Commonwealth ConneCtions SCHOOL'S IN - Advisor's Edge

Canada’s magazine for the finanCiaL ProfessionaL • sePtember 2007 • www. advisor.Ca

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school’s In

Don’t fear the new kid.the team’s in control.

AE09_OFC.indd 1 08/27/2007 03:02:11 PM

ONthe

cover

SEPTEMBER • 2 0 0 7 • volume 10number 9

8 Star Search

5 inside edge Handle ScandalInvestors are getting ner-vous, which means advisors will be put to the test. by Philip Porado

6 front end load Vice or Virtue?We can all learn a thing or two from moral dilemmas, says heidi Staseson in her review of randy cohen’s the Good, the bad & the Difference. And, in “how things Work,” levi Folk shows us how real-return bonds can help predict inflation.

8 cover story Star Search Don’t fear the new kid. the team’s in control. by Steven lamb

19 Aussi-Land What’s up Down under? Advisors in Australia say it’s all ‘super.’by Diana cawfield

27Pop QuizStrategic coaching is key to a passing grade. by ron Foran

33insurance insights Why Settle?A burgeoning insurance scheme may fly in the face of industry priorities.by David Wm. brown

34CLoSing BeLL with Beasley HawkesA Cautionary Tale

8 STaR

qualiTy

www.advisor.ca advisor’s edge | september 2007 3

ADVISOR Group/Groupe COnSeIlleR consists of Advisor’s Edge, Advisor’s Edge Report, Advisor.ca, Advisor live, Objectif Conseiller, Conseiller.ca and Conseillers en Direct.

SePtember 2007, volume 10, number 9

Donna Kerry, Publisher, Advisor’s Edge, Advisor’s Edge Report (416) 764-3805, [email protected] Jean goulet, executive Publisher, Financial & Advisor Services Group, Quebec Paul Williams, Vice-President, Financial Publishing, Brand extension & Online/Development/Services

eDiToRiAL ADViSoRY BoARD David Wm. Brown Jim Rogers Al G. Brown and Associates Rogers Group Financial David Christianson Kurt Rosentreter Wellington West Total Wealth Management Berkshire Securities Kathleen Clough nancy Shewfelt PWl Capital Wellington West Capital Inc. John Horwood Thane Stenner Richardson Partners Financial limited Stenner Investment Partners, GMP Private Client Rebecca Horwood Lynne Triffon Richardson Partners Financial limited T.e. Wealth Cynthia J. Kett Terry Zive Stewart & Kett Financial Advisors ltd. Gordon & Zive

RogeRS MeDiA inC. Anthony P. Viner, President and CeO

RogeRS PUBLiSHing LiMiTeD Brian Segal, President and CeO John Milne, Senior Vice-President, Business & Professional Publishing Group Marc Blondeau and Michael Fox, Senior Vice-Presidents immee Chee Wah and Patrick Renard, Vice-Presidents

, established 1998, is published by Rogers Publishing limited, a division of Rogers Media Inc. Advisor’s Edge subscriptions include 24 issues per year, consisting of 12 issues of Advisor’s Edge in magazine format and 12 issues of Advisor’s Edge Report in tabloid newspaper format.Rogers Publishing limited, One Mount Pleasant Rd., Toronto, Ontario M4Y 2Y5. Montreal office: 1200 avenue McGill College, Bureau 800, Montreal, Quebec H3B 4G7.Subscription price per year: $70 CDn; outside Canada per year: $144 US; single copy price: $15 CDn. ISSn 0703-7732. Printed in Canada.PM 40070230 R10969. Canada Post: Please return undeliverable address blocks to Advisor’s Edge, P.O. Box 720, Station K, Toronto, On M4P 3J6. e-mail: [email protected] We acknowledge the assistance of the Government of Canada, through the Publications Assistance Program toward our mailing costs. Contents copyright © 2007 by Rogers Publishing limited, may not be reprinted without permission. Advisor’s Edge receives unsolicited materials (including letters to the editor, press releases, promotional items and images) from time to time. Advisor’s Edge, its affiliates and assignees may use, reproduce, publish, re-publish, distribute, store and archive such submissions in whole or in part in any form or medium whatsoever, without compensation of any sort.

ADViSoR’S eDge Philip Porado, editor;editor, Advisor Group Conferences(416) 764-3802, [email protected] Heidi Staseson, Associate editor (416) 764-3804, [email protected] Aniko nicholson, Art Director (416) 764-3850, [email protected]

SUBSCRiPTionS Cornerstone, 1-866-236-0608 [email protected]

SALeS Kathleen Murphy (maternity leave) Senior national Account Manager (416) 764-3838, [email protected] André Meurer, national Account Manager (416) 764-3838, [email protected] Amy nelson, national Account Manager (416) 764-3809, [email protected]

CiRCULATion AnD ReSeARCH Keith Fulford, Circulation Director Cindy Younan, Circulation Manager (maternity leave)

Deanne gage, Consulting editor Bert Vandermoer, Contributing editorMichael Finley, Production Manager(416) 764-3928, [email protected] Marie Atkins, executive Assistant

ADViSoR.CA CUSToMeR SeRViCe Cameron Clark, Customer Service Administrator (416) 764-3859, [email protected]

Sophie Bellemare Account Manager, eastern Canada (514) 843-2133, [email protected]

eileen Lasswell national Account Manager (416) 764-4164, [email protected]

Tricia Benn, Director of Research elizabeth Hall, Research Manager

27 School’s in

19 Commonwealth Connections

19 MONEy MaTES

AE09_003.indd 3 8/16/07 4:08:24 PM

Handle ScandalInvestors are getting nervous, which means advisors will be put to the test.

insideedge

The headlines are screaming again. Between Bre-X and Lord Black, your clients are bound to be wondering about both the health of their holdings and the fundamental honesty of those heading the corporations listed on the publicly traded equity markets.

It doesn’t matter if you don’t have even one thin dime of your clients’ money in those stocks. The bad ac-tions of one or two public companies, or the questionable practices of one or two funds, can taint the entire invest-ments industry. When scandals break, your clients lose sleep. They wonder to themselves, “Do I own any of that?” Or, if they know they own it, they’re busy asking themselves, “Now what?”

Be prepared to answer either ques-tion. It’s time to get your reassurance speech ready—along with the necessary facts and figures to detail the makeup of client portfolios, and strategies for protecting investors from worst-case scenarios. And, while you’re at it, keep those talking points handy just in case the predictions of an impending bear market come true.

Just about anybody can make money and keep clients happy in a bull mar-ket. What separates the committed

advisor from the opportunist is the ability and willingness to work with clients when the picture darkens. As the chits continue to get called in for the go-go 1990s, the smart advisors have tuned in to the fact that clients do have worries about corporate gov-ernance and other seemingly abstract issues related to how companies oper-ate. They’re sophisticated enough to have concerns beyond the mere bot-tom lines of their monthly statements, and have developed and honed their aversions to those who act as if they’re above the law.

