mind your - Advisor's Edge€¦ · mind your Don’t get burned. Know what’s covered by errors and omissions policies. Canada’s magazine for the finanCiaL ProfessionaL • june

E’s o’s

mindyour

Don’t get burned.

Know what’s covered by errors

and omissions policies.

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

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prE-nup PRiMeRboomEr cliEnts:

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AE06_OFC.indd 1 5/25/07 10:45:41 AM

5 inside edge Heading NorthA cold country has given me a warm embrace.By Philip Porado

6 letters Smooth MovePraise for our new continuing education section. 8

front end load The Nose Knows “Your Pix” is now “Nit Pix,” and for a change, our editorial staff members will give you their takes on industry reads. In this issue: A review of The Sleuth Investor, by Avner Mandelman. And, lawyer Mike Cochrane, author and host of BNN’s “Strictly Legal,” says when it comes to a pre-nup, sensibility must prevail over romance.

10 cover story Mind Your E’s and O’sDon’t get burned. Know what’s covered by errors and omissions policies.By Jim Bullock

11 cover story sidebar Risky RenewalManaging the minefield of E&O policy reviews.By Kelly MacDonald-Dowdle

20 Avenge Apathy Help your clients develop the right mindset on which to retire.By Deanne N. Gage

23 Boomer Convention Understanding the boomer outlook will help you when planning their financial futures. By Sheila Avari

30 ClOSiNg BEll with Beasley Hawkes

10half- baked

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

ONTHE

COvEr

JUNe• 2 0 0 7 •

vOLUME 10NUMBEr 6

9 Pre-nup Primer

10 Mind Your E’s and O’s

20 Boomer Clients: What’s Your Type?

20pUNdit pOwer

Need MORE SuNSCREEN?

Get some relief on June 13th, when Advisor.ca launches its E&O special report package. visit www.advisor.ca/practice/special_report/ and learn more ways to beat the heat.

AE06_003.indd 3 5/25/07 10:45:59 AM

headingnorthA cold country has given me a warm embrace.

insideedge

It started out like any ordinary Tuesday. Crisp air and puffy high clouds heralded the arrival of fall as I walked to my bus stop in Silver Spring, Maryland. It didn’t seem like the kind of day that would change my life.

But it did.I arrived home shaken after work on

September 11th to find my daughter glued to the TV, watching the towers fall, over and over. She looked at me and asked, “Are there any buildings left in New York?” Her five-year-old mind had processed each playback as a sepa-rate event. I turned the TV off and took her in the backyard to help me pull weeds and trim a few branches.

Our house in a near-Washington, D.C. suburb stood along the flight path to National Airport, so the lack of air traffic made for an eerie silence. After dinner, we managed to pack the kids off to play in their rooms, and then my wife made the pronouncement, “I want to leave.”

It was a fitting end to a shocking day. When I asked where she’d like to go, she suggested various parts of South America, Africa, or perhaps Eu-rope. In other words, anywhere but the United States.

For a person who’d never lived more than a four-hour car ride from the house he grew up in, it was a chal-lenging statement. I didn’t like the idea of being far away from my father, or sister. I questioned whether my wife would want to be that far from her own parents. Then I said three words: “How about Canada?” I added, “I’m a journalist. I can’t make a living anywhere with a language barrier.”

Talk about a leap of faith. I was 39 and had never crossed the north-ern border. Nevertheless, I contacted the consulate, obtained an immigra-tion booklet, and began the long slog through the forms. I photocopied every identifying document I owned, includ-ing my high school diploma, and a few months later dropped the carefully as-sembled package in the mail. Two-and-a-half years, three sets of fingerprints, and six medical exams later, Ottawa instructed us to await our visas.

The chaos of selling our house, landing as immigrants, finding an apartment and registering the kids for school passed in a haze. Then, reality set in. We were digging into our sav-ings and I needed a job. The day I re-ceived my SIN, there on a website was

an ad for an associate editorship at a magazine called Advisor’s Edge. I’d spent five years writing about the brokerage industry, so it seemed a good fit.

What a fit it’s been! I joined a team of professionals who make every day worth the commute and, after a little more than two years, find myself in the editor’s chair (with my former boss, Deanne, conveniently in the next office for when I mess up).

So far, I’ve learned there are still such things as real winters, and that the vast majority of advisors in Can-ada have their clients’ best interests at heart—though they’re often wrongly tarred with a brush lifted against the few bad actors in the industry. You won’t see that here, although I’ll warn you I am pro-compliance and unlikely to offer sympathy to anyone who feels too busy to properly fill in a KYC. But that’s in keeping with the spirit of the client’s best interests, right?

The nice thing about leaps of faith is that they often land you in better places. That’s certainly been my case.

phIlIp porAdoEdItor

[email protected]


AE06_005.indd 5 05/25/2007 06:14:31 PM

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

JUNE 2007, VOLUME 10, NUMBER 6

ADVISOR’S EDGE Philip Porado, editor; Deanne Gage, Consulting editor editor, Advisor Group Conferences Bert Vandermoer, Contributing editor (416) 764-3802, [email protected] Michael Finley, Production Manager Heidi Staseson, Associate editor (416) 764-3928, [email protected] (416) 764-3804, [email protected] Marie Atkins, executive Assistant Aniko Nicholson, Art Director (416) 764-3850, [email protected]

SUBSCRIPTIONS ADVISOR.CA CUSTOMER SERVICE Cornerstone, 1-866-236-0608 Cameron Clark, Customer Service Administrator [email protected] (416) 764-3859, [email protected]

SALES Donna Kerry, Associate Publisher Sophie Bellemare (416) 764-3805, [email protected] Account Manager, eastern Canada Kathleen Murphy (514) 843-2133, [email protected] Senior national Account Manager Eileen Lasswell (416) 764-3838, [email protected] national Account Manager Amy Nelson, national Account Manager (416) 764-4164, [email protected] (416) 764-3809, [email protected]

