ADVISOR S CANADA’S MAGAZINE FOR THE …...DORIS: John’s family has been a longtime client of the firm. John became my client in 1991. He has a huge book distri-bution company which

day trippers

CANADA’S MAGAZINE FOR THE FINANCIAL PROFESSIONAL • JUNE 1999

ADVISOR’SD G EE

The highs and lows of online investing

PLUS

Demutualization:opportunity knocks

The psychologyof estate planning

Nick Murray:own the problem,own the solution

CONJune 1999

7 INSIDE EDGEAdvisor’s Edge cele-brates its one-yearanniversary.

8 LETTERSDistinctions betweenplanners and advisors,and a correction.

11 ONE ON ONEDoris Chan has helpedJohn Allen fit investinginto his busy lifestyle.

KNOW YOUR CLIENT

14 Deconstructing ClientsEight archetypes helpyou analyse your clients.

17 MONEY TALKS with Deanne GageUnlike mutual funds,nobody likes to discusslife insurance. If mutualcompanies succeed ingoing public, it mayspark a renewed interestin life insurance.

PORTFOLIO

34 Mortal WeaknessAre fears of death standing in the way ofproviding a good estateplan for your clients? Here’s how to breakthrough the emotion andget down to business.

39 Tax Break with Gena KatzIf your clients are play-ing the complex game of options, make surethey are aware of the tax consequences.

40 Mutual Watch withScott MackenzieAttribution analysisallows clients to see why a fund performs the way it does.

41 Estate Planner withSandra FosterYour clients may notunderstand the impact oftheir wills. By mappingout their assets, you canensure these documentsreflect their wishes.

BUILD YOUR BUSINESS

42 Seeking Outside HelpOutsourcers can providecheaper service. Butbefore signing an agree-ment, consider the potential legal issues.

44 My EdgeFocus on long-termclients and watch the referrals come,says Will Tiviluk.

47 The Quest forExcellence with NickMurrayPersonal responsibilityrests on four pillars.Can you adapt to them?

49 Interest with LisaMachadoThe Euro is carving out a comfortable niche foritself in world markets.

50 Cold CallGarth Turner on politics,debt and the irrelevanceof clothes.

Departments

TENTSVolume 2, Number 6

34

20 DAY TRIPPERSToday’s investor is plugged into the marketslike never before. And along with the growing popularity of online trading is an increasingly common breed of client:the pathological gambler. By Peter Boisseau

Features

“I know professors in the hard sciences whoare doing their own puts and calls. It’s the mania

of the 1990s. Your average consumer has nodamn business playing that game.”

—Lindsay Meredith, Simon Fraser University (right)

24

DEATH ANXIETY

Photography by Joseph Marranca

JUNE 19995

11DISCRETIONARY POWERS

bout the same time wewere launching the publi-cation one year ago, anindustry skeptic express-

ed concern over our ability to filla monthly magazine with qualitycontent.

Of course, what she was really say-ing was: “I believe you’re going to fail.”(Note to industry skeptic: As HenryFord said, if you think you can or youcan’t, you’re always going to be right.)

Frankly, my biggest challenge eachmonth is figuring out what not to run.Seismic quakes continue to rock theCanadian financial services industryright to the core—all of it potentialfodder for the magazine. But I like tothink of our role as being akin to acamera lens; we look at the big picture,then tighten the focus to frame yourpart, helping clients. You seem to likethe view because here we are 12 monthslater, alive and strong.

But more important than all ofthat—there you are.

Our readers are our raison d’être.Without you there would be nocolumns, no profiles of peers in yourindustry, no feature or cover stories.Without you there would be noAdvisor’s Edge.

On a personal note, I would like totell each of you how grateful I am foryour support. I thank you for takingthe time to read the magazine and foryour letters, comments, e-mails andtelephone calls. Over the past year,you’ve generously offered story ideas,encouragement, suggestions on how to

improve the magazine, and that mostwonderful gift of all, the inspiration tokeep on getting better. Nothing givesus a greater thrill than to hear fromour readers.

I was recently asked what I haveplanned for the magazine in the next12 months. While I could fill thisentire page with the details of excitingissues and special projects we’re plan-ning to implement in the monthsahead, I prefer to simply say this. Ipromise we won’t get arrogant. Ipromise we won’t stop listening. AndI promise (cross my heart, hope to die)that we’re going to keep on gettingbetter for you in the months and yearsto come.

A year ago, I ended the very first edi-torial of the very first issue of Advisor’sEdge with the following:

“Once created, a magazine takes ona life of its own. And as all living,breathing entities are wont to do, thismagazine will grow and evolve. Soplease don’t be shy about telling uswhat you think, because this magazineis for you.”

The same thing can be said today.

CAROLINE [email protected]

It’s the big “one”

ASeismic quakes rock the industry and AE turns one.

Over the past year,

you’ve generously

offered story ideas,

suggestions on

how to improve

the magazine,

encouragement and

that most wonderful

gift of all, the

inspiration to keep

on getting better.

“

”

INSIDEEDGE

JUNE 19997

Photography by Joseph M

arranca

ADVISOR’S EDGE8

“STROMBERG II: THE INDUSTRY RESPONDS”March 1999, page 37

Ron Graham, president ofthe Canadian Association ofFinancial Planners, made thedistinction between financialadvisors and financial plan-ners. He said “financialadvice invariably involvesproduct sales” and “a finan-cial advisor will sell yousome mutual funds.”

I don’t believe the publicsees any real difference between the financial advisor andfinancial planner. Both financial planners and financial advi-sors—when doing financial planning for a client—shouldfollow the six-step financial planning process, regardless ofwhether the client purchases any financial products throughthe planner. As Ron points out, planning is a process—not

a product. Professional financial advisors and financial plan-ners both follow this process.ROBERT J. COWAN

CHAIR, CANADIAN ASSOCIATION OF INSURANCE AND

FINANCIAL ADVISORS (CAIFA)

“ONE ON ONE”March 1999, page 15

In the March issue’s One on One interview, you state thatSteve Ferguson has “a BA in Commerce from McMasterUniversity in Waterloo.”

As someone who received his MBA attending McMaster’sHamilton campus, it is news to me that McMaster now hasa Waterloo campus. K.W. GOETZ

CIBC WOOD GUNDY, OTTAWA

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JUNE 1999 Volume 2, Number 6

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Maclean Hunter Publishing LimitedBrian Segal President and CEO

Terry L. Malden Executive Vice PresidentJim O. Hall President, Medical PublishingJohn Milne Executive Publisher

JUNE 199911

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ONEONONEInterview by Lisa Machado

After a stint as a research assistant with Nesbitt Burnsin Toronto in the late 1980s, Doris Chan headed toWall Street in New York to work in institutional equitysales for RBC Dominion Securities. After noticing agrowing client interest in discretionary portfolio man-agement, Chan joined Canada Trust in Toronto.

With about 100 clients and assets ranging from$500,000 to $5 million, the 37-year-old director ofinvestment counselling at CT Private Investment

Counsel (an affiliate of Canada Trust) also heads aninvestment network to teach women about managingtheir assets.

She has managed John Allen’s “seven-figure” port-folio on a discretionary basis since 1991. Allen, 67 years old, is the president and owner of ThomasAllen & Son, Ltd. in Markham, Ont., a national bookdistribution company started by his grandfather in 1916.

Continued on page 13

Running the family book distribution business doesn’t

leave much time for investing, says John Allen. His advisor,

Doris Chan,has the perfect solution—a discretionary account.

DORIS: John’s family has been a longtime client of the firm.John became my client in 1991. He has a huge book distri-bution company which is very successful. If you go into abookstore and look at the top 10 sellers, he usually has aboutfive of them.

My relationship with John is not at all like a broker rela-tionship. Since it’s discretionary, my job is to use our researchand resources to do the best for the client. The client’s job isto articulate what [his] needs are. When I met John, his focusfor his portfolio was growth and preservation of capital. Myfocus is managing that.

At an initial client meeting, we listen to their story. We askthem what their goals are, analyse their risk tolerance and puttogether a strategy to meet these needs. Once the client iscomfortable with the portfolio strategy, we have full discre-tion to handle the portfolio. So, on a day-to-day basis, wemake adjustments in keeping with the client’s objectives.

The number of times I speak with John on the phone isnot important because of the type of relationship we have.More important than the frequency of contact is the pre-sentation of portfolio performance and a strategy update. It’snot the kind of relationship in which we are on the phoneevery day. If that’s what he wanted, he wouldn’t have hiredme. Let’s say if he said to me: ‘I want to put my grandchil-dren through university,’ I’d have to provide for that.

But I do give him market updates on a week-by-week basis.As a rule, we meet with clients quarterly for a portfolio per-formance update and to discuss the existing strategy and thestrategy going forward. However, John and I probably meetmore often than that.