Realizing that’s the case, and then responding to it, is the hallmark of a true fiduciary. Such an advisor un-derstands more than just a client’s fi-nancial needs and retirement expecta-tions. He or she also bothers to suss out the client’s moral leanings, as a way to properly prepare for uphold-ing the proxy that’s been delegated. Some clients will have a real problem if they own stock in companies that are affiliated with a tobacco company or firearms maker. Others won’t care, but a good advisor knows which clients fall into which camp. Keep an eye on developments among the issuers, plan

contingencies and be prepared to move clients’ money away from firms that engage in unfair or inappropriate busi-ness practices.

Every day, your clients are watching a stream of embarrassing revelations—security cameras showing documents being removed from offices, stories about questionable contract clauses, tales of e-mails deleted in an effort to hamper investigators, and public hubris displayed toward those looking into wrongdoing. They’re left wonder-ing what you’re doing to protect them from that circus.

Fraud will never go away. Whenever a lot of money’s at stake, someone, somewhere will take a stab at round-ing up some ill-gotten gains. What can change, and should, is the method and speed with which you communi-cate with your clients about the events they’re seeing on the news and how they do—or don’t—affect the content and quality of their portfolios. Mak-ing improvements on that front isn’t just a best practice, it’s your job.

phIlIp poradoEdITor

[email protected]

www.advisor.ca advisor’s edge | september 2007 �

AE09_005.indd 5 08/17/2007 08:03:11 AM

*See “How Things Work,” next page

Source: “Benefits and Limitations of Inflation Indexed Treasury Bonds,”

3rd Qtr 1995, Federal Reserve Bank of Kansas City Economic Review

FRONT Books, trends, events and analysis

� advisor’s edge | september2007 www.advisor.ca

vice or virtue?

eNDLoADInflation Nation

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ix Book: the Good, the Bad & the

Difference, by randy cohen. The New York Times Magazine columnist Randy “The Ethicist” Cohen, may not hold a doctor-ate in Kantian philosophy but he doesn’t miss a

beat when tackling all sides of a moral dilemma. The for-mer writer for The Late Show got some of his best training while working on set. Boss David Letterman was a stickler for scruples and steered writers to maintain a moral compass that ensured monologue jokes attacked a victim for “what he does,” not “for what he is.” In other words, go full throttle with the young Hollywood jailbird trend, but stay away from the innate physicality beneath the suit.

Chockablock with ethics reflections, the book assesses conventional behaviour—everything from withholding taxes to public denouncing of fur wearers. Though not targeting advisors per se, one segment entitled “If it Ain’t a Broker Don’t Fix It,” sees Cohen preaching the evils of a breach in client confidentiality. He reminds readers that clients should buy a stock on its own merits and not simply because their broker told them to. And, that by extension, it’s up to the advisor and his fiduciary binding to pick the stock that’s right for them. Had the book been written post-Enron, World Com, and Lord Conrad verdicts, the author might have laced his lecture with more of an acid tongue.

If faced with the “don’t ask don’t tell” conundrum in a job interview, Cohen says speak freely and forthrightly of your last project. That’s not to say the potential big boss in front of you will approve of your previous working life, say, as Boaz Manor’s personal assistant. That’s the risk you take by being honest: Either he’ll think you’ve led an “in-teresting” life, or wonder if you have a princely cache of diamonds tucked inside your sock drawer.

A fun read, if only to remind you that virtue intersects all life scenarios. Or, as Cohen writes, “Civic life is a public park, paid for by all of us, enjoyed by all of us.”

—Heidi Staseson


Source: Bank of Canada, 2007

History RepeatsU.S. figures for 30-year periods indicate

inflation hikes of 2.4%, 80% of the time.*

Current Canadian long-term real-return bond yields are just over 2%, with long-term

inflation expectations at 2.4%.*

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AE09_006,007.indd 6 08/17/2007 09:03:29 AM


Source: “Benefits and Limitations of Inflation Indexed Treasury Bonds,”

3rd Qtr 1995, Federal Reserve Bank of Kansas City Economic Review

Advisors looking to estimate the real return

for their clients’ portfolios should look to

the bond market for clues.

Observing real-return bond yields rela-

tive to nominal bond yields is one of the

best ways to gauge the market’s inflation

expectations over the next decade and

beyond. Real-return bond yields are quoted

as real yields, adjusted for inflation. In

contrast, standard Government of Canada

bond yields are nominal yields.

While retirement goals are often stated

in nominal terms, one of the biggest wealth

destroyers is also the one least acknowl-

edged: Inflation. Over the long term, infla-

tion can erode an investor’s wealth and

purchasing power. It happened in the ’70s,

and it could happen again.

Advisors looking for strategies to help

protect their clients’ wealth can find no

better security than the real-return bond

(RRB) in Canada and the Treasury Infla-

tion-Protected Securities (TIPS) in the

U.S. These securities are indexed to infla-

tion, so they pay a nominal yield that’s

determined post facto based on the actual

rate of inflation. Both coupon payments

and principal are indexed to inflation so

the real rate of return target is always

maintained.

In simple terms, the yield on an RRB is

the stated real yield, plus the rate of infla-

tion. This yield will differ from the nominal

return on a Government of Canada bond of

similar maturity and duration to the extent

that the market’s expectation of inflation

differs from actual inflation. If inflation

turns out higher than expected, then RRBs

will have had a higher nominal yield than

nominal bonds. Conversely, if inflation

undershoots the market expectation, nomi-

nal bonds will have had the higher yield.

The current real yield on long-term

RRBs is slightly better than 2% on aver-

age, similar to what 20-year U.S. treasury

bonds historically paid from 1929 to 1994,

according to the SBBI 1995 yearbook. As

recently as three years ago, that same real

yield was higher than 3.5%—in the depths

of the equity bear market—suggesting

these bonds were a buying opportunity,

which indeed they were.

Since advisors undoubtedly invest some

of their clients’ money in government bonds

over the long term, a sizable portion of

those assets should be invested in real-

return bonds rather than in nominal bonds.

Current long-term inflation expectations

are 2.4%, based on the difference between

nominal and real-return bond yields. That

figure is low by historical standards of

actual inflation (in the U.S.). Looked at

another way, if advisors believe that aver-

age inflation over the next 30 years will

exceed 2.4%, they should invest some of

their clients’ money in long-term real-

return bonds (see charts, page 6).

To put that into context, inflation over

all 30-year periods dating back to 1922

has exceeded 2.4%, 80% of the time. And

it has done so during each instance since

the 1962-92 period.

Using history as a guide, odds are that

inflation will exceed 2.4% over the next

30-year period, thus making real-return

bonds at current rates a smart proposition

for protecting wealth.

The following example from a Federal

Reserve study summarizes the issue nicely:

“In 1955, for example, the Treasury

issued a 40-year bond with a coupon rate

of 3%. Because the actual inflation rate

over the past 40 years was 4.4%, an inves-

tor who bought this bond at full price and

held it to maturity received a negative

1.4% yield on this investment (3 - 4.4 =

-1.4).”