CIRCULATION AND RESEARCH Keith Fulford, Circulation Director Tricia Benn, Director of Research Cindy Younan, Circulation Manager Elizabeth Hall, Research Manager

Garth Thomas, Publisher, ADVISOR Group (416) 764-3806, [email protected] Jean Goulet, Publisher, Groupe COnSeIlleR (514) 843-2042, [email protected] Paul Williams, Vice-President, Business & Professional Publishing Group

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

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

ROGERS PUBLISHING LIMITED Brian Segal, President and CeO John Milne, Senior Vice-President, Business & Professional Publishing Group Marc Blondeau and Michael Fox, Senior Vice-Presidents Immee Chee Wah and Patrick Renard, Vice-Presidents

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

LETTERSsmooth move Re: “CE Corner—Moving to the U.S.” (April, page 9) I deal with many professional hockey players, so this article is pertinent. I am not registered to sell any product (nor am I inter-ested in that option). Rather, I act as their quarterback and find the

required professionals (money managers, attorneys, etc.) to fit my client’s needs. What an excellent teaching tool for my clients around the important issues when moving to the U.S. I provide them with written advice in this regard. However, when you have a respected publication reiterating the mes-sage, the power behind it is tenfold. It’s like a child receiving advice from a parent versus another respected third party; it is heeded more often from the third party than the parent, even though the same message is being sent. K. A. (Kim) Harder, CFP, OTI - Over-Time IncorporatedSherwood Park, Alta.

Re: “The New Number Crunchers” (May, page 38) I was intrigued by the numbers which show that delaying the ReSP contribution to ensure the maximum CeSG would in fact produce the higher overall return. This is not what I would have expected intuitively. However, I do feel that Scenario 3 deserved a caveat. Although the numbers may be correct, it should have been pointed out that while the first two scenarios would have the child starting university at 19, in Scenario 3, after 19 years the child would be 28. While not unheard of, it alters the overall baseline assump-tion. Thanks for the continuing excellent work.Bob Jamieson, financial advisor, Edward Jones, Ottawa

jamie golombek’s response:I have received several e-mails so far on that exact point. I agree, it would indeed

be unusual for a student to begin withdrawing RESP funds at age 28 (although

possible if pursuing an MBA, law school, medical school, etc.) but the reason I kept

it that way was to illustrate the dollars involved by keeping the assumptions 100%

consistent from Scenario 1, 2 and 3, so that apples could be compared to apples.

As I state near the end of the piece, “Of course the danger with doing any scenario

calculations such as these is that they’re only as good as the assumptions.”

So, you’ve been warned! Thanks again for writing.

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

� advisor’s edge | june2007 www.advisor.ca

AE06_006.indd 6 5/25/07 10:51:40 AM

FRONT Books, trends, events and analysis

� advisor’s edge | june2007 www.advisor.ca

the nose knows

enDLoADRustic Ranges

Cottage-Seeking Clients on a limited budget can still reel in a reasonable retreat.

Wealthier Clients can cast a little further

Ni

T p

ix Book: the sleuth Investor, by Avner

Mandelman. Globe and Mail columnist Man-delman loves a life of drama and challenge. He’s dabbled in everything from rocket science to pension fund management and is currently

CEO of a private investment firm. But it’s the hat of invest-ment P.I.—or sleuth—he wears with the most panache.

Through his book, he aims to teach would-be investors how to nab exclusive company information—including the downright juicy bits—to reap share-price profits. For ex-ample, crack a company’s code by collecting data from four specific sources; penetrate a company by reaching its low-level employees, suppliers and clients—or “cheque send-ers”—and get to know them personally. Find out names, digits and their passions for fishing or golf. Sleuth non-numerically with clues such as unkempt lawns or too many turbo trinkets in the boss’s parking spot, versus award- winning widgets on display in the lobby.

He even likens parts of his program to CIA and Mossad cold-reading tactics. While he doesn’t go as far as dump-ster-diving, he notes it’s A-OK to park in a diner lot, ob-serve company personnel and snap up pics. Just keep your lips sealed, don’t diss your subjects and have a paper trail.

Your ethics eyebrow will no doubt be raised—and where’s all your sleuthing capital going to come from? But Mandelman has covered his tracks. Peppered with case studies and anecdotal evidence, he views sleuthing as a moral endeavour where you’re “learning as much as you can about the group of strangers into whose hands you are about to entrust your family savings.” Besides, sales VPs befriend people daily for the benefit of their families!

While fascinating, yet downright nutty at times (a great bedside read for your more OCD clients), the book teaches you how to develop your instincts and learn about compa-nies beyond annual reports. Perhaps some good tips here for advisors to sleuth out potentially unsuitable clients?

—Heidi Staseson

Source: Royal LePage, “Snapshot of Canada’s Cottage Market,” May 2007

Source: Royal LePage, “Snapshot of Canada’s Cottage Market,” May 2007

Cottage Area Price Range

1. George’s Lake, Nfld. $75,000 to $90,000

2. Molega Lake, N.S. $120,000 to $140,000

3. North Rustico, P.E.I. $200,000

4. Lake Selby, Que. $250,000

5. Lanark Highlands, Ont. $150,000 to $250,000

6. Honey Harbour, Ont. $250,000

7. Lac Lu, Ont. (near Man.) $250,000 or less

8. Echo Lake, Sask. $250,000

9. Lac St. Anne, Alta. $250,000

10. Stack Lakes, B.C. $200,000 to $250,000

Cottage Area Price Range

1. Chester, N.S. Up to $1.5 million

2. Park Corner, P.E.I. Up to $500,000

3. Lakes Memphremagog, Up to $1.5 million Brome, Champlain, Que.

4. Rideau Lakes, Ont. $350,000 to $450,000

5. Moore Point, Ont. Up to $3 million

6. Clearwater Bay, Ont. From $1 million

7. Last Mountain Lake, Sask. Up to $750,000

8. Sylvan Lake, Alta. From $1 million

9. Okanagan Lake, B.C. From $5 million

10. Green Lake, B.C. Up to $1 million

AE06_008-009.indd 8 5/25/07 11:00:46 AM

At this time of year, family law lawyers

meet with marrying clients to discuss one

piece of paper that absolutely has to be

signed before the wedding: the marriage

contract.

