When segregated funds make sense

Segregated funds are structured very much like mutual funds, but are issued through an insurance company rather than an investment or fund company. As a result, segregated funds – also known as individual variable annuities – are governed by the Insurance Act. Segregated funds are more expensive than conventional mutual funds but some investors may feel the additional cost is worth it.

Each insurance company has different features with respect to their own segregated funds. The comments below may not apply to all types of segregated funds, but helps to provide a general overview. Within each section we will compare segregated funds against regular mutual funds.

Guarantees: Segregated funds come with two types of guarantees. The first type is a death benefit guarantee. This guarantee generally provides for the higher of the original principal invested or the current market value in the event of death. The second type of guarantee is the maturity guarantee. The maturity guarantee is normally between 75 and 100 per cent of the original deposit. In order for the maturity guarantee to apply the holding period is generally 10 years. Mutual funds have no guarantees.

Resets: Certain types of segregated funds allow contract holders to reset the maturity and death benefit guarantees. Resets are only done when the market value is greater than the original amount invested. Not all segregated funds have the ability to reset and are generally only permitted to certain ages (i.e. age 90).

Scenario 1: Three years ago an individual invested $50,000 into Segregated Fund A. Today the fund is worth $70,000. You may choose to reset the maturity and death benefits from that date. This means that the guarantees noted above are now based on the $70,000 and not the original $50,000 and the maturity date is 10 years from the reset date.

Scenario 2: Seven years ago an individual invested $50,000 into Segregated Fund B. Today the fund is worth $35,000. This individual should not reset the contract as the market value is below the original investment. Mutual funds have no reset ability.

Fund Selection: Individuals investing in a particular segregated fund contract may be able to select from a group of different funds. A particular series of segregated funds may have a group of brand name funds to choose from. The selection for individual mutual funds is generally far greater. The fund contract may allow the unit holder to switch within certain funds in the group without resetting the maturity date.

Probate: With a segregated fund contract a beneficiary is named. Provided the estate does not name the beneficiary the death benefit proceeds bypass the estate and are distributed more efficiently to the beneficiary. Probate fees generally do not apply to segregated funds when beneficiaries are named and general administration fees are typically lower. Mutual funds held in an individual account may be subject to probate fees.

Age Limitation: Most segregated fund contracts may only be established for those individuals under certain ages (i.e. 90 years old). Mutual funds have no maximum age limits.

Creditor Protection: Segregated funds may be protected from creditors if a spouse, child, grandchild or parent is named as the beneficiary. Younger professionals and entrepreneurs may find this feature particularly beneficial. Mutual funds may not have this same creditor protection feature.

Fees: Both segregated funds and mutual funds have fees attached to them. The fees are often referred to as the management expense ratio (MER). The more benefits that a segregated fund has, the higher its MER. The following lists the same underlying fund and the annual MER:
• 2.78% Segregated Fund – series I
• 2.35% Segregated Fund – series II
• 2.19% Mutual Fund

The highest MER relates to Segregated Fund – Series I with 2.78 per cent. The fees are higher than the other two primarily because it has a 100 per cent maturity guarantee. Segregated Fund – Series II has lower fees than the series I but only has a maturity guarantee of 75 per cent. Both Segregated Funds have a 100 per cent death benefit guarantee. The Segregated Funds are invested in the same underlying fund as the regular Mutual Fund. The MER on the Mutual Fund is the lowest at 2.19 per cent; however, this fund has no maturity guarantees and no death benefit. The MER comparison highlights that the above benefits come at a cost.

Who Should Invest?

Segregated funds are suitable for a wide range of individuals. Professionals and entrepreneurs in higher risk professions may be attracted to the creditor protection features. Individuals with a lower tolerance for risk may want to ensure their equity investments have some protection. Seniors may benefit the most if they implement segregated funds into their estate plan.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors (insurance consultant, financial advisor, accountant and estate lawyer).

RESPs – Not just for kids

There are no age limits for Registered Eductation Savings Plans.  RESPs are often set up by adjult subscribers for the benefit of usual children or grandchildren.  But adults can name themselves as the subscriber and beneficiary. 

It is more common for individuals to change careers as a result of displacement or a desire to do something different.  In fact many are now working into their retirement years.  Furthering your education may allow you to pursue different opportunities that are both satisfying and rewarding.  The potential to increase your income may also be an attractive incentive.

An RESP is a great savings vehicle for adults planning to go back to school, couples with different income levels wishing to split income and investors wishing to defer investment income.

RESPs for Adults

The steps for opening a non-family adult RESP is very similar to opening an RESP for an individual child or family RESP.  You simply name yourself both the subscriber and the beneficiary.  Individuals may contribute up to $4,000 annually ($42,000 maximum contributions to the plan). Unfortunately adults are not eligible for the Canada Educations Savings Grant.  The following outlines why RESPs for adults are still worth considering for some.

