canada’s magazine for the financial professional • …to a spate of declined life insurance...

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CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • JUNE 2004 • WWW.ADVISOR.CA

ADVICE RULES • INSURING CLIENTS WHO TRAVEL

Zero to $6 billion in a year:Philip Armstrong’s unique road to success

IN THE

MIDDLEMAN

INSIDE EDGE

7 Advice RulesWhile advice is now the preferred channel for investors, suppliercompanies are taking an unprecedented interest in advisors’professional well-being. Advisors are welcoming a brand new era of opportunity, competition and responsibility.

FRONT END LOAD

10 Patchwork ProA miscellany of noteworthy items, including how one former MDRTmember took her practice from the corporation to the quilting bee in her quest for quality of life. Plus, offsetting the offshore: Learnhow the IDA is combatting international money laundering.

TOOLBOX

15 Best Kept SecretEstablishing health and welfare trusts are a viable option for self-employed and business-owner clients to augment group benefit plansor as stand-alone coverage.

COVER STORY / INDUSTRY

20 Man in the MiddlePhilip Armstrong declares he’s not an integrator or consolidator;instead he wants to create a linked “community of interest” amongindependent financial service providers. By Scot Blythe

INSURANCE

29 Travel AdvisoryGlobal political and environmental volatility in recent years has ledto a spate of declined life insurance applications. Advisors may needto caution clients to re-think their overseas travel intentions.By Sheila Avari

35 Compliance Check with Ellen BessnerIt’s never too late to employ defensive strategies to better serve yourclients.

36 Insurance Insights with David Wm. BrownA clearer Income Tax Act would help insurance advisors deal with critical illness and long-term care insurance complexities.

37 True Wealth with Thane StennerWealth preservation can come in the form of principal-protectednotes.

40 Marketing Frontlines with Dan RichardsThanking clients is a creative process paramount to preserving the flow of future referrals.

42 This ‘n’That by Andrew RickardQuiet, please. Help me, I’m rich. Lots of life. Dead loss.

June 2004 Volume 7, Number 8

15 CHOICE MENU

29 HOT SPOT HAZARDS

5

20 COMING UP THE MIDDLE

Here’s good news: Canadians stillgenerally prefer to conduct their invest-ing through advisors and will do so ingreater numbers going forward. Such arethe latest findings of financial consult-ing firm Investor Economics.

In a recent presentation to the edito-rial staff of Advisor’s Edge and Advisor.ca,Investor Economics founder and pres-ident Earl Bederman noted the advicechannel accounted for 55% of thecountry’s wealth market at the end of2002—a gain of 10% from 1997.Moreover, he’s forecasting the advicechannel to gain an even bigger shareover the next five years. Bederman’s con-clusion? As he so succinctly put it to ourteam, advice rules.

The importance of the channel iscertainly not lost on product manufac-turers, as recent events can attest. Lastmonth, AGF Funds signalled it’s readyto re-engage advisors. After enduring acouple of years of net redemptions, thecompany is retooling its marketingmandate to focus less on Spider-Mantelevision commercials and more on theadvisor. Hence the company’s recenthiring of former Canadian FootballLeague player and securities industryveteran Randy Ambrosie, who will

quarterback a combined sales and mar-keting team. The firm has also con-tracted industry consultant DanRichards to research the needs of advi-sors and help shape its solutions.

AIC Ltd. is another fund companyhit hard by redemptions. Next month,David Whyte, who left AIM Trimarklast summer, will take the helm of thefirm’s sales and marketing team. He’llalso focus on the needs of advisors ashe helps company founder Michael LeeChin craft a plan to right that ship.

To be clear, fund performance hasbeen part of the problem and will bepart of the solution for these firms.But they, and most supplier firms,understand that the needs of advisorsgo beyond performance. These days,performance is just the ante, abovewhich supplier firms must deliver con-crete help to advisors coping withincreasing compliance burdens, risingcosts and tougher competition. Cur-rently, these firms deliver this help ina variety of ways, including practicemanagement consulting, continuingeducation and sales and marketingideas.

It’s easy for any of us to squander anopportunity—or even fail to recognize

one when it exists. Advisors are staringopportunity in the face right now: You are part of the preferred channelfor investors and you also have the undi-vided attention of supplier companies.What will you do with this power?

While you ponder this, keep in mindthat as the supplier-advisor relationshipevolves, it does so under increasedscrutiny by regulators, the media andself-styled industry revolutionaries likeJohn De Goey, author of The ProfessionalFinancial Advisor (Insomniac Press), whocontinues to campaign against embed-ded compensation and trailing com-missions as “a form of industry-sanc-tioned bribery.” That debate I’ll save foranother day, but I raise it only to putinto context the following:

In the months and years ahead, sup-pliers will continually ask you what youneed. Be ready with your answer. If allyou want is a pair of tickets to the gameor a box of golf balls, that’s all you willlikely ever get. For those advisors whoare looking for real help in serving theneeds of their clients and growing theirbusiness, it’s time to seize the day.

DARIN DIEHLEDITOR

[email protected]

INSIDEEDGEADVICE RULESAdvisors face a new era of opportunity,competition and responsibility.

www.advisor.ca ADVISOR’S EDGE | JUNE 2004 7

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

ADVISOR’S EDGEDeanne N. Gage, Managing Editor Wendi Phillips, Chief Copy Editor (416) 764-3803, [email protected] (416) 764-3814, [email protected] Avari, Assistant Editor Harvey Schachter(416) 764-3802, [email protected] Contributing EditorHeidi Staseson, Assistant Editor Lisa Darwen, Production Manager(416) 764-3804, [email protected] (416) 764-3928, [email protected] Blythe, Investments Editor Maggie Sicilia, Administrative Assistant(416) 764-3810, [email protected] (416) 764-3822, [email protected] Toth, Art Director (416) 764-3850, [email protected]

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OBJECTIF CONSEILLERYves Bonneau, Editor Christian Benoit-Lapointe, Assistant Editor(514) 843-2142, James Wagner, Art [email protected]

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SALESGarth Thomas Gisela StephanyNational Account Manager Sales Manager, Eastern Canada(416) 764-3806, [email protected] (514) 843-2133, [email protected] Kerry Graham Blair, Account ManagerNational Account Manager (416) 764-3809, [email protected](416) 764-3805, [email protected] David Carmichael, Marketing Research AnalystKathleen Murphy, National Account Manager (416) 764-3820 (416) 764-3838, [email protected] [email protected]

MARKETING AND RESEARCH Nancy Matheson, Director of Marketing Denise Brearley, Circulation Director, and Promotions Healthcare and Financial Services GroupJoanne Merrick, Promotions Manager Tricia Benn, Director of Research

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AB

OU

T Y

OU Giving tokens of appreciation to clients often comes in the

form of gift baskets or edible items—but for some advisors,it can be a challenge to come up with fresh ideas. Judith Cane,a registered health underwriter with Wealth Strategies inOrleans, Ont., found a unique concept with a personal touch:quilts. She makes them from scratch. Her latest, designed witha maple leaf motif, was tailored for a client recently diagnosedwith cancer.

She says clients feel at home when they enter her officeand are immediately drawn to one of her quilts prominentlydisplayed on the wall. “I thought that was much nicer thanhaving the index chart there!” she says.

Cane likens the art of quilt-making to creating financialplans. “You take pieces of someone’s life—tax returns, pay-cheques and an investment portfolio, and put them together

to create this financialplan,” she says. “With aquilt you take pieces of fabric and fit themtogether to look beau-tiful and last for life.”

She says revising herown business plan wassimilar. In 2002, afterworking for a decade as

an insurance advisor with large corporations, the former Mil-lion Dollar Round Table member opted to improve her workand life balance and reinvent her practice.

