CANADA’S MAGAZINE FOR THE FINANCIAL ......Advocis, Stonehaven Financial Group The Stenner Group,...

Rogers Publishing Limited, P.O. Box 720, Station K, Toronto, ON M4P 3J6 • PM 40070230 R10969

IS THE MFDA LIMITING?

GIVINGAWAY STOCKS

IMPROVING PENSION CHOICES

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

Will REGULATORS push ADVISORS

to the front lines of compliance?

AE07_OFC 6/26/06 12:49 PM Page 1

7Inside EdgeAdvocis can bring in new blood by answering the question:“What’s in it for me?”By Deanne N. Gage

10FRONT END LOAD Staying PowerAssante’s Lorne Schnell reviews JamesCollins’ and Jerry Porras’ book Built toLast, while Jamie Golombek dishes onpension credits in “How Things Work.”

13TOOLBOX Platform PredicamentThe MFDA platform is flexible, but italso limits the types of services an advisor can provide to clients. Yetswitching to IDA registration is notwithout its drawbacks, including lots oftesting and some loss of independence.Hear the platform pros and cons from people who’ve recently made the switch.By Michael Berton

18COVER STORY Eyes on YouWhat are you doing to protect your firm, and what have you done to make compliance officers your partners?Regulators want to know and increas-ingly view advisors as the starting pointof the compliance process.Moderated by Philip Porado and Prema Thiele

24Pension PathsShould you transfer a commuted valuefrom a DB pension plan?By Ashley Crozier

30The New RulesConservative charitable tax incentivescan work generously for your clients.By Jamie Golombek

33Compliance Check with Ellen Bessner

34CLOSING BELL with Beasley Hawkes

THE

JULY • 2 0 0 6 •VOLUME 9NUMBER 7

ONCOVER

www.advisor.ca ADVISOR’S EDGE | JULY 2006 5

13GO FISH

13 Is the MFDA Limiting?

18 Forward March!

24 Improving Pension Choices

30 Giving Away Stocks

18WATCH OUT!

AE07_005 6/23/06 8:10 PM Page 5

As Advocis celebrates its 100thanniversary this year, one issue fore-shadows a dark period for the industry’slargest advisor association.

Membership is sinking. In 2004,Advocis had nearly 16,000 members.Today, that number has plummeted toabout 12,000.

Those numbers must be leavingAdvocis wondering how on earth toattract new members. After all, theircurrent membership isn’t getting anyyounger.

First, Advocis needs to be realistic.There is definitely association apathy,as the majority of advisors do notbelong to any membership association.That said, some accredited advisors areopen to joining an association if it’s theright fit. I’ve done my own informal,unscientific poll with readers who arecurrently “association-free” but areopen to changing that status.

Most told me a variation of the fol-lowing: “It’s not worth the money tojoin an association. I have a designationand code of ethics that I’m bound to,so why bother?” Simply put, these advi-sors fail to see the value derived fromforking over the membership fees.

Others add they’re focused on the

bottom line. So ultimately, they wantaffordable errors & omissions insurance,and they want to network with otheradvisors from whom they can learn.

Are these things that Advocis empha-sizes? They certainly have those bene-fits. But lately, Advocis’s focus has beenon advocacy and national lobbying ini-tiatives. While these are noble causes,right or wrong, they aren’t necessarily atthe top of prospective members’ prior-ities lists.

Some advisors have a problem join-ing an association where there isn’t acommon benchmark. (You could arguebeing an advisor is just that, but appar-ently it doesn’t wash.)

One advisor takes issue with the factthat many Advocis advisors still do nothave designations. While Advocis hasemphasized that all members need tohave one by 2010 or be kicked out, thatrequirement doesn’t create a sense ofurgency for this advisor.

Other investment advisors I spokewith fell into one of two camps. Theyeither say, “Advocis who?” or they feelAdvocis is an association for insuranceadvisors only.

Their perception isn’t totally inaccu-rate. Advocis’s roots come overwhelm-

ingly from insurance, yet the organiza-tion bills itself as the “voice of finan-cial advisors.” To truly be that voice,Advocis needs to understand whatfinancial planners and investment advi-sors look for in an association. Somefinancial planners have found homes inthe Canadian Institute of FinancialPlanners and the Institute of AdvancedFinancial Planners, for instance.

What’s missing is a grassroots, back-to-basics approach. Too many associa-tions will have “feedback” meetingswith those who are already in their innercircles. But, if the goal is to attract moremembers, that means having meetingswith those whom you don’t actuallyknow. Where do you find these people?At your firm. At investment confer-ences. Go up to these advisors and makesmall talk. Ask for their opinions onassociations. Arranging advisor focusgroups could also be beneficial.

Only then can Advocis examine its unique selling proposition criticallyand from the perspective of its nextgeneration of members.

DEANNE N. GAGEEDITOR

[email protected]

INSIDEEDGEDESPERATELY SEEKING MEMBERSAdvocis can bring in new blood by answering the question:“What’s in it for me?”


AE07_007 6/23/06 8:11 PM Page 7

CULTURE CLASH ADVISOR’S EDGEDeanne N. Gage, Editor Aniko Nicholson, Art Director(416) 764-3803, [email protected] (416) 764-3850, [email protected] Porado Steven Lamb, Bert VandermoerAssociate Editor; Conference Editor Contributing Editors(416) 764-3802, [email protected] Marie Atkins, Executive AssistantHeidi Staseson, Assistant Editor (416) 764-3847, [email protected](416) 764-3804, [email protected]

SUBSCRIPTIONS ADVISOR.CA CUSTOMER SERVICECornerstone, 1-866-236-0608 Robin Wu, Customer Service [email protected] (416) 764-3859, [email protected]

SALESDonna Kerry Kathleen Murphy, National Account ManagerNational Account Manager (416) 764-3838, [email protected](416) 764-3805, [email protected] Sophie Bellemare

Account Manager, Eastern Canada(514) 843-2133, [email protected]

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

Garth Thomas, Publisher, ADVISOR Group (416) 764-3806, [email protected] Goulet, Publisher, Groupe CONSEILLER(514) 843-2042, [email protected] Williams, Vice-President, Healthcare & Financial Services Group

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

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

ROGERS PUBLISHING LIMITEDBrian Segal, President and CEOJohn Milne, Senior Vice-President, Healthcare & Financial Services GroupMarc Blondeau and Michael Fox, Senior Vice-PresidentsImmee 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 Programtoward our mailing costs. Contents copyright © 2006 by Rogers Publishing Limited, may not be reprintedwithout permission.

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

JULY 2006, VOLUME 9, NUMBER 7

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

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

8 ADVISOR’S EDGE | JULY 2006 www.advisor.ca

LETTERSRe: “Culture Shock” (May,page 14)I think the article on switching deal-er firms completely missed the boat.My partner and I recently movedour practice from an MFDA plat-form to an IDA platform. We chosea firm that offered the best com-

pensation, support, compliance, and back-office operations.Your story mentions dealer firms Assante, Raymond James,TD Waterhouse, two boutiques, and provides a quick and dirtypro/con-type of analysis. Surprisingly enough, this issue alsocontains full-page advertisements by these same firms.Nowhere in the article do you mention the firm we chose tomove our practice to, despite the fact we found it to be the mostprogressive of all those we spoke with—bank-owned and oth-erwise—and despite the fact it is financially sound, with ahealthy stock price and balance sheet.