Comparing RESPs to RRSPs

Both RESPs and RRSPs provide tax deferral benefits.   While similar in many respects, the following highlights the main differences:

  • RESP contributions are not deductible, where RRSP contributions are deductible
  • RESP contributors may withdraw their original capital at any time with no tax consequences, whereas withdrawals from an RRSP/RRIF are generally considered taxable income
  • RESPs must be terminated within 26 years after plan start date and individuals are not forced to withdraw funds after age 69; with an RRSP you must convert to a RRIF at age 69 and begin taking payments at age 70.

Withdrawing Income

The easiest way to withdraw income generated in the RESP is to be enrolled in a qualified post secondary institution.  After enrolment you may begin receiving Educational Assistance Payments (EAP).  In RESPs for adults, an EAP is a distribution of the accumulated investment income that is taxed in the beneficiary’s hands the year in which it is received.  Adults are not eligible for the Canada Education Saving Grant.  The EAP includes income only and no Grant portion.

Enrolling in School

In order for a beneficiary to qualify for an EAP the individual must be enrolled in a post-secondary program at a qualifying educational institution.  For institutions within Canada the program needs to be at a minimum ten hours a week for three consecutive weeks.  For institutions outside of Canada, the minimum is increased to 13 consecutive weeks.   The amount of the EAP is limited to the lesser of $5,000 and the actual expenses for the first 13 consecutive weeks.  There are no limits on the dollar amount of the EAP after 13 weeks.

Failure to Enroll

An individual may withdraw their original capital at any time with no tax consequences.  If not enrolled at a qualifying institution within ten years the individual can qualify for an Accumulated Income Payment (AIP) that represents the investment earnings in the RESP.  An AIP withdrawal is subject to a penalty tax of 20% in addition to the taxes payable when taken into income.  Other rules relating to the termination of the RESP after the first AIP payment also apply.  Individuals with RRSP contribution room available have an option to transfer up to $50,000 into their RRSP or to a spousal RRSP. This option avoids the 20% penalty tax and may provide a unique income splitting opportunity.

Interesting Points to Consider

Although the 20% penalty may be a determent for some, we feel it shouldn’t be.  Finding an economical course that lasts more than 13 consecutive weeks is an easy way to avoid the penalty.  The following are some interesting points to consider:

  • Correspondence courses qualify
  • Individuals are eligible for the EAP regardless of whether they attend classes
  • Individuals are eligible for the EAP even if they do not successfully complete the course
  • Individuals may be eligible for education and tuition tax credits

RESPs are not just for your children.  In fact, it might be your gateway to an exciting new career!


Education can be costly

The Cost of Raising a Child

The greatest cost in raising children may potentially be the cost of education.  There are several ways to fund a child’s post secondary education.  One way might be to anticipate that a child will receive scholarships or use student loans, while other parents may decide to pay as they go.

Whichever method parents choose to assist their children it is important to keep a mental note of the potential costs for budgeting your cash flows.  Like all plans, your future costs should also factor in the unexpected.  An unanticipated disability, death, divorce or other family emergency may interfere with your children obtaining an education.  In many cases purchasing adequate insurance may offset some of the risk if a supporting spouse were to become disabled, suffer a critical illness or pass away.

Today, many young parents are struggling to make ends meet.  Paying the household bills, including the mortgage leaves little left over for education planning.  Contributing to RRSPs provides a deduction from taxable income whereas RESPs do not provide this immediate tax relief.  Last week we discussed the basics of RESPs and the following outlines a few points to consider when looking at an RESP for a child.

Attribution Rules:  Normally, when you give your minor child money, interest or dividends earned on this money is taxed as if you had received the income (i.e. income is attributed back to the parent and taxed in their hands).  Capital gains income does not attribute back to the parents.  The attribution rules do not apply to RESP contributions.

Planning Contributions:  It may be very difficult for parents to contribute $2,000 every year.  Although the compounding component to investment returns is important, it is only one factor to consider.  Contributing a smaller amount, say $1,000 beginning immediately, is one option.  Another option may be to wait until your child is older and then contribute a greater amount, up to the yearly maximum of $4,000.  Both possibilities enable you to take advantage of the Canada Education Savings Grant (CESG).

Pre-Authorized Contributions:  Setting up a monthly pre-authorized contribution (PAC) is often the easiest way for a family to get started with investing.  Benefits of a PAC include dollar-cost averaging and the benefits of compounding over the long term.  Every month the CESG is paid based on a minimum of 20 per cent of the preceding months contributions.  Some financial institutions may not have systems in place to administer frequent contributions to RESPs.  The timing of the CESG payment may differ between financial institutions.