I also consult John on areas such as tax and estate plan-ning. For example, John has given me permission to speakwith his accountant to ensure his portfolio and tax strategyare working together well.

I’m not selling to John every day. He’s sold already. That’swhy trust is so important. He’s already agreed to having hisportfolio managed and he fully trusts that we understand his needs, his business and his family. The only thing

we are selling to him is ongoing service. As long as we’re performing well for him and meeting his needs, there’s no reason he wouldn’t want to stay with us.

Our service is very much about accountability. As a port-folio manager of a discretionary account, I have to be fullyaccountable for the performance of the portfolio.

John is a very friendly and open type of person. He andhis wife even attended my wedding last year. John is also goodfriends with my husband. In fact, they’ve joined a private fly-fishing club together.

Today, people are very busy with their lives. They don’thave time to absorb and analyse all the information outthere to pick the best stocks and bonds for their portfolio.Not only to pick them, but to monitor performance.Wouldn’t you rather have a whole operation whose sole pur-pose is to look after your money than having to do it allon your own?

JOHN: My family has been dealing with Canada Trust for60, 70 years and I’ve been a client since I was about 30 yearsold. I’ve gone through a few people, and Doris is who I recommend. She does a good job.

If I want to know something about a stock, I call Dorisrather than calling a stockbroker. She has people who cando the research on anything I’m interested in and come backwith an opinion on whether or not to invest. I’m not play-ing around with speculative stuff.

I don’t read the financial pages of the newspaper on a day-in day-out basis. It’s not that I’m too busy, but Doris does itfor me. That’s why I’m with her. If I knew it all, I could doit myself.

If there’s a stock I want to buy that I hear is good, I callDoris. She takes care of the core portfolio and that’s what isimportant. That’s the meat of it. And that’s the one that hasgot to work.

I can still make a sufficient amount of money withoutCanada Trust. In other words, I am not dependent on it.However, when I retire, there had better be something for meon a monthly basis.

JUNE 199913

ONEONONE

Continued from page 11

“It’s not the kind of relationship in which we are on the phone every day. If that’s what

he wanted, he wouldn’t have hired me.

”

inancial advisors begin interviews with prospec-

tive clients by asking a barrage of questions.

And over the years, they develop an intuitive

sense about their clients. As a pollster, Michael Adams does

the same thing. But the president of Environics Research

Group Ltd. in Toronto starts with different questions—and

far more of them—to catalogue the values of Canadians.

Recently, he pulled together his data on lifestyle and personal

financial needs to divide Canadians into eight distinct finan-

cial segments.

“These provide a full portrait which financial advisors can

use to supplement their own questionnaire. It gives a sense of

where people are coming from,” says Adams, who is currently

writing a book about the meaning of money.

Here are the eight groups, with Adams’ advice:

❶ Well-Prepared Self-Directeds

(8% of the population):

These well-educated, afflu-ent, do-it-yourselfers havehighly diversified invest-ment portfolios. In theprime of their life—60%are between 35 and 54—they have made it financially and are beginning to setless materialistic priorities. “These people are morelikely to make decisions on investments themselves,”he says. “A financial advisor should try to partner withthem. The clients will want to talk through ideas. They’llwant risk in their portfolio. They’ll be interested in for-eign equities.”

❷ Asset Guardians (8%): These are virtually debt-free,affluent, older individuals—half are retired—who areconcerned about safeguarding their wealth but also wantto find more meaning in life. “This is the Golden Gen-eration who have done well. They have assets. Theywon’t take much risk. They’re not into making the BigScore. They don’t want much more than they havenow,” he says.

❸ Early Adopters (5%): These are highly motivated,young self-starters—41% are under 35—who have

ADVISOR’S EDGE14

F

Percentage of Canadians surveyed who are members of registered pension plans:

KNOW YOURTrends, statistics and demographics

Deconstructingclients

Memorize these in-depth financialsegments and you may be in a better

position to win over the masses.By Harvey Schachter

CLIENTIl

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Source: Statistics Canada

JUNE 199915

NF

1.9

PEI

0.3

NS

3

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2.1

PQ

25.6

ON

38

MB

4.4

SK

3.5

AB

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BC

12.4

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considerable debt but are stillon the lookout for new thingsand personal experiences. “Theyare the Gen-Xers who are moving andshaking,” explains Adams. “They lovehaving fun. They are into money butalso into spending it. They’re experi-ence-seeking. They are eager to try newthings: They’ll want to know what a hedgefund is or other exotic financial instru-ments. National boundaries are irrelevantto them. They probably have a negative atti-tude towards the Canadian equities marketand figure the U.S. is where the action is.”

❹ Overwhelmed Providers (7%): These arequintessential baby boomers, often women with youngfamilies and debt, who appreciate the need to be fiscallyprudent but feel overwhelmed by responsibilities. Theyhave money, but they also have many things they want toaccomplish, like obtaining the best for their kids, takingtwo vacations a year and making some investments.“They’re leading a full, hedonistic life,” Adams says. “Theywill want a financial advisor as they feel overwhelmed andneed help. They are not into great risk. They want cau-tious asset growth. When they get on top of things, theymay be better clients. But they will still want to be con-

servative in their investments.”❺ Home-Equity Dependents (14%):

Primarily boomers, they have goodincomes—although not as high as over-

whelmed providers. Their focusis paying off their mortgage debtand they presently lack confi-dence in their ability to take on

any other challenges. “Eventually,if the house is paid off, they

will ramp up to mutualfunds,” he explains.“Theycould potentially be good

clients then. But they may be

more likely to go to the bank for advice, since they arefairly conservative and the financial institution will alreadyhave a leg up in dealing with them.”

➏ Nest-Egg Builders (8%): These individuals—youngerboomers and Gen-Xers—are just starting out, have healthyincomes and are trying to balance debt and retirementplanning. For now, that is probably taxing their seeminglyindefatigable spirit but better days lie ahead. As Adamsputs it: “They have the potential to be very good clients.”

❼ Contented Consumers (17%): These are non-materialis-tic, contented, middle-income individuals—42% earnmore than $40,000—who buy comparativelyfew financial products and services ingeneral. “This is alarge group but[they’re] not veryinterested in invest-ments,” Adamssays. “They’re say-ing, ‘I could be deadat age 60 so it would bedumb to have a lot of money.’As they go through life, they spend.They want polysensual, interesting, excitinglives.”

❽ Strugglers (33%): These are generally younger individu-als—50% are under 35—with modest incomes and veryfew financial products and services. Strugglers feel disen-franchised from the general direction that society is tak-ing. “They are not of interest to the financial advisor now,”says Adams. “They have a savings and chequing accountand that’s it. Down the road, they could become Nest-EggBuilders or Overwhelmed Providers. But right now, they’restruggling.”

Most advisors should recognize those archetypes fromtheir client list. Perhaps you have a special sensitivity to onegroup, and should specialize in it. Or maybe it’s time toexpand into new segments. Either way, the analysis shouldhelp you to understand those clients better.

JUNE 199917

une 10: D-Day for one ofCanada’s top mutual lifeinsurers. If all goes asplanned, that’s when Mu-

tual Life Assurance Co. of Canada Ltd.will be given the green light from itspolicyholders to transform itself into acorporation with publicly traded shares.The bonanza could result in an averageof $5,000 per policyholder with votingrights if Paul Martin also gives his sealof approval.

In April, Mutual Life mailed out aninformation package to its 900,000policyholders. Assuming that two-thirdsof voters favour demutualization, a bigdecision has to be made. Should theytake their windfall in the form of cashor shares? Mutual Life isn’t saying. Enterfinancial advisors.

This month’s MoneyTalks panel seesdemutualization as a potential gold minefor financial advisors because mostpolicyholders are still in the dark aboutwhat the process means for them.

“Did anyone happen to see MutualLife’s package? It’s huge, and I mean,who’s going to read it?” says BrianSmith, an investment executive withScotiaMcLeod in Victoria. “Policy-holders are going to seek advice fromsomebody, so there will be huge

amounts of prospects there. I considerthis to be one of the largest equityevents ever in Canadian equity markets.”

Avis Lapham, an independent finan-cial advisor for Avis Lapham FinancialServices in West Vancouver, concurs.“There will be hundreds of thousandsof orphan policyholders that haven’tsought advice from anybody for years,”she says. “I think it’s a wonderful oppor-tunity for advisors [to help clients].”

Demutualization could also be justthe thing to relaunch a surge of inter-est in life insurance. Most people don’tperk up about life insurance the waythey might about, say, stock tips. Whenwas the last time you overheard some-one in a restaurant or gym discussing thefiner qualities of life insurance? You’remore likely to hear about a mutual fundthat is currently providing good returns.

“Nobody likes to talk about insur-ance,” Smith says. “People don’t seem tobe as attuned to insurance than perhapsour parents and grandparents were.”