Perhaps your articles should present a less biased stand-point.Robert Luft, CFP, Dundee Securities, Vancouver

EDITOR’S RESPONSEWhile appearances of conflict between advertising and edi-torial sometimes crop up, they are rarely deliberate. In thiscase, there was no direct link between the story (written byan outside writer) and the sales effort (which is conductedby an internal sales team). Nonetheless, there are times whenthe advertising falls into place in ways that look planned.Our May cover story was one such instance, and it’s some-thing that we will have to watch for in the future. This articlefeatured many dealer firms besides the ones you mentioned,and our writer contacted other firms that either declinedinterviews or didn’t return his calls.

Re: “How Things Work: Sudden Steps” (May, page 8)In the fall, I am coordinating a half-day event for womenclients, prospects and their friends around the death of aspouse and am currently developing a small binder for themto take home.

Your article is an excellent summary of everything I need. Rebecca Horwood, first vice-president, investment advisor Richardson Partners Financial Limited, Toronto

AE07_008 6/23/06 8:13 PM Page 8

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S By Lorne Schnell, branch manager,Assante Capital Management Ltd., as told to Heidi StasesonBook: Built To Last, by James Collins and JerryPorras.

The authors were trying to answer the question: Is theresomething you can define that sets apart truly world-class,best-of-the-best, visionary companies—those such as, say,Disney, 3M, Motorola or Wal-Mart—not necessarily justbig, but companies that have been successful for decades.

So they did some comparisons with competitors in theirindustry who were also very good—just not as good. Forexample, they compared Sony to Kenwood; Procter & Gamble to Colgate; Johnson & Johnson to Bristol-Myers.

It’s research-based and they came up with a number ofthings the best companies do that help ensure they last—long past the founder. A lot of people in this industry don’trun businesses. Sure they’ve created very good jobs for them-selves, and in a lot of cases very high-paying jobs, but thatjob ends with them. If you truly look at what you’re creat-ing as a company and you’re trying to create equity, you needto build it to last far beyond yourselves.

These companies have incredibly strong core ideologiesbased on a set of core values and a well-defined core purpose:What does the company exist to do? My three partners andI went through the book and we did some exercises to comeup with our own personal sets of values, and then we workedon the shared ones to come up with a set of core values forthe company. From that we wrote a core purpose.

This doesn’t speak to the fact that we manage people’smoney—and 10 years from now this company we’ve createdmight not be managing money—I don’t know! I can’t say forsure, but I know it’s going to be satisfying that core purpose.That is a non-negotiable. Everything else about the companycan change. Walt Disney didn’t create a company to be a moviecompany. He created a company because he just wanted tomake people happy. The rest just came from that.

STAYING POWER

FRONT

ENDLOADPeople, trends, events and analysis


Playing SafeMore than half of Canada’s millionaires

have conservative objectives regarding their wealth management.

Source: Investor Economics, April 2006

Cartoon by S

ue Dew

ar

Capital accumulation

Capital preservation

Income generation

Tax minimization

Debt reduction

38%

35%

16%

6%5%

AE07_010,011 6/23/06 8:49 PM Page 10

CA

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To submit an event, [email protected]

If you have clients who receive pension

income, you are no doubt aware of the pen-

sion income credit.This credit provides a

non-refundable reduction in taxes payable

on the first $1,000 of qualified pension

income.

If your clients are 65 and over, qualified

pension income includes not only normal

pension income coming from a formal,

registered pension plan (RPP) but can

also include:

• Annuity payments; and

• Lifetime annuity payments under

› RRSP

› Deferred Profit Sharing Plan

› RRIF

For Clients Under 65The definition of qualified pension income

is much more restrictive in that it includes

only regular pension payments and certain

other payments received as a result of the

death of a client’s spouse or common-law

partner.

The recent 2006 federal budget, in an

effort “to provide greater tax relief to pen-

sioners”doubled the maximum amount that

is used in calculating the eligible pension to

$2,000 from $1,000, effective immediately

(i.e. for the 2006 tax year).

Planning OpportunityClients who have heard of the pension

credit, perhaps by chatting with fellow

retirees at cocktail parties and the like,

often fail to understand exactly what they

need to do to take advantage of this credit

without actually receiving any pension

income in the traditional sense. Perhaps the

biggest misunderstanding is while RRIF

payments are indeed eligible for the pension

credit, they must generally be paid to some-

one who is at least 65 years old. If some-

one is under 65 and receiving a RRIF

payment, that payment is simply ineligible

for the pension credit.

Obviously this invites you to perform a

simple financial planning strategy for

clients 65 and over: Ensure that they

receive at least $2,000 a year from their

RRIFs so they can take advantage of this

credit. Clients aged 65 to 68 need not

convert their entire RRSPs to RRIFs until

the year in which they turn 69.

However, should they wish to take advan-

tage of this credit, you may want to discuss

with them the possibility of transferring

some of their RRSP money to a RRIF prior

to age 69 so they will be in a position to

claim this credit.

The recent increase in the qualified pen-

sion amount to $2,000 affords a new

opportunity to reconnect with your clients

and tell them about this latest tax planning

development.

Final NoteThere’s one final cautionary note which

may restrict access to the pension income

credit in the year of death.

When the annuitant of a RRIF dies, he

or she is deemed to receive the fair market

value of his or her RRIF immediately

before death.The pension income credit is

not available on this deemed receipt

because in order to be eligible for the credit,

the deceased would have had to actually

receive actual RRIF payments prior to

death.

Setting your clients up to receive their

RRIF payments (or at least $2,000 worth)

early in the year would ensure that they

would receive the full pension credit in the

year of death.

—Jamie Golombek

■ AUGUST 14 to 16, Advocis Ontario School,

Nottawasaga Inn, Alliston, Ont., www.advocis.ca

■ SEPTEMBER 21 to 22, Changing Channel:

The Future of Mutual Fund Dealers, West

Trillium House, Blue Mountain, Collingwood, Ont.,

www.advisorlive.ca ■ SEPTEMBER 25 to 26,

Institutional Investing for Plan Sponsors

and Trustees, Four Seasons Hotel, Toronto,

www.canadianinstitute.com ■ OCTOBER 18 to

19, 3rd Annual National Registrant Regulation

Conference, Grand Hotel & Suites, Toronto,

www.strategyinstitute.com ■ FALL 2006,

Excellence in Practice Management with

Evelyn Jacks, www.knowledgebureau.com

■ NOVEMBER 6 to DECEMBER 8,

Master’s Certificate in Investment Planning

& DFA Designation, www.knowledge-

bureau.com ■ NOVEMBER 6 to

DECEMBER 8, Master’s Certificate in

Investment Planning, Schulich Executive

Education Centre, Toronto, www.knowledge-

bureau.com ■ NOVEMBER 7 to 10,

3rd Annual Distinguished Advisor Conference,

San Antonio, Texas, www.knowledge-bureau.com

■ NOVEMBER 10, Dialogue with the OSC,

Metro Toronto Convention Centre,

South Bldg., Toronto, www.osc.gov.on.ca

■ NOVEMBER 15, 8th Annual Canadian

Private Equity Markets Summit, The Liberty

Grand, Toronto, www.insightinfo.com

■ NOVEMBER 16 to 17, 12th Annual

Regulatory Compliance for Financial

Institutions, Metro Toronto Convention Centre,

North Bldg., Toronto, www.canadianinstitute.com

■ NOVEMBER 20 to 24 (one date per city),

2006 Year-End Tax Update (various locations:

Ottawa, Toronto, Edmonton, Calgary, Vancouver),

www.knowledgebureau.com ■ DECEMBER 7,

Take This Case and Solve It: Retirement

Income Planning for Business Owners

(Presented by Advisor’s Edge and The

Knowledge Bureau), Round Up Centre, Calgary

Stampede, Calgary, www.knowledgebureau.com


HOW THINGS WORK ?THE PENSION

CREDIT

AE07_010,011 6/23/06 8:51 PM Page 11

For the better part of 20 years, DonProteau, a Vancouver-based advisor, hasbeen successfully building a select high-net-worth client base. But recently he’s failed toattract a few top prospects due to his inabil-ity to take custody of their stock and bondassets. He’s not IDA-registered, and that’sbecome a problem because high-net-worthclients inevitably come with some assets theydon’t want to liquidate.