CESG:  The CESG is at least 20 per cent of contributions to a maximum of $4,000 annually or a lifetime total benefit of $7,200.  Utililizing the $7,200 CESG is a prudent move as this investment effectively provides a minimum 20% return upon contribution into the plan.  Although individuals may make a lifetime contribution up to $42,000 into an RESP they are effectively only obtaining the grant on the first $36,000.  If you multiply $36,000 x 20% you obtain the maximum CESG of $7,200.  The CESG makes RESPs for children very attractive.  Contributions over $36,000 are less appealing.

Grandparents:  Many grandparents are proud to start the next generation off on the right foot.  Funding an RESP is a great way to help both their children and grandchildren.  Godparents, friends and other family members may also be the subscriber of an RESP for a child.

Individual vs Family:  An individual plan is set up for the benefit of one person. A family plan is set up to allow contributions to be made for more than one beneficiary. The one condition is that all the beneficiaries must be related to the contributor(s) by blood, but not nieces or nephews.  Contributors decide on how the plan’s assets are invested along with the timing and amount of the education payments. The main benefit of a family plan is that RESP income does not have to be paid out proportionately between beneficiaries. If one child does not pursue post-secondary education, the other beneficiaries may use the income for their education.

Student Tax Initiatives:  The 2006 federal budget contained a number of proposed changes to personal income tax, some of which affect students.  For 2006 and future years, a non-refundable textbook tax credit will be introduced for post-secondary students.  The credit will be calculated with reference to the lowest personal tax rate and will be in addition to the current education tax credit.  Textbook tax credits are able to be carried forward and have the same transfer rules as tuition and the education tax credit.  For 2006 and subsequent years scholarship, fellowship and bursary income will be fully exempt from tax with respect to post-secondary education and occupational training.

The First Step:  In order to get started with an RESP today, a child needs to request a social insurance number.  An excellent source for information is www.servicecanada.gc.ca which includes information for parents.  The Human Resources and Social Development (HRSD) website at www.sdc.gc.ca also provides detailed information on obtaining a SIN for the first time.  The website enables you to download a current SIN application form.  To locate an office near where you live to pick up and/or drop off forms call 1-800-OCanada (1-800-622-6232).

Applying in person, rather than mailing the application, may be faster and more convenient.  Another benefit of applying in person is that you are not required to part with your identification documents because your identification is verified at that time.  If you obtain an application form from another source or financial institution, you should ensure that the form is current.  The application process normally takes three to four weeks before you receive the physical card provided that your application meets all criteria.  In extenuating circumstances, a SIN may be obtained verbally in a shorter period with the physical card to follow at a later date.

With the combination of tax sheltering and the CESG, an RESP may play an important role in your family’s education savings strategy.

RESP 101 – It pays to gain RESP education

What is an RESP?  Registered Education Savings Plans are registered accounts that enable you to make contributions now towards the cost of future education.   Unlike an RRSP, your contributions are not tax deductible.  Investments within an RESP have the potential to grow and income is tax-sheltered until paid out to the beneficiary.  RESPs may be very attractive for those beneficiaries who qualify for the Canada Education Savings Grant.

The Good News: Previously the rules governing an RESP were onerous. If the beneficiary did not attend a qualifying institution (i.e. college or university), any growth, interest, dividends and capital gains went to the educational institution that was designated on your RESP contract.  The good news is that the Canada Revenue Agency has significantly modified the RESP rules. In addition to the tax advantages, there are increased savings limits and additional termination options.

General Rules:  Although contributions to an RESP are not tax deductible, any income within the plan compounds on a tax deferred basis. Furthermore, when the accumulated income is withdrawn from the plan to pay for education expenses, the student pays the taxes, not the contributor.  In most cases, this income would attract little tax because the student’s basic personal exemption along with tuition and education credits help to offset the tax liability.  Any individual can set up an RESP including grandparents, aunts, uncles, godparents and friends.

Contributions:  These plans allow the contributor (called a subscriber) to deposit any amount up to $4,000 annually per beneficiary.  Contributions may be made for up to 21 years following the year in which the plan is entered into, to a lifetime maximum of $42,000 per beneficiary. If these limits are exceeded, a one per cent per month penalty tax is charged until the over-contributed amount is withdrawn from the plan.

Canada Education Savings Grant (CESG):  The CESG grant was introduced in the 1998 federal budget.  Currently, beneficiaries are not required to have an existing RESP to accumulate CESG contribution room. Under this program the Government of Canada pays a grant of at least 20 per cent of the first $2,000 of annual contributions, directly into the qualifying beneficiary’s RESP.  Qualifying beneficiaries are generally below the age of 18 and may receive a lifetime maximum CESG totaling $7,200 per beneficiary.  Contributions for beneficiaries aged 16 and 17 will only receive a CESG subject to certain stipulations. CESG room may be carried forward until the beneficiary turns 18.  Beneficiaries must have a social insurance number to receive the CESG.  If contributions are not made to the plan then the CESG contribution room may be carried forward and used when RESP contributions are made in future years.