Who’s to blame for the general dis-interest? Partially financial advisors, sayour panelists. Nearly half of Canadiansdon’t even have life insurance in theirportfolios, according to figures from theCanadian Association of Financial Insti-

Public ownership

“Nobody likes to talk about

insurance. People don’t seem to

be as attuned to insurance than

perhaps our parents and

grandparents were.”

Brian Smith,Victoria

“The risk of an individual

going through life without

insurance is just huge.We see

itall the time...people have

great savings portfolios but

nothing in insurance.”

Gordon Keon, Calgary

If mutual companies succeed in going public, it may spark a renewed interest in life insurance from financial advisors and prospective clients alike.


arranca

J

Talk about a hot stock ormutual fund and clients listenintently. Turn the discussion to

life insurance and you’re lucky ifthey don’t fall asleep.

ON THE LINE

Chris FunnellTen Star Financial Inc.Waterdown, Ontario

Gordon KeonManulife FinancialCalgary, Alberta

Avis LaphamAvis Lapham Financial Services

West Vancouver, British Columbia

Brian SmithScotiaMcLeod

Victoria, British Columbia

MONEYTALKSB y D e a n n e N . G a g e

tutions and Insurance, a year-old groupthat has 24 corporate members frombanks, trust companies and creditunions.

It’s a number that doesn’t surpriseGordon Keon, an associate manager atManulife Financial in Calgary. “Therisk of an individual going through lifewithout insurance is just huge,” he says.“We see it all the time...people havegreat savings portfolios but nothingin insurance.”

Insurance PromotionIt may be an issue of advisors promot-ing what they know best. Chris Funnell,an independent advisor with Ten StarFinancial Inc. in Waterdown, Ont., islicensed to sell different kinds of insur-ance. He believes many advisors simplydon’t have the expertise to understandsome life or disability insurance prod-ucts, which tend to be more complexthan the average mutual fund product.

“If they don’t have the knowledgebase, they’re not going to be comfort-able with [selling life insurance], sotherefore, they don’t talk to their clientsabout it,” he says.

“But that’s starting to change asmore and more advisors are becomingdual-licensed now. So as time goes on,I think [life insurance] is going to be

talked about more to the client base.”Not only talked about, but empha-

sized. Do your clients know the con-sequences of not having life and dis-ability insurance? It’s a question everyadvisor should be able to answer.

“There’s a statistic that says if youput away 5% of your income each year,you would wipe out 10 years of savingsafter just six months of total disabil-ity,” Funnell says. “Your income stopsif three things happen: you die, you getdisabled or you retire. And most advi-sors focus on retirement, but the othertwo things are equally important.”

Some of your clients may simplyview life insurance as yesterday’s news.And it doesn’t help matters when peo-ple like former Sun Life Assurance Co.Ltd. chairman John McNeil have re-ferred to the products as just that. Ourpanel sees life insurance in a differentlight—a buried gem that is worthexposing to clients.

“Clients don’t necessarily want tobuy [life insurance] but we should edu-cate and say, ‘This is what I think youshould do,’ ” says Funnell.

The fact that banks, trust companiesand credit unions all want a piece of thelife insurance pie can only enhance itspopularity. For the short term, mutualfunds will rule the day in terms ofclient mind-share, our panel agrees. Butwatch out—life insurance may fastapproach mutual funds’ heels, as it’sbecoming an integral part of a client’sportfolio. Both advisors and clients mayfind this out the hard way.

“It will be interesting when Canadabecomes more legally proactive as seenin the United States,” says Keon. “Ifyou have ‘financial advisor’ or ‘financialplanner’ on your card and you buildgreat savings portfolios but don’t talkabout life and [disability insurance] andsomething happens to the client, I thinkwe’ll see a [stricter] tone.”

Maybe then you’ll overhear more dis-cussions about life insurance at the gym.After all, there’s nothing like controversyto bring on a good debate.

Deanne N. Gage is associate editor ofAdvisor’s Edge. If you would like toparticipate in an upcoming MoneyTalks discus-sion, send an e-mail to [email protected].

MONEYTALKS

“Clients don’t necessarily

want to buy [life insurance]

but we should educate

and say, ‘This is what I think

you should do.’ ”

Chris Funnell,Waterdown, Ont.

JUNE 199921

Online investing may have created the

greatest casino for pathological gamblers.

Now it’s your duty to identify and help

clients investing on the edge.

BY PETER BOISSEAU PHOTOGRAPHY BY JOSEPH MARRANCA


DAY TRIPPERSBefore he found the stock market, Chris Anderson was

known as the family “tightwad” and a man who

couldn’t even be dragged into a friendly poker game.

But by the time Anderson hit bottom, he was addicted

to what he calls “the greatest gambling casino in the

world.” He started off with risky positions on market

index options, “although we didn’t call it gambling, we called

it speculative investing,” says Anderson, a former stock-

broker who now heads the Illinois Council on Problem and

Compulsive Gambling in Chicago.

JUNE 199923

“It took me about two and a half years to destroy myselffinancially and end up in bankruptcy court, divorced, then[in] a series of psychiatric hospitals and treatment centres,”he says.

Anderson developed his gambling addiction in the mid-1980s—long before online brokerages and electronic accessto stocks, options and commodities markets helped set thestage for what some addiction experts fear will be a growingwave of stock market junkies. From wannabe day-tradersto do-it-yourself investors foregoing traditional brokeragerelationships, the opportunity to roll the dice in the marketshas never been greater for those predisposed to prob-lem gambling.

In Canada, experts on problem gambling generally esti-mate that 1% to 2% of the population has a significant orpathological gambling addiction, while another 3% to 4%may be moderately addicted.

Most of the attention has surrounded the proliferation ofgovernment-sanctioned video lottery terminals and casinos.But concern has now turned to the boom in instant, elec-tronic access to stock and commodities markets—a small butsignificant part of the catalytic mix behind the spread ofgambling addictions.

In a 1998 provincial survey by the Alberta Alcohol andDrug Abuse Commission, nearly a quarter of respondentsidentified as gamblers—ranging from pathological to non-problem gamblers—told researchers they gambled on stocks,options and commodities markets. This was an increase of7% compared to a baseline survey conducted in 1994—sur-passing the rate of growth in both casino and video lotteryterminal (VLT) gambling over the same period. So where dopeople gamble? The survey found the most severely addictedgamblers—the pathological gamblers—ranked the stock mar-ket second only to video lottery terminals.

Lindsay Meredith • Simon Fraser Universitymarketing and economics professor, Vancouver



“I know professors in hard sciences who are doing theirown puts and calls. It’s the mania of the 1990s.Your averageconsumer has got no damn business playing that game.”

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Risky investor or big-time gambler: How does your client rate?

See page 33 to calculate your score.SOURCE: Marvin Steinberg, Connecticut Council on Problem Gambling

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ADVISOR’S EDGE24

1. I have been preoccupied with seeking daily informa-

tion about the status of my investments or trades or

have been preoccupied with thoughts of past and

future investments or trades.

Yes __ No __

2. A major reason I have invested or traded is to

change an unhappy mood, for example, to escape

worries, pressures, anxiety, depression.

Yes __ No __

3. I have experienced extreme highs when I win and

extreme lows when I lose in the markets.

Yes __ No __

4. I have felt uncomfortable when any cash accumu-

lated in my brokerage account and have needed to

quickly find a way to keep it in action.

Yes __ No __

5. I have been restless or irritable when unable to be

active in the markets, for example, when short of

money or away on vacation.

Yes __ No __

6. I have needed to increase the amount invested or

traded to maintain the high or excitement of being

in action.

Yes __ No __

7. My investments or trades have become increasingly

speculative or risky over time.

Yes __ No __

8. I have had more money at risk in the markets than I

could afford to lose.

Yes __ No __

9. I have often engaged in high-volume investing or

trading, for example, to outguess the direction of the

market.

Yes __ No __

10. My investments or trades have been highly

leveraged.

Yes __ No __

11. I have not opened brokerage statements to avoid

having to think about my losses.

Yes __ No __

12. I have borrowed money from family, friends, credit

cards or other sources to invest or trade.

Yes __ No __

13. I have borrowed money to invest or trade and have

not paid it back.

Yes __ No __

14. I have had to have someone else provide money to

relieve a crisis caused by my investing or trading.

Yes __ No __

15. I have lied to people in order to hide that I was

investing or trading or to hide how much money was

involved.

Yes __ No __

16. When losses piled up, I continued the same

investments and trades or increased the amount,

in the hope my strategy would work or my luck

would change and I would regain the losses.

Yes __ No __

17. I have wanted to stop investing or trading but did

not think I could. Or, I have been unsuccessful when

I have tried to control, cut back or stop investing or

trading.

Yes __ No __

18. I have risked losing or lost important work, family

or other commitments due to the amount of time

and money taken up by my trading or investing.

Yes __ No __

19. I have committed an illegal act to get money to

continue to invest or trade or to pay back a loan

for my investment activity.