Targeting divorced and widowed women, she teamed upwith advisor Robert Abboud, whose expertise in family plan-ning helped cement a holistic practice. Most of Cane’s clientscome from referrals, trade shows and seminars—but her goalis to bring 25 new clients on board annually. She concedesdownsizing her practice came at a financial cost, but her qual-ity of life, which includes fostering happy clients, prevails.“When somebody sends you an e-mail that says, ‘Thanks forhelping me pay cash for my first car,’ you realize how muchyour work matters.” —Heidi Staseson

PATCHWORK PRO

FRONT

ENDLOADPeople, trends, events and analysis

10 ADVISOR’S EDGE | JUNE 2004 www.advisor.ca

Managing Big Bucks

Here are the top 10 Canadian managers of high-net-worth assets as of last June.

FINANCIAL INSTITUTION ASSETS IN BILLIONS OF CANADIAN DOLLARS

TD Asset Management Inc. $13,251.0

RBC Private Counsel $8,110.0

Scotia Cassels InvestmentCounsel Ltd. $8,074.0

Jarislowsky, Fraser Inc. $4,550.0

BMO Harris InvestmentManagement Inc. $4,300.0

TAL Global Asset Management Inc. $3,256.0

Phillips, Hager & North InvestmentManagement Ltd. $3,247.3

Seamark Asset Management Ltd. $2,564.3

McLean Budden Ltd. $2,132.0

Natcan Investment Management $1,965.0

Source: Benefits Canada Top 40 Money Managers Survey, 2003

Cartoon by S

ue Dew

ar

Judith Cane

CA

LE

ND

AR

OF

EV

EN

TS

■ JUNE 7 to 8, Society of Trust and Estate

Practitioners 6th National Conference,

Metro Toronto Convention Centre, Toronto,

www.step.ca ■ JUNE 9 to 10, Dynamic

Asset Allocation Strategies, Toronto,

www.strategyinstitute.com ■ JUNE 12 to 16,

Million Dollar Round Table Meeting, Anaheim

Convention Center, Anaheim, Calif., www.mdrt.org

■ JUNE 13 to 14, Canadian Insurance

Consultants 14th Annual Insurance

Conference,The Hilton Hotel, Quebec City,

http://www.cicongress.com ■ JUNE 13 to 16,

The Canadian Institute of Financial Planners

National Conference, Ottawa, www.cifps.ca

■ JUNE 13 to 16, IDA Annual Meeting

and Conference, Fairmont Tremblant,

Mont Tremblant, Que., www.ida.ca ■ JUNE 15 to 18,

Compliance Readiness Strategies, Toronto,

www.strategyinstitute.com ■ JUNE 22 to 24,

Elite Advisor Summit, Niagara-on-the-Lake, Ont.,

www.strategyinstitute.com ■ JUNE 23,

Ibbotson Asset Allocation Workshop: Pre-to

Post-Retirement Planning, Winnipeg,

www.ibbotson.com ■ JUNE 24 to 25,

4th Annual Advanced Forum on Insurance

Coverage Disputes,The Sutton Place Hotel,

Toronto, www.canadianinstitute.com

■ SEPTEMBER 10 to 14, Financial Planning

Association Annual Convention & Exposition,

Denver, Colo., www.fpanet.org ■ OCTOBER 18 to

19, Advisor Forum—Halifax,World Trade and

Convention Centre, www.advisorforum.ca

rovincial securities regulators have

rubber-stamped an IDA policy that

requires increased disclosure of offshore

account ownership. The move is an

attempt by the brokerage industry

association to combat international

money laundering.

Under the new policy—an amendment

to the IDA's “know your client” require-

ments—member firms must identify the

beneficial owner of private, or non-indi-

vidual, corporate and trust accounts,

many of which are held offshore.

The verification must be completed

within six months of opening a new

account. In cases of current accounts

where the beneficial owner is not known,

the information must be obtained within

one year of the policy's implementation.

“Implementation of these new

requirements will send a clear message

that Canada will not allow its financial

intermediaries to be used to launder

dirty money,” says IDA senior vice-

president Paul Bourque.

Last June, the international Financial

Action Task Force issued a recommen-

dation that beneficial owners of corpo-

rate accounts should be identified.Within

two days, the IDA board had adopted the

recommendation at its annual general

meeting in New Brunswick.

The IDA says it will soon advise

members of the policy's implementation

date and is also preparing guidance on

how to comply with the new rule.

Money laundering is considered to be

a serious problem in Canada. An IDA

survey conducted in 2001 identified

13,000 offshore accounts in Canada.

In 2000, the federal government cre-

ated the Financial Transactions and

Reports Analysis Centre (FINTRAC) to

collect and analyze financial informa-

tion related to money laundering and

terrorist activities.

In the year ending March 31, 2003,

FINTRAC identified $460 million in

suspect financial transactions. At an

IFIC conference in May in Toronto, San-

dra Brown, senior officer of FINTRAC,

called Canada a haven for money laun-

derers, citing lenient jail terms for finan-

cial fraudsters and privacy rules that can

be used to help conceal criminal action.

—Doug Watt

P

R E G U L AT I O N

IDA ANTI-MONEY LAUNDERINGMEASURES—APPROVED

To submit an event, [email protected]

FRONTENDLOAD

■ BILL KANKO hasresigned his position as fund manager forAIM Trimark. Kankowas the lead manager onthe $3 billion TrimarkFund and the $6 billionTrimark Select GrowthFund. TYE BOUSADA

will become lead man-ager of the TrimarkFund, joined by DANA

LOVE. RICHARD JENK-INS will be responsiblefor the Trimark Select

Growth Fund, with JUDITH ADAMS.■ RANDY AMBROSIE has joined AGFFunds Inc. as senior vice-president,sales and marketing—a newly-createdposition. He hails from HSBC Secu-rities where he was North Americansales director responsible for its brokerage sales force in the U.S. andCanada. ■ MURRAY TAYLOR has been namedpresident and CEO of InvestorsGroup, replacing JEFF ORR who wasreappointed as president and CEO ofIGM Financial Inc., the public parentcompany of Investors Group andMackenzie Financial Corp. and IPC

Financial Network.■ DAVID GALLOWAY has beenappointed chairman of the board ofBank of Montreal. He replaces TONY

COMPER who has been appointedpresident and CEO.■ TERRY FRYETT has been appointedchief financial officer of Scotia Capi-tal, replacing COLLEEN M. JOHNSTON.■ NORMAND LITALIEN has joined XNFinancial Services as underwritingmanager. He hails from Montreal-based Groupe Ultima Inc. where hewas the vice-president of reinsuranceand new programs. ■ LUC FARMER has joined the finan-cial services division of Eckler Part-ners Ltd. as appointed actuary forprovincially and federally regulatedinsurers, advising on mergers andacquisitions, product development andasset liability management issues.■ DORIS H. H. GNANDT has joinedOdlum Brown Limited as vice-presi-dent of sales services. She hails fromScotiaMcLeod in Vancouver where shewas an assistant branch manager.

INDUSTRY NEWS

CI FUND MANAGEMENT INC. hasacquired IQON Financial Mange-ment and Synera Financial Services,adding nearly 600 advisors. Bothfirms were owned by Sun Life Finan-cial. IQON, based in Winnipeg, has400 advisors across the country withmore than $4 billion in assets. Syn-era, established by Sun Life Financialin 2002, following the acquisition ofClarica, supports 170 independentinsurance advisors.

&MOVERS SHAKERS

Bill Kanko

Randy Ambrosie

Murray Taylor

85TIPS

Keep Cottages in the Family

Using InsuranceWhile principal residences may be

exempt from the capital gains tax,

that’s not true of cottages and other

seasonal residences. Clients who are

worried that their heirs may have to

sell the family’s summer home to pay

the tax bill should consider taking out

a life insurance policy to cover the

expense—since their children stand to

benefit, they can pay the premiums!To submit an announcement to Movers & Shakers, e-mail

[email protected]

As provincial governments downloadmore expenses in the guise of “user fees” orrestrict the list of eligible (paid for) med-ical services, group insurers have respondedby re-pricing the extended healthcare(EHC) and dental benefits their clients pro-vide to their employees. Over the last fiveyears some employers have seen a 100%increase in the costs of providing theiremployees coverage.