“When a sophisticated client comes toyou with a large portfolio and you cannotdeal with certain parts of it, your servicesappear limited,” explains Proteau. “I’minterested in working for high-net-worthclients, so I must seek out the best platform.”

Some trustees, like MRS Trust, offer partial solutions but advisors say these can be awkward,because the trustee, and not the advisor, acts as the holderof the securities. And regulators may soon rule out sucharrangements for MFDA advisors. Even if they have no inten-tion of actively trading stocks or bonds for their clients, many,like Proteau, consider the ability to at least take custody of such assets to be vital to the relationship and the completeness of their service offerings.

From her observations, Susan Monk, a compliance officerwith PEAK Securities, explains, “Most advisors who haveupgraded to the IDA platform really just wanted to be ableto advise on their clients’ existing stocks and bonds, ratherthan actually actively trade them.” While this may be themajority intention, advisors must recognize the increasedresponsibility they’re taking on, warns Vancouver-based finan-cial planner Brian Goss. “Even though it may not be yourmain focus, you will be opening yourself up to a more intense

level of research, responsibility and liability once you startdealing with individual securities.”

In spite of the wider range of investment-service optionsavailable under the IDA regulatory regime (see chart, page17), many advisors have remained steadfastly aligned with theMFDA, in part because they wish to avoid the hassles of tran-sition. More serious stumbling blocks include the desire bymany to remain self-employed, charge direct financial plan-ning fees, and retain their current levels of freedom. Since itsestablishment in 1998, the MFDA has generally permittedadvisors to operate in a more entrepreneurial way. Self-employed status is recognized, permitting advisors to run theirbusinesses as independent practices, rather than employees inan employer-owned branch. An exemption secured by theMFDA also lets advisors receive income through their corporations, allowing favourable income tax planning

IDA registration offers advisors more business options,but the switch comes with some loss of independence.

PLATFORM PREDICAMENT

Illu

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Dav

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ond

TOOLBOX

Continued on page 15

Strategies for advisors from advisors

By Michael Berton


AE07_013-017 6/23/06 7:48 PM Page 13


TOOLBOX

advantages. Rather than receiving a T4,these advisors can manage their incomethrough their corporations and controlthe form in which it’s received. Theseaccommodations have worked well forthose entering the securities business viathe insurance industry, where incorpo-rated practices are common.

While both regulators require deal-ers to supervise any securities-relatedactivities, they have slightly diff-erent approaches to the providing of

financial planning advice. In its consid-eration of Dual Occupations, theMFDA accepts that financial planningservices will include non-securitiesadvice and permits this so long as it isconducted, “through another entity thatis otherwise regulated or that is subjectto the rules of a widely recognized pro-fessional organization.” There is norequirement for advisors to run theirfinancial planning practices and feesthrough their MFDA dealers, providedthey do so under the auspices of

another regulator. The IDA requires its dealers to

supervise the securities-related adviceoffered in financial plans. Unfortu-nately, the highly integrated forms ofadvice in most comprehensive financialplans make it impractical to try to sendin this section of the plan without thecontext of the rest of the analysis. Asa result, the dealer would have to verify and approve the entire financialplan, including sections that are beyond

Continued from page 13


DIFFERENT WORLDSWhich platform you choose affects your business operations.

OPERATIONAL MFDA IDAISSUES

• Client name

statements

• Nominee statements

• Disclosure

• Client history

• Signage

• Annually

• Monthly for active accounts,

otherwise quarterly.

• Standard fee schedule; MFDA

client complaint form; account

information.

• Can be transferred in.

• Dealer internal and external

signage required.

• Monthly for active accounts, otherwise quarterly.

• Monthly for active accounts, otherwise quarterly.

• Standard fee schedule; IDA arbitration form; account

information; CIPF brochure.

• Client history prior to transfer in will not be reported.

• Dealer internal and external signage required; CIPF sticker;

IDA member sticker.

Source: Investment Dealers Association, Mutual Fund Dealers Association

Advisors tell us that they plan to increase the amount of

Principal Protected Structured Notes they sell in 2006.

Presented by:

FACT:THE PRINCIPAL PROTECTED STRUCTURED NOTES INVESTMENT SERIES

– an advisor education program that provides advisors with information they need to understand

and properly explain structured products to their clients. Visit Advisor.ca/structurednotes/ for the

roundtable report and more information from our sponsors.

AE07_013,015-017 6/23/06 7:54 PM Page 15

the dealer’s jurisdiction and the reason-able legal privacy permissions providedby the client. To properly manage super-vision of these complex financial plans,dealers would have to standardizearound a particular planning softwaretool, so that results could be consis-

tently and efficiently reviewed by theircompliance departments.

But that flies in the face of manyfinancial planners’ view that choice ofplanning software is a mark of profes-sional independence. The tools theychoose reflect the style of practice theyrun, the type of clientele they serve and

their personal methods of presentation.A software change also means a loss ofpractice efficiency for as much as oneyear while the staff is re-trained on theproper use of the new system.

Although financial planners whocharge separately for their advice are inthe minority, they tend to object to therequirement to surrender what theyview as an outside activity to their deal-ers. While delegating the billing andcollection processes might seem like apractice benefit, dealers will need tocharge an override for the costs ofadministration, supervision and thepotential liability they take on.

And then there are market-position-ing difficulties: “Once all of your busi-ness is run through and supervised bythe dealer, you have lost all control ofyour business from the perspective ofpromoting products and services thedealer doesn’t support. Your business is100% commoditized,” warns StanWood, a financial planner with AssanteFinancial Management in Vancouver.

The IDA platform also involves moreregulatory interference, more stringentcontinuing education requirements andhas historically been more expensive(see table, page 15). “Advisors wouldsee about a 10% cut in their mutualfund revenues upon joining an IDAplatform firm,” Monk says—a painfulcutback for an advisor with a largemutual fund book who wants primarilyto remain involved with mutual fundproducts.

But, while the costs are considerablein the IDA world, rapidly rising costs atthe fledgling MFDA are expected toeclipse those of the IDA sometime thisyear (of specific concern are costs connected to the new MFDA investorprotection fund). Over the long haul,the larger scale of efficiency and well-

16 ADVISOR’S EDGE | JULY 2006

TOOLBOXContinued from page 15

AE07_013-017 6/23/06 7:52 PM Page 16


established cost structure of the IDA would seem to forecastlower fees.

To upgrade to the IDA platform, advisors are required to writeand pass the Canadian Securities Course (CSC) and the Con-duct and Practices Handbook (CPH) exams. Successful advisorsmust then participate in a 90-day training program and abide bya prohibition from any trading activity, followed by a six-monthsupervision period. They’ll also be required to join a branch withan IDA-approved branch manager, or to take the Canadian Secu-rities Institute’s branch manager course themselves and seek thenecessary exemptions to quickly become a branch manager.

Once approved, advisors would then have to complete NewAccount Application Forms (NAAFs) with each of their clientsand face the pain of a back-office system data conversion. TheIDA does provide some exemptions for advisors who have recentlywritten the CSC and CPH, or who have been recently licensed,but the process is still difficult. “Even if you’re just switchingbetween platforms within your own dealership, it can be as painfulas a switch to another dealer would be,” says Proteau.