Yes __ No __

20. I have wondered whether I was gambling excessively

in the markets.

Yes __ No __

These numbers reflect the fact that stock market invest-ing generally requires putting larger sums in play than some-thing like a slot machine, notes Harold Wynne, president ofWynne Resources Ltd. His Edmonton-based research firmconducted both the 1994 and the 1998 surveys examiningthe prevalence of gambling among adult Albertans.

A recent Angus Reid survey commissioned by the Cana-dian Securities Administrators (CSA) found that one in fourCanadian investors use the Web for researching investments.Four per cent of those surveyed use the Internet for trad-ing securities.

The astounding array of resources available to anyone withInternet access—from real-time stock quotesand financial information to personalizedstock tracking services and online trading—is posing a new challenge to the traditionalclient-broker relationship.

Misguided Enthusiasm The hardest job for Wilson Temple these daysis keeping his increasingly wired clientele fromtaking wild leaps in a bid to out-guess the market. “I’m veryfast coming to the conclusion that most of the things we’veabided by—clients’ aversion to risk and all that—are out tolunch,” says Temple, president of Temple Financial Services Ltd.,a mutual fund dealer in St. John’s, Nfld. He says he has no doubta few of his clients are holding back money to invest on theirown through discount brokers and online services that they nor-mally would have invested through him.

Les Dunbar, an investment representative with EdwardJones in Sault Ste. Marie, Ont., has also handled his shareof clients who think they’ve received a hot tip online. “Iwould say 40% of my clients have their computer hookedup to some kind of financial program that’s showing themprices of everything, every day.”

Most can be talked out of misguided enthusiasm for aquestionable stock, says Dunbar, but there are always a fewthat can’t. Like the young real estate agent who insisted on alarge block purchase of Bre-X shares just before it crashed,and was furious with Dunbar when he refused—calling hissuperiors to complain. That client went down the street tohis bank and bought the stock anyway, Dunbar recalls.

“It seems like they get a fixation,” he says. “It’s the oldstory: fear and greed. If you get that greed at a certain level,they ignore the facts and feel that, ‘Well, I’ve got to take achance. I’ll never get rich if I don’t take a chance.’ ”

As an advisor, Dunbar says he can sit a client down andoutline the pros and cons of an investment, pointing out

when a risk is greater than what he or she can afford on aone-shot gamble. As a last resort, he can tell them to findanother advisor. But when asked if he’s ever thought of refer-ring them to professional counselling, Dunbar pauses. “Tobe honest, I never thought of it,” he says.

Mental health professionals point out that problem gam-blers are increasingly seeing the investment world as an out-let for their addiction. “We do have a gambling environ-ment that has moved into all kinds of activities. And[buying] stocks can be a form of gambling,” says Dr. Nadyel-Guebaly, president of the Canadian Psychiatric Associ-ation and director of the Foothills Hospital Addiction Cen-tre in Calgary.



“Investing is not gambling.With any investment there is a risk.You can say that much.”

—Steve Kee, manager of media services

Toronto Stock Exchange

Investment ArcadeDr. el-Guebaly cites the two key factors in the spread of anyaddiction as “availability and exposure.” And when it comesto the markets, the public has been getting plenty of both.They’re plugged in, hooked up and tuned in like never before.Business and financial news has moved to the front page andinto prime time, fueled by a record migration of newinvestors. It’s nearly impossible to open a newspaper or turnon the television without being treated to a blow-by-blowaccount of stock market news.

“One of the problems here is that people are getting stam-peded into believing they really have to get those returns fastand now, that the clock is ticking,” says Lindsay Meredith, amarketing and economics professor at Simon Fraser Uni-versity in Vancouver. Like an increasing number of Canadi-ans, one of the first things Meredith does when he arrivesat work in the morning is fire up his computer to check outthe markets.

“All kinds of people are playing equity positions, doingInternet trades on their own,” he says. “I know professors inhard sciences who are doing their own puts and calls. It’sthe mania of the 1990s. Your average consumer has got nodamn business playing that game. They should stay away from

puts and calls, derivatives, margin trading and all that stuff.The reality is that these days, anyone can trade stocks,

options, futures or bonds from the privacy of their own homeor office computer. In the United States, about 25% of retailtrades are now executed online, mainly through electronicbrokerages.

In Canada, online trading wasn’t even available before1996. But today, almost all the major banks and brokeragefirms offer some type of electronic service.

Forrester Research Inc. of Cambridge, Mass., estimates2% of all Canadian households are now conducting someform of investing online. With computers in 53% of Cana-dian households today—compared to 50% of U.S. house-holds—access is widespread.

There’s little doubt at least a segment of these wiredhouseholds are playing the markets like a lottery game, saysForrester Research’s Robert Rubin, program director oftechnographics.

“Certainly more than 20% would fill that definition of,you know, the thrill of it. I think it’s very interesting,” he says.

Online brokerage E*TRADE Canada, which launched itsservice in February 1997, saw its customer base grow bynearly 200% during 1998, according to Colleen Moorehead,



president of VERSUS Brokerage Services Inc., which oper-ates E*TRADE Canada.

Figures from Toronto Dominion Bank’s Green LineInvestor Services show that 40% of retail trading in 1998was initiated electronically from home computers—althoughnot all of it using the Internet. Unlike U.S. online broker-ages, Canadian online brokers are still responsible for vettingeach trade’s suitability against an investor’s risk tolerance pro-file under the Investment Dealer Association’s “Know YourClient” guidelines, says E*TRADE’s Moorehead.

“We turn down trades every day,” she says, noting thishuman intervention would help identify reckless investmentbehaviour that might suggest a gambling addiction.

But many online investors believe these regulations are outof date in the electronic world and slow down the investmentprocess. E*TRADE currently has a submission before reg-ulators to exempt online services from “Know Your Client”responsibilities.

The seductive combination of Internet resources and chas-ing a pot of gold is the new siren call of many noviceinvestors bypassing brokers entirely to trade on serviceslike SWIFT.

Net surfers think “they’re on top of the world” with thisinformation, says Kevin Hamlin of Collingwood, Ont., ahigh school teacher who quit a full-time job last year to jointhe growing ranks of day-traders who try to earn a livingby making lightning-quick buys and sells from a homecomputer.

“I know people who have been wiped out,” he says. “Theproblem is, people know they’re gambling when they go toa casino and they can get hooked, but somehow there seemsto be something more seductive in the stock market.”

Concern among addiction researchers in the U.S. con-vinced the Securities and Exchange Commission (SEC) tointroduce information on problem gambling as part of its

investor education program in 1998. Marvin Steinberg, exec-utive director of the Connecticut Council on Problem Gam-bling, developed the self-help questionnaire on investing and gambling problems on behalf of the SEC (see sidebar:“Risky investor or big-time gambler: How does your client rate?” on page24). Steinberg’s interest in the issue is founded in his researchthat suggests gambling addiction could be endemic to stockmarket activity.

A group of U.S. stockbrokers Steinberg surveyed in 1994estimated 2% of retail investors in the stock market have agambling problem. And a startling 10% of the brokers sur-veyed indicated that they themselves had a gambling prob-lem. An overwhelming majority of respondents agreed thatthe more speculative areas of the stock market are no dif-ferent than gambling in a casino.

Where clients can go for helpMental health professionals diagnose and treat

problem gambling as an illness. Free information

and referral services for counseling are available

through various organizations across the country:

Alberta: 1-800-665-9676

British Columbia: 1-888-795-6111

Manitoba: 1-800-463-1554

New Brunswick: 1-800-461-1234

Newfoundland: 1-888-424-5623

Nova Scotia: 1-888-347-8888

Ontario: 1-888-230-3505

Quebec: 1-800-461-0140

Saskatchewan: 1-800-306-6789

Yukon: 1-800-661-0408



Steinberg contends that the commodities market, in par-ticular, clearly fits the definition of gambling, pointing to theexample of the U.K., where legal gaming bookies are autho-rized to take action on the commodities market. “There’s noquestion about whether or not it’s gambling,” he says. “It is.”

Steinberg adds that problem gambling in the financial mar-kets is one area neglected by health and addiction profes-sionals, with little available in the way of research.

“It’s hard to know the prevalence of anything until there’sa major awareness campaign, so that people will be able toidentify the signs in themselves, or anyone else, as a prob-lem,” he explains. “People involved in the stock market arenot experts on problem gambling. They don’t look at it fromthe point of a psychiatric disorder. They look at it in termsof risk tolerance.”

Most addiction counselors in Canada see only a trickle ofcases involving stock market gambling. But people who seek

counselling for other gambling addictions sometimes dis-play an obvious dependency on playing the market, saysPat Davies, a counsellor with Bellwood Health Servicesin Toronto.

“I’ve seen some clients who’ll ask for a phone pass, and youask why, and they’ll say, ‘Well, the market is closing,’ ” saysDavies. “But [they’ll insist that] they don’t have a problem.”