Many Canadians consider the whole

idea of a marriage contract to be either

something reserved for selfish celebrities

or the downright unromantic. But they are

a potentially important financial planning

tool. Underlying the unromantic negotia-

tions are some commonsense motives.

With about 40% of Canadian marriages

ending in divorce, any couple would be

foolish not to do some due diligence

before finalizing this important economic

partnership.

Why? There are numerous reasons. Say

a parent gives a couple a home as a gift.

The matrimonial home has special status

in property division since it automatically

goes into the pot for equal division at the

time of divorce. So regardless of when it is

acquired, people may well want to protect

that investment or gift.

But let’s say a young woman has worked

hard, saved her money, qualified for financ-

ing and purchases a home prior to her

marriage. Imagine her reaction should the

marriage subsequently fail, and the home’s

value is divided as a part of the divorce—

regardless of the fact she bought and paid

for it before the wedding. In these cases, a

marriage contract may acknowledge that

the home’s special status will be waived

and, in the event of a divorce, the purchaser

of the home will be given full credit for its

value at the time of divorce.

Or, the focus may be on children and

education. Parents might wish children

be raised in a particular faith and attend

religious-based educational institutions.

Judges will respect a couple’s decision

in a marriage contract to provide for

matters related to a child’s general

welfare.

Discussion around a marriage contract

is also an excellent opportunity to suggest

clients do a little due diligence about one’s

fiancé(e), with emphasis on adequate dis-

closure of each person’s financial situation,

including both assets and liabilities.

Consider this: Should a client think

twice about marrying someone who he dis-

covers has gone bankrupt twice? Should

she marry someone who has $60,000 in

outstanding student loans and will not be

making a meaningful financial contribu-

tion to the marriage until those loans are

retired? Ask how they would feel about

marrying someone who has not filed

income tax returns for the last decade and

may have an income tax liability of several

hundred thousand dollars.

These disclosure questions will allow

someone to go into the marriage with their

eyes wide open. The technical requirements

call for a contract to be in writing, signed

by both parties and it must be witnessed.

There is no legal requirement for indepen-

dent legal advice, but it’s highly recom-

mended if the marriage contract is to be

bulletproof in the future.

Indeed, a marriage contract or cohabita-

tion agreement can be a valuable financial

planning device. Use the opportunity to also

ensure clients obtain both wills and powers

of attorney. If such a domestic agreement is

on the horizon, my advice to clients is:

• Start early so the discussions are

not pressured.

• Have a clear purpose, so that the point

of the contract is clear and common-

sense to both marrying parties.

• Be fair with your partner. If a marriage

is about teamwork and sharing, and

is truly intended to last a lifetime, an

unfair marriage contract is a very poor

beginning.

Last, but certainly not least, is to dis-

cuss how to have the marriage contract

conversation with a fiancé(e). May I sug-

gest: “Oh, my financial advisor gave me

a copy of an article from Advisors’ Edge

that says a marriage contract may be a

good financial planning device.” . . . Good

Luck!

—Michael G. Cochrane is a partner

with Ricketts, Harris LLP in Toronto, and

author of Strictly Legal: Things You Abso-

lutely Need to Know About Canadian Law.

He is the host of BNN’s “Strictly Legal.”

■ june 10 to 13, IIAC Annual Conference,

Fairmont Le Manoir Richelieu, La Malbaie, Que.,

www.iiac.ca

■ june 10 to 13, Certified Financial Planners

Annual National Conference, Hyatt Regency

Hotel, Calgary, www.cifps.ca

■ june 11 to 13, Changing Channel: Managing

General Agencies Symposium, “Staying Ahead

of the Curve,” West Trillium House, Blue Mountain,

Collingwood, Ont., www.advisorlive.ca

■ june 13, Morningstar Annual Conference, The

Carlu, Toronto, www.morningstar.ca/conference

■ september 17, Compliance Forum, Attend-

ees: IDA licensed brokers, branch managers,

and senior management, Mars complex, Toronto,

www.advisorlive.ca

■ september 20, Quebec MGA Symposium,

Attendees: MGA senior management, Fairmont

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

French), www.advisorlive.ca

■ september 25 to 27, Changing Channel:

The Future of Mutual Fund Dealers, Westin

Trillium House, Blue Mountain, Collingwood, Ont.,

www.advisorlive.ca

EyES WIDE oPEN

For more events go to www.advisor.ca

ca

le

nd

ar

o

f e

ve

nt

s

HOW THINGS WORK ?


ENDLoAD

For a complete version of this story go to www.advisor.ca/practice

AE06_008-009.indd 9 05/25/2007 05:11:01 PM

mind

E’s o’s

By Jim Bullock

and

yourDon’t get burned.

Know what’s covered by errors

and omissions policies.

AE06_010-018.indd 10 05/25/2007 05:11:50 PM

have been reliably informed that human beings have only three essential needs—food,

shelter and someone else to blame. If a client loses money, for any reason, the first thing he’ll do is look for some-where to point the finger. And, since the advisor is his primary contact with the industry, that makes him or her the most likely candidate.

Once your client decides to lay blame, it’s only a short jump to decid-ing to sue. And that’s why maintaining proper Errors and Omissions (E&O) insurance is so important.

Just arranging E&O coverage, though, is not enough. E&O compa-nies routinely start their processes by investigating claims with an eye toward seeing if they can deny them. A law-yer who specializes in defending advi-sors once told me that E&O insurers refuse to defend the advisor and that claims are denied in about 30% of cases. These denials are made for two common reasons: Whatever triggered the claim was not an insured activity (in other words, if an insurance, mu-tual fund, or securities licence is not required for the activity, it may not be considered an insured professional ac-tivity under the terms of the policy); or the insurer was not advised about the claim in a timely manner.