Some employers have begun to share thecost of benefits with their employees. Theyhave also reduced the number of eligible vis-its or services or the amount of coverage inthe plan or increased the co-insurance per-centage or the deductibles of the plan. Allof these moves have been made to controlor reduce the cost of EHC and dental cov-erage without being seen as taking away benefits.

Advisors are recommending their business-owner and self-employed clients establish health and welfare trusts or HWTs,officially known as private health services plans (PHSPs), aseither augmentation to group life and disability benefit plans

or as stand-alone coverage. Favourable tax treatment and aflexibility of design make these plans very attractive.

Most provincial medical plans provide coverage for a basiclevel of essential and critical care. To ensure themselves choices,

Business owners and self-employed clients should consider a health and welfare trust to augment a group benefit plan or as stand-alone coverage.

BEST-KEPT SECRET

Illu

stra

tion

by

Am

anda

Duf

fy

TOOLBOX

Continued on page 17

Strategies for advisors from advisors

By Michael Berton

many Canadians find they are spendinglarge amounts above what the govern-ment plan will cover. These expenses areoften for drugs not covered by theprovincial plan (either an experimentaldrug or a name-brand drug where onlythe generic drug is covered), for treat-ments deemed non-essential such as lasereye surgery, or for services delivered out-side the provincial healthcare system(such as private magnetic resonanceimaging). Most group plans are priced

such that they only cover the cost ofdrugs and services above what theprovincial government will pay. Eachemployer plan varies on whether or notdrugs and services not covered by theprovincial plan are covered at all or atwhat rate they are covered. (In manyinstances, pre-approval for these types ofexpenses is required by your group plan.)

According to Section 118.2 of theIncome Tax Act, the qualifying range ofmedical expenses for a PHSP is verybroad, compared with most provincial

coverage, and many group plans, too.(Please see “Private Health ServicesPlans: Tax Primer,” below.)

Most employers will say you can’t please everyone all of the time.Nowhere does this show up more thanin a group plan for a diverse employeegroup. Younger, single employees usually aren’t that interested in groupbenefits that don’t resemble money intheir pockets today unless they have achronic health issue. Few of them have

TOOLBOXContinued from page 15

Tax legislation permits businesses to

deduct 100% of the contributions

made in the tax year to a trust to self-

insure employee hospital, medical care

or other health expenses, including

dental care (except in Quebec).

• The rules require that such a trust

account must be administrated by an

independent trustee.

• When employees claim for a reim-

bursement of their eligible health-

care expenses, the payments are

received tax free. They are not

considered a taxable benefit.

• Incorporated businesses have no lim-

its on the contributions they make.

• Unincorporated business owners

are subject to annual limitations of

their contributions. For each owner/

employee and his family, a maxi-

mum of $1,500 per adult and $750

per child applies. For example, a

family of two adults and two chil-

dren has a maximum annual bene-

fit of $4,500. An unincorporated

business that has three employees

total, each whom are married with

two children, and one single worker,

would have a total company limit of

$15,000 ($4,500 x 3 + $1,500).

Under the Income Tax Act, such

plans are also required to have an

insurance element. As a result,

many will necessarily include

an insurance plan, such as out-of-

province or travel medical coverage.

These maximum limits do not

restrict the amount that can be spent

on each family member but rather

determine the family maximum. If an

employee with a wife and two children

has a child with braces whose ortho-

dontic costs this year total $3,500, the

whole amount would be an eligible

expense but would mean that only

$1,000 was available for the rest of the

family to spend in that year ($4,500 -

$3,500). —M.B.

PRIVATE HEALTH SERVICES PLANS:TAX PRIMER


many expenses in this arena. As thoseemployees age and have children, thesebenefits become very important, espe-cially once their kids need braces.Older employees nearing retirementoften take medication and rely on theirgroup plans for financial assistancewith some of their medical expenses.Some employees want better drug cov-erage while others want more coveragefor eyeglasses or other aids (e.g. hear-ing aids, orthotics, etc.). Others wantcoverage for preventive or more thera-peutic services like massage and phys-iotherapy. Still, others hope for cov-erage for services from the morerecently recognized professions such asnaturopathy and acupuncture.

So employers are faced with the chal-lenge of designing a plan they canafford. Group insurance plans tend toprovide lists of coverage with limits at

a fixed cost. The coverage list is the samefor everyone regardless of need. Only inthe largest or more progressive compa-nies will you find the so-called “cafe-teria plans” where employees can choosefrom various coverage limits and levelsin almost every area. HWTs can pro-vide an unlimited list, within rules pro-vided by CRA, and a spending cap foreach employee. Most plans we have seenprovide spending caps based on familystatus—such as $X if you are single,$2X if you are a couple and $3X if youhave children. This gives each employeethe ability to determine how to spendtheir family medical and dental budgeteach year while providing certainty to the employer as to the cost of theprogram.

The downside of these cafeteria plansis that they are not insured. If theemployer has limits on the plan it is possible that employees will not be fully

covered if they have a significant medicalexpense in any one year. For example, amedical expense of $12,000 would onlybe covered up to the employee’s limiteach year leaving the employee to fundthe rest of the expense. In an insuredplan it is possible, depending on theexpense, that more or all of the expensewould be covered, leaving the employeebetter off, but the employer’s premiumswould rise in future years to cover thatexpense over time.

Aside from the attractive tax reliefpermitted, HWTs may be more usefulfor their flexibility of design and costcontrol. Parts manufacturer XYZWingnuts can control the cost of itsbenefit plan by limiting the amount ofmoney that is contributed per plan mem-ber. By establishing a “health spendingaccount” of $2,000 per year for indi-viduals or couples and $3,500 per yearfor families, the employer has drawn a

TOOLBOXContinued from page 17

line on plan costs. At the same time,employees appreciate the flexibility tochoose what benefits they wish to spendtheir plan dollars on. For example, if anemployee wants to purchase expensiveeyeglasses, he can direct more of thefunding to that, while another can useher family account to cover costs asso-ciated with her children’s dental expenses.Employees covered under a spouse’sgroup plan can claim under the spouse’splan first, then claim any remainingunpaid amounts under the HWT.

The spending caps are not written instone; they can be based on a review ofpast claims and can be adjusted by thedirectors at any time. In addition, theyvest to the employee monthly to protectthe plan from large claims made early inthe year by a departing employee.

Under the PHSP rules, premiumspaid to the trust are for the employee’sbeneficiaries. The funds in a PHSP areconsidered an asset of the company foraccounting purposes and can revert tothe company but the amount that is“repatriated” is taxable to the company.This activity raises eyebrows at CRAand is not recommended.

The trust must be an arm’s-length

entity and cannot be connected to theemployer. The independence of thetrustee is essential so the majority of thetrustees must not be appointed by theemployer.

A PHSP is not an insured EHC anddental plan. Although the client canbuild up a savings or pre-paid balancein their account to reasonable limits,the plan can also be funded on a pay-as-you-go basis. Each time anemployee submits a claim to the planthe employer could make the contri-bution (plus the processing fees andtaxes) to fund the claim. Employersmust ensure they are always able tomeet claim payments, so most employ-ers will build up a reserve within theplan or fund one-12th or their annuallimit exposure each month until theyhave at least six to 12 months of areserve in the account.

Take for example two business part-ners in a small consulting business. Theyhave established an HWT for them-selves, their employees and their employ-ees’ families. As non-incorporated indi-viduals, they are subject to CRApremium limits so they must keep trackof their contributions over the year.

Limited cash flow dictates that theymust make a monthly contribution.Their advisor assists them by ensuringthey contribute within the limits. Healso reminds them to renew the out-of-province travel medical coverage of theplan to ensure it still qualifies as a PHSP.

While CRA has allowed welcomerelief from income tax, that is the endof the free ride. Alas, all Canadiansmust pay GST on the administrationfee charged for each claim. In addition,recent changes in Ontario require itsresidents to pay 8% PST and 2% pre-mium tax on the gross claim amount(including administration fees).

Whether your self-employed clientsare incorporated or not, in most cases an HWT will cost them less than a traditional extended benefit and dentalplan, and be more valued by theiremployees.