Education Assistance Payments (EAP):  Once the beneficiary of an RESP is enrolled in a qualified school, education assistance payments may commence.  Any income or growth earned within the plan may be paid out to the beneficiary once they are attending a recognized post-secondary institution.  EAPs are taxed in the hands of the beneficiary, who reports it as “other income” on their tax return.

No Post Secondary?  If the beneficiary of the RESP does not proceed with post secondary education, the contributions are returned to the contributor with no tax consequences and the CESG, if applicable, is returned to the government. Contributors may withdraw the income earned in the RESP if the following criteria are met:  (1) all beneficiaries named in the plan are at least 21 year old and are not eligible for EAP payments; (2) contributor is a Canadian resident and ;(3) RESP was opened at least ten years ago.   These income withdrawals are referred to as Accumulated Income Payments.

Accumulated Income Payment (AIP):  Provided the above three criteria are met, the Accumulated Income Payment that has not been paid out to the beneficiary can be returned to the contributor by either: (1) transferring up to $50,000 to the contributor’s RRSP or a spousal RRSP (the contributor must have sufficient RRSP contribution room available);(2) having it taxed in the contributor’s hands at their marginal rate plus an additional 20% tax is levied; (3) donating the income to a post-secondary institution (no donation tax credit provided).

Maturity:  An RESP has to be terminated on or before the last day of the twenty-fifth year after the year in which the plan was entered into.  The consequence of this deadline is similar to the beneficiary deciding not to pursue post-secondary education.  All contributions will be returned tax-free to the contributor and the CESG repaid to the government.  Any income that has not been paid out to the beneficiary must be returned to the contributor as an AIP.

An RESP is one of several vehicles individuals may choose to help fund post secondary education.  Rules are continually changing with respect to RESPs.  Individuals should always consult with their personal tax advisors before taking any action based upon these columns.


Evaluating Your Financial Advisor

Ultimately everyone is responsible for their own financial well-being.  If you are one of the many individuals who choose not to take an active role in their finances for lack of time or interest, it’s important to acquire enough knowledge to determine whether the advisor you have entrusted is doing – at a very minimum – an acceptable job.

Many investors work with one or more of the following:  investment advisor, stockbroker, financial planner, mutual fund agent, or insurance agent.  Other individuals may have investment accounts with a chartered bank, credit union, or trust company.  Regardless of the advisors that are handling your investments, it is important to periodically evaluate the service you’re receiving and the performance of your investments.  Many people are unaware of the services that some investment advisors provide outside of investment selection.


How do you monitor the performance of your investments?  Unfortunately the tide of the market often affects investors’ opinions of their advisor.  One of the most widely used equity indices in Canada is the S&P/TSX Composite Index.  The Dow Jones, Nasdaq, and S&P 500 are also popular U.S. indices.

The single biggest factor that determines investment returns is asset allocation (percentage of cash, fixed income and equities).  The most common type of equity is common stock.  Stocks are exposed to the fluctuations in the indices noted above.  Fixed income investments such as guaranteed investment certificates, or bonds often provide investors with more assurance regarding the return of their capital and the income that they will be receiving.  Each investor should decide how much risk they are willing to take.

Risk Assessment

Do you have an idea of how your portfolio is structured from a risk standpoint?  What is your percentage of cash, fixed income and equities?  What is the quality of your equities?  Let’s look at an illustration of a typical investor with $200,000 and an asset mix of 30 per cent cash/fixed income and 70 per cent Canadian equities.  If we know that the fixed income investments earned four per cent last year then we can easily calculate that portion to be $2,400 ($200,000 x .30 x .04).  For 2005 the S&P / TSX Composite Index returned 24.13 per cent.  Provided the investor had investments that were similar to those in the index, the equity return would be $33,782 ($200,000 x .70 x .2413).  As a reasonability test, the combined portfolio should have earned approximately of $36,182 (18.09 per cent) less commissions and/or fees.

Using the same information from above, an investor with 100% guaranteed investment certificates earning four percent should not expect to earn more than four percent.  Investors that have taken the risk and have 100 per cent equities should have seen some reward last year for the risk they have taken.  Certainly some foreign markets did not fair as well as Canadian markets in 2005 and should be factored in if a portion of your equities were outside of Canada.  Individuals will also need to look at their individual equities to see the risk profile of their portfolio.

