease office overhead by hiring seasonal staff.

The RRSP stampede is financial procrastination, pureand simple. It is up to you to break your clients of the habit.They are not going to do it for you.

The Three KeysThere are three key elements to your business—administra-tion, production and marketing. During a busy RRSP sea-son, marketing takes a backseat. Which means you are not

out there building your businessduring two of the most impor-tant months of the year.

Begin by including year-round investing in this year’smarketing plan. Prepare somesimple charts which illustrate tothe client the value of year-roundinvesting. Show him or her howhis or her money has been put to work sooner, and can there-fore produce higher returns.

Try this simple calculation. Based on an average yearlyreturn of 10% over 30 years, a $1,200 annual RRSP con-tribution spread over 12 months will earn $207,929. Com-pare that with $193,220, for an annual lump-sum paymentof the same amount.

Ask your client if he or she could use an extra $14,709in his or her investment portfolio—especially after retire-ment when investment income replaces employment income.

Address your client’s distaste for high taxes. Point out thatby waiting until the end of February to make importantRRSP decisions, he or she is not likely to receive tax moneyback until late May or June.

In addition to the clear tax and compounding advantages,year-round investing adds value to the advice you provideyour clients. Imagine the benefits of going over an investmentportfolio with a client during a less stressful time. It will earnyou a reputation as a financial advisor who takes a stronginterest in your client’s financial health.

Better scheduling, lower overhead and more time with eachclient add up to improved profitability for both the client andyour business. Think of year-round investing as a commitmentto a better time management plan—one that will pay large div-idends to your business every January and February.

David Thibaudeau, CFP, CLU, CH.F.C. is president and CEO of theCanadian Association of Insurance and Financial Advisors.

Photography by Joseph M

arranca

Crunch time

TBy David Thibaudeau

MENTORWords of wisdom for rookie advisors

BUILD YOURBUSINESS

ast month I suggestedthat all successful invest-ing proceeds from theanswers to three simple

questions: who’s the money for, what’sthe money for and when will themoney be needed?

Interestingly, all real excellence inour profession also follows from threequestions: who are you, what do youwant and what’s your plan for gettingwhat you want?

“Who am I?” tells you what yourexcellent self believes, and thereforehow it must behave. Excellence, as I’vesaid before, stands for something. Andit is uncompromising in its advocacyof that one thing—or those very fewthings—for which it stands.

This stance, which is as much amoral as a business choice, dictates thekinds of services that your excellent selfwill be good at providing, as well as thesorts of people who fit this service pro-file. Inevitably, it also pinpoints thekinds of services and clients who are,as doctors say, contraindicated.

For instance, I’m a builder of multi-generational financial independence formy own and a certain number of otherfamilies. This means that my clientsand I have the longest imaginableinvestment time horizons, which inturn dictates that we’re equity investors.(To try to hold wealth, much less con-tinue to build it, with debt—given the

ravages of taxes and inflation—seemsto us the sheerest folly.)

Thus I can’t work with badly bro-ken or strife-torn families. I don’t takebond accounts, or those with patho-logical equity risk aversion. I’m notinterested in asset allocation. I don’twork with traders, speculators or othershort-term, market-focused accounts.In this way, my business is who I am.

“What do I want?” Well, you cer-tainly want a specific level of revenue,and you have at most 2,000 hours ayear (50 40-hour weeks) to earn it. Ifthe gross revenue you’ve determined todeserve is $500,000, then you need toaverage $250 per working hour.

The only activity I’ve ever foundthat would yield that kind of revenueis seeing and counselling people whoneed and want my help. (These days,I also speak and write about this activ-ity, but only to the extent that it’s accre-tive to my revenue goals.) My experi-ence suggests that excellence is possiblein only one type of endeavour for eachof us, so we must hire people to do lit-erally everything else.

“What’s the plan?” In its simplestform, it’s to have under managementthat amount of capital which will, at1% annual fees/commissions, yieldyou the desired/deserved revenue.Again, if that target is $500,000, yousimply need to accumulate $50 millionin assets.

The plan then divides into twoparts: a business plan and a marketingplan. The business plan establishes theclient-unit profile you’ll seek in orderto complete your asset base. Will it be50 families with $1 million each ininvestable assets? Two hundred familieswith $250,000? One thousand fami-lies with $50,000? You have to makea conscious choice as to what sort ofclient deserves your brand of excel-lence.

Then, realistically assessing yourown strengths and limitations, you ask:what’s the type of approach that makesyou feel strongest—that lets your pas-sion shine through? Don’t look now,but that’s your marketing plan. I lovespeaking to audiences, so mine is sem-inars. What’s yours? Who are you?

Now, make a three-year commit-ment to your plan. You’d better believein it, and even love it, because you can’tchange it. And any plan you can workat passionately and consistently forthree years is bound to be successful.

Because it’s such a brilliant plan?No, because it’s your plan. It’s who youare. It’s what you want. And it’s yourplan for getting what you want.

©1999 Nick Murray. All rights reserved.Information on Nick Murray’s book, TheExcellent Investment Advisor, and hisaudiotape program, You Are What You Do,may be obtained by faxing (516) 298-1845.

FEBRUARY 199967

Photography by R

ob Lang

SELLING FROM FIRST PRINCIPLES, PART 3

By Nick Murray

EXCELLENCETHE QUEST FOR

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FEBRUARY 199969

People, products, news and eventsINTEREST

Although many Canadians are approaching 1999 with anoptimistic attitude, that attitude isn’t as high as it was lastfall. That according to CIBC’s second annual Financial HealthPoll. Forty-two per cent of Canadians are feeling increasinglypositive about the stock market and expect that they will bebetter off financially at the end of this year. One in three

Canadians say that they plan to change their investment and savings strategyby investing in RRSPs, spending less, saving more and preparing a financialplan. That’s an 18% increase since Sept. 1998.

