Lesson 13 Announcements

Final marks from FIN 403 have been handed in to JLU Administration.

Note taking is especially important in this section because the entire power point will not be posted.

SummaryUnlike corporations, people have limited lives.Financial patterns of people and corporations are different.People tend to have predictable patterns. People can hold ownership in

corporations and pass that ownership to the next generation, which changes the pattern and cycle.

People usually:– Develop earning power early in life– Borrow money and save very little– Later in life, after making the major purchases (eg. home) we begin to save

for our retirement.– Income peaks at middle age.– Upon retirement, the savings are used to pay for living expenses.

Not everybody gets rich. Those who do get rich, usually know a lot about money management. Those who do get rich and don’t know a lot about money management, usually lose their wealth and wonder why!

Historical Banking Trends

The Four Pillars1. Banks2. Trust Companies3. Life Insurance Companies4. Investment Dealers

Separate Laws govern each area, because each area requires a Specialization of Knowledge.

The laws ensure that employers will face penalties for negligent and incompetent service.

This encourages and motivates corporations (which are

owned by shareholders) to set high standards for their employees of face legal and financial penalties. Stock holders do not like their investments to be fined.

The reason for Specialization is that the risk to the individual citizen’s financial security, and the security of the whole community is reduced if a high standard of professionalism is required.

During the 1970s and 1980s these large institutions bought their competitors from within the same industry.

The trend to purchase was especially strong among trust companies and investment dealers who were to small to achieve economies of scale.

Definition: Economies of ScaleThe reduction in long-run average and marginal costs arising from an

increase in size of an operating unit (a factory or business office). Economies of scale can be internal to an organization (cost reduction due to technological and management factors) or external (cost reduction due to the effect of technology in an industry).

Question: How can a business that produces a service, such as an investment dealer (stock brokerage) improve its economies of scale?

Cross Ownership In the 1990s Laws were changed to allow Banks to purchase other types of financial institutions.

The Trend continued: To provide a wider range of services than in the past.

What happened: Banks have been permitted to compete with insurance companies, stock and bond brokers and personal financial planners.

In many cases, the banks bought more than one and merged Trust Companies and Investment Dealers.

In some cases, Banks started their own:• Trust Companies• Investment Dealers• Mutual Funds• Life Insurance Programs

The 6 largest Canadian Banks dominate financial services in Canada.Only the Life Insurance Companies are large enough to pose strong

competition.

The banks have economies of scale that give them these advantages:

Size (people, specialization, training, professional development)

Geographical coverage (located in established communities and up and coming communities, near old wealth and new immigrants)

Variety of products and services (one stop shopping – like Walmart- it is very convenient)

Can this ever happen in China?Is it good or bad?Can it be of some benefit to you?

Chartered BanksTwo classes of Banks: Schedule A and B• Offer a wide range of services and products in a retail

environment• Cross country network of branch stores• Transaction services (in house/on-line: screen capture – next slide)

• Investment Services (eg. Scotia McLeod)

• Trust Management (eg. disability, estate)

• Consumer and Residential Mortgages (biz and personal)

• Insurance (eg. TD 1-800 skype)

Payment Clearing System (transfers cheques, deposits, other transactions among banks and other financial institutions)

THE BANK OF CANADA is controlled by the FEDERAL GOVERNMENT. The BANK OF CANADA regulates the money supply and provides temporary liquidity support to the chartered banks.

Schedule A and Chartered Banks are Regulated Federally under the Bank Act and must be awarded a Charter (license) to operate by PARLIAMENT.

Schedule B Banks are much smaller in size , most do not have retail stores / branches and serve mostly the business sector and sometimes ethnic populations.

Trust Companies

Originally established to:• Manage Estates• Special Trust Funds• Executors

Later, Trust Companies began offering additional services similar to Schedule A Banks.

Caisses Populaires and Credit UnionsMutually owned by the customers.See share price (screen capture) which is evidence of

share capital in the credit union.Common factor of membership is usually• Community (region or city)• Employer• Ethnic or Religious Group (strength in numbers – avoid being taken

advantage of). Examples include:Caisse Populaires Cataract Savings and Loan Meridian Credit Union

Dejardins Menonite Savings Penfinancial CreditSt. Stan Polish Credit Ukrainian Credit Thorold Community Credit

Credit Union and Corporate Social Responsibility

The need for Credit Unions was called for by people left out of the mainstream of financial power.

They demanded:• Services that met their needs

(financially poor, working class, undereducated)• Early on, Credit Unions offered limited services but today, they offer

– Transaction servieds, – Term deposits– Credit cards– RRSP– Consumer Loans– Mortgage Loans

• Regulate Provincially, not Federally like the Banks

Cheque Clearing Houses – Data Centre

Automated Clearing House (ACH) is an electronic network for financial transactions. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments on insurance premiums, mortgage loans, and other kinds of bills. Debit transfers also include new applications such as the point-of-purchase (POP).

• Credit card = loan• Debit card = directly from acct• Direct deposit = salary or refund or

other transfer• Direct debit = mortgage, insurance.• Cheque Conversion – takes several

days.

Reconciliation of your account is mandatory to ensure that all transactions have been accurately recorded.

Mortgage and Loan Companies

Unlike Banks and Credit Unions, deposits held by Mortgage and Loan Companies are not insured by the government or private insurers.

They receive their money from private depositors.This increases the risk of dealing with them.

As their name implies, they provide:• Consumer Loans• Residential Mortgages

People who borrow from Mortgage and Loan Companies usually cannot get a loan from a Bank or Credit Union.

Borrowing rates are higher for people with poor credit.

Investment DealersProvide Investment Services by acting as agents to:

– Buy and sell securities (stocks, shares, bonds and other securities)– Self Managed RRSPs (registered retirement savings plans)– Manage your money and invest your money using their judgment based on

pre-agreed terms of your risk tolerance– Margin Loans = a short term loan amounting to a percentage of the purchase

you want to make. You need to have an account that they hold in trust as collateral. This allows you to buy and sell. They charge a legal interest rate.

A more popular option than in the past:– Provide no advise– Execute the transaction– Charge lower fees than full service dealers– Internet Trading – E*Trade is an example. TD Waterhouse is the largest

Canadian discount broker

Discount Brokers

Life Insurance CompaniesSell the following:- Life - Health - Disability• Premiums are paid in advance and claims paid

later (home insurance – fire).

• Insurance companies have huge investments from which to earn profits to pay dividends to their share holders and pay out legitimate claims.

General Insurance CompaniesProperty – Home, Business, Farm, etc.

Casualty – Accident

Liability – At fault. It was my fault and I have to pay.

More in Chapter 11

Mutual Fund CompaniesThis is the name of the company and the product.Mutual funds are a pool (grouping) of securities held

by a company.Private citizens or groups of people purchase units

(percentages) of the fund. Owners realize proportionate increases or decreases in the value and can sell to take their profit or loss.

Track records demonstrating the percentage of profit are available to assist you to determine whether or not you want to invest with them.

In Class ExerciseIn a group of 3, answer this question and hand it in to be graded.Put your name and student number on the paper and hand it in before

leaving class today.

If you are an employee and not a business owner, why is it still so very important to be skilled at personal financial management?