Other Services

A characteristic that should be admired in financial advisors today is the ability to communicate effectively and provide services beyond basic trade execution.  An advisor should have the expertise to deal with an increasingly complex financial and regulatory system.  The value added component is when your advisor is able to identify issues that should be proactively addressed.  Unless you speak with your advisor about issues that arise it may be difficult for your advisor to be proactive in providing you the best advice.  In many cases your financial advisor may not have the expertise to assist in all questions; however, they should have the knowledge to guide you in the right direction.

Over the 2005 fiscal year, did your financial advisor:

  • Review your plan at least once to ensure that the overall strategy is on track?
  • Discuss your asset mix to see if you were still comfortable with the amount of risk you were taking?
  • Incorporate any new personal information into your financial plan?
  • Provide you with regular updates on how your investment portfolio is performing?
  • Make themselves available to answer all of your questions or address your concerns?
  • Provide you with information to complete your taxes?

Over the 2005 fiscal year, did you:

  • Review the investment recommendations provided by your financial advisor?
  • Keep your financial advisor up-to-date on any changes to your personal situation?
  • Notify them when you could not be contacted (i.e. holidays)?
  • Review the performance of your investments?
  • Review your asset mix and discuss any concerns with your advisor?

Investors should periodically look at their asset allocation and returns over a period of time.  If you compare this information to the appropriate benchmark indices then you will be able to monitor the relative performance of your financial advisor.   We encourage those investors that have not spoken with their advisor recently to book a meeting to review their accounts.  Taking an active part in your finances may be one of the smartest investment decisions you will make.

Advisor choice not easy

Selecting a Financial Advisor

Choosing a financial institution and advisor has become an increasingly difficult decision for many individuals to make.  Finding the right advisor was not always this complicated.  Prior to the deregulation of the financial services industry in the early eighties, there were four distinct business units: banking, trusts, insurance and investment dealers.

Today, each of these business units may offer multiple services overlapping into the other pillars – the clear distinction is gone.  Adding to the complexity is the sheer growth in the number of investment dealers and advisors.  Spending the time to find the right financial advisor based on your needs may be one of the most important investment decisions you will make.

We recommend that individuals looking for a financial advisor visit at least three different financial institutions.  The more time that you spend at this stage the more likely you will find an advisor that is most suitable for you.  When you meet with each advisor, we suggest that you are prepared with a list of questions.  By obtaining answers to these questions from at least three advisors, you can make a better comparison.

The following are suggested questions that you may want to ask a financial advisor before entering into a relationship:

Experience / Education

  • What is your educational background?
  • What professional designations do you have?
  • How long have you been in the financial services industry?
  • When do you plan to retire?
  • Are you licensed as a securities dealer?
  • Are you licensed as a mutual fund dealer?
  • Are you licensed to sell insurance products?

Service Overview

  • How many clients do you have?
  • Do you have a minimum account size?
  • How often do you contact your clients?
  • Do you have support staff?
  • What are the types of services you provide?
  • What makes your service offering unique?
  • Do you work with other professionals, such as lawyers and accountants?

Investment Process

  • What is your investment selection process?
  • Do you sell proprietary products?
  • What type of products do you primarily sell (i.e. individual equities, mutual funds, bonds)?
  • Are there any restrictions on the types of investments you may offer?
  • How liquid are the investments you are recommending?
  • How do you monitor the investments?


  • How is the firm compensated?
  • What are the fees to sell and buy the investments you recommend?
  • What portion of the fee paid to the firm is paid to you as the advisor?
  • Do you offer fee-based options?
  • Do you offer managed accounts?
  • Do you offer commission only accounts?


  • Do you have clients willing to speak with me about your services?
  • Do you have professionals that may be willing to speak with me about your services?
  • Have you ever had a complaint filed against you with the BC Securities Commission, IDA or any other professional or regulatory body?
  • Have you ever been disciplined by a professional or regulatory body?

We recommend that you call any references provided and that you visit the BC Securities Commission website at www.bcsc.bc.ca.  For a nominal fee you can conduct a background check through the website and search for any disciplinary action since 1987.

The decision to select the right financial advisor is an important one.  Doing your due diligence could prevent an unfavourable outcome.

Diversification a key component

The words diversification and investments go hand-in-hand.  The term diversification generally refers to owning a number of different investments.  Investors should generally diversify by asset class, sector, geography and capitalization.   Some investors may feel they are diversifying their holdings by having investment accounts at several financial institutions.

In our opinion, diversifying between financial institutions is not necessary.  The following are a few benefits of consolidating your investments with one advisor:

Asset Mix

The most important component of investment performance is asset mix.  Consolidation can help you manage your asset mix and ensure that you have not duplicated your holdings and are therefore, not overexposed in one sector.   Unless your financial advisors have been given a copy of all of your investment portfolios, it will be difficult for them to get a clear picture of your total holdings.  Even if you were able to periodically provide a summary of each account to each advisor, as transactions occur you would still need to update every advisor with those changes.