The IDA appears to have been listening to some of these con-cerns and has begun to provide accommodations for some dif-fering business styles. In particular, they plan to allow their deal-ers to pay commissions directly to the corporations, althoughthat change awaits approval by the Canadian Securities Admin-istrators (CSA) and the various provincial commissions.

Proteau says the regulatory load may actually be less bur-densome on the IDA platform. “The NAAFs are no more dif-ficult than the MFDA versions and will require fewer clientsignatures on a nominee platform,” he says. To aid transitionsbetween platforms within money-management firms, somedealers are seeking approval for a version of the NAAF that’sjointly approved by the IDA and MFDA.

Ultimately the decision is philosophical. Advisors mustdecide whether they like working in the more structured, Big

Brother-employer world of an IDA firmor the flexible and entrepreneur-friendlyMFDA platform. For Don Proteau, thedecision to move to his dealer’s IDA plat-form was clear—he was being preventedfrom courting the types of clients hewanted to serve. Other advisors in hisbranch are looking seriously at thisoption and plan to make their own deci-sions once they see how his transitiongoes. This puts pressure on the branch toprovide proper compliance supervision

for both MFDA and IDA representatives. And, in the not toodistant future, the whole branch may have to make a decisionabout which platform makes the best business sense.

Michael Berton, CFP, CLU, R.F.P., FMA, is a financial planner withAssante Financial Management Ltd. and part-time instructor at the B.C.Institute of Technology (BCIT) in Vancouver. The opinions expressed arethose of the author and not necessarily those of Assante Financial Management Ltd. or BCIT.

IDA REGISTRATION CATEGORIESThe larger regulator offers options for new registrants.

Source: Investment Dealers Association

• Registered Representative Mutual

Funds (RRMF)

• Investment Representative (IR)

• Registered Representative (RR)

• May only deal with the public on mutual

fund transactions (limited provinces).

• Cannot advise on trades, but can take

unsolicited client orders.

• Can deal with the public, and can advise

on trades.

Financial Services Group, is proud to announcethe appointment of Sophie Bellemare asAccount Executive, Advisor Group for EasternCanada.

Sophie has a Bachelor's Degree in Marketingand over 13 years of experience in marketingand communications, mainly in the financialindustry. She has worked for AXA Insurance,Assurance vie Desjardins-Laurentienne as wellas with CIBC Asset Management, previouslyknown as Talvest Fund Management, as SeniorManager, Relationship Marketing.

APPOINTMENT

M. Jean Goulet, Publisher,Rogers Healthcare and

AE07_013-017 6/22/06 11:37 AM Page 17

18 ADVISOR’S EDGE | JULY 2006

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view your compliance departmentas a partner in profit, or a barrier to success? Advisor’s Edge

recently assembled a roundtable of industry experts to talkabout the state of compliance operations at investment firms.We asked our panellists if they’re confident in the ability ofcompliance to safeguard the best interests of clients, advisors,and their firms; what role advisors play—or should play—inthe compliance process; and how they see relations betweenadvisors, branch managers, regulators and compliance super-visors evolving in coming years.

Their take? Compliance is key to brand protection and firmsare increasingly looking to see retail advisors acknowledge theirplace at the forefront of a chain designed to protect clients’best interests. Here’s what they told us:SCOTT SINCLAIR:We have a head-office compliance depart-ment with clear roles, but it goes down to the branch managerand to the advisor level. I have a very high level of confidencebut it doesn’t draw from that group of people who sit in thehead-office environment, it draws from the entire infrastruc-ture we’ve built.

KURT ROSENTRETER: Our compliance department is totallyvisible on a day-to-day basis. There are clearly defined guide-lines to follow; things you’re going to do; things they’ve laidout; and constant updating of that. So, even if you have aminor infraction on paperwork, you have a set period of timebefore there’s follow-up. There’s also the penalty aspect, so ifyou do something wrong you’re going to get penalized rightto the point of leaving the organization for things that are tooextreme. But overall the compliance people recognize you’re in business, you’re trying to succeed.

YOUR compliance officer is lurking, ASKING TOUGH QUESTIONS,and quadrupling your paperwork. Consider yourself lucky.

MODERATED BY PHILIP PORADO AND PREMA THIELE

AE07_018-023 6/22/06 11:39 AM Page 18


So it’s not an adversarial role. It hasbeen in the past but we’ve really workedhard to say, ‘We’re a team, let’s try to getahead jointly.’We have regularly sched-uled compliance updates—we have twonext week, one for a rep, one for abranch manager. WAYNE BOLTON: For compliance to besuccessful we need to create awarenesswithin the organization of not just therules but the spirit of the rules. Andwe’ve created an environment wherepeople don’t hesitate to call us. It’s bet-ter to call us early than after the fact. PREMA THIELE: Do you think all theregulatory initiatives over the last year

have caused this change toward the con-cept of partnership? Or do you thinkthat’s been there for awhile but that theregulatory initiatives and penalties havebrought it to the fore?WB: When I first got into compli-ance, one of the advisors I used to dealwith when I was on the operations side questioned why I would do that,because I’m too nice of a guy. I’ve seenit where compliance takes a confronta-tional stance. It’s not effective and it justresults in people avoiding and trying toget around compliance. It has changedand it is changing.SS: About five years ago, compliance

was important from a purchasing pointof view, but there was almost that back-stop mentality. Now the compliancearea is responsive and knows its busi-ness—it’s going to protect advisors butalso will interact on a business level. SoI’m not exaggerating when I say com-pliance is now the biggest recruitmenttool I have.KR: The number one concern I have is to protect the brand. Even if I’m asclean as it gets, you have to be con-cerned about everybody across thecountry—the bigger the dealer, the big-ger the challenge. On the flipside, as an


Cover Story

AE07_018-023 6/22/06 1:17 PM Page 19

advisor, the biggest day-to-day chal-lenge is practice management andadministration created by paperworkand compliance matters. I have to ask,‘How many people do I have to add to deal with the paperwork and still maintain profitability?’

DEALING WITH REGULATORS

PHILIP PORADO: When was your lastregulatory review and how did it go?What kind of reactions did you getwhen you pushed back on a regulator’sfindings about your operations? SS: Two weeks ago, we had our MFDA review. They had findings, as I’dexpect any auditor would. They wereincredibly detailed and were there fora couple of weeks. There were a cou-ple matters on which we didn’t agree,which was interesting because in thepast I would have expected them to say,‘Well, we don’t really care if you don’tagree,’ and this time it was, ‘Well,explain that point of view.’ In one caseit was how we were handling trustaccounts, with respect to a client whoprovides a cheque for segregated funds,GICs and mutual funds. You can’t put

that into the trust account exclusivelyfor mutual funds, so we created aprocess whereby in an hour we were ableto split that cheque and feed it back out.We explained our logic and how itmaintained all the continuity of thetrust account. Their perspective was,‘We need you to put that in writing butwe see where you’re coming from.’KR: Every trade I do is checked dailyby my branch manager. I’ve got head-office staff checking my Know YourClient paperwork. And then you’reaudited, where someone will come inand regularly look at a sample of yourclient base. But to speak specifically toa regulatory audit, I’ve had one withinthe year and it found some missing documentation in the files. You’re given a list of deficiencies and time to follow up.