The financial services industry downplays concerns,remaining unconvinced that problem gambling is a majorissue within its ranks. Steve Kee, manager of media servicesfor the Toronto Stock Exchange, bristles at the very mentionof the word “gambling” in connection with the markets.“Investing is not gambling,” he says. “With any investmentthere is a risk. You can say that much.”

Others suggest the proliferation of electronic financial andinvestment resources is doing more to help and educate—rather than harm—investors. Increased access to online trad-ing and market research is, on the whole, making investors

ADVISOR’S EDGE32

Dr. Nady el-Guebaly • Canadian Psychiatric Associationpresident, Calgary


“We do have a gambling environment that hasmoved into all kinds of activities. And [buying] stockscan be a form of gambling.”

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better equipped to demand satisfaction from brokers andfinancial advisors, says John Kaszel, research director for theInvestment Funds Institute of Canada in Toronto. “At onetime, you really had to screw up in order for a client to goelsewhere. Now clients are saying, ‘Justify yourself to me.’And there’s no ifs and buts about it.”

But addiction specialists suggest brokers and financial advi-sors could be doing more to recognize that clients hell-benton taking big risks or letting the markets drive their emotionsmay have a medical disorder. John Kelly, executive director ofthe Canadian Foundation on Compulsive Gambling inToronto, advocates the development of a protocol by invest-ment advisors and addiction experts for dealing with sus-pected problems among clients.

“Maybe you wouldn’t want to call it a gambling program.It could be tailored discreetly,” says Kelly. “But if this guy hasa problem, it’s just like alcohol, it’s available everywhere. Soyou’re relying, from the provider’s point of view, on low-levelinformation and inoffensive intervention.”

Kelly has put together a set of points that can be used tomeasure whether someone may have a gambling problem, ormay be at risk of developing one. (To get this information, con-tact the foundation at (416) 499-9800). It’s the kind of data andreferral that advisors could be passing on to clients, Kellysays—particularly in cases where a refusal to accept adviceand plunge ahead with a risky investment seems based moreon emotion than reason.

“As the guy’s walking out the door, you say, ‘Look, I’mno diagnostician, but I think it’s important for you to take alook at this pamphlet, and just see if there’s anything in therethat rings a bell,’ ” he says. “It’s sort of an ethical obligationto direct your client to resources that might help them takea better look at themselves.”

Peter Boisseau is a Toronto-based freelance writer, columnist and contributing editor for Advisor’s Edge.

Know the scoreAllow one point for every yes answer.

0 points: no gambling problem

1 or 2 points: possible future problem

There’s nothing too alarming at this stage, but it may

indicate signs of something to watch out for.

3 or 4 points: mild current problem

Online investing is probably affecting your client’s life

in a slightly negative way.This could be the early

signs of a problem. Suggest that your client consider

modifying his or her behaviour.

5 or 6 points: moderate current problem

Day-trading is manifesting itself into one or more

areas of your client’s life. It’s causing stress in his or

her life. Suggesting that your client talk to an

addiction professional may be a good idea.

7 or more points: severe current problem

Your client is likely addicted to online investing. He or

she is incapacitated to some degree. Do everything

you can to see that this person gets some help and

realizes his or her home truth.

NOTE:This quiz is a guideline and not in any way diagnostic. It’s designed to give

you an indication of some signs of addiction. Pathological gambling is a treatable

mental disorder which can only be diagnosed by a qualified mental health or

addiction professional.

QU

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from page 24

SOURCE: Marvin Steinberg, Connecticut Council on Problem Gambling

ADVISOR’S EDGE34

veryone needs an estate plan, but not everyoneknows it. Selling clients on this can be a dauntingtask, given the gloomy spectre of death that over-shadows the estate planning process.

But understanding typical responses to death can improvecommunication with clients. With this goal in mind, CanadaTrust recently commissioned a study to uncover the “deatharchetype” in Canada. Briefly, the archetype theory postulates

that our emotional responses to a particular concept, product or service are the result of imprinting, embeddedthrough a first experience and reinforced throughout our lives.By understanding these responses, we gain valuable insightinto why people do what they do, and can therefore respondto these unspoken needs and interact with clients in a moremeaningful way.

About 300 participants from study groups in Toronto,

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PORTFOLIOComprehensive wealth management

Mortal weaknessA fear of death can be a major barrier to estate planning.Understanding your client’s emotions can help you break through.

By Hilary Laidlaw

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London, Ont., and Vancouver, were first asked about theirimmediate responses to death—almost like a game of wordassociation. But the study’s real focus was to interpret the sub-text, so these responses were probed further to expose theemotional roots. Participants were therefore encouraged todiscuss their first experience with death—the very momentof imprinting—to assist in identifying the emotions that trig-gered their responses.

While the study results would surprise few seasoned advi-sors, the real value lies in understanding the implications of the results and the practical application to your client rela-tionships and communication strategies. This article exam-ines some ideas as they relate to estate planning.

Death Waits for No OneWhat does death really mean for the average person? Althoughcultural, religious and personal beliefs profoundly influenceeach individual’s views, the research uncovered commonthemes. It appears, on the surface, that the fear of finalitylooms large. Because the exact nature of the death experienceis unknown (and largely outside one’s control), there isan overwhelming sense of uncertainty surrounding it.

In probing these responses, however, it became appar-ent that beneath the apprehension lies a need to viewdeath not as an end, but as part of a continuum. On asubconscious level, it is about finding meaningful thingsin life through what a person leaves behind.

How, then, can you overcome the acknowledged fearsand address the hidden emotional needs in a way thatreally engages the client in the estate planning exercise? It is,after all, a highly personal exercise that necessitates under-standing who and what are important to the client.

But paradoxically, clients’ responses to death tend to makethem more analytical and detached in their approach to thetask. Resolving this is your key to success, since there is lit-tle merit in addressing the emotional aspects of estate plan-ning when the client’s focus is on the practicalities. This islike speaking another language which the client cannot under-stand. You must instead earn the right to advance the con-versation to an emotional level by building trust.

A certain level of rapport is needed to achieve this. Under-standing the death archetype can help. For example, the wordsyou use often have a powerful impact, particularly when deal-ing with death. Since the research showed that “death” con-notes finality for many, some clients may prefer moreeuphemistic terms. So listen carefully, and consider adopt-ing the client’s own terminology to increase the comfort level.“Passing on,” for example, is more consistent with the idea

of leaving something behind than to think about what willhappen when one is “gone.” Acknowledging client sensitiv-ities in this way conveys respect for them as individuals andhelps you connect at that emotional level.

Most participants in Canada Trust’s study confirmed thattheir estate planning efforts were generally prompted by trig-gering events, like the death of someone close to them. Othersignificant events, like the birth of a child, marriage, divorceor a change in financial circumstances, might also prompt aclient to take action. Another, more subtle trigger is the factthat an increasing number of baby boomers are caring notonly for their own children, but for parents and pos-sibly grandparents.

These factors are all consistent with preserving and protecting both family and property—goals that are drivenby a desire to “do the right thing.”This usually means think-ing about estate planning only when certain circumstancesand events arise.

Indeed, the study confirmed that clients tend to approachestate planning reactively, not proactively. So why, you may

wonder, does it matter what motivates your clients, if at theend of the day, they eventually get their plans in place? Well,by supporting the reactive approach, you miss an importantopportunity to connect with the client’s deeper motivations.

Think instead about encouraging your clients to see thisas an opportunity to explore the goals they have for theirfuture and the future they envision for others. Don’t proposeoptions which offer the client an excuse to procrastinate.Instead, be demanding where necessary, since permissivenessallows the client to legitimately ignore your requests for infor-mation or action, which may stall the process, leading to frus-tration on both sides.

Once you’ve convinced your clients about the benefits ofestate planning, get the job done quickly. Most estate plan-ning clients are somewhat reluctant participants, at least ini-tially, so any delay will seem longer than it is. Respect theclient’s desire to conclude matters as quickly as possible, andkeep them informed of your progress and any changes.

Think about your own responses. You may feel uncom-

Since the research showed that

“death” connotes finality for

many, some clients may prefer

more euphemistic terms.


fortable trying to console a client who has lost a loved one.But remember, clients consult you for your expertise. Thearchetype research revealed that they don’t want or expect youto offer the kind of support that a relative or friend wouldprovide. This is not to say that sensitivity is out of place.Showing compassion about death conveys a caring attitude,but so does getting the job done.

If you pay attention to details like these, your clients willbegin to feel secure enough to discuss relevantpersonal and emotional issues. This is youropportunity to explore what legacy the clientwants to pass on. It is also the client’s oppor-tunity to reflect on important relationships,achievements and values. This becomes the focus of the exer-cise: the instinct to ensure the survival of one’s “genes,”whether these take a biological, ideological or other form.With that goal in mind, the client’s apprehension will quicklydissolve.

