Closed-end funds grow popular

Funds allow investors the ability to obtain diversification by pooling their dollars together.  Investors must be careful to pick the fund managers they feel will do the best job.  With the number of funds steadily increasing this is not an easy task.  In addition, there are a variety of different funds available with different investment objectives, strategies, and portfolios.

The purpose of this column is to discuss investment strategies with respect to “closed-end” funds.  It is important for investors interested in funds to obtain an understanding of the difference between “closed-end” and “open-end” funds.

Open-End Funds

Most of the funds on the market place are open-end funds (OEF), which generally have no restrictions on the amount of shares the fund will issue (unless a fund manager closes the fund to new purchases). The fund will continuously issue shares and also buy back shares when investors wish to sell.  OEFs are issued by an investment company, and are subject to certain disclosure rules.  After purchasing an OEF you will generally receive a full prospectus in the mail outlining the funds investment objectives, strategies and fees.

Closed-End Funds

Growing rapidly in the market place are closed-end funds (CEF).  The initial public offering is generally done through a prospectus, similar to OEF.  This document is intended to provide investors complete information on the structure as well as all applicable fees.  We encourage investors to read this document.  As an example, the prospectus may specifically state whether the CEF may use leverage within the structure.

Important Difference

CEFs do not continuously offer their units for sale as an OEF would.  CEFs sell a fixed number of units at one time, through the initial offering.  After the initial offering the shares typically trade on a secondary market, such as the Toronto Stock Exchange (TSX).  CEFs trade on an exchange much the same way as individual equities.

Net Asset Value

OEFs are bought and sold at net asset value (NAV) directly from the fund company.  NAV is the total value of the fund’s portfolio less liabilities generally calculated on a daily basis.  As noted above CEFs trade on an exchange after the initial public offering.  As a result, they are generally bought or sold at a discount or premium to its NAV.  Although a fund company does not redeem CEF units, most disclose their NAV daily.


When CEFs disclose their NAV, these may be compared to the most recent trades in the secondary market.  Investors who look at the various CEFs offered in the secondary market may find that most trade at a discount to their NAV.  It is not uncommon to see some CEFs trading at a discount of 5 to 10 per cent or more during market volatility.  This may be a little frustrating for investors who purchased a CEF at the initial issue and are now looking at selling their units.  On the flip side, opportunities may become available for investors looking on the exchange for deep discounts (large differences between NAV and market value).


Some CEF investments are not redeemable for a period of time.  CEFs are generally structured so they are not required to buy units back from investors until maturity of the structure.  CEFs therefore may not be suitable for individuals who desire liquid investments.  CEFs are generally not redeemable by the company (see redemption privileges below).   Investors should use caution prior to selling CEFs on the secondary market.  Many CEFs have very little trading volume and care should be taken before entering “market” orders.  Prior to making a CEF purchase on the secondary market, investors may be able to look at the historical volumes and total issue size of the CEF.  This may provide some indication as to the future liquidity.


As noted above, the trading volumes on CEFs may be very low.  In some cases the spread between the bid and the ask may be significant.   Once a secondary market exists for a CEF, investors are able to sell their units if there are buyers.  It is not uncommon to see a significant change in the market price of a CEF when an investor sells a large position.

Redemption Privilege

One feature that investors should consider prior to purchasing a CEF is if the offering document provides for a redemption privilege.  Some of the original CEFs do not have a redemption privilege.  We would expect some of these CEFs to possibly trade at a greater discount than those that have redemption privileges.  Most of the newer CEFs provide some form of redemption privilege.  The more frequent the redemption privilege the more flexible for the investors.  Some offering documents provide redemption privileges equal to 100 per cent of NAV.  Other less attractive CEFs may have redemption privileges equal to 90 or 95 per cent of NAV.  Individuals who have closed end funds should be aware of these redemption dates, if applicable.  The offering document generally provides full details with respect to redemption privileges.

Ongoing Management

Companies may establish a CEF (rather than an OEF) for the ease of administration.  After the initial offering, management knows the amount of funds available for investment purposes.  Administratively they do not have to be concerned about additional purchases or early redemptions.  Redemption rights by investors generally must be provided to the issuer well in advance and settlement may be longer than the normal three days.

Income Payments

CEFs may be structured in a manner that provides a regular stream of income to investors.  Some structures are more beneficial in a non-registered account if the income payments are tax efficient.