RBC Dominion Securities Inc. has been disciplined by the Alberta DistrictCouncil of the Investment Dealers Association of Canada. A fine of $225,000has been levied, plus RBC Dominion will pay $20,000 toward the association’sinvestigation expenses. The firm was found to have “failed to adequately super-vise client accounts” between Jan. 1993 and Feb. 1994, and to have “engagedin business conduct or practice unbecoming a member or detrimental to thepublic interest” between Sept. 1985 and Feb. 1994.

Charles Schwab Corp. has bought Porthmeor Securities Inc. and its discountarm, Priority Brokerage Inc. The new name is Charles Schwab Canada.

News Wally Kusters hasjoined C.I. Fund Man-

agement Inc. as thelead manager of twonew Canadian mutualfunds—a new Cana-

dian equity fund and a new Canadian bal-anced fund.

Michael Nairne has been named presi-dent and chief executive officer of Assante

Advisory Services Inc. That’s a newlyformed division of Assante Capital Man-agement Inc., set up to manage head office’srelationships with each of its Canadianfinancial planning firms.

William Best has been appointed pres-ident and chief executive officer of The

Equion Group Limited. Best has been withEquion since 1995.

Loring Ward Investment Counsel Ltd.

has announced the appointment ofPatrick Keating as president and chiefexecutive officer.

Altamira Investment Services Inc. hasannounced Bonita Then as its new manag-ing director and chief financial officer.

People

Canada Life Assurance

Co. has launched a newfamily of segregatedfunds. The new Gener-ations line bringsCanada Life’s number of

seg funds to more than 40.

TD Asset Management Inc. has intro-duced 30 new mutual funds that invest inother funds—including those of rival fundcompanies. The series includes 10 Fund-Smart Managed Portfolio Funds, 10 GreenLine Managed Portfolio Funds and 10Green Line Index Portfolio Funds.

Products

A couple of noteworthy titles—written by financialadvisors—have recently crossed our editor’s desk.

RRSP & Mutual Fund Basics: 1998-1999, by Derek King with Sean W. Burgess

(LEGAS). To order call 1-800-267-9345.Derek King, a financial consultant and senior vice president/director withMerrill Lynch Canada Inc. in Ottawa, Ont., wrote this book to help addresswhat he calls “the serious lack of concise, informative and straightforwardmaterial for the average investor.”The no-nonsense book covers a lot of ground,including special chapters on RESPs, seg funds, and labour-sponsored funds.All proceeds of this book are being donated to the Children’s Hospital ofEastern Ontario Foundation and the Ottawa Heart Institute Foundation.

In Short: Secrets to Make Your Dollars Grow,by Larry Short (Doubleday Canada).

Larry Short is a financial advisor with RBC Dominion Securities Inc. in St.John’s, Nfld. In Short is written in a nice, easy and breezy style, including chap-ters on everything from how to choose a financial advisor to a discussion offinancial instruments such as derivatives. Available in bookstores.

Bookshelf

March 24-26 Institute for International Research is present-ing “Capitalize On New Opportunities For Growth ThroughSegregated Funds and Other Guaranteed Investment Prod-ucts.” Look for it in Toronto at the Holiday Inn on King. Con-tact (416) 928-1078.

Events

Photography by B

runo Crescia

COLD Do you employ a financial advisor?

Yes. I have my money managed for me by aninstitution. It’s a private banking situation. I sitdown once a year with an individual who is incharge of my stuff. That person knows everythingabout all of my finance issues. He has tax infor-mation, he has insurance knowledge and he alsoknows what my strategy is. I’m middle-aged, soI’m extremely conservative. This is the nest egg formy retirement, if I ever retire. So I’m very cautious,and I err on the side of U.S.-dollar-denominatedeverything. I have done that for more than adecade. I have never believed that the politiciansthat run Canada know what they’re doing. And Ihave been proven, unfortunately, to be right. Ourcurrency is at 65¢.

You’re a better-informed client than most. How

does that affect your relationship with your manager?

I think any good advisor should encouragethe education of his or her clients—and indeeddo some of that educating himself or herself. Itwasn’t very long ago that I suggested taking a flyeron a very speculative stock that had come into mycross-hairs, only to be talked out of it. Of courseit’s always a debate.

Besides newspapers, what do you read?

I always read The Economist. That’s the bestpublication in the world. If you want to know—politically, economically and business-wise—what’s going on, that’s where the ball bounces.

What’s the most important investment story

right now?

The most important investment story inCanada right now is also the most importantpublic policy issue—high taxation. It is hurtingour currency, hurting our stock market perfor-mances, hurting our importers, hurting our dis-posable incomes and therefore retailers. It’s veryscary when you read our Industry Minister JohnManley saying that high taxes actually enhanceproductivity.

What story would you most like to write this year?

I would love to write a story, after Paul Mar-tin’s budget announcement [this month], that thegovernment of Canada has realized that taxes areexcessive, and that over the next four years this coun-try is going to reach tax parity with the U.S. Thiscountry would kick into overdrive.

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DianeFrancis

Attention Paul Martin.Before you put this year’s

federal budget to bed,National Post columnist

Diane Francis has a suggestion or two.

Illustration by Leif P

eng