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AE07_018-023 6/22/06 11:42 AM Page 20

CARL SPIESS: We get daily feedback from compliance. Wehave something called Green Sheets when an account activityneeds further explanation. A typical example, you’ve got aclient with a $100,000 RRSP and he says, ‘I want to buy someindividual stocks,’ and he wanted to buy his first bank share.So we open a cash account and buy the stock for $5,000 andthe next day there’s a Green Sheet that says, ‘This account hasa 100% concentration in one security, please explain.’ Andyou tell them, ‘I know the regulatory environment runs byaccount, but my relationship runs by the household. And in this client’s household, owning one stock for 5% of theportfolio isn’t excessive concentration.’ You document it andeverything’s fine. WB: The regulators are likely to always find something, especially documentation. But the approach they take whenthey come in to do an exam is positive. They’re educating atthe same time as they’re auditing and they are very open topushback and listening to whatever compelling reasons youmay have. I’ve been experiencing reviews for 20 years, and theyare certainly a lot more diligent and thorough now than they’vebeen in the past. And that’s a good thing.

THOROUGHNESS COUNTS

WB: If firms haven’t already implemented a new product diligence process, they will. With more complex productsor derivatives, or even many of the mutual funds, there’sa due diligence process the firm goes through to deter-mine what ends up on the shelf. An extension of this is firms doing more and more due diligence on thecompanies, not just on the products. That trend willcontinue.PT:What’s the process if you have a client who reallywants to buy something you don’t offer?CS: I would send them elsewhere. I’m reluctant to buystuff for my clients that I wouldn’t buy for my ownaccounts, or for my mother’s account. I don’t have anycomfort buying something I haven’t done the legworkon just because they asked me for it. While I rely onmy company’s approved list, it still comes back to meto say, ‘OK, so it’s approved but do I understand it andis it an appropriate product?’SS: To get E&O insurance, the first thing the providers



AE07_018-023 6/23/06 7:59 PM Page 21

say is, ‘Show us your product approvalprocess.’ And if they approve theprocess, then the E&O insurance willapply to the products. Our diligenceprocess involves our audit area, ourmoney managers, our product special-ists group, our operations group, ourcompliance group, and finance. Eachgoes through an independent assess-ment of the product and then it goes toour product approval committee. Themoney managers tend to be telling usmore about the company background,the structure of the product, how it fallswithin our registration. It is a lengthyprocess and we’re not in a position toapprove a product in a few weeks. We’reapproving one or two products everycouple of months. You need to knowwhat you’re putting on the shelf, becauseotherwise the clients will be comingafterwards to fix this.PT: Do you have that process docu-mented for your next sales compliancereview? You seem to have a verythoughtful approach but I’m not surethat’s necessarily the standard. There area lot of folks who are learning that asthey get their sales compliance reportsfrom the MFDA.

SS: I think Portus taught a lot ofpeople a lot of lessons. My experienceis that most dealers, even the small deal-ers, have come a long way regardingproduct approval. They are takingapprovals really seriously because theyrealize it’s a make-or-break point. It’sdifferent for the banks, it wouldn’t breakthem but it’s their reputation. In thecase of a small dealer, it will breakthem. Either way, you have the samebusiness driver which is, do a reallygood diligence. We’ve been able to pullpeople internationally on some dili-gences, but we’ll also hire local talentif necessary because you don’t alwaysknow enough about a niche product.

PARTNERSHIP OR PREVENTION?KR: Should advisors be involved incompliance? On the extreme side, Icould easily say the advisor should haveno role, that the sales enticement is justtoo much of a conflict for some peo-ple. I worry less in big dealers, wherethere are levels of compliance and prod-uct review committees, but I do get con-cerned about smaller organizationswhere profitability has to be squished. CS: In the ideal world, the advisorwould be the entire compliance depart-ment. I want to get a decent rate ofreturn with a minimum of risk for myclient and here are the products I needto do that. We’re seeing it in terms ofless and less of the transactional com-missions in mutual funds, and there’sless incentive than there was 10 yearsago to focus on the trade.KR: I don’t give a lot of credibility,with respect to compliance, to the aver-age advisor on the street. Between the



For more on our Compliance Roundtable, visit www.advisor.ca

More online

www.advisor.ca/interact@

AE07_018-023 6/26/06 11:21 AM Page 22

pressures of trying to run their busi-nesses, trying to make a profit, managestaff, I think the area where they’regoing to be quickest to take a shortcutis compliance. The average education ofan advisor is at the bottom of where itneeds to be. I just look at the clients I’mattracting, and they say things like,‘Well, I haven’t heard from the guy inthree years; I’m 80 years old and I’m inthis high-risk stuff.’You look at that andsay, ‘What’s the advisor doing?’ That’sscarily more common than it should be.CS: I’ll concede your point onaccounts I’m transferring in, but in thecircles I’m running in, we’re all lookingat maximizing the net worth of ourbusinesses. And the only way to do thatis to get a decent rate of return for yourclients, have your clients understand it,and not waste your time three monthsfrom now explaining something thatyou didn’t do right the first time. KR:The KYC is the starting point andit’s fundamentally important, but thereare a lot of advisors out there who aren’tdoing what they should be, based onwhat they’re selling, putting clientsthrough, and based on how they’re getting compensated.WB: Every member of the firm isresponsible. As a compliance officer, allI know about the client is what I see onthe account application, what you’vetold me from any queries that I’ve sent,and the portfolio and trading path ofthe client. And I’ll go one step further,looking at things like new money laun-dering regulations. If a client brings in$100,000 or $1 million, you need tounderstand where that’s coming fromand the circumstances behind that. Tome it’s natural for the advisor to be thestarting point for that and the compli-

ance officer to be a check and balance. SS: As a dealer, the advisor commu-nity is my first point of compliance. Ineed the information they provide aboutthe clients. The only time I’ll meet theirclients is when they invite me out to anevent or something bad has happened.But I think there’s a point at which they’refinancial planners, so I don’t want themto spend all their time doing complicatedpaperwork. I want them to provide the information so that the next tier ofcompliance can do its job effectively.

EVOLVING ROLE

SS: Our annual reviews are partly anaudit but what I find fascinating is thatseveral hours are spent with the advisorssitting with the compliance people say-ing, ‘How can I do this? I understandthere’s this regulation. How do we bringthe two together?’ That consultativebusiness support is a big part of com-pliance moving forward. Instead of itbeing, ‘Oh my God, the auditors arecoming in, clean the files, get ready,’we’re seeing them very much viewingthem as business partners. CS: A year ago I was invited to be theadvisor rep at our firm as we were sourc-ing some new software. What excitedme was to see compliance and the otherparts of the firm saying, ‘Let’s try andbe more efficient and not have com-pliance coming back and askingfor another letter that should havealready been in the initial client kit.’WB: I think you’re seeing the roledevelop more into one of risk manage-ment, so compliance people have tohave some sort of expertise in privacyand anti-money laundering, and theirknowledge of products has to expand.Compliance people are getting more

involved in the day-to-day activities atcompanies that are multinational, ordeal with clients residing outside ofCanada. If I have a client who resides inGermany, I have to have some under-standing that I’m not violating themoney-laundering requirements in Germany or any securities legislation. KR: And that could result in con-solidation of small dealers that just can’tafford the compliance infrastructure.Honestly, I think that’s healthy for theindustry because everybody needs to beproperly supervised. Who’s actuallyreviewing that one-inch-thick plan that’sgoing out the door? Very few dealershave people to even review that. It startswith the rep. You are the guardian ofyour client’s own best interests, so youhave to jump on the compliance band-wagon. Look at these people as friendsand partners. Don’t run away when theycome in.

Philip Porado is associate editor of

Advisor’s Edge. [email protected]


AE07_018-023 6/23/06 7:59 PM Page 23


People who change jobs and are in adefined benefit (DB) pension plan getto choose whether to leave their bene-fits in the pension plan of their formeremployer, or transfer the commutedvalue to their individual locked-in reg-istered plan. Many place a higher valueon the lump-sum amount and quicklyelect that option. But is this the appro-priate choice?