Let’s look at an example. Advisors don’t actually need a licence to give advice about pension rollovers, RRSP transfers or tax situations, yet they get phone calls about these issues all the time from their clients. Suppose some-one follows the advice, loses money and sues the advisor. Was the advice a professional activity, as defined in the E&O policy, or not? The insurance company may decide it was not.

The requirement to advise the in-surer of a claim situation is also tricky. I have a case open now in which the insurer has denied the claim because the advisor did not tell the company about the situation soon enough. The insurance company, making full use of hindsight, is saying, “You should have recognized two years ago that this situation could result in a lawsuit.” The advisor’s reply asserts he is not an expert in forecasting legal actions and that he called the insurer when the client threatened to sue.

The solution is simple, but can be time-consuming. Tell your insurer, in writing, every time a client loses money in a situation that was unexpected or when the losses were bigger than antic-ipated. A brief note about the amount and circumstances will suffice. This gives the insurer an opportunity to take

Continued on page 13

Photography by G

etty Images

www.advisor.ca

It’s that tIme of year again. Your professional liability (E&O)

insurance policy is due for renewal, and you’ve just received two quotes from

competing insurance carriers. At first blush they seem comparable, with the

exception of the annual premium (Quote A is $200 more than quote B).

riskY rEnEwAl

advisor’s edge | june 2007 11

Managing the minefield of E&O policy reviews. by kelly MacDonald-Dowdle


i

AE06_010-018.indd 11 05/25/2007 06:46:26 PM

control and intervene if it anticipates a situation could worsen. Armed with information provided by the advisor, the E&O insurer might recognize sim-ilarities to other matters it’s handled and know for certain it can mount a proper defence. In other situations, the insurer might know it can reduce the settlement costs by quickly apologiz-ing and offering to pay some damages. If, however, the case is left to fester, the client could eventually retain a lawyer and start legal action.

By the time both sides have investi-gated the case, paid lawyers and maybe even gone through a legal discovery process, the cost of settlement might easily double or triple. A byproduct of a legal battle is ill-will and a black mark in the community for the insurer and the advisor, so it’s often in the best interests of both parties to confront the loss as soon as possible.

And no, taking this precautionary course will not cause problems when it’s time for the advisor to renew the E&O. In fact, the insurer will likely be impressed with the advisor’s proactive approach, professionalism and risk-management skills.

The imperfect formI’ve seen several cases where advisors gave good advice under the prevailing circumstances, but then found plans didn’t work out because of some detail they didn’t know about or couldn’t an-ticipate. A classic example is failure to make a routine filing that inadvertently triggers a tax loss, such as an advisor not knowing his client was born in the U.S., even though he’d lived in Canada most of his life, and therefore still had to file U.S. tax returns every year.

And then there’s the know-your-cli-ent (KYC) form. I have yet to find a

KYC in a file that could be used to prove the advisor knew his client well enough. That’s not necessarily the advisor’s fault: The forms themselves are woefully inadequate at document-ing the relevant facts about a client’s background. I’m working on a case now in which the client was put into an index fund and the KYC indicates a willingness to take what the form calls “moderate risk.” Since opening the account, the client has lost $70,000 and is suing his advisor, explaining he defined “moderate” as willing to risk that his rate of return might drop, but was never ready to take a loss on his capital. The client is 83 and has a net worth of about $250,000. I think a judge might see things his way.

Unless the definitions of terms such as “moderate risk” are spelled out on the KYC, then these documents offer little or no protection to the advisor. So add a measure of safety by updat-ing the KYCs to state “moderate” means something more like: “Willing to lose up to half my investment.”

New realitiesInsurance companies are no longer owned by and operated for the policy owners; they’re owned by shareholders who are focused on profits. When a claim comes in, the first thing that hap-pens is it’s scrutinized to see if there’s a way to avoid payment—shareholders expect the company will not pay for illegitimate claims.

That means every advisor must be careful about what he writes to clients. Any time the word “will” is used, it can be interpreted as creating an undertak-ing or warranty. Best avoid phrases like, “This will be enough to cover the tax liability;” “At death, the proceeds will be paid to Mary Lou;” or “I will see you soon to review your needs.”

That last example was part of a mass mailing an advisor sent to all his clients. One client only had a $50,000 policy and the advisor never got around to seeing him. Nine years after writing the “I will see you soon” letter, the client died and the executor no-ticed the $50,000 policy had included a $2,000 per month income disability benefit. The client was a firefighter and because of severe injuries had been disabled for the past 12 years. His family suffered financially but never knew about the disability benefit in the life policy and never filed a claim. After the client’s death, the insurance company told the heirs that the policy clearly states a claim has to be filed while the applicant is still alive.

If the advisor had visited the client, as promised, he would have learned about the disability and could have told him about his $2,000 per month disability insurance. Now the advisor has been sued for poor service and failure to provide the promised visit.

In this case, the advisor is lucky. He’s had the same E&O insurer dur-ing all the years the claimant’s policy was in force. It recognized the advisor may have made a mistake and is step-ping up to protect him by negotiating a settlement. If he had changed E&O insurers, the new insurer would have scrutinized his application carefully, looking for a way out of the claim.

In a different case the advisor did not bother filling in the part of the E&O application form that asked when he first arranged E&O insur-ance. Since that information was missing, the company considered the period of insurance to have started with the new policy, and so the previ-ous 15 years were deemed uninsured. The advisor learned this the hard way

Continued from page 11

www.advisor.ca advisor’s edge | june 2007 13


AE06_010-018.indd 13 05/25/2007 06:48:04 PM

Youthinkyouarecomparingapples,butlookagain.Is

onereallyapear?

AllE&Oinsurancepoliciesarenotcreatedequal.Thereare

anumberofkeyprovisionsfoundoravailableinE&Oinsur-

ancecontracts,which,dependingonhowtheyarewrittenor

whetherornotthey’reincluded,candramaticallychangethe

landscapeofthecoverageavailableintheeventofaclaim.