Michael Berton, CFP, CLU, RFP, FMA, is afinancial planner with Assante FinancialManagement Ltd. and a part-time instructorat the B.C. Institute of Technology in Vancou-ver. The opinions expressed are those of theauthor and not necessarily those of AssanteFinancial Management Ltd. or B.C.I.T.

Philip Armstrong

declares he’s not

an integrator or

consolidator; instead

he wants to create a

linked “community

of interest” among

independent financial

service providers.

By Scot Blythe


INTHE

MIDMAN

In the financial services industry,consolidation is on everyone’s mind.

After a gruelling bear market that sawmutual fund sales fall off considerably,smaller planning firms continue to be picked off by better-capitalizedmajors—with Investment PlanningCounsel of Canada and IQON Finan-

cial the latest scores. Headline-seekingpundits can’t stifle their interminablegossip on Manulife’s appetite for anothertakeover, or which of the banks will beleft standing in the near future—all thetime assuming that banks consist only oftellers and investment bankers, with nowealth managers or planners or advisors.

What if consolidation isn’t quite thefuture of the industry? What if acquir-ers seeking great rivers of wealth man-agement fees through a quick asset grabinstead risk revenues dripping away tosmaller rivals? There have already beensome contrary impulses to the “get big”strategy a lot of financial industry

Cover Story / Industry


observers think is inevitable.Discontent among bank brokers, for

example, has turned into a flow ofentrepreneurial advisors, many ofwhom started out with an independ-ent brokerage that was consolidated,opting for a Wellington West, a FirstAssociates, a Richardson Partners andsoon, a GMP Capital. Each firm is dif-ferent in what it does but they allattract high-end producers by eschew-ing the cookie-cutter model essentialto a larger, more bureaucratic organi-zation intent on economies of scale.Still, each faces challenges in buildingout the business—and that’s the natureof entrepreneurialism.

Between the consolidator’s expensivecash grab and the slow jog of buildingassets in a boutique, there might beanother way. How about a franchisethat grows from $150 million in assetsunder management to almost $6 billionin just over a year? How about a fran-chise that includes a stable of hedgefunds, a new mutual fund manufacturer,as well as increasing forays into thelucrative underwriting market? What ifthere’s room for players that are neitherboutiques nor industry giants?

“It won’t just be larger players withsome small boutiques biting at theirheels,” says Philip Armstrong, presidentand CEO of Jovian Capital. “There’sa place for mid-sized players. It’s a

market that everyone’s ignoring.”Armstrong, the former CEO of

Altamira Investment Services and for-mer chair of IFIC, isn’t ignoring it,though he seems to be flying under theradar for most industry watchers. Thepast year has seen a flurry of acquisi-tions for Jovian, the most prominent ofwhich is Rice Capital ManagementPlus, which added $3.5 billion in assets and 270 advisors to Jovian. Rice Capital has assumed the Jovian name.

Jovian’s fortunes will depend on a cen-tral fact in the financial services industry.“There will be some consolidation, but there will also be some spinoffs,”

says industry veteran Paul Bates, now acommissioner with the Ontario Securi-ties Commission (OSC). On the otherhand, he says: “I don’t think we’ll end upin a steady state where everyone’s con-

solidated. The nature of the industry isthat it breeds and trains entrepreneurs.”

But the nature of the industry is alsothat it breeds opportunities. “Jovian hada vision of a public company owningvarious interests in distribution chan-nels without controlling them and witheverybody having to earn their ownway,” says Rice Capital founder TomRice, now Jovian’s chair. “We had thepublic company, we were of the samemind and we had critical mass of dis-tribution and infrastructure that wasaccountable. They needed what we had;we needed what they had.”

Jovian’s different advisory arms arerecruiting, but advisors might encounterJovian in other ways: as a hedge andmutual fund manufacturer, as a whole-saler and as a back-office provider. Jovianhas interests spread across 11 differentfinancial services companies, all operat-ing with a high degree of independence.

Market BustAugust 1987 probably wasn’t the great-est time to start a career in the financialservices industry. Nor was 2001, whenthe sums fund companies paid to takeeach other over in previous years lookedoverly rich compared to the revenuesbeing generated in the bear market. Itprobably didn’t seem prudent to re-enter the business. Indeed, some veteranfund managers had left, including Tri-mark’s Bob Krembil and Jim O’Don-nell, formerly of Mackenzie Financial,and later of SVC O’Donnell.

However, as the adage goes, whenmarkets are bleakest, the opportunitiesare greatest.

Back in 1987, Armstrong was one ofthe five founders of Altamira’s foray


DLE

“WE HAD THE PUBLIC

COMPANY,WE WERE OF

THE SAME MIND AND

WE HAD CRITICAL MASS

OF DISTRIBUTION AND

INFRASTRUCTURE

THAT WAS ACCOUNTABLE.

THEY NEEDED WHAT

WE HAD;WE NEEDED

WHAT THEY HAD.”

—TOM RICE, CHAIR OF JOVIAN

into the mutual fund business. As themarket tanked in October that year,mainstream fund companies—Arm-strong mentions Trimark and Macken-zie—ducked for cover. Altamira rodeup the middle, becoming a dominantplayer in the early- to mid-1990s, withassets under management growing from$100 million to $14 billion at theirpeak, including pension fund assets.

Now Armstrong’s trying to come upthe middle again. He left Altamirabefore it was acquired by National Bankin 2002. He joined McFarlane Gordon,then a small retail brokerage founded byGordon Capital private client alumniDon McFarlane and Crawford Gordonin 2000, after its takeover by HSBC in 1999.

Until January 2003, McFarlane Gor-don was Jovian’s sole asset. Then came thepurchase of a high-net-worth asset man-ager, Felcom Management, followed bynearly a dozen acquisitions over a yearand a half later. Market conditions certainly played a part. “Bad markets gaveJovian some really good opportunities toacquire Rice Capital Management at agood price,” Armstrong remarks. “ButJovian isn’t buying assets simply to throwthem in a generic pot. We’re not an integrator. We’re not a consolidator. We

invest in good brands with good managers and provide synergies.”

It’s a model that some in the industrywould question—synergy isn’t the sameas building assets, but Armstrong is con-tent to build what he calls a “communityof interests.”Thanks to the great wavesof consolidation, “small players want toalign themselves with someone who’s nota big-league player,” he says.

He disavows “forced selling” rightfrom the start—he needs greater prod-uct distribution than a tied sales forcecan provide. “It’s key for us to keep thisopen architecture,” he says.

Jovian Capital now sits atop a slew ofcompanies. Next to McFarlane Gordonis Rice Financial, a primarily western-based mutual fund dealer and insurancemanaging general agency. To complementthat, there’s T.E. Financial, a fee-only advi-sory firm founded in 1972. Armstrongnotes that even though they are bothadvisory firms, they are very different.

“There’s no natural fit between T.E. Financial and Rice Financial,” hesays. “They have two different philoso-phies, two different client bases.” Nev-ertheless, he adds, “Rice has the insur-ance specialization that they coulddeliver to T.E. clients.”

Rice agrees. So far, the Jovian compa-nies are a collection of firms with differ-

ent areas of specialization. “They had theexpertise in the wealth management side,and the capital markets area where we hadno expertise,” Rice explains. “We hadexperience in financial services integra-tion, fixed term deposits, mutual fundsand insurance, and a large insurance ben-efits organization.”

On the manufacturing side, Joviannow has four hedge funds: Mountain-view, Northern Rivers, DeltaOne andPescara, along with a straight energyfund. Plus, there’s a mutual fund com-pany, Accumulus, with funds run byAltamira veteran Frances Connelly andhighly regarded institutional advisorRoss Healy, who has been called themutual fund industry’s “oldest rookie”after 20 years out of active manage-ment. The balanced fund has as its co-manager Mark Arthur, RBC GlobalInvestment Management’s former chiefinvestment officer.