A DB pension plan provides amonthly pension in retirement. Con-sider Mary who is age 50 and has a$1,000 monthly pension starting at age65 in the DB plan of her formeremployer. She may start the pension asearly as age 55 (age 50 for some plans).For now, assume it will be actuarially

reduced if she starts it early (i.e. reducedto an amount that has an equivalent costas the $1,000 starting at age 65), so thevalue is based on assuming she starts herpension at age 65.

The commuted valueequals the lump-sum presentvalue that needs to be investedtoday to provide her pension.By law, it’s based on currentlong-term interest rates andgiven mortality rates. In mostprovinces, unisex mortality rates are tobe used, reflecting the actual demo-graphics of the plan (i.e. if most mem-bers of the plan are male, then mainlymale mortality rates will be used in theunisex rates, and vice versa). An actuar-

ial calculation is done to determine thelump-sum value, weighted by the prob-ability of living to each age. The resultcan be considered as a payment payablefor a term equal to life expectancy. This

is not necessarily accurate, but it is intuitive, easier to understand andshould give similar results.

For calculations performed in June2006, annual interest rates of 5% forthe first 10 years and 5.25% thereafter

PENSIONPATHS

Should you transfer a commuted value from a DB pension plan?

By Ashley Crozier

The commuted value must

fully reflect all aspects of

the DB plan, including ancillary

benefits.

AE07_024,025,027,029 6/23/06 8:01 PM Page 24


are to be used, each of which is basedon current yields on long-term govern-ment bonds. The rates change eachmonth as the bond yields change.

In Mary’s case, only 5.25% interestis used during the retirement years, asshe has more than 10 years before age65. The table on page 29 shows that herpension has a commuted value of$69,600. This is the lump-sum amountthat the plan is willing to pay as areplacement for her future monthlypension. In theory, both the plan andthe former employee should be indif-ferent about whether the commutedvalue or deferred pension is taken.

The commuted value must fullyreflect all aspects of the DB plan,including ancillary benefits. For exam-ple, if the monthly pension is indexedfor inflation, then the commuted valueneeds to consider this.

Similarly, it must recognize enhancedbenefits on early retirement, such as i) the ability to start early with noreductions, ii) reductions that are moregenerous than actuarial equivalent or iii) a bridge benefit payable to age 65.Lastly, any death benefits are reflected,including guaranteed periods or pen-sions payable to a surviving spouse onthe death of the employee.

Suppose that instead Mary was in apension plan with generous ancillary ben-efits. In actuality, her commuted value forthe same $1,000 monthly pension couldbe as high as $200,000! So depending onthe plan terms, the value of Mary’s pen-sion ranges from $69,600 to $200,000.This possible range is precisely why finan-cial advisors have a difficult time under-standing how the commuted value isdetermined. The plan terms have as muchimpact, if not more, than current inter-

est rates and age of the employee.

Take It or Leave It?Any employee who quits and who is notyet eligible to retire (under age 55 formost pension plans) must be given theoption of transferring the commutedvalue of his or her benefits from thepension plan. If they are eligible toretire, the law does not require they begiven the commuted value transferoption, and it is up to the plan to decidewhether to offer it. (This decision ismade for the plan in total and not forspecific employees.)

As Mary is not eligible to retire, shehas the option to transfer her commutedvalue. There are several issues to considerwhen deciding which route to take. Onaverage, the two decisions (either trans-ferring the commuted value or leaving herpension in the plan) are of equivalentvalue, but Mary’s circumstances may notnecessarily be average, and may thereforeaffect her decision. Electing a transfermeans Mary accepts the responsibility toinvest the commuted value and provideher own retirement pension going for-ward. The decision then becomes an issueof whether she can replace the pensionshe would otherwise get from the planand the death benefits.

Consider these factors:The interest rate used to calculatethe commuted value.This representsthe average investment return that needsto be earned in order to replace themonthly pension. As her commutedvalue was based on 5% and 5.25%interest, Mary needs to earn at least thismuch. Whether she can depends onfuture returns and investing strategies.If she is conservative and will only

invest in GICs, then her returns willcurrently be lower and it is unlikely shewill earn enough on average to replaceher pension. The pension plan can beconsidered as providing this conserva-tive, guaranteed option, so is perhapsthe better choice for those who wouldinvest conservatively.

Alternatively, balanced investmentswith some exposure to equities shouldearn at least this high a return on aver-age over the long term. Note that Maryneeds to consider how she may invest inretirement, as the funds will last thatlong. Will she decide to invest moreconservatively as she gets older? If so,then this should be reflected when considering the returns.

The current low-interest rates usedto calculate the commuted value give alow hurdle for a balanced investmentfund to “outperform” in the long term.But, one needs to pay attention to inter-est rates. If the interest rates used to calculate commuted values increase, thehurdle investment return also increases,making it more difficult to achieve forthose considering this option in thefuture.

Mary’s expectation of her futurelifetime and whether she wishes to takeany of the financial risk/reward on theuncertainty. The pension plan pays herretirement income for her lifetime,whether she lives to age 100 or only toage 70. As shown in the table, the lifeexpectancy for someone age 65 is cal-culated as age 84. Note that theexpected lifetime gives the age whenroughly 50% of the people have died,but it also means that 50% are still aliveand will live longer! No one knows how long Mary will live, but there is a


AE07_024,025,027,029 6/23/06 8:01 PM Page 25

possibility she may live beyond age 84.To the extent she does, a slightly higherreturn on her investments is needed to compensate. For example, a 6.3%dollar-weighted, compound averageinvestment return is required to pay the pension until age 100.

Many people want to transfer theircommuted value because they say theirfamilies will get nothing from the plansif they die. This is wrong. If they diebefore they retire, the plan must pay thespouse or beneficiary at least the com-muted value of the pension, assumingno death occurred. Also, at retirement,the employee has the option to elect adeath benefit if he or she wishes,including five, 10 or 15 years of guar-anteed payment and/or a pension thatcontinues to the spouse (e.g. 60%,67%, 75% or 100%). These deathbenefits will be available at an equiva-lent cost, meaning the monthly pensionis reduced, but it does provide somepeace of mind for the employee. If theemployee has a spouse when the pen-sion starts, the law requires a joint pen-sion with 60% continuing to the spousefor their remaining lifetime, unless thespouse agrees to waive this benefit.

If Mary has a shortened expected life-time due to a terminal illness, then theremay be a benefit to taking the commutedvalue. But most people ignore the possi-bility of living too long and instead focuson the prospect of dying early.

Suppose Mary was in a plan withgenerous ancillary benefits and a$200,000 commuted value for her$1,000 monthly pension. While theplan is required to pay the $200,000,the Income Tax Act gives a maximum onthe amount that may be transferred to her

individual registered plan. The maximumtransfer is the annual pension at age 65times an age-based factor. For Mary, itis $112,800 [ = $1,000 x 12 x 9.4],meaning the remaining $87,200 is paidto her and taxable when received. Thisaccelerates the timing of paying taxes andmeans the realized investment returns onthis portion of the commuted value willalso be taxable each year. Thisincreases the investment returnthat must be earned to replaceher monthly pension.

An ancillary benefit, oftenprovided, is the ability toretire early with an unre-duced pension or at least reductionsmore favourable than the actuarialequivalent. The commuted value is cor-respondingly higher as it needs to rec-ognize such benefits (if they are pro-vided to former employees who do notretire from active service). If Marydecides to leave her pension in the planbut does not retire early, then she losesthis higher value of the early retirementbenefits. The commuted value needs toreflect it, but if she takes a deferred pen-sion, her future decision determineswhether she gets the value. In this caseshe may be better advised to take thecommuted value in order to realize thehigher dollar amount. This works outto lowering the investment return she needs to earn to replace her pension,or increases the expected retirementincome for the same investment return.