Source: 3rd Qtr, 1995, Federal Reserve

Bank of Kansas City Economic Review

The cost of higher inflation to your cli-

ents’ portfolios is potentially huge. Even

though inflation is not a major factor

today for near-term returns, it is definitely

a factor for long-term plans.

When investment time horizons reach

out to 20 years and beyond, advisors

should factor in the potential costs of

inflation to financial plans and utilize real-

return bonds to hedge that risk.

—Levi Folk is president and

managing editor of The Fund Library and

president of Generation Capital Inc.

■ september 17, Compliance Forum, Attend-

ees: IDA-licensed brokers, branch managers,

and senior management, MaRS Complex, Toronto,

www.advisorlive.ca

■ september 20, Quebec MGA Symposium,

Attendees: MGA senior management, Fairmont

Queen Elizabeth, Montreal, Que. (this event is conducted in

French), www.advisorlive.ca

■ september 25 to 27, Changing Channel:

Profiting From the Future, Westin Trillium

House, Blue Mountain, Collingwood, Ont.,

www.advisorlive.ca

■ september 26 to 27, 12th Annual OSC/SEC

Financial Accounting and Reporting Course,

Toronto, Optional Workshops: September 25

and 28, 2007, www.infonex.ca

■ november 15 to 16, 13th Regulatory Com-

pliance for Financial Institutions, Direct Energy

Centre, Toronto, www.canadianinstitute.com

■ november 28 to 29, 7th Annual Advanced

Forum on Securities Litigation, St. Andrew’s

Club & Conference Centre, Toronto,

www.canadianinstitute.com

■ december 3, “Take this Case and Solve

it,” Attendees: Independent Financial Advisors,

Mariott Pinnacle, Vancouver, www.advisorlive.ca

PREDICTInG PROTECTIOn

For more events go to www.advisor.ca

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HOW THInGS WORK ?


EnDLOAD

AE09_006,007.indd 7 08/17/2007 09:03:48 AM

starsearch

AE09_008-017.indd 8 8/16/07 4:15:41 PM

a major U.S. insurance firm decided it was time to ramp up its little-known Canadian investments division, it hired one of the biggest names in the Ca-nadian mutual fund industry. “We’ve got Kanko,” the promotional ads proclaimed, as The Hartford Investments Canada placed its bets on the star power of a former AIM Trimark ace who’d been off the scene for two years.

“Bill Kanko is a big story for us,” says Mary Taylor, senior vice-president of mar-keting at Toronto-based The Hartford, ex-plaining her company’s bold ad approach. “I think there was some pent-up demand to get him back as a manager, so it was good for us; he is a brand. Whether we had a strategy to trumpet him or not, the press was going to pick up on it.”

So far, the campaign seems to have worked. In about a year, The Hartford’s Global Leaders Fund, Kanko’s primary mandate, grew from $16 million in assets to $117 million. But it wasn’t just Kanko’s fund that took off—according to data from the Investment Funds Institute of Canada (IFIC), The Hartford’s total mutual fund assets under management grew from just under $487 million in June 2006, to $839 million in June 2007.

Taylor concurs the company’s success is about more than one star player, although Kanko’s hire certainly “opens doors, creates a spillage effect and creates industry buzz,” she says. To be sure, the value of a star manager is obvious for a low-profile fund company like The Hartford, says Morn-ingstar Canada fund analyst Mark Chow. He adds the company still has a relatively small asset base, ranking 30th among fund sponsors (according to IFIC stats) but that the speed of growth can be largely attrib-uted to name recognition.

First and foremost, the big names come with a track record, says Chow: “There are only so many big-name managers in Cana-da, and [they’re the ones who] will get your fund on the radar.”

And the Kanko example is no anomaly. When Kim Shannon’s firm Sionna Invest-ment Managers left CI Funds and joined forces with Brandes Investment Partners, the latter co-branded the funds that she would control. Within six months, the Brandes Sionna Canadian Equity Fund had amassed $357 million in assets, eclipsing the $229.5 million managed in the Brandes Canadian Equity Fund, even though that mandate was opened in 2002.

For a company like Brandes, which is well known but doesn’t have a huge mar-keting presence in Canada, a name like Kim Shannon can provide instant cachet, says Chow, noting Shannon’s CI Canadi-an Investments was probably featured on numerous brokerage focus lists. “You’re probably going to see Brandes Sionna on some of those lists now,” he adds.

Name recognition can help to gather a lot of assets in a relatively short period, but relying on a star manager can have its downsides. If the manager decides it is time to move on, investors may follow him or her out the door.

Interestingly, both Brandes and Sionna were best known for the mandates they managed for larger companies—AGF Funds and CI Funds, respectively. Unit-holders were faced with a choice: follow the manager, or stick with the mandate they had bought.

Advisors must carefully weigh the pros and cons of either route before guiding their clients to make such a decision. “There are going to be some redemptions whenever

www.advisor.ca advisor’s edge|september 2007 �

star

Continuedonpage11

AE09_008-017.indd 9 08/17/2007 10:01:43 AM

there is a manager change, because certain advisors are a little more trigger-happy when they see an event like that happen,” says Dom Rando, vice-president, investment manager research, TD Asset Management. “But for the most part, even with some big redemptions that we have seen over the years, they are a small fraction of the overall fund assets.”

Redemptions might range from 10% to 15% of assets over the 12 to 18 months following a star manager’s depar-ture, Rando says. Fund redemptions can make life difficult for the incoming manager of the mandate, as they may have to sell off some positions to cover the outflows.

The impair-ment on their in-vestment strategy may be mitigat-ed, however, if there are suffi-cient assets in the fund that

do not fit their criteria. As with any sudden shift in the investing land-scape, client communication is of the utmost importance. In times of uncertainty, investors need the advisor to provide them with an evaluation of the new manager, and above all, avoid getting too ex-cited by the change.

“Any responsible advisor is go-ing to have a prepared statement for all their clients holding that fund,” says Rando. “I stress the fact that the fund companies are very good at replacing managers going out and they try to do it in a fairly reasonable time frame. But incom-ing management is never a dog, so let’s take a look at who the incom-ing management team is and evalu-ate them.”

Chow, a former investment ad-visor himself, says there’s little evidence to indicate investors will dash out the door to follow the manager. Investors may be sitting on a sizable gain and not want to trigger a capital gain by moving their money. Deferred sales charges are another good reason for clients to sit tight.

“A lot depends on how it was sold by advisors to clients, and who’s coming in to replace the

departing star manager,” explains Chow. “You may not be able to get another star, because there are only so many of them, but what you want to do is what CI has done—they picked someone who is not a household name but has an extremely strong track record, and is similar.”

In other words, continuity is key. So when—not if—a star manager leaves, make sure you’re prepared to preach the consistency message to advisors and ensure it gets down-streamed to clients.


Continued from page 9

Continued on page 12

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Coming in next month’s issue of Advisor’s Edge

Does your client expect miracles from you, or is she just looking for solid,sustainable growth that will lead her to retirement?