Typical CEFs

The following are the main categories of CEFs:  global equity, income and growth funds, fixed income funds, preferred share funds, income trust funds, commodity funds, infrastructure funds, and alternative asset management funds.

We encourage all investors considering a closed end fund to understand the limitations and risks.

Informed decisions are necessary in the world of structured products

Investment bankers and financial institutions have become very creative in the structured products they design.

Essentially, these products are designed to meet investor demand.  Special features are often added that may relate to risk and return, such as principal protection, while some are arranged to distribute tax efficient income.

Nearly all of them have a targeted investment objective.

Structured products are generally a pre-packaged investment strategy that may include a combination of investments and derivatives.  The structure is generally linked to the performance of an underlying security or basket of securities.  The structure is generally linked to the performance of an underlying security or basket of securities.

Every structure is different and some may hold domestic investments while others are linked to foreign investments.  Some structures may be linked to direct holdings, other funds and indices.  Often, the linked investments may be combined with derivatives making structures more complicated to understand.  Typical types of derivatives include options, forwards, and swaps.

Rather than explain the mechanics of derivatives we will explain the main reason why they exist.  Derivatives exist to enable the transfer of risk from those who do not want to bear the risk to those who do.  In other words, some investors may use derivatives to reduce risk (for a fee), while others may use them to increase risk and the potential for return.

So, how are they used?  Structured products are generally an alternative to a direct investment.  When people get excited about an asset class or a specific type of investment then financial companies are likely to respond by creating a structured product to meet the investment demand.  Structured products may be added to a portfolio for a number of reasons, to provide diversification, exposure to different asset classes and geographies.  Investors may find them appealing because they provide lower correlation to other investments within a portfolio.  Simply put, they react and perform differently to various market conditions.  The products that offer some form of protection may provide a method of managing downside risk.  As noted above, many structured products provide tax-efficient income.

During the technology boom of the late 1990’s many people were following financial news and seeing incredible gains in this sector.  Sophisticated and unsophisticated investors wanted to buy technology.  Financial firms responded by setting up technology mutual funds and other structures linked to technology.

Many investors want to preserve their capital, but even more so after the tech bubble and 9/11.  Around this same time, fixed income investments, such as bonds, were barely staying ahead of inflation and taxes.   Financial firms responded quickly by offering financial products with equity exposure and principal protection.

Trust Example

Prior to the federal government’s “tax fairness plan” announcement on October 31st, many investors were excited about income trusts.  Several structured products were created to hold a basket of income trusts and provided investors an easy way to obtain diversification within this type of equity investment.

Retirement Example

Some companies have developed income and segregated funds that are more complicated than previous series.  Some of these funds are focused on creating retirement income and have different features that individuals should fully understand prior to making an investment.

Infrastructure Example

Some structured products are very interesting to read about.  Take the recent “infrastructure funds” as an example.  The average investor cannot simply go out and buy a road or bridge.  Some of these structures allow individual investors access to these types of asset classes that have primarily been reserved for private equity and pension plans.

Other Examples

New structures are continually being created.  Many of these structures may provide investors access to international investments.  Other funds may have specific objectives including uranium funds, water funds, socially responsible investing, etc.  A key point to remember is that with some types of investments or asset classes, structured products may be the easiest way to gain access.

Who uses Structured Products?

Although heavily marketed to the retail investor, they extend to all individuals regardless of net worth.  Investors with small accounts may be attracted to the low minimum amounts required for most structured products.  Hedge funds are generally targeted to the high net worth individual.

Understand the Structure

Regardless of the amount people would like to invest, or their level of sophistication, it is important to understand the structure before making a purchase.  This understanding should include how the investment objectives of the structure fit into your overall plan.  Take a detailed look at the risks and rewards, fees, and liquidity.  Comparing structures issued by different companies may soon reveal the different options available.  A complete understanding of the investment is also necessary to monitor the ongoing performance.

We caution all investors to only consider purchasing structures they understand and are suitable for their plan.  We recommend avoiding investments you do not understand.  From time to time you may miss out on a good opportunity, however, successful investing also involves avoiding poor investment decisions.

When the dust settles on income trusts

Although a few weeks have passed since the news effecting the taxation of income trusts, time isn’t helping investors forget the Oct. 31 announcement.

The spectrum of comments in the media has ranged from general acceptance to outrage.  Two things are certain-  investors dislike negative surprises and the federal government is not going to reverse this announcement.

Investors who overweighted income trusts for a long period of time have profited handsomely.  One could surmise that it was good while it lasted.  The best way to combat volatility and uncertainty in the market is to diversify your portfolio.