Most firms provide access to view your investments online.  If you have accounts at different institutions, then you will need to get online access from each. It is unlikely that you will be able to transfer funds between these institutions online.

Tax Receipts

If you hold non-registered investment accounts at several institutions, you will receive multiple tax receipts.  By consolidating your accounts, you will receive a limited number of reporting slips for income tax each year.  Reducing the number of tax receipts may also reduce the amount of time your accountant will spend completing your tax return.

Managing Cash Flow

Projected income reports from different institutions will be presented in various formats and at different points in time.  For you to obtain a complete picture of your financial situation, you will have to manually calculate the total income from your investments.  In situations where you have instructed your financial institution to pay income directly from an investment account to your banking account, it becomes more complicated to manage when there are multiple investment accounts.

Estate Planning

A couple of weeks ago we highlighted the benefits of registering your physical share certificates in a nominee account.  Another helpful estate planning measure is to reduce the number of investment accounts and bank accounts.  Having your investments in one location will certainly simplify estate planning and the administration of your estate.

Monitoring Performance

Some investors may be comparing the performance of one firm/advisor to another.  Investors should be careful when doing this to ensure they are really comparing apples to apples.  One investment account may have GICs while another may have 100% equities, in which case we would expect the returns to be different.  It is easier to understand how all of your investments are performing when you receive a consolidated report.

Conversion of Accounts

If you have multiple RRSP accounts and are turning 69 next year you may want to consider consolidating now and discussing your income needs with an advisor that you trust.

Account Types

Fee-based accounts are usually suitable for a household that has total investment assets of $100,000 or more at one institution.  Consolidating allows these types of accounts to be an additional option.  As your account value grows, the fees as a percentage may decline in a fee based or managed account.

Other Benefits

When individuals have all of their registered and non-registered investments in one location an advisor may be able to fund RRSP contributions through in-kind contributions.  Your advisor may also be able to swap investments between accounts to improve the overall structure from a cash flow and tax efficiency standpoint.

Building Relationships

Building trust between advisors and their clients goes both ways.  Clients want their advisor to have the expertise and ethics to do what is in their best interest.  Advisors want to be able to trust their clients and ensure that the effort they are dedicating is appreciated.

As you’re looking through all your individual account statements you may want to give some thought to the level of service you’re currently receiving.  If you are happy with one of your advisors, the best compliment you can give is to consolidate your investment accounts with them and this will provide you with all the benefits described above.

The value of knowledge

Do you need a Financial Advisor?

There used to be a time when investors who wanted to purchase stocks and mutual funds had only one way to go – through a financial advisor.  But since 1984, when Toronto Dominion launched its discount brokerage services have appeared allowing individuals to choose to continue working with an advisor or execute trades themselves by phone or online.

Many investors are unclear about what financial advisors do and how they are compensated.  This is understandable as every advisor has a different skill set and offers various services.  Spending some time this spring to understand the services and options available may provide clarity on the benefits of working with an advisor.

The decision for some investors to do their own finances may come down to wanting to save money.  Another reason may be that individuals feel that it is easy to take control of their own investments.  These individuals may also be unaware of the services offered by financial advisors.  The more time you dedicate to your financial needs the more likely you are to realize the benefits of working with a qualified financial advisor.

Is It Too Expensive?

When fees are charged on a per transaction basis, the value of the service is directly linked to the cost of the trade.  Unlike an accountant or lawyer that charge a fee based on time, financial advisors historically have charged on a transactional basis.  The premise being, the more trades you are doing, the more work the financial advisor is doing on your behalf.  This is only partially true as the majority of the services that many financial advisors provide are not billed in this traditional way.  The industry solution to this issue was to develop a fee-based platform.  Fee-based advisory services are charged a flat fee that is based on your total investment assets – these types of accounts provides free trades up to a reasonable limit.  This places the focus on all of the services provided by the financial advisor including transactional costs.  This also highlights the other services that financial advisors do, such as structuring your total finances in a way that saves you money.

Past Experience

Some individuals may have received poor advice from an advisor in the past leading them to question why they are paying fees when they may not perceive value in return.  In these cases, we encourage investors to consider the following:  How much effort did you put in to finding the best financial advisor?  Did you stay the course when things got volatile?  Did you take unnecessary risks?  Did you have a plan?

Easy to Do Yourself

A discount brokerage representative does not provide advice on individual investments or offer other value added services that an advisor does.  Some discount brokerage firms are beginning to provide their clients with limited access to research.  Will you have the time to read through research reports and understand the financial jargon?  Are you able to develop a diversified portfolio that optimizes returns while minimizing risk?  Financial markets have become more complicated and staying on top of all the changes and financial news is more than a full time job.