Some plans periodically index pen-sions on an ad hoc benefit. As it is notcontractual, the commuted value doesnot reflect this benefit. One should con-sider the likelihood of indexing con-tinuing in the future, which they wouldnot get if they take the transfer.

Consider the current funded status ofthe pension plan. If the plan is in a deficit,as is the case currently for many plans,then it is possible not all of the com-muted value will be paid currently. Onlythe portion that is currently supportedby the plan’s assets may be paid now,unless either the commuted value is smallor the employer agrees to make payments

to the plan to fund the shortfall for thetransfer. For example, if the plan’s assetsat the last actuarial valuation equal only80% of the windup liabilities, then only80% of the commuted value may be paidcurrently. The other 20% may be heldback and paid out with interest over aperiod of up to five years.

We have often heard employees electa transfer because the plan has a deficitand they are concerned about the finan-cial viability of the employer. Thisshould not be an issue as the pensionassets are separate from the employer andthe law in most jurisdictions requiresemployers to fund deficits over five years.Also, Ontario plans are protected by thePension Benefits Guarantee Fund for upto $2,000 of monthly pension. So leav-ing their benefits in the pension planshould not mean greater solvency risk.

Alternatively, some plans still have asurplus. Should the plan wind up witha surplus in the future, the membersmay get some of it. The eligible groupincludes all who remain members in the plan, but often excludes former


If the plan is in a deficit,

then it is possible not all of the

commuted value will be paid

currently.



AE07_024,025,027,029 6/23/06 8:01 PM Page 27

employees who elected to transfer theircommuted value from the plan.

Determine if the employer providesretiree healthcare benefits. Do formeremployees qualify for such, and do theylose eligibility if they elect to transferthe commuted value of their benefitsfrom the pension plan? These factors aresomething older employees need toconsider. Many employers are startingto link the payment of a pension witheligibility for any retiree healthcare ben-efits. For example, Mary needs to knowwhether she could lose entitlement tosuch benefits, and consider the value.

In the case of an employee being ter-minated from his or her job, provinciallaws require they continue to accrue apension for the statutory notice period,and most employers will also continuethe accrual during the common-law sev-erance period. But, with the advice ofadvisors, many employees request theybe deemed a retiring allowance withtheir severance payment so they maytransfer a portion of this to theirRRSPs on a non-taxable basis (amountdepends on years of service before1996). One of the requirements ofCRA for such designation of a retiring

allowance is that there will be no furtheraccrual of pension. So the employeeloses out on some pension when herequests this retiring allowance treat-ment. In some situations, the loss maynot be great and is more than offset bythe financial gain of deferring incometaxes on the portion of the retiringallowance rolled over to the RRSP. Butwe have seen some situations where theemployee lost significant increases in thecommuted value by requesting suchtreatment. This is because they wereclose to meeting the service criteria forsubsidized early retirement benefits, andwould have received this with the addi-tional service had they not requested aretiring allowance.

The decision whether to transfer thecommuted value of benefits from a pen-sion plan varies from person to person.Not all of them apply to each person.There are situations where the bestadvice is to leave the pension in theplan, and other situations where one isexpected to be financially ahead by tak-ing the transfer. How one will invest thefunds, and the expected investmentreturns, is an important consideration,but not the only one.

Ashley Crozier, FCIA, CFA, is an

independent actuary based in Toronto

with 20 years of experience in pensions

and life insurance.

[email protected]

CASH ACCUMULATIONCalculation(1) of Commuted Value of $1,000 Monthly Pension for a 50-Year-Old

A. Life expectancy at age 65 19.0 years to age 84

B. Present Value at 5.25% of 1(2) for a term of 19.0 years 12.17

C. Discount for 15 years: 10 years at 5.0% and 5 years at 5.25% 2.10

D. Resulting Factor at age 50 [=B/C] 5.80

E. Commuted Value at age 50 of $1,000 Monthly Pension $69,600[=$1,000 x 12 x D]

(1) simplified; actual method for actuarial calculation differs, but results are similar(2) 1/12th payable each month



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AE07_024,025,027,029 6/27/06 9:38 AM Page 29


Conservatives made good ontheir pre-election promise to

encourage the donation of publiclytraded securities (including mutualfunds and segregated funds) to charityby completely eliminating the tax onany accrued capital gains arising fromthe disposition to charity.

This change opens a huge windowfor you to broach the topic of philan-thropy with your clients in a way thatcan significantly benefit the client, theadvisor, and, most importantly ofcourse, the charity.

Almost 10 years ago, the governmentintroduced enhanced tax assistance fordonations of publicly listed securitiesto charities. Under the old (pre-budget)rules, if an individual donates eligiblesecurities, only 25% instead of theusual 50% of any capital gains triggeredby the sale of those securities had to beincluded in the individual’s income.

To encourage additional donations

of listed, publicly traded securities tocharitable organizations and publicfoundations, the budget proposed tocompletely eliminate any capital gainstax payable on the donation of thesesecurities to charities by reducing thecapital gains inclusion rate for suchdonations to zero.

While there was some speculationthat this donation rule would beretroactive to January 1, 2006, the fed-eral government announced these newrules would apply only to donations of eligible securities made on or afterMay 2, 2006.

Donation Tax CreditBefore reviewing the new opportunityin detail, let’s take a quick look at howthe basic donation credit rules work.

Donations to a registered charity inCanada are eligible for the donation taxcredit. For the first $200 of donationsmade by an individual in the year, the

NEWRULESThe Conservatives’ charitable tax incentives can work generously for your clients.

By Jamie Golombek

THE

AE07_030,031 6/23/06 8:15 PM Page 30

federal donation credit in 2006 is15.25% of the amount given. (Thiscredit is increasing to 15.5% for 2007and beyond, as announced in the recentfederal budget.)

Each province also provides a provin-cial donation tax credit. For example,the Ontario provincial credit is an addi-tional 6.05%, for a combined totalcredit of approximately 22%. In otherwords, Ontarians would be entitled toabout $44 back from the first $200 ofannual donations.

It gets even better. Once you’ve madeat least $200 of donations in any year,the donation credit jumps to 29% fed-erally, plus between 11% and 18%provincially, depending on your incometax bracket and whether you are subjectto the high-income surtaxes in yourprovince.

So, for donations in excess of thefirst $200, you would get back at aminimum, 40% of the amount youdonate. Given that the donations are inthe form of tax credits (a credit is a

reduction of tax owing) as opposed totax deductions (a reduction of taxableincome), the credits are essentiallyworth the same for low-, middle- andhigh-income earners (ignoring theeffect of any high-income provincialsurtaxes).

A Case Study To understand the impact of the newrule, let’s assume one of your clients,Mark, currently owns mutual fundsthat have a fair market value of$100,000 that he purchased manyyears ago for $20,000 (see chartbelow). He is considering donatingthese mutual funds to charity.

If he simply sold the mutual fundsfirst, he would realize a capital gain of$80,000 and pay tax of about $18,000on the gain, assuming a top marginalrate of about 45%. His net benefit, taking into account the value of thedonation credit less the tax on the capital gain, would be about $27,000(Column A).

Under the existing (pre-budget)rules, if he donated the mutual fundunits directly to charity instead of dis-posing of them first, this $18,000 ofcapital gains tax would have been cut inhalf for a net tax benefit of $36,000(Column B).

Under the new rules, since the cap-ital gains tax would be eliminated altogether on the donation of themutual funds to charity, and sinceMark would still be entitled to his fulltax receipt for the $100,000 con-tributed, his net benefit would be$45,000 (Column C).