Then there’s Felcom InvestmentManagement, a private-client advisorthat also provides advisory services toPescara, chaired by Arthur and FelcomData Services, which looks after back-office functions for 25 funds. Finally,there are two wholesaling firms, Gibral-tar Alternative Asset Consulting GroupInc. and Independent Hedge, both

Continued from page 21


with interests in alternative asset management. Gibraltar markets fundsowned by Jovian, while IndependentHedge also markets third-party funds.

There have also been changes atMcFarlane Gordon. With Brad Griffiths,co-founder of Griffiths McBurney, join-ing in 2003, McFarlane Gordon hasentered the underwriting market.

Interestingly, the hedge fund businessprovided the entry point for Jovian.

Hedge funds weren’t necessarily look-ing for capital, Armstrong recalls. Theyknew they could manage the capitalonce it came in. What they were look-ing for was distribution and more thanthat, the bane of every entrepreneur,back-office services: fund accounting,custodianship of assets, transfer agentswho could keep track of who owns andis owed what.

The first investment Armstrongmade was in Raj Lala, now president ofGibraltar. Just back from a stint in New York, Lala noted that whileMerrill Lynch brokers made a hedgefund allocation as a matter of coursewith their high-net-worth clients, inCanada advisors were behind the curve.“That gap was an opportunity,” herecalls. Together with Serge Simone, a prominent advisor who built a $150 million hedge fund book at RJSWealth Management, they formedPescara Partners, which launched a fundof funds with many of the same man-agers RJS had used.

Pescara Partners sought advice andmore from Jovian. Armstrong “evolvedinto a kind of mentor role,” says Lala.“He showed me how to run a success-ful asset manager.” Felcom Managementprovided the asset allocation advice,while Norshield Financial Group, aprominent alternative investment man-ager, supplied some of the tools forrisk-metrics.

But Armstrong is more than a men-tor. Healy, one of the founders of Scep-tre Investment Counsel, was convincedby Armstrong to come back to activemoney management. “He’s got a goodreputation,” says Healy. “I couldn’t



“YOU RUN THE FUND

THE WAY YOU WANT TO,

WE TAKE CARE OF

THE PERIPHERALS.”

Raj Lala

president, Gibraltar Alternative Asset

Investment Consulting,

Toronto

refuse when someone with a lot ofintegrity comes along.”

Healy runs the Accumulus TalismanFund, which itself is a reflection ofinnovation in the industry. Like a cou-ple of other funds, it can go to cash inpoor market conditions. Like someDynamic funds, it can also do limitedshort-selling. And finally, like two orthree other funds, it charges a perform-ance fee if it beats a benchmark. On theshorting, Healy says, “the regulatorswill be watching us like a hawk.”

Lately, Lala’s Gibraltar Consultinghas been promoting the Accumulusfunds. But it’s also the wholesaler forPescara Partners and Mountainview, aswell as a new hedge fund acquisition,DeltaOne. Jovian’s strategy, Lala notes,is to take ownership stakes in moneymanagers, while providing administra-tive and wholesaling services. It will alsoseed hedge funds. The idea, says Lala,is “you run the fund the way you wantto, we take care of the peripherals.”

Armstrong forsees building a stableof up to 15 hedge funds. “What webring to the table,” he says “is theadministrative capacity and the abilityto market the funds.”

But Jovian brings something else foroffshore investors who are increasingly

interested in Canadian hedge funds: thecapacity to perform due diligence. “A lot of players are looking at this asa way of playing in Canada withouthaving to do the due diligence on themanager,” says Armstrong. Jovian’s ownership stake in the managers “givesus good control of the process.”

Re-brandingJust as diversification is good practice inthe hedge fund industry, it’s also goodpractice in the advice business. “Ourmodel is more a Power Financial-type ofmodel, where you invest in a series ofgood brands,” says Armstrong. “We thinkit takes too much time and effort to con-solidate.” But having a hand in differentbusinesses can stabilize revenues for whatArmstrong intends to be a model finan-cial services company that also pays dividends to its shareholders.

The current environment probablynecessitates diversification, just as itputs a premium on expertise. Ricepoints to the toppling of the old fourpillars of the financial services industryas a catalyst. “We live in a state ofchange,” he notes. “Deregulation startedin 1986 and part of the process is theintegration of all the platforms for theconsumers. The independent advisorsmade a lot of people aware of the need

for diversification but the back-officesources and opportunities lie within afully integrated structure.”

For T.E. Financial, it was a story witha slightly different twist. The firm wasengaging in a form of succession plan-ning. “We were looking for a suitor thatwould leave our basic principles intactand I believe that we did that with Jov-ian,” says T.E. Financial president KostasAndrikopoulos. “It is definitely what thedoctor called for. They’ve been very help-ful in terms of the business acumen theybring to the table, especially with Arm-strong and his experience and with thesister companies. It’s a joy to work withthese people.”

What else does Jovian bring? “We’reneither brokerage nor exclusively finan-cial planning, in the sense that we dooffer investment advice to our clients,which most boutiques do not,” saysAndrikopoulos. “We try to standardizethings across the companies. There aresynergies there in terms of a lot of theIT departments. We don’t need to have12 or 14 [IT employees]. We can haveone individual who co-ordinates thewhole team. The same thing can be said about leads.” There’s also thepossibility of referrals.

For Rice Financial, the combinationwith T.E. Financial and McFarlane


Gordon makes for a better customerexperience. “All of them offer certainexpertise to the consumer and they’ll stayapart doing that,” says Rice. “But we’ll bestructured to provide integrated relation-ships to those consumers who need it andwant it, and to advisors who need andwant it. Plus, on the asset managementside, there are a lot of good qualitymoney managers we’re discovering whoare looking at accountable distribution.”

Does Jovian point to one possiblefuture for the industry? Time will tell. AsBates notes, it’s cheaper to start a firmthan it used to be. “What you’re findingis that this has spawned the growth of alot of niche-oriented businesses and thoseniches could be focused on a particulardemographic; they could be focused ona particular demographic area or anyother segmentation that you might wantto dream up.”

Certainly, the economics are there,and Bates adds that a firm can be quitesuccessful without having a giant clientbase. That leaves the question of expert-ise. Noting Armstrong’s leadership atAltamira in its heyday, Bates says: “Hebrings to the team at Jovian his obviousknowledge of business management butalso a very strong network, particularlyin the Toronto community.”

Armstrong says he didn’t envisage hewould invest in something as “big asthis” so quickly. Rather, he expected toreturn to the business after Altamiraand remain active on advisory panels atthe OSC. Now, Armstrong says he’s “infor a penny, in for a pound”—anotherindicator that Jovian’s model has afuture.

Scot Blythe is investments editor of Advisor’sEdge. [email protected]


TRAVEL

Insurance


ADVISORYTerrorism, now part of the global collective consciousness,

plays a role in many decisions, such as cancelling a businesstrip. For the Canadian life insurance industry, it can even meandeclining life insurance applications.

Underwriters at both the insurance and reinsurance com-panies now view applications with a more critical eye. Clientapplications that state overseas travel intentions to places suchas Israel, Afghanistan, Iraq or China, will go through extrascrutiny. Tense political situations scare insurance companies,as do health crises such as the severe acute respiratory syn-drome (SARS) breakout in the Far East, says Mike McArdle,director of advanced underwriting for Maritime Life inToronto.

They also scare advisors, who often find themselves caughtin the middle. Advisors are responsible to both clients seekingadequate insurance coverage and to the insurance companyexpecting a thorough and truthful application. If an advisorknows a client habitually travels to a certain country, he is obli-gated to write that on the application. That creates a dilemmasince the travel questions are not standard across companies andadvisors are left to make their own interpretations, says DavidWm. Brown, a Toronto-based insurance advisor with Al G. Brown & Associates. “Some ask for the length of the trip

Amidst current globalvolatility, clients whoapply for life insurancemay need to reconsidertheir travel destinations.

By Sheila Avari

hree days after militants bombedMadrid’s railways in March, executivesfrom a major financial services firm satin their downtown Toronto officesreconsidering their company’s plan togo to Spain. Fifty of their top insur-ance advisors were scheduled to fly toMadrid at the end of April for a con-ference. News reports warned moreterrorist attacks were likely so theydecided travelling overseas wasn’t worththe risk. They subsequently cancelledthe trip.