October’s CE Corner author Jim Otar examines the nexus between a client’s financialand emotional capacity to determine just how aggressively you need to invest

before a client leaves the working world. It divides clients into Green, Grey and Red zonesto help advisors determine the right combination of income need

and investment risk to get the job done.Sponsored by

Teaser Brev 7x2.375 .indd 1 08/09/2007 08:29:02 AM

AE09_008-017.indd 11 08/21/2007 03:30:19 PM

“You never want to lose a high-calibre money manager, but we’re very careful to have plans in place in the event of a loss,” says Peter Anderson, CEO, CI Financial. Recognizing the potential damage of manager mobility, CI Funds already had its plan in place when Shannon announced Sionna’s departure. The fund company quickly named Daniel Bubis and his Tetrem Capital Partners as successor and new managers of CI’s $7 billion flagship CI Canadian Investment Fund.

Chow says Bubis was relatively un-known to most advisors because his firm specialized in managing pension assets, rather than retail funds.

Morningstar was aware of his track record, however, and was able to offer a quick analysis. “We knew his style was very similar to Shannon’s ... it’s

actually eerie how similar they are,” Chow says.

Any change of manager will auto-matically attract scrutiny, but when a well-known manager leaves a multi- billion-dollar fund, the replacement will certainly feel he or she is in the hot seat. “Anytime there’s a manager change on a fund that has a lot of assets or [one] that we recommend, we have to take a hard look at the incoming management team,” notes Rando. “I can’t really say that I’ve ever seen a dog manager come in to replace a star.”

An Even KeelAnalysts are looking for consisten-cy—does the incoming manager suit the mandate of the fund? With to-day’s carefully crafted portfolios, style drift may be considered a capital of-fence, as the advisor may be compelled

to replace the fund. “We have to assess if the end client is getting what they paid for,” explains Rando. “Is this manager going to provide a similar level of alpha- and risk-adjusted returns using a process that is consis-tent and repeatable?”

Anderson says advisors and analysts alike can expect a window of incred-ible access to the management team, as the fund sponsor seeks to reassure these key points of investor contact that the new managers are up to the task they’re being assigned.

“We certainly had more phone calls coming into our call centre from ad-visors and investors,” he says. “They just wanted some assurance that this was something CI was paying atten-tion to, and would be taking care of in short order.” Anderson adds the vast majority of callers ended up taking


12 advisor’s edge | september2007 www.advisor.ca

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AE09_008-017.indd 12 08/20/2007 09:55:15 AM

a wait-and-see approach, which bought the incoming team time to adjust.

And communication between the fund sponsor and the advi-sor is every bit as vital as between advisor and client. “Advisors, just like everybody else, don’t like change,” he says.

Anderson says advisors don’t want to have to field a lot of phone calls from clients about something that has happened to their portfolios. For the most part advisors are willing to have some patience to give the new managers some time, so long as there’s a clear understanding about what’s happening and who this new manager is.

“Our goal when this happened was to be as open and transpar-

ent with every constituent that is involved in it,” he says. “Advisors knew how to respond to their clients so that they could make the right decisions.”

The key to a smooth transition is to be prepared ahead of time and to communicate with advi-sors and clients. Furthermore, introducing the new manager and explaining why he or she is the right replacement helps reas-sure investors the mandate they bought into has not changed.

“Do advisors care about man-ager changes? You bet they care—they care a whole lot, because the investors want them to care,” says Randy Ambrosie, president of AGF Funds. “They want to know that what they bought for a client is going to continue to perform

the way they’ve committed to the client.”

When Brandes severed its re-lationship with AGF Funds in 2002, millions of dollars in cli-ent assets followed the sub-ad-visory firm out the door. AGF slipped into net redemptions following the loss of the star sub-advisor, and spent the next two years rebuilding its relation-ships with advisors, with then newly hired Ambrosie crossing the country to ask advisors what they wanted.

“They told us that they were going to deal with a fairly small number of partners and that those partners need to satisfy most of their needs,” recalls Ambrosie. “You don’t need to


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be everything for them, but you need to be able to do a lot of the things that they want.”

Ambrosie notes there is a definite marketing benefit to putting manag-ers in front of advisors and clients, but that it’s important to keep the focus on research and the investment pro-

cess, since that can be replicated re-gardless of the actual manager. “None of our portfolios are manager-centric; our portfolios are mandate-centric,” he says.

“You don’t look at a portfolio and describe its investment management in terms of what a person is going to do, but rather what the team will do. We

think it brings credibility to our firm and our management capabilities.”

While AGF may be aiming to build assets across the board, there are reports that as much as 90% of its inflows are landing in just two funds—both man-aged by the AGF International Advi-sors. Trying to avoid a manager-centric focus is proving difficult, as the lead-ers of AGF IA, John Arnold and Rory Flynn, are now among the most recog-nized names in the business. Ironically, this is the team that replaced Brandes.

Arnold’s Dublin-based team man-ages three of the company’s five larg-est funds: AGF International Value; AGF European Equity Class; and AGF International Stock Class—together they account for about $7.25 billion in assets, while the team manages an ad-ditional $1.3 billion in another four funds.

Changing TimesBut this time around, the downside of star status may be lessened, as AGF IA is a wholly owned division of AGF Management Ltd. Keeping portfolio management in-house can make it easier to retain talent.

While larger firms are opting for in-house management, there is also a growing emphasis on management by committee. Chow says Morningstar is often asked to list management teams, rather than one specific name, in an effort to take some of the spotlight off a single manager.

Chow notes the team approach is gaining ground, with companies like AIM Trimark adopting mentoring strategies or maintaining a couple of managers on the fund, to mitigate events such as sudden departures. “When Kanko left, there was a team there that picked up right after him. Even though Kanko was a big name,


14 advisor’s edge | september 2007

AE09_008-017.indd 14 08/20/2007 09:55:42 AM

their foreign funds have still done ex-tremely well after that departure,” he says.

Chow adds a good fund is a good manager coupled with a mandate that makes sense. “A fund is just a vehicle; it’s the person making the decisions that drives the performance,” he says. “People are less inclined to talk about a fund’s performance versus the man-ager’s performance. People are getting into the investment philosophies more; its not the fund that’s value-oriented, it’s the manager.”

Rando says stand-alone managers, who do all of the stock selection, sector allocation and portfolio construc-tion, are the legacy of a bygone era in fund management, and that many firms are now shining the spotlight on co-manage-ment structures.

“Ten years ago every-thing would be the oppo-site,” Rando says. “There was a much bigger focus on the star manager, but now you’re starting to see the lead manager assisted by a co-manager and maybe two assistant managers, so now you have a team of four.”

A team-based approach, with deep bench strength is a sign that many fund companies recognize the risk as-sociated with manager mobility, and are facing the investor sensitivity in terms of succession planning.

“When the managers do leave, as they often do, the advisor and the end clients are accustomed to having two managers on the portfolio,” Rando points out. “If you lose one, you still have the other guy and he’s been there for five years. It mitigates the loss in


some cases, and it’s becoming more evi-dent, but it’s not for every single firm.”