Let’slookatthekeyfeaturesofE&Oinsurancepoli-

ciesthatshouldbecloselyreviewedbeforemakingafinal

determinationaboutwhere topurchaseyourcoverage.

Anunderstandingoftheseprovisionsandhowtheyaffect

futurecoveragewillbeinvaluableinnavigatingtheminefield

ofanE&Oinsurancecoveragepurchase.

Herearejustsomeofthereasonsthecheapestquoteisn’t

necessarilythebestone.

RetRoactive datesTheserefer toadate thatmay

bespecifiedinaclaims-madeor

claims-made-and-reportedpolicy

thatistheearliestdateforwrongfulactscoveredbythe

policy.Coverageforwrongfulactsthatoccurredpriorto

theretroactivedatewouldbeexcluded,eveniftheclaimis

firstmadeduringthepolicyperiod.

Theycanbetheinceptiondateofthepolicy(inwhich

casethereisnoprior-actscoverage)orsomeearlierdate

(inwhichcasethereisprior-actscoverageforwrongfulacts

backtothatdate).

Clearly,apolicywithalaterretroactivedateofinception

isfarinferiortoonethatprovidesanearlierretroactive

date.However,policieswrittenwithfullprior-actscoverage

(noretroactivedate)aremostdesirable.

PRioR-acts coveRage Prioractsisafeatureofclaims-madeandclaims-made-

and-reportedpoliciesthathave

either no retroactive date (in

whichcasethereisfullprior-acts

coverage)oraretroactivedate

earlierthantheinceptiondateof

thepolicy(inwhichcasethereis

Continuedfrompage11

Continuedonpage16

14 advisor’s edge|june2007 www.advisor.ca

POLICIEsgEnErALLYHAvETwOLOss-LImIT

COmPOnEnTs.

Citadel Diversified Investment Trust

Citadel HYTES Fund

Citadel Premium Income Fund

Citadel S-1 Income Trust Fund

Citadel SMaRT Fund

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16 advisor’s edge | june2007 www.advisor.ca

prior-acts coverage back to that date). Prior-acts coverage

applies to claims made during the policy period arising out

of events that preceded the policy period, subject to the

terms and conditions of the current policy.

A policy with no prior-acts coverage will almost always

be less expensive given that coverage for wrongful acts that

took place before policy inception is precluded.

AggregAte limitsProfessional liability policies generally have two loss-limit

components. The first, the per-loss limit of liability, is the

most an insurer will pay for any single loss under the policy.

The second, the annual aggregate, is the most an insurer will

pay in any one year.

So, a policy with a $1 million per-loss limit of liability and

a $2 million annual aggregate limit of liability will allow for

a maximum of two full-limit losses (2 x $1 million losses)

in any one year, or any number of smaller combinations of

losses, provided that neither the per-loss limit nor the annual

aggregate is breached.

Many E&O insurance plans for advisors also carry a

group or plan aggregate. This refers to the most the car-

rier will pay out in any one year for all advisor claims. For

example, a group policy with a $10 million annual aggregate

will only pay out a maximum of $10 million in any one year

for all claims, regardless of the number of agents on the

program, and regardless of the sum total of the annual cer-

tificate aggregates of all participating agents on the plan.

Purchasing your insurance from a plan that includes a

group or plan aggregate should be avoided at all costs. Oth-

erwise, you may find yourself without coverage for a claim if

the group or plan aggregate has already been exhausted.

Defence costsThen there are costs associated with the investigation

and defence of a claim. In today’s litigious environment,

defence costs can be significant, and it’s important to

understand how your policy is written with respect to

defence costs coverage.

Insurance policies can be written in one of two ways: To

provide defence costs over and above the limit of liability, or

within the limit of liability.

If defence costs are within the limit of liability, they will


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AE06_010-018.indd 16 05/25/2007 06:45:52 PM

erode the limit of liability avail-

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lier example your defence costs

will be paid out of the $1 million

limit of liability and leave only the

balance of the policy limits to pay

any settlements or judgments.

If defence costs exceed the limit of liability, the funds

available to pay a claim are the entire per-loss limit amount.

Again, using the earlier example, your defence costs will be

over and above the $1 million limit of liability, leaving all

that money to pay any settlements or judgments. Simply

put, policies written with defence costs in excess of the limit

of liability are the most advantageous for the insured.

Vicarious liability This arises when liability is imposed on one party for the

conduct of another (such as an employer for the acts of its

employees). Vicarious liability coverage is meant to protect

the principal or employer if a suit is brought against it based

on any wrongful act committed by an agent or employee. It

does not cover allegations of independent negligence against

the principal or the employer.

Understanding the nature and

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policy is integral to choosing

between various insurers and

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consider more than just price

when purchasing insurance. To make certain your insurance

dollars are spent most effectively, be sure to purchase the

level of protection and policy appropriate for your specific

exposure.

Kelly MacDonald-Dowdle, BA, CRM, FCIP, RPLU, is

account manager and assistant department manager

of Aon’s professional services group, specializing in

professional liability for agents and advisors. This article

contains general information only and is intended to

provide an overview of coverages. The information is not

intended to constitute legal or other professional advice.

Please refer to the insurer’s policy wordings for actual

terms, conditions, exclusions and limitations on coverage

that may apply. [email protected]


YOU nEED TO COnSIDER MORE ThAn jUST

PRICE whEn PURChASIng InSURAnCE.

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changing journey, some people possess

the means to keep it on track.

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customized solutions to meet the

varying needs and goals of your clients.

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stability, strength and expertise you have

come to expect from Canada Life.

For more information visit www.canadalife.ca

You,ve got clients whoseneeds change

throughout their lives.

We’ve got Millenniumwhich offers more choice.

Canada Life and design are trademarks of The Canada Life Assurance Company.