T Illustration by Craig Terlson

and this can affect whether the policy isa decline or an accept.”

Over the past year and a half, 12 ofBrown’s clients have been denied lifeinsurance because of their travel inten-tions, including a healthy, 45-year-oldclient who was planning a one-weekvisit to Israel to see his son.

Underwriters often rely on newsreports when determining whether anapplication is accepted or declined. Thegovernment travel advisories they consultalso substantiate their concerns. OneCanandian advisory states: “Canadiansshould carefully consider a decision totravel to Israel.” An advisory from theUnited States, characteristically harsher,says: “The Department of State warnsU.S. citizens to defer all travel to Israeldue to safety and security concerns.”Other advisories to world hotspots

include phrases like “threatened revenge,”“extremely volatile,” or “kidnap andassassinate.”

“I look at travel advisories and cur-rent situations,” explains Nazir Damji,chief underwriter for Sun Life Finan-cial in Waterloo, Ont. “If we happen toget a lot of business from clients trav-elling to the same area I will send outan official memo to advisors saying thatwe will not accept these applicationsuntil further notice. Right now, forexample, we will not accept any applications from clients travelling toMiddle Eastern countries and someAfrican countries.”

The natural rebuttal for an advisor isto ask insurers for a travel exclusion inthe policy. Worded correctly, the exclu-sions could suggest that if a claimoccurs in a certain country, the policywould be considered void. Bounce that

suggestion off some of the top under-writers of the biggest firms and itbounces right back. “We don’t offerexclusions for clients travelling to certain high-risk areas, says Damji.“What happens if a client is shot in theMiddle East but dies in Canada? It canbe a real legal nightmare.”

The law also worries McArdle. “Wedon’t feel comfortable that an exclusionwould hold up in court,” he says.“What happens if a client has a heartattack, something that is irrelevant tothe war or health situation in the coun-try, do we still cover him?” Most insur-ance companies’ systems hard code theirbasic rates and add to premiums butthere is no way to lower a premium toaccommodate travel, he explains.McArdle doesn’t feel it is fair to chargea client the full premium if there is atravel exclusion (and therefore decreased


benefits) on the policy. “If you aregoing to exclude death in a high-riskcountry you probably shouldn’t becharging an extra premium. On a one-off basis, we’re just not going there.”

The U.S. isn’t going there, either. In April, a Los Angeles man sued 14major insurance companies because hewas declined life insurance after he vis-ited Israel. He wants to stop what hefeels is the unfair practice of refusinglife insurance to people travelling toIsrael. Among those named in the law-suit is Manulife Financial’s newlymerged division, John Hancock VariableLife Insurance Corp.

At least one U.S. firm, MassMutualFinancial Group, has taken a differentstance. In March, the Springfield, Mass.-based financial services companyannounced it would provide insurancecoverage for people travelling to Israel.

“This is a marketplace that needs to beserved,” says Robert Haran, vice-presi-dent and chief underwriter of Mass-Mutual. “We believe the industry is act-ing with a knee-jerk reaction to thesensationalizing of the news.” MassMu-tual is offering this coverage by retainingall of the risk instead of farming it outto reinsurers.

Citing U.S. census bureau statistics,Haran notes Israel may not be as high-risk as some insurance companies think.“Of all the countries currently on theU.S. State Department travel warninglist, Israel was the only country that hada life expectancy greater than the U.S.,”he explains. “Also, Israel’s rate of deathdue to intentional injury is less than theU.S. We used that information and cau-tiously dipped our toe into this market.”

MassMutual does underwrite onCanadian citizens, provided the applica-

tion is written by an insurance advisorlicensed in the U.S. and the clients meetspecific residency and tax requirements.Compcorp, the consumer protectiongroup for the insurance industry, con-firmed MassMutual is a member—so ifthe company goes under, policies wouldstill be honoured.

Going to the U.S. to get coverage forclients is not always practical, so advi-sors often suggest clients at least takeout travel insurance to tie clients over.While not all travel insurance is issuedwith medical underwriting, if someoneis travelling to a high-risk destination,the policy can be underwritten toaccommodate or reflect the potentialrisk. “If there is a travel advisory, clientscould get policies but even those areissued on a case-by-case basis,” explainsAndrew Munroe, manager of business


development for Trent Health InsuranceServices Corp. in Toronto.

For his part, David Wm. Brown asksclients to consider taking out an acci-dental death policy while they are away.He admits it isn’t a perfect solution, espe-cially for clients who travel often to thesame high-risk country, but he says atleast they’ll have peace of mind that theyhave some coverage.

Another solution is to look beyondNorth American companies for cover-age. Ken Hunter of Hunter McCorquo-dale Inc. in Toronto takes client casesrejected by what he calls the “traditionalroutes” and uses overseas insurance mar-kets like London, England-based Ster-ling Life to find coverage for clients trav-elling to high-risk countries. His officesees several inquiries a day from advisorswhose clients were declined for life and

disability insurance through Canadiancarriers because of their travel plans.

“Insurance companies can be a littlemore creative in offering at least limitedcoverage,” Hunter says. “I hope they willevolve but I don’t think they will because,with consolidation, there are fewer bigplayers. They are less interested in theniche areas. They favour preferred andstandard business only. We will see moreniche companies filling the gap.”

When clients are declined, all anadvisor can do is try again. “I just sug-gest we reapply when my clients returnfrom their trips,” Brown says. “But nowif I know someone is travelling, I won’teven put them through the applicationprocess because I know there will be adecline.”

Sheila Avari is assistant editor of Advisor’sEdge. [email protected]

Find yourself doing more—or want-ing to do more—insurance-relatedwork in your practice? Advisor.ca is now featuring an all-new onlinepackage of articles and tools to ensure your insurance expertise.This special June package includes:

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CHECKCOMPLIANCE

It’s never too late to employ defensive strategies to better serve your clients. By Ellen J. Bessner

TAKE YOUR TIME

All too often, advisors speak toeach of their clients just once a year—during RRSP season. Constrained bytime, they collect the money and usu-ally end the conversation as quickly aspossible so they can move to the nextclient name on the list. Communica-tion lasting all of five minutes doesn’tpermit advisors to collect the infor-mation necessary to protect them-selves and their practice so when itcomes to clients issuing complaints,advisors aren’t always in the best posi-tion to defend themselves.

Sure, they may support theiractions by saying, “I met with theclient last year when he signed off onthe documents. See, I even updatedthe know-your-client (KYC) form.”Or they may confirm, “Yes, that is myassistant’s handwriting but I tell herwhat to ask and she records the client’sfeedback. I’m always available if anyquestions arise.”

But who actually completed the doc-umentation and the new KYC—theadvisor or the assistant? Who is givingthe advice and making the commission?Whose name appears on the state-ments as the advisor? More important,will the advisor be in a position to laterprove he acted conscientiously?

There is no time like the present tostart practising defensively. I’m suresome advisors reading this article areasking themselves why I didn’t publishthis before RRSP season. The simple

answer is advisors wouldn’t have hadtime to read this article if it came outbefore RRSP season! However, nowthat it’s behind us, it’s actually the per-fect time for advisors to catch up ontheir reading material and improvetheir practice with defense and com-pliance strategies that will ultimatelyserve clients better.

Yes, when you collected the RRSPcontributions you made more moneyin the short term, but advisors want-ing to improve client relations need tobuild their relationships and theirbusinesses over the long run. A five-minute, annual conversation isn’t suf-ficient to allow advisors to do this. Foradvisors to answer questions andgather information reminding clientsthey care about their needs and areacting responsibly and professionally,they must go back and do it properly.It’s not too late.

The following steps will help advi-sors implement defensive practices.❶Examine your client list and preparea schedule for the next several months.Let your assistant help you with thisstep. Choose the higher-risk clientsfirst: leveraged clients, older clientsand clients with whom you have notmet for longer than 10 minutes forseveral years.❷Call each of your clients and tell them you want to take the timenecessary to catch up with them nowthat RRSP season is over.