But every team needs a captain, so Rando will still focus on the lead manager, rather than the whole team when conducting his own research on a fund. The lead manager sets the tone. “We’ve seen some great examples in the U.S. where as soon as you get to be a high-profile manager, there’s a high probability that you’re going to jump ship and go to a hedge fund,” says Ran-do. Part of his due diligence includes

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AE09_008-017.indd 15 08/20/2007 09:55:57 AM

assessing any handcuffs that may bind the manager to the fund sponsor.

Gilded handcuffs notwithstanding, compensation is often tied to long-term performance, and that encourages the manager to stay for at least three years. Bonuses are often amortized, again with three years being typical. Contracts with sub-advisory firms will almost always include an exclu- sivity agreement.

Another common incentive for in-ternal managers to stay put is to pro-vide an equity stake in the firm as part of their compensation. Owner-ship stakes can be a two-way street, though. Rando points to the recent Mackenzie Investments purchase of The Cundill Group as an ex-ample of the employer buying out the sub-advisor.

“That’s one way to avoid a manager departure—if Cundill were to leave Mackenzie, that would be a hugely significant event, and they’ve taken steps to make sure that doesn’t happen,” he says.

An ownership stake can be an important incentive for a fund sponsor seeking to lure a star manager away from another firm, espe-cially to start up a new fund. To compete with the fund the star is leav-ing, fees will need to be comparable—few investors will follow their favourite man-ager to a new man-date if they’ll face a significantly higher MER.

“They’re typi-cally not overly

expensive,” says Rando, explaining that stars attract large asset bases which al-low lower MERs. But if the manager has a certain specialty, he or she may be able to command a higher fee.

“They probably aim to start out close to the same costs as where the star just came from, though, to entice their fans to follow,” says Chow, noting this is especially true if the replacement manager has a proven track record. “If they are relatively unknown, though, the departed star might be able to com-mand higher fees,” he says.

Assuming the same management fee, leaving a $6 billion fund for a $300 mil-lion fund could slash revenues by 95% for the manager, so there must be ad-ditional incentives to make the move. Taylor says The Hartford is taking a partnership approach with Kanko’s firm, Black Creek Investments, helping to build it out, add more investment talent, and hopefully cement the relationship.

Surprisingly, most sub-advisory con-tracts do not include a set term for the partnership, with 60 days’ notice typi-cally being all that either side must pro-vide the other. The Hartford’s contract with Kanko is no different. “We don’t put a term on them. We approach it by saying we have a long-term partnership,” says Taylor.

“While the contract is important, what I think is more important is how well you’re working together and achiev-ing the goals of both parties.”

And perhaps that’s best. In a competi-tive business environment where depar-tures of star managers are inevitable, in-vestment firms need to place the emphasis on the fact that the institution will press on and provide the investors’ returns, no matter whose names are on the door.

Steven Lamb is news editor of advisor.ca. [email protected]



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There’s not a lot of “down” in the con-tinent Down Under these days. Cana-da’s commonwealth partner, Australia, has been riding a bull-market wave that still shows no signs of stopping. Just like Canada, Australia’s equity markets are robust, and the countries share an urban-clustered culture, resource-rich landscapes, and parallel economic and environmental challenges.

The financial services sector is the third largest in the Australian economy and the country is considered a hub for money moving in the Asia-Pacific region. The sunburnt continent now accounts for the world’s fourth largest funds management portfolio (with the total pool of funds under management over $1 trillion).

Canadian pension veteran Dr. Leo de Bever recently took on the position of chief investment officer of Victo-rian Funds Management Corpora-tion (VFMC) in the heart of bustling Melbourne. “In Australia, they call themselves the lucky country,” says de Bever, a former executive vice-presi-dent, Global Investment Management at Manulife Financial, and senior vice-president for risk management at On-tario Teachers Provident Plan Board. “In the last 15 years, the stock market returns have been so good that when I came here, people said, ‘Leo, Australia’s different, the stock markets do much better than the rest of the world.’ ”

While all markets have their ups and downs, he notes Australia did miss the big market downturn of 2000 and adds, “They’re like Canada without a tech sector.” His mandate upon joining VFMC was to create a more efficient,

internal, risk-management strategy for the $39 billion in Victorian insurance and pension monies.

A key driver of the Australian in-vestments industry, says de Bever, is so-called superannuation (or super) funds. They’re similar to pension funds in other countries and current Australian law makes it mandatory for employees to sock away 9% of their annual incomes into superannuation coverage as a salary benefit. Further, money that goes into a super fund is taxed at a rate 15% below the marginal tax rate. Much like RRSPs in Canada, employees are given the option of top-ping up their contributions.

With these upfront benefits, it’s no wonder that 2006 Australian Bureau of Statistics data shows super funds made up more than 50% of market share of Australia’s funds under man-



aussi-land

What’s up Down Under?

Advisors in Australia say it’s

all ‘super.’By Diana Cawfield

AE09_019-025.indd 19 08/20/2007 09:56:49 AM

agement. They’re categorized as corpo-rate funds, industry funds, retail funds, public sector funds, and self-managed funds, depending on the issuer.

In recent years, government-man-dated tax sweeteners have combined with an aging demographic and greater awareness of retirement needs to boost the assets of superannuation funds in Australia. Similar to Canada, unused retirement savings plan room in Aus-tralia is enormous, says de Bever, and he believes that was the impetus be-hind the government’s introducing the mandatory 9% contribution.

“Well, just think of it, he says. If someone earns $100,000 a year, they would normally pay 40% in taxes. But put it into a superannuation fund taxed at 15% and they’ll pick up $25,000,” de Bever says “As a further tax incentive, effective July 1, under new government legislation, a lump sum of superannuation funds can be withdrawn tax-free at age 60.”

While superannuation funds have been attracting investors like a mag-net in the last few years, de Bever says there are two flaws in the system. First,

lump-sum withdrawals don’t pro-vide any incentive to keep the money building during retirement, he says. Secondly, a much larger proportion of pension assets in Australia are defined contribution, so if you outlive your as-sets, that’s your problem.

Sandy Grant, chief executive officer of Cbus (Construction & Building Industry Super Fund), has seen fund assets grow by over $2 million in each of the last two calendar years. Cbus manages $6.5 billion on behalf of 430,000 members who receive con-


www.advisor.ca20 advisor’s edge | september 2007

Difference Down UnDerA few facts and figures on Australia’s financial planning industry:

• While the industry is still dominated by independent advisors, commercial banks have

acquired a wide range of investment firms and savings banks which now account

for some 29% of all planners. While many work from the banks themselves, others

operate via seemingly independent firms.

• Insurers account for an additional 23% of the investments industry.

• Australia’s $1 trillion (as of Dec. 2006) of funds under management is the fourth

largest in the world (after the U.S., France and Luxembourg). This funding base

means that most international fund managers now have offices in Australia, adding

to both the quality and competition in local services.

• The funds management business cuts across the commercial banks, investment banks,

insurance companies, trustee companies and independent fund managers.