AE06_010-018.indd 17 05/25/2007 06:46:05 PM

when he was sued over the failure of a disability policy to pay a claim. He had told the client he had “own oc-cupation” coverage, when in fact he did not. The E&O company told the advisor he was on his own, because his business policy did not cover activity from previous years.

Get the factsTimes are changing. Insurance cover-age isn’t what it used to be and if the advisor is going to increasingly bear the brunt of blame, then he or she needs to document files with paperwork that shows the client was advised of the risks and accepted them.

And KYCs are not enough. To do

the job properly, an advisor needs a comprehensive initial fact finder that delves into the background of the cli-ent, including spouse, children, par-ents and any other dependents. This fact finder would include information about education, job history and per-sonal priorities. Risk tolerance would be defined in clear terms like, “How much of your investment are you pre-pared to lose?” This document would be reviewed with the client annually.

An insurance advisor also must identify the insurable issues and make sure recommendations are suitable. It would do wonders for his defence if he could show that a photocopy of the paperwork was sent to the applicant with a request to review it for accuracy and completeness. This request should spell out the dangers of incomplete answers if a claim is made.

As for E&O policies, they’re not commodities to be shopped by price. Each one is different and you should read your policy carefully, paying close attention to the parts about insured activities and the exclusions. Con-sider your activities and see if they are covered or excluded—completing tax returns for clients, for example. If you produce written reports or fi-nancial plans, see how those activities are insured. Some policies only insure financial planning if it is part of a sales process.

Many advisors are lulled into com-placency because they’ve never been sued and think it can’t happen to them. They’re wrong and the devils are in the details. You advise people to look at the fine print every day, so start taking your own advice.

Jim Bullock is a Toronto-area advisor and Registrar of the Peel Institute of Applied Finance. [email protected]


18 advisor’s edge | june 2007

AE06_010-018.indd 18 05/25/2007 06:46:15 PM

NYCm d RT b o o m eRT i R e m e nT c o n f eR e n c e

April24

25to

Help your client develop the right mindset on which to retire.

all retirement the ultimate ex-periment. Working until death never used to be a bad idea. So

how did we arrive at the current view of retirement as a 30-year vacation?

The peaking of the industrial age during the 1920s first put retirement in gear when manufacturing compa-nies launched a movement to rid their workforces of slower, aging employ-ees (they impolitely referred to them as geezers). Their work was becoming less productive, giving rise to the com-pany pension, which in actuality was no more than a stipend designed to induce people to leave.

“Retirement was born with no glamour; it was simply a rest from what was physical work,” says Ken Dychtwald, speaking at the Mil-lion Dollar Roundtable’s late April Boomertirement conference in New York. As founding president and CEO of San Francisco-based Age Wave, Dychtwald’s firm helps companies to

understand the boomer mindset. He explains it wasn’t until the 1960s that retirement began to be viewed as a time of leisure. A decade later, it be-came what we dream about today: the ultimate entitlement.

The prevailing philosophy is that retired life is better than work and ev-eryone should be able to retire com-fortably. The younger you retire, the happier you will be. And the kicker? Someone else should pay. But how so when pensions are on the decline?

If you do have one, it’s likely a de-fined contribution pension, meaning the onus is on you, not the company, to make wise investment choices—a horrifying thought considering most people hate dealing with financial matters. And for those who are pen-sion-less, it’s completely up to them to fund the retirement. Savings rates are at an all-time low, and the majority of people have less than $25,000 stashed towards their dream.

Boomers also need to watch their carbs. Typically “the Sandwich Gen-eration” described parents in their 40s who were taking care of young kids and older parents. Today, it’s more of a senior sandwich generation, says financial gerontologist Neal Cutler. He notes it’s not uncommon for par-ents in their 50s and even 60s to have young kids, and for at least one of their parents to be alive.

This may all play a factor in delay-ing the boomers’ own retirement sav-ings. “Boomers got married later than

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

Avengeby deanne n. Gage

apathY

C

Ken dychtwald, Ph.d. futurist, Author and President, Age Wave

photography courtesy M

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AE06_020-021.indd 20 05/25/2007 06:50:30 PM

advisor’sedge | june 2007 21

their parents, had their first child—and first divorce—later than their parents, and then in many cases, started second families,” Cutler explains.

Bottom line is boomers have fewer years to accumulate retirement funds. So, how can this potential crisis be turned around before retirement?

Start by looking at your retiree clients and their present retirement psychologies. Dychtwald recently con-ducted a U.S. survey of the average retiree and discovered they fit into one of four categories.1. Ageless explorers: These powerful and highly optimistic people are having a terrific time. When asked the question, “When will you feel old?” their response was “Never.” Dychtwald was compelled by the fact that 80% of ageless explorers still worked in some capacity. “Most high achievers want to work,” he explains. “Only 17% of boomers said they never want to work again, but those tend to be the lower earners who have positions involving hard labour.” 2. ComfortAbly Content: Dychtwald describes these retirees as those simply living their golden years and enjoying some much-needed “me time.” They feel as if they’re basically on an extended vacation. When asked the same question, their response is “Soon.” Dychtwald’s own parents fall into this category.

3. live for todAys: These are high-spirited folks who are always up for any adventure. They may even have retired early to embark on some new life exploits. The problem is they never saved along the way and 10 years after retiring, find themselves in financial trouble. They are no longer enjoying the retirement experience and feel old and trapped.4. siCk And tireds: Now that they’re retired, they’ve given up and are ready to die. They’re uncomfortable, unhealthy and have no money. They fit the current dictionary description of retirement: “to disappear; to go away; to withdraw”—not an interesting way to spend up to 30 years of your life, Dychtwald notes.

Some would say the sick and tireds were dealt a bad hand but Dychtwald believes these folks had a similar per-sonality when they were in their 30s or 50s. He says that no matter how old you currently are, your clients are steering toward one of the four groups—even though it may not be where they want to end up.