In exploring your client’s planned legacy, listen for cues inthe conversation. Pick up on clues that will naturally lead toa discussion about these emotional issues. Go ahead and askabout that antique brooch—it may be a treasured heirloomthat segues nicely into a dialogue on whatever the client wantsto see continued. If your meeting is in the client’s home,

photographs and souvenirs all have emotional associationswhich provide insight into what continuity means to him orher, and how you can help achieve it.

By viewing the estate planning process as an opportunityto provide for a client’s continuity, it becomes a more mean-ingful exercise than simply dividing the spoils. It affordsthe client the opportunity to leave a lasting legacy consis-tent with his or her values, principles and beliefs. In this

way, it becomes an exercise focused on life, not death.You can play an important role in this process by demon-

strating sensitivity to client concerns and seeking to under-stand their underlying motivations and needs. This will helpstrengthen your relationship and contribute to a differentexperience than expected. And at the end of the day, it is theclient experience that really counts and that distinguishes onecapable and competent professional from any other.

Hilary Laidlaw is a lawyer and managing director of estate and trustdevelopment for Canada Trust.

Don’t propose options which offer

the client an excuse to procrastinate.


READER CONTEST!Win great prizes!

GOOD LUCK!

Thanks to Kenton Dueck, a financialadvisor in Grande Prairie, Alberta, forthis great business-building tip below:

Tip #46: “Scan the logos of your clients’businesses and insert them into yournewsletter. Not only will your clientsalways open your newsletter to look fortheir logo, they will thank you for thefree publicity as well.”

Dueck has won Nick Murray’s newestbook The Craft of Advice and IntuitCanada’s Quick Tax Deluxe software.But the contest isn’t over yet.We stillhave many more prizes to give away toreaders who send us their best businessbuilding tips. All readers who submit abusiness-building tip will be credited inthe magazine in an upcoming issue.

So don’t delay, send us your tips today!Fax to: (416) 596-5071 or (416) 596-3498. Or if you prefer, e-mail to:[email protected].

JUNE 199939

n volatile markets, investorsoften turn to options as aprotective measure or evento turn a quick profit, but

there are tax consequences.You should first determine whether

gains and losses on share option trans-actions are capital gains or losses, orregular income or losses.

Revenue Canada generally considersgains and losses realized on options tobe on the same account as the under-lying shares. Gains or losses realized bya writer of naked options is normallyon income account. However, except inthe case of traders and dealers in secu-rities, Revenue Canada will acceptreporting on capital account if this isdone consistently year to year.

Share option transactions do notqualify for the guaranteed capital gainstreatment that applies when a specialelection has been made for Canadiansecurities. Here are other tax issues surrounding options:

Purchasers of call options: If exer-cised, the option cost is added to thecost of the shares acquired. If theoption expires unexercised, its cost willresult in a capital or income loss in theyear of expiry, depending on whethercapital or income treatment applies. Ifthe option is sold before expiry, the salewill give rise to a capital or income gainor loss in the year sold.

Writers of call options: Whereincome treatment applies, the premiumis included in income in the year theoption is exercised or expires. If theoption is closed out before expiry, thepremium is netted against the offsettingoption cost to determine the net incomeinclusion in the year of closeout.

A writer of call options using capi-tal treatment is deemed to dispose ofan asset with a nil cost in the year thatthe option is granted, resulting in acapital gain. If an offsetting option isacquired, its cost would be a capitalloss. If the option is exercised, the cap-ital gain becomes nil and the optionproceeds are added to the proceeds ofthe sale of the related securities. If thegranting and exercise occur in differentyears, the investor may adjust the taxreturn for the year that reported thegain from writing the option to negatethat gain.

Purchasers of put options: Whenexercised, the option cost is deductedfrom the proceeds at the time of sale,reducing the income or capital gain. Ifthe option expires, its cost is a deduc-tion from income or a capital loss inthe year the option expires. If theoption is sold before expiry, the pre-mium is included in income and thecost written off in the year the optionis closed out in the case of an incometransaction. With a capital transaction,

the net gain or loss on the purchase andsale of the option is a capital gain orloss in the year the option is closed out.

Writers of put options: Whereincome treatment applies, the premiumis subtracted from the cost of theshares if the option is exercised, orincluded in income in the year theoption expires. If the option is closedout before expiry, the premium is net-ted against the cost of the offsettingoption to determine the net incomeinclusion in the year of closeout.

Where capital treatment applies, thewriter is deemed to dispose of an assetwith a nil cost in the year that theoption is granted, resulting in a capitalgain. If an offsetting option isacquired, its cost would be a capitalloss at the time. If the option is exer-cised, the capital gain from granting theoption becomes nil and instead theoption proceeds are deducted from thecost of the related securities. If thegranting and exercise occur in differentyears, the investor may adjust the taxreturn for the year that reported thegain from writing the option to negatethe gain.

Gena Katz, CA, CFP, is senior principal withErnst & Young’s National Tax Practice inToronto.

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Taxing optionsIf your clients are using options

to make some easy cash, there aretax issues they should know.

By Gena Katz

PORTFOLIOTax Break

ADVISOR’S EDGE40

hy do your clients pay up to 3% per yearon actively managed equity funds? Proba-bly because they hope the funds will out-perform the market. Sooner or later, the

issue of whether or not they are receiving good value mustbe addressed.

After all, your client is ill-served if they pay high man-agement fees for a manager to under-perform an associatedindex. This is especially true when the index can be purchasedat a much lower cost via passively managed index funds orstock index derivative products.

In the mutual fund ranking business, much emphasis isplaced on the relative under- or over-performance of a fundto some relevant benchmark. It is critical that the benchmarkchosen matches the investment policy of the fund, otherwise,comparisons become confusing at best.

Since the performance of an actively managed fund candeviate greatly from the index itself, evaluating the effect ofthe manager’s decisions is useful and allows us to answer otherquestions. How did the manager beat the market? Was itthrough stock picking or was it a case of being in the rightsector at the right time?

Attribution analysis tries to answer these questions bybreaking down a fund’s performance into components thatwill describe the “value-added” or “management effect.”

The management effect is the total over- or under-performance of a fund relative to an appropriate benchmark.For example, a diversified Canadian equity fund that returned6% in a year that the market (TSE 300) returned 5% is said to have experienced a positive management effect ofnearly +1%.

Continuing with our domestic equity fund example, inorder for the fund manager to outperform his benchmark,the underlying assets must be allocated differently from those

of the index. Two means to accomplish this are through:• security selection: selecting a different mix of securities

than that of the benchmark, particularly within the sameindustry sector; and

• sector weighting: under- or over-weighting a particularasset class or industry sector relative to the benchmark. By applying some simple arithmetic, it’s possible to esti-

mate what portion of a fund’s performance was due to thesecurity selection effect (the impact of the stocks selected)and what portion was due to the sector weighting effect (the emphasis of certain industry sectors).

To illustrate, a top-down manager first determines whichindustry sectors are to be emphasized and then selects thestocks to be included. The sector weighting effect will bemore important in evaluating this type of manager. Whereasa bottom-up manager will select securities on their own meritwith little or no regard to the industry sector to which thesecurity belongs—and is probably best evaluated by stress-ing the security selection effect.

In either case, if the benchmark being used to comparethe fund doesn’t closely match the fund’s investment policy,none of the results of the attribution analysis will be use-ful. If, for example, a fund manager is mandated to invest upto 20% of the fund’s assets in U.S. securities, then the TSE 300 index is not an appropriate benchmark.

With a little number-crunching, it’s possible to identifysome key determinants of a fund’s performance and under-stand what value your clients are receiving.

Next month, Mutual Watch will provide examples of attri-bution analysis techniques and some interesting results whenapplied to selected Canadian equity funds.

Scott Mackenzie is vice president, mutual funds with Portfolio AnalyticsLtd. in Toronto.

Evaluating funds

Attribution analysis unlocks thesecrets of a fund’s success, and determines if your clients are

getting what they’re paying for.By Scott Mackenzie

Mutual Watch

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JUNE 199941

PORTFOLIO

amilies are not always clearabout the implications oftheir estate planning docu-ments. I’d like to share the

details of a family that recently came tosee me.

Ted (the names have been changedfor privacy) was scheduled to “beretired,” as he put it, in a couple ofmonths and wanted to make sure theirfinancial house was in order.

A few years back, he had opted outof a defined contribution plan in favourof a locked-in RRSP which had donewell until last August. To complicatetheir planning, he discovered there wasa maximum on the amount they couldwithdraw from a life income fund (LIF),which would provide less income thanthe family was counting on.

Ted and his wife, Mary, both hadwills recently prepared by a lawyer. The

wills would have been pretty straight-forward except for two facts: Mary hadbeen married once before and had oneadult son who was financially insecure;and Ted had been married twice beforeand had four adult children: two fromhis first marriage, whom he did not see,and two from his second marriage wherethe relationships were ongoing.