Taking Out Emotion

Removing the emotions from buy and sell decisions is important.  All too often when individuals are making their own investment decisions, they are based on emotions such as anxiety about not being in the markets, or being nervous about overexposure in the markets.  An advisor can offer guidance having experienced several market cycles.

Limited Time

Many savvy investors use the services of a financial advisor.  Having a trusted advisor to discuss your total financial picture with can give you more assurance that the decisions being made are the correct ones.  Individuals that are busy at work often have limited time to attend to financial affairs.  Others may want to enjoy retirement without the daily work of monitoring their investments.  Regardless of the individual’s stage in life, they can be comforted by having an advisor that knows about their personal situation.

Other Services

There are many things that some advisors do for clients that can easily go unnoticed.  An investor that gets fixated on the cost of a single trade may decide that doing trades themselves through the internet is a prudent move.  What is the big picture here?  Is it time to cut corners when it comes to your finances?  What is the value lost by not having an advisor on your side to help you achieve your goals?  A simple strategy recommended by your advisor may increase returns, reduce risk, save taxes, and simplify your life.  An advisor can provide clarity when you receive conflicting advice from friends and family.

A trusted financial advisor is dedicated to keeping up-to-date on regulatory changes and financial news.  Financial advisors have resources and a network of professionals that provide solutions to the most complex of financial questions.  Most individuals are more likely to achieve their financial goals if they work with a knowledgeable advisor.

Options to consider about securities certificates

Registering your investments

Investments and shares generally need to be registered in either the name of their beneficial owner or registered under the name of a nominee.  Most new investment accounts that are being opened today have the individual securities being registered in nominee name.

Registered In Client Name

More common in the past, investors had investments registered in their own name. Many investors today still have share certificates in their name either from recent transactions or holding certificates they acquired in the past.  Client requests to receive the physical share certificate are becoming less common.  Such requests generally result in an administration charge of approximately $35 per share certificate.  Holders of share certificates not only have to monitor the quality of their investments but now have the added responsibility of securing their investments as well.

Some investors may feel that holding the share certificate is more tangible.  Share certificates are generally decorated with intricate artwork which is why collectors of defunct stock certificates tend to hang on to them.  When investments are registered in client name the dividend and interest cheques are mailed directly to the registered owner. As an investor registering in client name, you have more to deal with in regards to the administration of holding, buying and selling the shares.

What has changed?

Life has become more complicated.  Capital markets have expanded.  Fortunately, computers have made the tasks of shareholder registry and transfers more efficient.  In addition, financial institutions provide a nominee service that also assists in expediting transactions.

Registered In Nominee Name

The majority of investors today are registering their securities in nominee name.  This essentially means that the securities in your investment account are not registered in your name but in the firm’s name or the name of another person or company holding the securities on your behalf.  The issuers of the securities may not know your identity (beneficial owner) as your account is in nominee name.  You may choose whether you object to or would rather not disclose your personal information as beneficial owner to the issuers of the securities.   In addition, securities law permits you to decide if you would like to receive security holder material such as annual reports and financial statements.  If you object to the disclosure of your personal information and still wish to receive security holder material there may be costs associated for the financial institution to send you this information.

Nominee accounts take the majority of the administration out of your hands.  Although your securities may be registered in the financial institution’s name as nominee, you maintain beneficial ownership.  The nominee generally may not act unless instructed by you.

The following are some of the benefits of registering your securities in nominee name:

  • Interest and dividends on your securities are paid into your investment account versus having cheques mailed to you for each security you own
  • Online access listing your investments
  • Monthly transaction histories and statements enable you to keep track of your investment and better monitor their value
  • Flexibility to sell a partial position or to transfer a security in-kind within investment accounts
  • You will receive consolidated tax slips for each non-registered investment account each year
  • Efficient management of cash flow with all incoming income deposited into your account; the ability to customize outgoing payments, most of which may be automated
  • Flexibility with respect to adding savings into the investment account
  • Efficient settlement occurring normally within three days if held in nominee name with minimal paperwork
  • Timely notification and advice with corporate actions and reorganizations such as rights issues, takeover offers, conversions of subscription rights, etc.
  • Positions held in nominee name through a financial institution help to create a more organized estate

10 Questions to Consider

Individuals with physical stock certificates should consider the following:

  1. What are the benefits for holding your individual share certificates in your name versus nominee name?
  2. What happens if your share certificates are lost or stolen?
  3. Do you know how to transfer your share certificates to another individual?
  4. Do you feel the executor of your estate will be able to find all of your share certificates?
  5. Do you have old share certificates that are defunct that you are still holding onto?
  6. Do you have share certificates that you are unsure of their value?
  7. Are you aware of the added administrative burden your executor may encounter by having share certificates registered in your name?
  8. Are you aware that transfer agents may charge fees to your estate even when proper documentation is provided?
  9. When do you plan to dispose of your shares?
  10. How did you plan to dispose of your shares?