• At one time, life insurance companies dominated this business, but the banks have

since gradually replaced them. —Michael Skully

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tributions from almost 40,000 partici-pating employers. As the name implies, the fund tailors its products to workers in the construction sector. Fund man-agement at Cbus is outsourced, as well as administration and insurance work. Current asset allocation is 32% Aussie equities, 28% international equities, 13% infrastructure (such as roads and airports), 13% properties, 7% fixed income instruments, 1% cash, and the remainder in private equities.

While a thriving market and robust returns have accelerated money into super funds, the number of funds has diminished. New licensing regulations have reduced the more than 1,300 su-perannuation funds to fewer than 400. Most of the whittled-down funds were corporate funds, not industry-tailored offerings such as Cbus. At present, there are about 80 industry-specific super funds.

Many in the industry question whether the tax advantages of super funds will survive. “There are a lot of people looking at it and saying, ‘Hang on; the impact from a tax take is going to be very substantial,’ ” notes Grant, explaining recent speculation surrounding the funds’ eventual ex-tinction. He also suggests the catalyst for the establishment of the financial planning industry in Australia was the ability of people to get their superannuation at retirement and still quali-fy for the old age pension.

“Tax drives the investment decision in Australia,” says Michael Skully, a professor in the Department of Ac-counting and Finance at Monash Uni-versity in Melbourne. Skully believes fi-nancial planners play a more significant role Down Under than in some other countries, citing a large percentage of new university graduates moving into



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the financial services area. According to Kevin Bailey, CFP and chairman of fee-only firm The Money Managers Ltd., based in Melbourne, Australian univer-sity graduates of financial planning can expect to earn six-figure salaries within two to four years of convocation.

He adds there are approximately

30,000 advisors operating in Austra-lia, about half of whom are members of the Financial Planning Association (FPA) there.

“There’s a huge demand for advice,” says Bailey. Advice, he notes, is partic-ularly sought-after by older investors with retirement savings that are close to the values of their homes.

Fee Fracas As a result of a government-mandated 9% superannuation retirement contri-bution, the banks and big accounting firms have moved into financial plan-ning. Bailey’s firm provides fee-only advice that varies depending on the scope of the service. Much like the Canadian scene, there’s been ongoing debate in Australia about whether fee-based or commission-compensated advisors best serve their clients.

Bailey says the majority of advisors earn more than 60% of their incomes from commissions or trailer fees and considers having $10 million to $20 million in assets under management as a fair indication of success.

That, however, doesn’t preclude industry funds from having an ongo-ing war with financial planners, notes Grant. He attributes this to the fact fund companies don’t pay commis-sions. As a result, he says advisors make a point of downplaying super funds among clients. To illustrate, Grant cites a recent regulatory inves-tigation that found 35,000 cases in which inappropriate advice had been given at a large investment firm.

Despite the required superannua-tion contribution, conventional wis-dom says clients need about 15% of their annual incomes to retire comfort-ably. The old age pension in Australia, which amounts to about $13,000 an-nually for individuals and $20,000 for a couple, can make up the difference.

Donna Dunn, a nursing coordinator at Victoria University in Melbourne, bought her first home in 1982 and when she sold it 12 years later, the house had more than doubled in price. The huge gain inspired her to begin investing in residential housing.

About 70% of Australians own their homes, says Grant, and there’s no


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capital gains tax on the sale of a prin-cipal residence. As a result, buying the house next door and renting it to cover the mortgage has become a favourite way to create supplementary income and additional savings.

So when Dunn recently sought the advice of a financial planner, his coun-sel came as a complete surprise. After carefully taking into account her age, finances, risk tolerance and goals, the advisor stated quite clearly that super-annuation, not a rental home, was her best option.

The reason for his caution? The risk factor of an overheated real estate market. Last year, the Reserve Bank of Australia increased interest rates three times, cooling inflation, and another increase is expected in the next year. Since high mortgage rates tend to sap housing booms, advisors are starting to urge caution.

Dunn paid a $2,000 one-time fee for drawing up a financial plan and pays an annual 0.55% fee for ongoing portfolio management. “It’s a relatively high-cost model,” says de Bever, “and if you want to set up the equivalent of an RRSP—they call it an individually managed account—it costs a couple of thousand dollars a year, because it is set up as a trust in Australia.”

Jeff Rogers, chief investment of-ficer, IPAC Securities Ltd. in Sydney, considers the fee structures very trans-parent for the firm’s $15 billion in as-sets under management. The typical Australian superannuation fund in one of his client’s portfolios has a strong equity bias toward Aussie stocks. Home-country tilt is common.

“The thing that’s untested in all this,” says Rogers, “is if we were to run into an environment, say a U.S. or Canadian pension fund in 2001, 2002, where the equity market is going

backwards, it would be a surprise to a lot of people.” For a super fund, there’s only been one year in the last 15 with a negative return, he adds.

Peter Dunn, managing director, Moneyplan Australia (MP) Propri-etary Ltd., offers clients the option of a fee-based or commission-based service. “We’re probably a bit be-

hind the times,” he says, “because we only charge $550 for most financial plans,” and then a percentage of the assets invested.

One question that keeps popping up, says Dunn, is if they move to purely a fee-based service, how will younger people or those who don’t



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have adequate wealth afford a financial planner? He notes that a typical financial plan takes between eight and 12 hours to prepare, so if the advisor

charges $300 an hour, that’s a minimum $2,400 fee. “It’s all very well for the consumer advocates to say you should charge a flat fee, but there are some pretty significant issues,” says Dunn.

Bailey points out one key difference between Aussieland and Canuck ter-ritory is that Australia has a national regulatory body for the securities in-dustry. He adds Canada’s “province-based regulations are a little bit more difficult for planners to get around,” making it harder for advisors to run fee-only practices.

Despite Australia’s federal regulatory system, “there’s still lots of chances for individuals to get their fingers burnt very badly,” says Kevin Davis, a profes-sor and director at the Melbourne Cen-tre for Financial Studies. “People don’t understand that high returns probably involve pretty high risk.”

Skully, who moved from the United States to Australia more than 15 years ago, says the national licensing require-ment, brought in around 2002, has had a big impact on the financial services industry. Basically, anyone who provides financial advice in Australia must first have a licence, and second have a cer-tain level of training in order to be ac-credited. The licensing requirement, he says, has forced out a number of play-ers who were unwilling to go through the accreditation process.

In the end, that’s good for inves-tors. Says Bailey: “We’ve spent a lot of time in this country educating a lot of our legislators, building very strong relationships, so we get sensible legis-lation and sensible licensing.”