Ted’s will left everything to Mary andMary’s left everything to Ted. On thesecond death, all assets were to be dis-tributed according to the will of thespouse last to die, with no mention ofthe other spouse’s children.

Ted’s will also had a joint disasterclause which indicated that should Marynot survive him by more than 30 days,$25,000 was to be paid to each childfrom his first marriage (the ones he doesnot see) and the balance of the residueof the estate to be divided equallybetween the two children he does see.

Unfortunately, by the time all thedebts of the estate were paid, thefavourite children would likely receiveless from the estate than the children hedoesn’t see, which was not what hewanted to happen.

Since Ted’s financial situation willchange over time, he might be better todistribute all of his estate through theresidue rather than leaving a specificamount to the children, even though thiswould result in probate fees. For exam-ple, he might consider leaving 10% ofthe residue of his estate to eachestranged child and 40% of the residue

to the others. That way, regardless of thevalue of his estate, the children wouldbenefit according to Ted’s wishes.

But what’s the best way to deal withthe inheritance Mary would need tosupport herself after Ted’s death? Oneway might be using a spousal testamen-tary trust so the spouse could not writethe other’s children out of their inheri-tance. The assets of the estate (notincluding the locked-in RRSP) wouldbe paid into the trust and the incomeand capital could be used for theremainder of her days. After Mary’sdeath, any remaining amount would bedistributed according to the trust agree-ment. The remaining value of the LIF,after both of their deaths, would needto be carefully worded in both wills tohandle the after-tax distribution accord-ing to their wishes.

This couple needed help mappingout the flow of assets for various scenarios. We looked at what wouldhappen if Ted dies first or if Mary diesfirst, and then what would happen if shedies last or he dies last. Once they couldsee how the assets might flow to their beneficiaries, they were better pre-pared to set up documents to reflecttheir wishes.

Sandra Foster, CFP, RFP, CIM, FCSI, is theauthor of Make The Most Of WhatYou’ve Got: The Canadian Guide toManaging Retirement Income, and is avice-president and financial advisor at EquionSecurities in Toronto.

F

Estate Planner

Charting a courseYour client may not understand the impact of their will.

You can help by mapping out the flow of their assets after death.By Sandra Foster


arranca

ADVISOR’S EDGE42

Illu

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tion

by

Mar

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Zub

er

BUILD YOURBUSINESS

f you’ve recently outsourcedany of your business needs,you’ve joined a trend that’sverging on an explosion.

Outsourcing (sometimes referred to as“sourcing”) has been called one of thehottest trends of the late 1990s. Aftergoing through downsizing in the early1990s, companies now need more services,especially on the administrative side, butdon’t want to incur the costs of buildingthe infrastructure internally.

At the same time, outside serviceproviders offer the promise of better andcheaper service in such areas as HR, back-office processing,computer maintenance or photocopying. All kinds of busi-nesses, from financial institutions to home-based consul-tants, are taking them up on that offer.

Many financial institutions use an outsourcer for things like external clearing and trade settlement.

For bigger organizations, outsourcing is seen as an admin-istrative function. That’s where outsourcing decisions aremade—although it is workers throughout the organizationwho have to deal with the results of those decisions. But insmall and medium-sized organizations, everyone may getinvolved with outsourcing.

I

Sales and marketing strategies that work

Seeking outside helpOutsourcing can get the job done while boosting your bottom

line, but tread carefully, as more cases are being settled by a judge.By Jennifer Northcote

But there is a range of legal issues that businesses shouldconsider before making a commitment to outsourcing. Thisarticle looks at just a few, and while it doesn’t offer legaladvice, it may provide some guideposts as you make your waythrough this new territory.

In general, outsourcing arrangements may be structured ina variety of ways, ranging from something that resembles tra-ditional subcontracting to an actual partnership. Whateverthe structure, the scope is generally broad, covering a rangeof issues, duties and responsibilities.

Cozy ArrangementsTwo areas of law that call for particular attention in the outsourcing context are employment and intellectualproperty.

Outsourcing often makes for tightly integrated arrange-ments: the supplier, and its employees, have to know exactlywhat you want, whether it’s computer support or handlingcustomers’ phone complaints.

Accordingly, outsourcers may become intimately involvedin your day-to-day business operations. And if you use asmall supplier, the line between independent contractor andemployee may become blurred. If the line gets wiped out alto-gether, you may find any number of government agencies,

from Revenue Canada to Worker’s Comp, on your case.Over the years, courts have grappled with how an inde-

pendent contractor differs from an employee. They have con-sidered factors like the following: • the amount of control a business exercises over someone;• how integral the worker is to the business’s operations; • who provides tools and equipment; • who is ultimately responsible for the worker’s remunera-

tion; and, who takes risks or reaps rewards from the business. By many of these criteria, some outsourcing arrange-

ments might flunk—particularly ones where workers are “contracted in” to provide service to the business on a con-tinuous basis. If that happened, you might suddenly find you

are an employer, instead of an outsourcer, and accordinglyliable for withholding income tax. You may also find your-self paying CPP and employment insurance premiums.

Intellectual PropertyOn the intellectual property side, there is the question of

who exactly owns the business solutions that anoutside contractor develops for you. You maythink your contract with an outside computercompany makes you the owner of any intellectualproperty—such as programs or other softwarethat the supplier develops.

But it’s very common for software companiesto outsource their needs in the programming areaby hiring their own subcontractors, in turn. Ifyour supplier hasn’t ensured that they have the

right to assign to you anything developed by any subcon-tractors they use, you may find a nasty dispute standingbetween you and that great outsourced solution to your sys-tems problems.

This is something that may loom large this year, as every-one scrambles to cover off the possibility of Y2K glitches.

If you take these issues into consideration, outsourcingmay be a perfect solution for your company. There can bemajor benefits and a modicum of care will allow participantsto reap those benefits without the risk of substantial legalproblems.

Jennifer Northcote is a partner in the Toronto office of Stikeman, Elliott,whose legal practice focuses on the investment funds industry.

JUNE 199943

SOUTSOURCING

DOS AND DON’TSDO contract with the company and not the individual.

DO pay for the project and not the time spent.

DO consider payment based on profit or loss.

DO require contractors to provide their own equipment

and supplies.

DO avoid “integration.”

DO permit subcontracting.

DO have intellectual property rights assigned to you.

DO protect confidential information.

DON’T dictate hours, vacation, etc.

DON’T put independent contractors on the payroll.

Outside service providers offer

the promise of better and cheaper

service. All kinds of businesses

are taking them up on that offer.

Photography by B

rian Sum

mers

Like most investment advisors, WillTiviluk treasures the little thank-younotes he sometimes gets from clients.

But the recent accolade they gavehim topped even that. Still only in hisearly thirties, Tiviluk was recently votedthe people’s choice for best financialadvisor by NOW MAGAZINE, a trendyToronto newsweekly.

Tiviluk says he was flattered but sur-prised about the award, and the clientsresponsible are not talking. But themessage is clear, he adds.

“It seems if you’re just an honestand good person, people will gravitateto you in this business,” says Tiviluk,who got into the financial planningindustry three years ago with RBCDominion Securities after spendingseven years in commercial banking and insurance.

“You don’t have to be a hero. Theyaren’t looking for home runs. They justdon’t want any strikeouts.”

That almost familial loyalty that hasdeveloped around Tiviluk’s business isno accident. When starting his busi-ness, Tiviluk drew on his network ofcontacts—including former bankingclients—to build his book. Then heteamed up with Peter Stanley, an oldfamily friend who had been Tivi-luk’s broker.

Stanley was a veteran advisor with35 years at RBC. The alliance madesense for both of them, explainsTiviluk.

“We’ve got his and my generation,”he says. “So his generation is retiringwith lots of money, but a 30- or 35-year-old doesn’t necessarily want tostart up a relationship with a broker

who might retire, so he says, ‘I have ayoung partner here you might want totalk to.’ ”

While Tiviluk and Stanley share alltheir clients, Tiviluk brings more thanan ability to bridge the generation gapwith younger clients. His backgroundin insurance is a good fit with theestate planning needs of the old-er clients.

Dealing with the entire client basealso helps the odds that they will staywith Tiviluk after Stanley retires.Between the two of them, they oftenwork with three generations of a family, from grandparents to grand-children.

“What you want to do is managefamilies, not individuals, because if youcan get three generations, you’re notgoing to lose that client,” he says.

MYEDGEWILL TIVILUK

INVESTMENT ADVISORRBC Dominion Securities

TorontoClients: 400

Age range: 30 to 45, 60 to 80Assets under management: $100 million +

Started advisory business: 1996

MY TIPS• If you’re stressed out about your

own portfolio, it will affect yourability to manage your clients’money.

• People I started calling threeyears ago are just becomingclients today.

• I don’t recommend anything toclients that I wouldn’t buy myself.