He suggests advisors ask more open-ended questions of people early on. And the probing must go beyond the traditional linear life plan (spending the first 25 years of life on education, the next 40 years working, followed by years of retirement). More people are mixing up this life plan, wanting to go back to school at age 45 to learn a new career and perhaps taking a few years of leisure time before heading back to the workforce. And they don’t neces-sarily mind if these decisions mean they have to work much longer than age 65, Dychtwald says. “The biggest mistake we make is we assume when people reach 65, they have nothing left to give,” he says.

Age 65 is no longer the marker of

old age, Dychtwald adds. Ask boom-ers when old age begins, and they say “age 80.” Now that boomers are start-ing to turn 60, they are three times as likely to believe their best years are ahead of them. Those with adequate funds also believe money will give them the freedom to do what they want on their own terms.

Indeed, boomers are not like their parents. Those born before the Sec-ond World War tend to be savers and recipients of fat pension cheques. They’re also model clients because they trust authority and expertise.

Boomers, however, have certain sketchy best friends to deal with: cred-it—and more credit. They give into guilty pleasures whenever the mood hits and they don’t believe in rainy days. They also don’t trust author-ity, which could lead to their jump-ing around from advisor to advisor, Dychtwald notes.

What do boomers look for in an advisor? Dychtwald’s studies show they want someone “who knows how many children they have, what their dreams of retirement are, where they’re going, what scares them, and how they want to be talked to.”

But when he segments the data by age, slight differences present them-selves. Sixty-year-olds, for instance, want an advisor who works for a com-pany they trust. Compare that to 55- year-olds who desire someone who can help them to understand their future, visualize their retirement and help fund their dreams.

Sounds like a tall order, but if you can help your boomer clients navigate their way, you’ll reap the rewards in the form of referrals.

Deanne N. Gage is editor of Advisor.ca. [email protected]

www.advisor.ca

neal Cutler, ph.d.University of

north Carolina

AE06_020-021.indd 21 05/25/2007 06:50:44 PM

Understanding the boomer outlook will help you when planning their financial futures. By Sheila Avari

oomers comprise a remarkable group. They are 43, 61, or any age in between. They are par-

ents, grandparents, caregivers, newly single or re-married, empty nesters and productive members of the work-force. And there are as many roles as there are rules for advisors to follow when planning for a boomer client’s retirement.

Though a concise list of these will be presented later on, let’s first get one interim rule out of the way: Avoid using the word retirement. Of the 78 million boomers in the Unit-ed States, most would prefer not to think about the concept. As heard at the Million Dollar Roundtable’s late April Boomertirement conference in New York, pundit vernacular suggests a good euphemism for the R word is “financial future.”

Boomers typically have accumulated significant savings but have no formal

financial plans, according to the 2007 Retirement Confidence Survey (RCS) conducted by the Employee Benefits Research Institute (EBRI). In fact, re-sults show that over the past year most of this group has spent no time at all planning for retirement, financially or otherwise. Could there be a more per-fect prospect for advisors?

Reality hasn’t sunk in for most boomers, who still believe their com-pany pensions and government plans will see them through retirement, even though plan sponsors are freez-ing packages in response to govern-ment warnings of an all-out fund extinction. Roughly 17% believe they need to accumulate less than $100,000 by retirement to live comfortably. Only 15% believe they will need at least $1 million. The same study shows 71% are somewhat confident or very confident they will have enough

boomerconvention

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nYcm d rt B o o m ert i r e m e nt C o n f er e n C e

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AE06_023-028.indd 23 05/25/2007 07:03:22 PM

advisor’sedge | june 2007 25www.advisor.ca

money to live throughout their retire-ment years in the manner to which they’re accustomed. While the figures are American, research has shown Ca-nadian boomers don’t think that much differently.

“The expectations of boomers in retirement are much higher than should be warranted,” says Dr. Jack VanDerhei, research director at EBRI in Washington, D.C. and co-author of the RCS. “People think they can get by on a lot less, but this is a gross underestimate.” Further, active workers don’t feel the incentive to reduce their standard of living to save for retire-ment, and nearly 35% indicated they would continue to draw down their savings at their current rate and “take what they need to cover expenses.”

So what do advisors need to know when speaking to boomers about their money, now and in the future? That was the big question on the minds of each of the New York conference delegates, most of whom were boomer- aged advisors themselves. Speaker Matt Thornhill believes he has the boomer market analyzed down to a science. He runs The Boomer Project,

a market research consulting company in Richmond, VA, and his presenta-tion entitled “New Rules for Selling to Boomers” is intended to help advi-sors better understand and serve this market sweet spot.

To get boomers on the right retire-ment track:

1. give them control.This includes having control over their finances, yet according to the 2007 Boomer Lifestyle Survey, 60% have no formal financial plan, 50% don’t have a will and even fewer describe themselves as financially disciplined.

Study after study projects that a 50-year-old boomer expects to live an additional 35 years. Surprisingly, this perceived longevity has done little for boomers’ demand for annuity prod-ucts. According to the RCS, only 23% of boomers who expected to live to 85 would consider buying an annuity. VanDerhei says advisors face a “huge communication challenge” with these clients because annuity rates at retire-ment are disturbingly low.

Thornhill suggests advisors ask them where they think their money will come from. “The government? You have no control with that.” Ditto for pensions and the stock market, he snickers.

Both Thornhill and VanDerhei sug-gest advisors recommend annuities which will allow boomers to accumu-late tax-deferred funds for retirement and then, if they desire, receive a con-trolled, guaranteed income over a set period of time, say 35 years.

2. focus on the life stage, not the age. “Take age out of the equation,” Thornhill advises, highlighting the

continued from page 23

continued on page 26

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differences between himself and his brother, both boomers but definitely at different life stages. Thornhill is 47, with a two-year-old in tow, while his brother is 50, the father of a fresh-man—one brother saving for that toddler’s tuition, while the other sib-ling is already paying it.

“Not only do boomers feel younger than they are, but they are all in dif-ferent stages of life,” he explains, ad-mitting that neither sibling has done much in the way of prioritizing for retirement. “You want a boomer at age 50 to plan for life at age 75? He doesn’t even know what he is doing next week!”