❸Meet with each client to gatherinformation while following the five“Cs” of an effective paper trail (see“Preparing Your Defence,” Advisor’sEdge, March 2004, page 29).❹Put the client’s long-range plantogether and discuss the outcome withthem. Have the client initial the planonce it is complete. ❺Ensure the existing portfolio meetsthe client’s newly stated objectives andadjust it if necessary (after getting thenecessary instructions, of course).

One year will probably have passedby the time you get to the bottom ofyour client list. Now you’re in a muchbetter position for next RRSP seasonas the funds deposited will be investedin accordance with a comprehensiveplan based on client information andproper instructions.

This isn’t something you can do in five minutes. Take your time, don’t be discouraged and fix yourmistakes before the client issues acomplaint.

Ellen J. Bessner is a lawyer at Gowling,Lafleur, Henderson. She practises in the areaof brokers’ liability and offers compliance train-ing to brokerage firms. The above is intendedfor a general audience and should not be con-sidered legal advice. “Compliance Check”appears every other issue.


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INSIGHTSINSURANCE

A clearer Income Tax Act would help insurance advisors deal withCI and LTC insurance complexities. By David Wm. Brown

REQUIRED READING

I want to extend a hearty con-gratulations to a few colleagues in theCanadian insurance world: threecheers for Ron Sanderson of theCanadian Life and Health InsuranceAssociation (CLHIA), Ted Ballantyneof the Conference for Advanced LifeUnderwriters (CALU), and theirteams, for their 50-page submissionto the Department of Finance andCRA in March. Entitled “Analysisand Discussion Regarding the Taxa-

tion of Critical Illness and Long-Term Care Insurance in Canada,” thisis required reading for insurance advi-sors as it clearly reviews the products,discusses the issues and presents solu-tions from the industry’s viewpoint(which at times has been inconsistentwith the Department of Finance).

The crux of the document is thatinterest rate fluctuations, economictrends, demographic shifts and medicalscience advances are leading to new andinnovative products, such as critical ill-ness (CI) and long-term care (LTC)insurance—products the Income TaxAct has yet to define. The paper is asking the government to confirm theindustry’s interpretation of CI and LTCproducts and then explain the tax treat-ment of their premiums and claims.

The federal government is beingasked to confirm that CI and LTC ben-efits are not taxable and that the refundof premium on death does not alter the(non) taxability of the benefit. Thiscould affect how advisors position theseproducts for their clients. The paperalso asks for clarification about the taxtreatment of life insurance purchasedwith CI and LTC riders.

The response from the Departmentof Finance and CRA is critical foradvisors because clients rely on theirability to interpret tax ramificationsof products recommended to themand as such they are in an uncomfort-able situation. According to 2004

reports from LIMRA International,which conducts research on the insur-ance industry, CI and LTC insurancesales in Canada are booming. New CIsales in 2003 generated approximately$71 million of annualized premiums,a growth of 34% over 2002. In 2003,new LTC insurance sales had grown74% over the previous year and hada premium base of $27.1 million.

CLHIA and CALU’s submission tothe government suggests there is aneed for clarity, simplicity and con-sistency of tax treatment. These arelofty goals especially given the currentcomplexity and confusing status ofour tax legislation. It also suggests anychanges be introduced at the begin-ning of a year, with sufficient leadtime for the industry to address anyrevisions necessary in product design,as well as time to digest the informa-tion and train advisors and their staff.Finally, any new changes should notdisadvantage clients who have alreadypurchased the product.

Advisors should welcome this well-intended and important initiative of CLHIA and CALU. I hope the answers from CRA are deliveredquickly and on a timely basis.

David Wm. Brown, CFP, CLU, CH.F.C.,RHU, is a member of the MDRT. He is apartner at Al G. Brown & Associates inToronto. “Insurance Insights” appears everyother issue.

WEALTHTRUE

The high net worth are scooping up principal-protected notes to preserve their wealth. By Thane Stenner

PROTECTION PLUS

Principal- protected notes (PPNs)have been around in one form oranother for some time. Currently, how-ever, they are enjoying a renaissance asfinancial institutions are becomingincreasingly aware of the distinct needsof the high-net-worth (HNW) popu-lation and as HNW individualsincreasingly understand the need toprotect their wealth.

The idea behind PPNs is simple:They allow investors to participate instock market gains while limitingdownside risk by guaranteeing princi-pal or a portion of it upon maturity.In a typical PPN, performance islinked to the performance of a basketof other investments—a portfolio ofblue-chip stocks, a group of marketindices or a collection of actively man-aged mutual funds—and is paid outwith principal on the note’s maturitydate. PPNs can be “custom-built” ina variety of ways, or they can bebought “off the shelf ” from a num-ber of fund companies and otherinstitutions.

Either way, these products are anexcellent choice for the HNW port-folio. Clients who have acquired sig-nificant wealth need capital protectionmore than capital growth. This is acore principle of the successfulHNW practice, and a critical idea toget across to your HNW clients.

PPNs are designed to balancegrowth and security, making them a

compelling investment alternative totraditional stocks, bonds and cash—so much so that I’d be surprised ifthey didn’t become the investment ofchoice for HNW individuals.

Choosing the Right PPNOff-the-shelf PPNs come in allshapes and sizes, from aggressive toconservative. Some offer completeprincipal protection. Others offergreater upside potential but less prin-cipal protection. Most PPNs hedgeout currency risk but some do not.Some PPNs focus on North Ameri-can equities while others are global.Choosing the right one is largely amatter of matching the risk profile ofthe client to the profile of the PPN’sreference assets.

Customized PPNs typically havehigh investment minimums ($5 mil-lion US is common). When buildinga customized PPN, my team analyzesthe client’s personal situation. Then weconsult different sources for primestock picks and allocation recommen-dations. We’ll even talk to a few topmoney managers to get their opinions.We then match these recommenda-tions with our own and submit a proposal to the structured productsgroup of our firm, and they willreview it from there.

In our practice we prefer to buildcustomized PPNs. Sure, it meansmore homework and greater due

diligence, but the added flexibilitymakes up for that. We’ve also noticedthat HNW clients like having a port-folio created exclusively for them.

If the client can’t meet the minimuminvestment requirement for a cus-tomized PPN, or if your back officedoesn’t have a lot of experience creatingthem, there’s no reason why you should-n’t choose an off-the-shelf product.

A Detailed ExampleAn example of a real-life PPN willshow you how powerful these prod-ucts can be. CIBC issued a PPN calledthe Global Blue Chip Pearl NotesSeries 1 last year. This note has a five-year maturity and a $5,000 minimuminvestment. Performance is tied to aportfolio of 10 big-name interna-tional stocks from a variety of differ-ent industries. Every six months(measured from the issue date), theperformance of the top stock islocked in. That stock is then removedfrom the portfolio. Upon maturity,gains are calculated by taking the average of these locked-in returns andare paid as interest along with theprincipal.

For the client, this structure offersa number of attractive benefits. Firstand foremost is peace of mind: Aprincipal guarantee coupled with thelock-in feature means clients don’thave to worry about high-flying stocks



crashing back to earth. Diversificationis another benefit. By holding stocks ina variety of industries, from a variety of

markets, clients don’t have to guesswhich industry or market will outper-form. Tax flexibility is another plus. Ifthe note is held to maturity, the gains

are paid as interest and taxed at theclient’s marginal rate. If the note is soldprior to maturity, the generally acceptedview is that the gains would be consid-ered capital gains for tax purposes.

The chart on the left shows the dis-tribution of historical returns thatinvestors would have enjoyed forrolling five-year periods maturing atmonth-end between August 29, 1997and January 31, 2003.

Of course, past performance is noguarantee of future results. That said,a quick look at the chart shows youhow powerful a PPN can be. At notime would these annual returns havebeen lower than 4.5%. This can be animmensely attractive investment foryour HNW clients.