• At a certain point, you have tostart looking within your existingbook for new opportunities.

• Manage for the long term because long-term clients stayand will give you referrals.

PHILOSOPHY“Maintain a balanced lifestyleand pursue outside interests.

There’s more to life than money,and clients can [sense] if that’s the

only reason why you’re there.”

By Peter Boisseau

ADVISOR’S EDGE44

erhaps when I began thisseries on selling fromfirst principles, youexpected to read about

prospecting “techniques,” seminarstrategies, referral gathering, over-coming objections, closing “tech-niques,” and the like.

Instead, if you’ve been with me sincethe beginning, you’ve seen half a dozenlittle variations on essentially the sametheme. Namely, that you can have anyquantity and quality of business thatyou want, provided (a) that you makethe irrevocable decision to deserve itand (b) that you never cease consis-tently to work toward it, until youachieve excellence as you define it. “Justwhat you want to be,” as The MoodyBlues sang, all those years ago, “youwill be in the end.”

What happens to you in this businesswill be whatever you accept the respon-sibility to make happen. Excellenceassumes responsibility; mediocrityassigns blame...to down markets, crazyclients, underperforming fund man-agers, or whatever excuse is convenient.

But today’s prospects and clientsneed have no lasting effect. If theirresponses are inappropriate, excellencewill simply go and get the betterprospects and clients it determines to deserve.

Likewise, markets and investmentsare powerless to affect a career in the

long run; a diversified portfolio ofquality managed equity investmentswill never fail to build, preserve andenhance real wealth over real lifetimes.Faith in that great truth is excellence’ssword and shield. And, of course,wealth happens when an excellent advi-sor’s faith conquers an all-too-humanclient’s fear. (Please note that I didn’tsay “when an advisor’s knowledge con-quers a client’s ignorance,” for that issimply not true.)

My own code of personal responsi-bility rests on four pillars, developedslowly (and quite painfully) over manyyears. See if you can adapt them toyour situation—and if you “can’t,” askyourself very seriously why you “can’t.”❶ I compete with myself; in essence I’m try-ing to close the awful gap between my perfor-mance to date and my potential. How muchmore efficiently could I work, howmuch more good could I do, andtherefore with how much more of thefreedom that is wealth could I endowmy family, if I could just close that gapby 10% this year? What is my career(hell, what is my life) but the tinyblack spot of what I’ve accomplished,against the huge white space that is mycapacity?❷ All my professional limitations are self-imposed. I work entirely for myself, in abusiness where I define my productsand services, select (and reject) clients,and charge what I need to charge. If a

ceiling appears over my earnings, it’s asign that I (and no one else) built aceiling over the amount of good I’mdoing. Facing this, it becomes myresponsibility to tear that ceiling down.❸ If I can own the problem, I can own thesolution. Blame is like a drug. It givesyou a short-term rush (“This isn’t my fault”) at the cost of enslaving yoursoul: if someone else is the cause ofyour problem, only someone else canbe the solution. But you can’t changeanyone else. So if you take title to theproblem, you can take control ofthe capacity to solve it. (In time, thisprinciple has metamorphosed, for me, into: I am the problem; I am thesolution.)❹ All chronic production issues are behaviorissues. Don’t self-recriminate and don’task “why”: you behaved your way intowhatever box you find yourself in, andyou can behave your way out of it. (Inmy case, all my problems seemed tocrop up whenever I became “too busyto prospect.”)

“Decide to construct your characterthrough excellent actions,” Epictetustells us, “and determine to pay theprice of a worthy goal.”

It’s your responsibility.

© 1999 Nick Murray. All rights reserved. Forinformation on Nick’s books, tapes, and otheractivities, you may visit his website atwww.nickmurray.com

JUNE 199947

Photography by R

ob Lang

SELLING FROM FIRST PRINCIPLES, PART 7

By Nick Murray

EXCELLENCETHE QUEST FOR

P

People, products, news and eventsINTEREST

By Lisa [email protected]

An emerging marketEurope has been called an economic powerhouse.

Are your clients plugged in?

s part of an occasional series ofinterviews with portfolio managers,Advisor’s Edge spoke with Sarah

Caygill of TAL Global Asset Management Inc.,manager of the Talvest European Fund.

When Europe introduced its newcommon currency at the beginning ofthis year, investors watched cautiouslyfrom the sidelines. Now just sixmonths old, the euro—well-receivedand well-adjusted—has become amajor currency. In fact, the growingmomentum could make the euro an

alternative reference to the U.S. dollar,says Sarah Caygill, manager of theTalvest European Fund.

The euro has established its credi-bility,” says Caygill, whose office isbased in Geneva, Switzerland. “It rep-resents a unified economic block thatseriously rivals the main economic zone

that most investors have traditionallythought of—the U.S. dollar zone. Ithink in global markets and ininvestors’ minds, the euro market isnow becoming a very strong option.”

Sounds like something you shouldbe telling your clients? Absolutely, shesays. Keeping in mind that Canada rep-resents a market capitalization of just3% of the MSCI World Index, itmakes sense to look globally whenpositioning your client’s assets.

Caygill says although some Canadi-ans consider investing south of theborder to be a way of diversifying theirportfolio, since the U.S. is a “verylinked economic block,” U.S. invest-ments don’t make for much of a diversification strategy. On anotherfront, investing in Europe givesinvestors a “more efficient diversifica-tion because they’re investing in a wholedifferent economic cycle and structural situation.”

So, are we talking a short-term orlong-term payout? Definitely short-term, says Caygill, pointing out the

speed at which economic changes arehappening, especially within the tele-com and banking sectors which arealready undergoing complete restruc-turing through rapid mergers andacquisitions.

Given these prospects, it’s no surprisethat the fund’s holdings include sam-plings from both sectors. She also favorsaerospace and defence and oil stocks.

As for the fund’s performance, itposted a return of 48% from June1997 to May 1998, and Caygill islooking for growth to continue “com-fortably in double digits” for 1999.

She does share a cautionary notehowever: “If the U.S. takes a setback,we will too. If Japan doesn’t pullthrough, that’ll also have a knock-oneffect because we’re linked together inthe global economy.”

A

June 10-11

Strategy Institute

presents “Marketing

Wealth Management

Services to High-Net

Worth Individuals”

at The Sutton Place Hotel in Toronto.

Contact: (416) 944-8833.

Portfolio Analytics

is offering Advisor’s

Edge readers a 10%

discount on PALTrak

mutual fund software.

To qualify call (416)

489-7074, ext. 240, and quote this

issue’s date and page reference.

NewsEvents

JUNE 199949

Top Stock Picks

Nokia

Telecom Italia

Banque Nationale de Paris

Fund:Talvest European Fund

Manager: Sarah CaygillInvestment Objectives: Long-term

growth through capital appreciation

in European countries.

Assets: Almost $95 million since its

inception in May 1990.

Performance: (as of December 31,

1998)

1 year 24.2%

3 years* 24.2%

5 years* 16.9%

* annual compounded rate of return

COLDCALL

Photography by R

ob Waym

en

What did you like least about being the Minister of

Revenue?

The politics. Once you get elected, you have tothink about the next time you get elected. That’s adrag. It’s a ‘throw the bums out’ philosophy.

What was your first big purchase?

I started a newspaper when I was 22, so whenI was 24, I bought a printing press for $1 million.

Where did you get the $1 million?

The company had good cash flow, so we wereable to get financing.

Didn’t owing that much money make you sweat?

Yes, but it’s the only way to [move forward]. It’skind of like when you buy your first house, youthink, ‘Oh my god, this is a mortgage!’ but after awhile it becomes just a way of financing things.

What was your first job?

Working for the railroad. I was the guy whobuilt those things on the railway track that tell thetrains when to stop.

How much did you get paid?

Hmmm, that’s like 400 years ago. Maybe $100a week.

What do you consider to be a waste of money?

Probably clothes. I think people spend horri-ble amounts on that and at the end of the day, Idon’t think [clothes] are all that important.

What would you change about the financial

planning industry?

I would like to see less emphasis on productand more emphasis on process. People don’t wantproducts thrown at them, they want to understandwhere the economy is going and what they shoulddo to fit into it. That’s my biggest beef.

Do you have any tips for investment advisors?

They’ve got to think long-term. Right now inthe industry, I’m seeing many people look short-term. Their business is down a little bit this year, andI see some cutting back on advertising dollars andmarketing programs. That’s wrong, because todaywhat the average client is looking for is information.Advisors should be reaching out to their clients.

When do you plan to retire?

Hopefully never. My goal is to remain inter-estingly occupied.

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GarthTurner

The former Minister ofRevenue has come a

long way since the days of making $100 a week.

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Documents

ADVISOR S CANADA’S MAGAZINE FOR THE …...DORIS: John’s family has been a longtime client of the firm. John became my client in 1991. He has a huge book distri-bution company which