The answers to the above questions may show investors that there are few reasons to hold investments in their own name.  You will find that the costs to your estate may be significant.  If the costs are not a concern then consider the longer delays and greater paperwork that you are essentially asking your executor to do for you.  Registering your investments in nominee name ensures completeness, ease of administration and less overall risk of something being overlooked.

Estate Planning Tip

A basic estate planning measure that we recommend for individuals with share certificates is to open an investment account and have them registered in nominee name.  This will ensure that your investments are fully accounted for and safeguarded.  At the same time you are reducing estate costs and saving the executor you have appointed a lot of paperwork.

The benefits of holding investments in nominee name are many, especially when it comes to estate planning.  For some, it may be more important to consider the consequences of not registering your securities in nominee name.  We recommend that if you have share certificates registered in your name that you meet with a financial advisor to determine if the certificates have value and if you should consider registering the securities in nominee name.

Unmasking F-Class Funds

F-Class mutual funds are gaining in popularity as investors begin to understand the benefits.  Designated in 1999, they are available for fee-based clients only, and the majority of fund companies offer them.

To understand F-Class we need to understand the types of fees associated with mutual funds.  All mutual funds have annual fees and service fees.  Combined they are often referred to as the Management Expense Ratio (MER).  The annual fees include the fees to the portfolio manager and the ongoing expenses of the fund.  The service fee is the amount that is paid to the investment firm that is holding the investment, a portion of which is generally paid to the advisor.

Let’s use a fictional mutual fund called XYZ Fund.  The XYZ Fund has an annual MER of three per cent that is comprised of an investment management fee of one and a half per cent, administrative and operating expenses of a half of a per cent and a service fee (often referred to as trailer fees) of one per cent.  With regular mutual funds, the three per cent is deducted from the adjusted cost base of the fund and the mutual fund company sends the servicing firm one per cent.  With F-Class mutual funds, only two per cent would be deducted within the fund and the fund company does not compensate the servicing firm.

How is F-Class different?

The structure of the MER is different with F-Class mutual funds than with regular mutual funds.  Fee-based clients are already paying a fee to their advisor based on the assets in their account (including mutual funds) so the fund companies have eliminated the advisor commission component, thereby eliminating a duplication of fees for the client.  The F-Class version simply excludes the one per cent service fee, making the XYZ Fund available with an MER of two per cent (rather than three per cent).

Why is this important?

Five reasons why we like F-Class:  1) Fee Transparency, 2) Fee Flexibility, 3) Commission, 4) Tax Efficiency, and 5) Benefits for RRSPs and RRIFs

1.  Fee Transparency:  With regular mutual funds the fees are embedded in the unit price and are not transparent unless one is inclined to read through the prospectus and financial reports.  The unit value of the fund declines when the fees are charged.  With F-Class funds the investment management fees and administrative and operating expenses totaling two per cent are still embedded in the unit price.  The service fee is charged by the investment firm directly allowing the individual investor to clearly see the fees paid.

2.  Fee Flexibility:  With regular class mutual funds the ongoing fees paid to the investment firm are set by the mutual fund company, there is no flexibility.  With fee-based accounts, the client and advisor agree on an appropriate fee to be charged.

3.  Commission:  The majority of mutual funds have been purchased on either a front-end (initial service charge) or back-end (deferred sales charge) basis.  Front-end means that the investor paid a commission to the investment firm when the fund was first purchased.  With back-end purchases, the fund company paid the investment firm the commission at the beginning and the investor paid no commission.  If the investor sells the position, the fund company will charge the investor a redemption fee that declines with time; however, this is generally zero if the fund was held for seven years or more.  F-Class is considered no-load as it has no commissions to purchase or sell, resulting in greater flexibility.

4.  Tax Efficiency:  For non-registered accounts the quarterly fees charged for F-Class are fully deductible on schedule four of your tax return when paid, even though you may still hold the underlying security.  With regular mutual funds the fees are deducted automatically and have the effect of lowering the current market value of the fund.  When you ultimately sell the regular mutual fund then the difference between the adjusted cost base and the current market value is a capital gain (loss).  As only one half of capital gains are taxable, investors are essentially only getting a deduction for half of the embedded fees.

5.  Benefits for RRSPs and RRIFs:  Although investors are not able to deduct the fees associated with F-Class mutual funds held within a registered accounts they are able to pay the fees by contributing outside money.  Contributions into the account to pay fees are not deductible; however, this does allow the investments within the account to compound even more.

F-class is one of the benefits available to investors that have a fee-based account.  You may want to talk to your advisor to see if a fee-based account is right for you.