0%3.0%

13.6%

33.3%

25.8%22.7%

1.5%

< 4.55% < 4.55% to 7% 7% to 10% 10% to 13% 13% to 16% 16% to 19% > 19%

Fre

quen

cy %

Annually Compounded Rates of Return

0

5

10

15

20

25

30

35

Distribution of Historical Overall ReturnsGlobal Blue Chip Pearl Deposit Notes, Series 1


WEALTHTRUE

Here are some suggestions for introducing PPNs to your clients: ❶ Sell security.HNW individuals are more resistantto sales pitches than other investors, sowhen you discuss PPNs, don’t sell theproduct, sell the security the productprovides. If the client can see the consistency between the product andyour “security first” attitude, then you’llbe more persuasive. ❷ Keep it simple.Most clients won’t enjoy discussingthe mechanics of PPNs, so clearlyfocus on the benefits of the product(security, flexibility, peace of mind,etc.) and relate them back to theclient’s family and life goals. This willbe more persuasive than technical talk.

❸ Present back-tested data and visuals.Back-tested performance data can makePPNs more compelling. Have yourmarketing assistant create graphs,charts or other visual aids you can present during the discussion. Makethese available as take-away handouts—a persuasive strategy to remind clientswhy you’re recommending PPNs.

More than a ProductPPNs can be an important tool in your effort to secure the wealth of your HNW clients. However, they are more than a product; they are the tangible representation of an important principle behind the HNW practice.

By introducing products that promote a balance of security andgrowth, you are positioning yourselfas a steward of client wealth. Clientswill see you as a professional who’smore concerned with securing theirquality of life than securing a commission cheque. And that’s goodfor business.

Thane Stenner, CIM, FCSI, is a first vice-president and

investment advisor with The Stenner Group™ of CIBC

Wood Gundy. The views of the author do not necessarily

reflect those of CIBC World Markets Inc. This article is

for information only. CIBC Wood Gundy is a division

of CIBC World Markets Inc., a subsidiary of Canadian

Imperial Bank of Commerce and Member CIPF.

[email protected]

“True Wealth” appears every other issue.

FRONTLINESMARKETING

Thanking clients is a creative process paramount to preserving the flow of future referrals. By Dan Richards

REFERRAL WRAP-UP

As I discussed in the past threecolumns, a client’s personality makeupcan sometimes make it impossible toinduce referrals no matter how gooda job you do. Getting that initial refer-ral takes a lot of hard work on theadvisor’s part, and for most clients,overcoming the natural apprehensionabout introducing friends and familyto their advisors is a significant accom-plishment.

The good news is the first referralreally is the hardest. Once you’ve bro-ken through that introduction, otherswill follow more readily provided youdo two things.

First, ensure you have a process inplace from the get-go, so that everynew client is impressed by your pro-fessionalism, diligence and commit-ment to their needs. This is doublyimportant for clients who are referredto you.

Second, you need to ensure thatclients who have provided a referralfeel genuinely appreciated for theirefforts. Once a client refers you once,this is the single most important thingyou can do to get future referrals. Saythanks right from the start by follow-ing the initial introduction with a simple phone call or note (or both) ofthanks to the referring client.

Another opportunity to thank aclient for a referral can occur when thereferred client comes on board. Thereare many ways to do this. A few exam-

ples include extending movie passes, abox of chocolates or even a donationto the client’s favourite charity. Oneadvisor sends clients a giant chocolatechip cookie saying, “A million caloriesfor your confidence.”

Still, another advisor sends a gifteven if the prospect declines to sign on!The accompanying note says, “Iwanted to let you know that after twomeetings Bill and Joanne have decided,for the moment, to stay with their exist-ing advisor. We have agreed that I willstay in touch with them. In the mean-time, I want to sincerely thank you foryour confidence in introducing us andhope you enjoy these cookies as a smalltoken of my appreciation.”

You should also have a variety ofways to thank clients since there’salways the risk they might question thespontaneity of your gesture, especiallyif it’s the third time you’ve sent a giftbasket or flowers. But you can alsosporadically seek fitting opportunitiesto remind them of your appreciation.For example, every December, oneadvisor drops by with a special gift towish holiday greetings to clients whohave provided referrals that year. Oneyear, for example, it was a centrepiecefor a table. He simply thanks the clientfor the opportunity to work togetherover the past year and for their confi-dence in making a referral.

In an even more ambitious exam-ple, one Toronto-based advisor hosts

an annual trip to the Shaw Festival inthe Niagara region for a half-dozencouples who have provided largereferrals in the past year. He providestheatre tickets, hotel accommoda-tions and breakfast the next morningwhere he thanks attendees, making itclear the reason they are there is to bethanked for referring their friendsand family.

Although the cost is significant—approaching $2,500—the impact hasbeen spectacular. There has been animmediate spike in referrals fromthose clients, and it’s not because theyfeel coerced or guilty, but becausethey are genuinely feeling more positive toward their advisor.

There is no one way to thankclients for providing referrals. The keyto acknowledging clients—just like itis when asking for and accepting refer-rals—is to find an approach thatworks for you and to apply it regularly.Only by putting consistent processesin place will you maximize your flowof client referrals.

Dan Richards is author of GettingClients, Keeping Clients: The Essen-tial Guide for Tomorrow’s FinancialAdvisor and is based in [email protected]“Marketing Frontlines” appears every month.


More online


By Andrew RickardIl

lust

rati

on b

y R

uss

Will

ms

QUIET, PLEASELike a lot of people, Isabel Barros isn’t

pleased with the service she received

from her bank. It’s not that the serv-

ice fees were too high or the interest

too low, however. Her problem was the

teller was too loud.

She told the Chilean newspaper LasUltimas Noticias that when she went

to make a significant withdrawal from

her account, the teller who returned

with the money couldn’t find her.

Instead of making a discreet inquiry,

he shouted, “Who’s the lady for the

10.5 million pesos?” (approximately

CDN $20,000).

“I don’t know why I was so stupid

to answer,” said Barros. Surprise,

surprise, she was robbed by two thieves

shortly after leaving the branch.

She’s suing the bank for her loss.

HELP ME, I’M RICHLook deep inside the 2004 federal

budget documents and you’ll find

a short reference to the possible

creation of tax prepaid savings plans

(TPSPs). Apparently the Liberals are

still thinking about creating a savings

plan most Canadians don’t need.

While the investor would not get a

tax deduction for contributing (as they

do with RRSPs),TPSPs would allow

investors’ earnings to accumulate tax-

free and only be taxed at the time of

withdrawal. “The Department of

Finance is reviewing the views brought

forward and is continuing to examine

and assess TPSPs and other

approaches to improve the tax treat-

ment of savings.” Huh?

According to Statistics Canada, in

2001, 45% of family units didn’t even

have an RRSP. Of those who did,

the median account size was just

$20,000.Why do we need a new plan

for the handful of wealthy people

who’ve maximized their RRSPs?

LOTS OF LIFEWhat if every Canadian bought a life

insurance policy last year? That’s

about the amount of business the Life

Insurance Corporation (LIC) of India

wrote during their 2003-2004 busi-

ness year.They added about 30 million

new customers, growing by more than

11%.

The LIC was created in 1956 when

the Indian government nationalised

the country’s life insurance industry to

raise funds for government projects

such as co-operative housing, road

building and power generation.

DEAD LOSSA cemetery owner’s failure to imple-

ment a business succession plan has

got the provincial government of Nova

Scotia into the burial business.

According to the Halifax Chronicle-Herald, the owner of the Forest Haven

Cemetery in Cape Breton died in 2003.

In the absence of someone to run the

cemetery, the bodies are literally piling

up. “From what I’ve been told (the

caskets) are on the floor of a tool

shed,” said Dave Wilson, member of

the province’s legislative assembly.

The Tory government has decided it’s

time to introduce legislation that will

allow the province to step in and see

that the remains are properly buried.

END QUOTE: XXX XXXXXX XXXXXXXXX

“Money, like vodka, turns a person into an eccentric.”

ANTON CHEKHOV (1860–1904), RUSSIAN PLAYWRIGHT

THIS’N’THAT


canada’s magazine for the financial professional • …to a spate of declined life insurance...

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