Indeed, boomers are putting off old age and are continuing to climb the proverbial hill with aspirations and an impressive “to do” list. In an informal

audience show of hands almost all de-clare their best years are ahead of them. This creates another challenge for advi-sors: broaching the topic of planning for the end stages of life.

That includes avoiding associating certain products or concepts with age. Wills are a good example. Emphasize the clients’ current life stage and frame the conversation around their pres-ent responsibilities. Stay away from fear, uncertainty and doubt. “Advi-sors have to plan for now in order to get them thinking about the future,” Thornhill notes, adding that as a gen-eration, boomers are eternal optimists and negative words and images will go completely unnoticed.

3. be aware boomers want to “age in place.”They have established strong social

circles and unlike their parents, are not moving to Florida or Arizona once they stop working. Instead, Thorn-hill explains they are concerned with re-feathering the nest. This includes spending money on home improve-ments, repairs and renovations. Rather than live away, they will be more open to local home-care options, live-in nursing and other assisted living ar-rangements (another appropriate eu-phemism for the outdated “nursing home”). More than ever, they will need advice on how to save for these upcom-ing expenses.

Cut to long-term-care insurance. To get them thinking about LTC, advisors should keep it personal and ask cli-ents about their experiences. They may have seen friends become unwell and struggle to pay for home health care.




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“I wouldn’t want that to happen to me,” Thornhill says, put-ting his “client” hat on for the advisors in the audience.

4. forget the facts. Wrap it in emotion.One of the biggest mistakes advisors make with boomer clients is they talk too much about products and facts. “Old-er consumers don’t respond to facts as much as emotional feelings,” notes Thornhill. “They won’t pay attention to negative thoughts and ideas,” he reiterates. Instead, he suggests using “inspirational and aspirational images” when talking to clients about their financial priorities.

Consider certain television and print ads—they have it right, he says, sharing some financial services examples. In one, a younger man asks a man in his 50s why he is selling his auto shop. The response: “I want to chase the dream before I am too tired to do it.” In another commercial, a couple is “ready to plan for the time of their lives.” Thornhill displays a print ad that features just two words, “Hello future.” All three taglines conjure up positive, emotive images without referring directly to age and retirement.

Another tip when planning your marketing messages to boomers: Avoid nostalgic themes and keep in mind that boomers want to remain active and continue to do more. “They are still forging ahead. They will respond better to new brands and new experiences,” Thornhill explains.

5. make a difference in the world. Speaking of doing, boomers are re-directing their focus to-ward positive social purpose and activities that provide in-tegral meaning. Thornhill says boomers, in their constant quest to learn, will seek out volunteering opportunities and civic and humanitarian efforts. They will respond to client-appreciation events that cater to their interests. Even some-thing as simple as gathering a team of clients to participate in a local charity walk will solicit responses.

6. get ready for referrals. This one is easy. All you have to do is ask for them.

Certainly, advisors are in an enviable position, as maintaining financial independence will be a clear focus for baby boomers over the age of 50. Now’s the right time to start planning for their best years ahead.

Sheila Avari is a freelance writer based in New Jersey. [email protected]

continued from page 26

www.advisor.ca28 advisor’s edge | june 2007

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Get out of the way


but the rest of my team can’t wait to see me go. Why is that?Well, let’s see . . . Who gets in the way of getting things done? Who tends

to make things overly complicated? Who keeps trying to find a different way to do things?

My answer to those questions is usually found in a hurried look in the mirror.That’s not to say I don’t have my purpose in the practice. I’m sure there’s some

reason why I’m around. However, that role has certainly been decreasing. I still get to do some of the dirty work, like dealing with difficult clients

and tough situations, or telling clients we can’t look after them anymore. I do the marketing and still answer the odd question on financial planning strategies.

However, if you ask the rest of the members of my team, they would likely suggest that my main role is coming up with these crazy ideas that they have to try and implement. I then tend to get in the way of other people getting things done, or volunteer to do most of the work myself and then fail to deliver.

So, there are two good reasons why they’re happy when I’m away—no new make-work projects and the opportunity to get the existing ones completed.

Have you tried stepping aside? It may be a great strategy to increase the efficiency of your advisory practice. It might also help with your personal sanity, family life and the balance (but let’s not dwell on that).

I learned this lesson most dramatically several years ago, when I had volun-teered to write the client procedures section of our evolving procedures manual. I believed I was the only one who could write it, as I was the only one who knew everything. It turned out I was wrong, as I dithered with it for nine months before asking for a volunteer. Then I left on vacation. Upon my return the chapter was complete, accurate and ready to publish.

Here are some things you already know. The business is becoming much more complex. There are lots of new administrative tasks and paperwork that drive you crazy. Even without all that, you could never provide full and comprehensive wealth

management services to your clients by yourself. To do that, you would have to be on duty all the time, be exceptional at both the big picture and the details, and continue to be an expert in an expanding universe of increasingly complex issues.

Since we all know those things, why do we have a hard time stepping aside?

You know the old saying: Lead, follow or get out of the way. Certainly, we have to provide leadership to our team. But often we are better to follow, espe-cially when we have delegated the task to a co-worker. There is nothing more counterproductive than meddling or taking a task back.

And you must get over the belief that you have to do it all because only you can do it right. I have news for you—there are a lot of things your team can do better than you.

More and more, I’m finding it useful to have a good team discussion about an issue, jointly agree on the goal and desired outcome, appoint a person re-sponsible—ideally, a volunteer—and then get the hell out of the way.

Try it sometime. Your golf game might even improve.

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

How can we miss you

if you don’t go away?

Here’s a funny one: I feel guilty when I take time off,

AE06_030.indd 30 5/25/07 10:55:41 AM

Documents

mind your - Advisor's Edge€¦ · mind your Don’t get burned. Know what’s covered by errors and omissions policies. Canada’s magazine for the finanCiaL ProfessionaL • june