Diana Cawfield is a Toronto-based freelance writer.



fund choicesAustralian funds under management, by market share, 2006

Super funds 54.4%

Public unit trusts 21.6%

Life insurance offices 19.1%

Others 4.9%

Source: Professor Michael Skully:

“Lecture Seven: AFF9260”

Australia Capital Markets,

April 16, 2007

Advisor's Edge, Advisor's Edge Report, Advisor.ca, are a part of Rogers Publishing, a division of Rogers MediaInc., a division of Rogers Communications Inc. (TSX: RCI; NYSE: RG) Rogers Communications Inc. is a diversified Canadian communications and media company. It is engaged in cable television, high-speed Internetaccess and video retailing through Canada's largest cable television provider, Rogers Cable Inc.; in wireless voiceand data communications services through Canada's leading national GSM/GPRS cellular provider, Rogers Wireless Communications Inc.; and in radio, television broadcasting, televised shopping and publishingbusinesses through Rogers Media Inc.

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AE09_019-025.indd 25 08/20/2007 09:58:39 AM

in the financial services industry that passing exams is a stepping-stone to achieving suc-

cess. However, the securities and insur-ance commissions, Investment Dealers Association, and Mutual Fund Dealers Association, among others, are raising the bar with respect to educational re-quirements for advisors. Similarly, the investing public is demanding advisors be more knowledgeable to help them meet their diversified needs.

The norm for industry exams is to register with the applicable institute, for example the CSI (securities cours-es); Advocis (insurance, CLU cours-es); the Financial Planners Standards Council (CFP examination); the CFA Institute (CFA exams); and IFIC (mu-tual funds exams) to name a few. After registering you’ll be sent the course materials. And then reality sets in.

Most course materials consist of at least one text, roughly 300 pages of small print. Or, if it’s a program such as the CFA, several textbooks are assigned.

Don’t fret, though, because for each course there is usually a breakdown high-lighting the exam relevance of each area.

TesT TacTicsBefore setting up Foran Financial In-stitute in 1987, I spent 10 years as an investment advisor with Merrill Lynch Canada and Wood Gundy. I was required to pass numerous indus-try exams, including the Series 7 (U.S. securities) and options, futures, and insurance courses. For career purposes, I obtained designations including the CFA and CFP, which required me to pass several six-hour exams. Based on those experiences, along with studying psychology about how people learn, I developed the following approach to help people pass these tests.

How you should approach an exam is dependent on its composition. Is the exam multiple-choice, essay-style, short-answer, or a combination? The vast majority of financial industry exams are multiple-choice. However, a few incorporate essay and short-

answer questions. Multiple-choice ex-ams are based on specific details, such as numbers, time periods, ages, and dates. For example: “How often must a registered individual in the securi-ties industry in Canada have his or her licence renewed, and on what date?” The answer is: “Annually, on Decem-ber 31st.” Note how specific the ques-tion is in respect to the material.

Detail also factors into what’s on, and not on, a list. For example, there are three purposes of a securities act: to protect the investor; to promote fair capital markets; and to promote effi-cient capital markets. An exam ques-tion could be: “What are the purposes of a securities act?” or “What is not a purpose of a securities act?” followed by a short list. Either way, you have to know the three correct answers to get the question right.

Pay aTTenTion To deTailsWe teach students to pass multiple-choice exams by stressing specificity and using memory techniques, includ-ing acronyms and other associations, to help them remember the material.

Acronyms are powerful tools to help people recall data. Imagine you are studying economics and want to remember the five stages of a business cycle, which are: Trough; Recovery; Ex-pansion; Peak; Contraction. The first letters are T.R.E.P.C. So, as a memory key we suggest: People in Toronto are in a cycle and Torontonians Really Eat Potato Chips (TREPC).

Once the type of exam has been determined, the learning approach comes into play. Now it’s time to ex-amine course content. We tell students to think ahead while studying the ma-terial and ask: “How would the exam-iners test me on this content?”

it’s a fact

of life


continued on page 29

POPquiz By Ron Foran

strategic coaching is key to a passing grade.

AE09_027,029,030.indd 27 08/16/2007 04:42:57 PM


KNOW THE CONTENTTo properly learn the material, start by simple perusal:• How many chapters or texts must be learned? Examine

the major headings of each chapter, along with sub-head-ings and minor headings to get a perspective of the over-all content.

• Read the introductions and conclusions for each chapter,then notice illustrations and major examples.

• Learn terminology and defi nitions from glossaries.• Read material thoroughly and make notes on key areas.

EFFECTIVE CLASSROOM INSTRUCTIONThe goal with teaching adults is to make the reading mate-rial animated, interesting and fun. This is quite a challenge with topics such as “The harmonization of securities laws in Canada based on the CSA MRRS.” If you can relate the material to the experiences of the participants, then the lights go on.

For example, while a textbook provides a defi nition of selling short, I relate a story about a famous stock market trader who shorted the market on Black Monday in 1987 and made just over $1 million in profi t on the crash.

PASS POTENTIAL Structuring the content in a logical manner and using a va-riety of teaching techniques to relay information are cru-cial for adult learners. Humour and stories are part of the process. Adult students want to learn, and if we can also entertain our students by using humour and telling relevant stories, that’s a bonus.

According to studies conducted by the University of Michigan and other prominent educators, each person has a preferred learning style. People can be categorized as: Why Learners; What Learners; How Learners; and What-If Learners. Most people, in fact, use all four of these learning styles but tend to prefer one over the others.

The Why Learner wants to know “Why is it important to learn the material?” In our seminars we provide an answer by saying, “The reason we are here today is to help you learn the material in the course so you can pass your exam.” Obvi-ous, perhaps, but it works for this group. Also, throughout the session we continually discuss the signifi cance of the material and why it’s important to know all the facts.

The What Learner wants to learn content. Information and data are important to these people. So, for example, we

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tell them, “This is a four-day seminar. On the fi rst day we will cover the fi -nancial services industry and the Ca-nadian economy. From 8:30 a.m. until 10:00 a.m., we will cover the role of the chartered banks and the CDIC protection fund and then we will take a 15-minute break.” You get the idea.

To address the How Learner, we talk about our plan to cover the ma-terial using a combination of lectures, quizzes and case studies. We will also have a class participation session and give feedback to the students on their understanding of the material.

Meanwhile, a What-If Learner searches for other applications of what is being taught. While the information is useful, these people want to know where else they could apply this data. In other words, they’re looking for jus-tifi cation of the content and usually ask a lot of questions. While it might appear at times these students are chal-lenging the instructor about the con-tent, they simply want clarifi cation of the information.

Addressing learning styles helps the instructor build rapport with the stu-

dents. We use our knowledge of learn-ing styles to introduce and facilitate a seminar. When we begin, our normal introduction is: “The reason you are probably here today is to get assis-tance to pass your exam (Why). Over the next four days we will be covering fi ve major topic areas and 10 differ-ent subject areas. More specifi cally, here is what we will cover (What). To help you with your learning, we will present a lecture and provide quizzes, case studies and sample questions. There will be an opportunity for a discussion with feedback, on the last day of the seminar (How). Now, some of you will probably want to know ‘Where else can I use the information obtained from the seminar?’ While the information is important for your exam, you will fi nd that the investment information, in particular, can help you with managing your personal fi -nances (What If).”

Besides addressing the four learning styles, we also stress the importance of whole-brain learning. The more senses a person uses in the learning process, the better. We’ll present information using visual techniques such as Power

Point, and whiteboard illustrations. Also key is to repeat information ver-bally to reinforce the data.