Note that while the new rules areproposed to be effective for donationsmade on or after May 2, 2006, as of the time of writing, they are not yetlaw as they must still be passed by Parliament and the minority govern-ment. But it would be highly unlikely(and extremely unpopular) for any partyto oppose the passage of these newrules.

What if you and your client want tocontinue to own this strong-perform-ing mutual fund? No problem. Simplyadvise your client to repurchase the fundjust donated.

By doing so, not only will your clientget his donation credit, he won’t paycapital gains tax on the disposition andhis adjusted cost base will be “bumpedup” or “reset” to the current fair mar-ket value, limiting any future capitalgains tax on their ultimate sale to subsequent increases in value.

Jamie Golombek, CA, CPA, CFP, CLU,

TEP, is the vice-president, taxation & estate

planning, at AIM Trimark Investments in

Toronto. He can be reached at

[email protected]


MUTUAL BENEFITCompare tax-savings pre- and post-federal budget.

Source: AIM Trimark Investments

Cash In-kind Donation In-kind DonationDonation Pre-budget Post-budget

(A) (B) (C)

Fair market value of donation $100,000 $100,000 $100,000

Adjusted cost base (assumed) ($20,000) ($20,000) ($20,000)

Capital gain $80,000 $80,000 $80,000

Taxable gain (50% vs. 25% vs. 0%) $40,000 $20,000 0

Tax on capital gain (at 45%) (A) ($18,000) ($9,000) 0

Tax benefit of gift (at 45%) (B) $45,000 $45,000 $45,000

Net tax benefit (A + B) $27,000 $36,000 $45,000

Tax savings from donating in-kind instead of cash $9,000 $18,000

AE07_030,031 6/23/06 8:15 PM Page 31

CHECKCOMPLIANCE

Before jumping ship, make sure your new firm views compliance as a top priority. By Ellen J. Bessner

CULTURE OF COMPLIANCE

Picking a new firm is a difficultdecision. Regardless of the size andtype, you need to affiliate yourselfwith a firm that has what is com-monly referred to as a culture ofcompliance.

So, how do you determine that? Forstarters, consider the questions yourinterviewers ask you. Do they askwhether your clients are knowledge-able concerning financial matters andwhat steps you take to assist thosewho are unsophisticated investors? Arethey concerned about the average ageof your clients and the types ofinvestments they are in? Do they askwhether any of your clients are inalternative types of investments basedon your advice, like limited partner-ship units?

Do they ask whether your clientsare in leverage loans (MFDA andinsurance) or margin accounts (IDA)? What about how much ofyour book is a result of borrowing to invest?

The majority of litigation I haveseen involves margin accounts andleverage loans. It’s not uncommon fora single complaint to involve severalclients who know one another throughreferrals. As a group, they hire a

single lawyer to represent them andshare the cost.

If the firm isn’t checking out therisk in your book, they likely haven’tchecked out their other advisors’books either. If a firm seems focusedexclusively on your book’s gross value,ignoring its quality, that would alsoworry me. After all, a high-risk advi-sor can bring down the reputation ofan entire firm. What do you thinkMark Valentine did to ThompsonKernaghan?

Of course, if you’re not being askedquestions regarding compliance, youcan use this opportunity to interviewthe company representative. The inter-viewer of a compliant firm will beimpressed with your questions con-cerning compliance, while a firm thatis non-compliant may be put off.

Also consider your impression ofthe branch manager. What are thebranch manager’s values? Does themanager have his own book of busi-ness? How much time does she spendon management versus her own book?

Does the branch manager have reg-ular meetings with the advisors? If so,ask for the agendas for the last sixbranch meetings. Are practice-man-agement topics, compliance and train-ing on the agenda? Are specializedspeakers or coaches brought in to helpthe group with obstacles? Conductingpost mortems to go over summariesof concerns expressed at meetings will

give you insight into the productivityof the meetings.

These days, no one can afford toignore compliance and you will wantto gauge whether the organization val-ues its regulatory obligations. Askabout the compliance managerresponsible for that branch and howmuch contact and correspondencethere is between the compliance man-ager and the advisors. Is there an effortby the branch managers and advisorsto work with compliance to resolvelooming issues before they result in acompliance problem or lawsuit?

Is the compliance team solid andrespected by senior management ofthe firm? Is compliance perceived asthe police, who only come in withguns loaded when something goeswrong, or is it regarded as an integral,supportive part of the team?

Suffice it to say, if the compliancedepartment is not seen as a partner inthe organization, the firm might faceserious problems in the future. In mynext column, I will point out red flagsconcerning compliance and the firm’sother advisors.

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


THIS IS THE FIRST OF ATWO-PART SERIES

ON SUSSING OUT A FIRM’S COMPLIANCE PRIORITIES.

AE07_033 6/23/06 8:17 PM Page 33


What are you supposed to do when a client’s legal counsel doesn’t know whathe’s doing? This comes up all the time in estate planning. A lawyer who special-izes in real estate or corporate litigation is asked to prepare a will, supposedly basedon the client’s needs. Asking a real estate lawyer to handle a complex estate plan islike asking a plumber to fix the computer in your car—hardly the expert you need.

A trust officer and I were recently exchanging war stories about bad wills. Hesees a lot of them and, unlike me, has to clean up the mess left from poor planningor bad drafting. The examples range from the ridiculous to the merely stupid.

Here’s a case in point. I receive a draft will from the client’s lawyer to review. Theclient wants to split things between his wife and their kids. An early clause in thewill specifies the RRSPs, RRIFs and pensions will be transferred to the wife andthat “this constitutes the complete gift to my wife on my death.”

But in the residue clause, 40% of the remaining estate is left to the wife. Which instruction is the executor supposed to follow? My friend’s client was penny-wise and pound-foolish regarding probate fees. One

of the client’s three kids owed the estate $150,000, because Dad had bought hera house and provided some other support. His intent was for that amount to beequalized through the estate after he died.

One problem: his lawyer never asked if there would be enough estate. The clienthad named his three kids equally as beneficiaries on his RRIF, life insurance poli-cies and segregated funds. This avoided probate all right, but there was only $30,000left to split between the two kids who didn’t owe the estate. That means they gotan extra $15,000 each, but the prodigal daughter still owes them the remaining$120,000 if the estate is ever to be divided equally. Since she has the RRIF, lifeinsurance cash and seg fund money in hand, she must be writing the cheques, right?

Nope. It turns out that money is thicker than blood, even if blood is thicker than water.

So, what do you do about incompetent lawyers? You definitely don’t want toget into the habit of checking these wills and making sure they work. Even if you’ve

graduated from law school, at best it’snot your specialty, nor a good use ofyour time. At worst, it’s a big lawsuitwaiting to happen.

It becomes especially difficult when theclient insists on using his long-timelawyer or friend, who just isn’t that skilledor up-to-speed on estate planning. Evenfor a simple will, problems are likely, andopportunities will be missed.

Here are some suggestions:➀Build a network comprising one tothree exceptional lawyers who specializein estate matters. Find the ones who’vemade this their life’s work, who listen toclients and explain concepts simply andclearly. It’s a tall order, but worth filling.➁ In specific instances, talk to clientsdirectly about the dangers of using a non-specialist, and at least get them to inter-view some of your recommended experts.➂Talk to the client’s lawyer and askcandidly if he or she is confident doingthis work, or if they would feel morecomfortable having a specialist preparethe will and then review that document.

Lawyers can be an occupational haz-ard. Why not turn a select few of theminto assets instead—for the good ofyour clients and your practice.

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

SCARY ALLIED PROFESSIONALS

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

closingBELLI’m afraid of a lot of things,

but what scares me most is knuckleheaded lawyers.

They can do a lot of damage.

AE07_034 6/23/06 8:18 PM Page 34

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