Storytelling appeals to the kin-esthetic part of our senses, which includes our feelings. Other senses, such as taste and smell, can also be invoked in a great story. Recall your best vacation. For me, it was the maj-esty of mountains and the sight of an ocean—the sounds of waves splashing up against the rocks on a shore. I recall my family sharing this wonderful ex-perience. I can smell and almost taste the salty richness of the waters.

While you might be thinking, “What does Ron’s vacation have to do with me passing my exams?” consider this: If you truly experience a situa-tion, your recall of that memory will be highly pronounced. I know it’s a stretch, but when you are learning new information, the more of your senses that you can use in the learning process, the better your retention will be.

Ron Foran CFA, CFP, CLU, FCSI is president of Foran Financial Institute, a professional training fi rm in Toronto. [email protected]


www.advisor.ca30 ADVISOR’S EDGE | SEPTEMBER 2007

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WHY SETTLE?A burgeoning insurance scheme may fl y in the face of industry priorities. By David Wm. Brown

I recently returned from Mi-ami Beach, Florida, the Mecca of an emerging insurance offering called life settlements. At almost any given hour in Florida there’s an advisor on the radio touting the virtues of these investments—commonly referred to as zero-cost life insurance—and of-fering the opinion that they represent a risk-free way to print cash.

Life settlements involve the sale of life insurance policies by people who are currently healthy to investors in exchange for money that’s wanted or needed by the policy holder. (In that sense, they differ from viatical set-tlements, which are sales of policies for cash needed by people who are terminally ill.) There are several variations on life settlements, with transactions exotically called SPIN-LIFE (speculator-initiated life insur-ance), SOLI (speculator-owned life insurance), and STOLI (stranger-owned life insurance), which appears to be named after a brand of vodka I favour.

The basics of the plans are simple. Take an elderly person who can be both fi nancially and medically under-written, and then apply for a policy. Offer to pay the fi rst two years of premiums and then let the life in-sured either take over payments and maintain the coverage or agree to be bought out of the contract.

Promotion of these products is

drifting over the border and more than a handful of clients have re-cently asked my opinion on the new insurance scheme. But what seems a simple concept should raise alarm bells among insurance sellers—es-pecially with regards to Canadian tax and insurance laws.

First, there’s the issue of insurable interest. One of the fundamentals of the insurance business is that an in-surance product should be purchased to protect against a loss that would impoverish a family or a business. This is not necessarily the case with life settlements, which are entered into and sold as investments. There is certainly fi nancial gain, but where’s the personal loss from which the buy-ers are being protected?

If these settlements are investments then how, and by whom, should they be regulated? It seems to me they should fall under the scrutiny of both securities and insurance regulators.

And what about the tax implica-tions? Should the tax-free aspects of the death benefi t still apply, or is the mortality gain to the investor now, in fact, a capital gain that should be taxed accordingly?

From the examples I’ve seen, it doesn’t look as if the fi nancial results of a life settlement are as great for the investor as promoted, and they’re certainly not guaranteed. In addition, the insured or owner of the policy

doesn’t seem to come out that far ahead fi nancially. There are a lot of extra expenses woven into the process that suggest promoters are taking a large share of the profi t.

In addition, the return is based on the projected life expectancy of the insured. Certainly one can rely some-what on actuarial tables but they’re based on a much larger population than the cohort to whom life settle-ments are being marketed. Due to the various layers of expenses, the internal rate of return can be signifi cantly less than the investor had anticipated.

If a cure for cancer or a new heart treatment is developed, the mortality tables will no doubt improve, result-ing in a lower rate of return for the purchaser of the investment.

And then there’s the fear of foul play—it can’t be comforting for peo-ple to know there are investors who will benefi t from their deaths.

Both parties considering these ar-rangements will have to be careful to make sure they get what they con-tracted for. But, perhaps more impor-tantly, our industry needs to decide whether these plans refl ect what the insurance business is all about.

David Wm. Brown, CFP, CLU, Ch.F.C.,RHU, is a member of the MDRT. He is a partner at Al G. Brown and Associates in Toronto. “Insurance Insights” appears every other issue.

INSIGHTSINSURANCE

www.advisor.ca ADVISOR’S EDGE | SEPTEMBER 2007 33

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closingbellb y b e a s l e y h a w k e s

a cautionary tale

sit down for a meeting with your largest client?Worse yet, she brings the magazine with her into the meeting and asks you

about it. Naturally, the article is riddled with shocking examples of misconduct and inflammatory tales, illustrated in ways that only art directors can concoct.

That’s the surprise that lawyers woke up to this past summer, when Maclean’s de-cided to attack the legal profession by focusing on the misconduct of some small percentage of lawyers.

Now, obviously, none of us would find fault with castigating lawyers, or even tarring them all with the same evil brush. After all, why don’t sharks eat a lawyer who has fallen off a boat?

Professional courtesy.What do you have when a lawyer is buried up to his neck in sand?Not quite enough sand.We all know lawyers who haven’t yet had misconduct proven against them have

simply not been caught. The mere fact they enter a profession that allows them to earn high incomes by selling people advice proves they are all of suspect character, doesn’t it? And besides, they make more money than the average person in Canada, so they are fair game for criticism—accurate or otherwise.

Hmm ... I’m not sure we advisors would want to be tried, convicted or sentenced based on the same criteria. That’s something I worry about every time I read yet an-other news report on Advisor.ca about one more advisor being fined or suspended for misconduct. It seems to happen at least weekly across the country.

The Ontario Securities Commission may be inept on the big cases like Felder-hof and Rankin, but the various regulators seem very active and adept at imposing sentences in their own domains. Why do we keep giving them the opportunity?

What can we do? For starters, make sure our own act is cleaned up.I’m not talking here about fraud or theft—if you’re inclined in that direction,

nothing I can say is going to stop you. What I mean is that most of us think we’re

doing the right thing at all times, and putting our clients’ best interests first.

But I see constant evidence of advi-sors pushing the limits of ethical be-haviour, at the expense of their clients. Things like churning DSC accounts and using fee-based advisor accounts to sell new issues, while keeping the new issue commissions and not crediting them back. That can do wonders for your per-sonal revenue-on-assets, but they cost your clients and will bring disrepute on our profession, when exposed.

Some advisor thieves get caught and we are generally glad to hear that, even though it hurts our collective reputation. The larger issue is the advisors who take advantage of their clients and push just to the point of misconduct, but never far enough to get charged or sued.

Just doing a better job also helps. Simple things such as avoiding over-concentration in volatile sectors, being intelligent about not subjecting clients to undue risk, learning more about the science of investing, and generating cash flow for clients can all go a long way toward avoiding client complaints and bad publicity.

Let’s all work together to stay off the cover of Canadian Enquirer.

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

“Financial advisors are rats!” —Canadian enquirer magazine, November 2007

How would you like to see a headline like that this fall, just as you are about to

34 advisor’s edge | september2007 www.advisor.ca

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