The first step in diversifying your portfolio is to establish an Investment Policy Statement (IPS).  An IPS provides the framework for developing a disciplined investment approach.  A disciplined investment approach nearly always prevails in the long run.  Every individual has to obtain an understanding of the level of risk they are comfortable with.

An IPS also highlights the need to rebalance individual positions and asset classes periodically.  Determining an appropriate asset mix between cash, fixed income and equities is the most important decision investors need to make and a critical component of an IPS.   Any change in your personal situation or the taxation of investments should result in individuals reviewing their current IPS.

Illustration:  Mr. Patterson has the following asset mix – 5 per cent cash equivalents, 30 per cent fixed income and 65 per cent equities.  The cash equivalents component is invested in a money market fund.  Fixed income is comprised of Guaranteed Investment Certificates (GICs), bonds and treasury bills.  Mr. Patterson’s 65 per cent equity component is invested as follows:  common shares (25 per cent), preferred shares (10 per cent), mutual funds (10 per cent), exchange trade funds (10 per cent), and income trusts (10 per cent).  In the first week following the October 31 announcement, the income trust sector index declined on average approximately 14 per cent.  Some of Mr. Patterson’s exposure was to real estate income trusts which were not impacted.  There is no doubt that Mr. Patterson’s portfolio was negatively impacted from the income trust news.  Fortunately, other components of his investments, primarily his common shares, performed positively during this same period and his combined portfolio actually increased in value.

Concentration and Timing

Mr. Patterson’s portfolio mix described above provides one example of a diversified portfolio.  In many cases a diversified portfolio really shines when negative market events occur.  Individuals that chose to concentrate or overweight a portion of their portfolio within income trusts have been impacted the most, as were those people who purchased income trusts recently.  We encourage investors to understand the asset class weightings in their portfolio.  What component of your portfolio is comprised of income trusts?   Once determined, this should be compared to your overall investment plan.

Structured Products

As the income trust market has grown in popularity so too has structured products that pool these types of investments.  Many of these pooled products are structured as “closed end funds.” They trade on an exchange and may not be readily redeemable from the fund company.  As these structures trade on an exchange they may trade at a discount or premium to the actual Net Asset Value (NAV) of the underlying investments.  Some closed end funds have very low trading volumes and in the absence of individuals wanting to purchase, individuals entering market sell orders may receive a discounted value.   These structures often provide investors the ability to redeem at NAV at predetermined times.  We encourage investors to obtain an understanding of these dates and the various redemption privileges.

Active versus Passive

Individuals who have purchased structured products may want to determine whether the fund is actively managed or whether it has a passive structure.  Fees for actively managed funds are generally a little higher than passive structures.  Examples of a passive structure may be a basket of 100 of the largest income trusts, equally weighted.  Certain actively managed structures may provide a flexible mandate to change to other income asset class types, while others may be restricted to income funds only.  Investors should determine whether their funds hold income trusts and whether the mandate is flexible or not.  Investors holding active and passive income trust structures should assess these strategies in light of the recent news.

All Or None

For those investors that are holding individual income trusts the options are a little different.  The recent news highlights the need to hold quality investments.  Investors should clearly understand that the recent announcement does not wipe out the fact that many of these trusts are solid businesses that will continue to pay a stream of consistent income.  The tax efficiency will continue until 2011.  Often at times investors feel they have to make an all or none decision.  If you are undecided as to the best course of action then sometimes the middle road is the best option.  Selling half of a position that you are uncertain about will reduce your overall exposure but still provide you some income and hopefully the benefits if the trust market stabilizes or improves from its current state.

Stop Loss Orders

When uncertainty still exists regarding a specific investment many investors choose to put a stop-loss order to minimize further downside risk.  This type of order is used not only to reduce further losses but also to protect unrealized gains. This type of order is automatically triggered once the security’s price declines to the stated limit within the determined time and becomes a market sell order.  Investors should be cautious when entering stop orders on thinly traded positions.

Tax Consequences

Individuals that hold income trusts within a taxable account should assess their current tax situation.  Most individuals that have held these investments for a significant time may still have significant unrealized capital gains.  Selling prior to year-end may realize these gains and create a taxable capital gain.  Others that have recently purchased income trusts may have unrealized capital losses.  Tax loss selling is a strategy that can be used to offset capital gains from other investments.

What type of investment would you purchase today?  Some individuals may see value in those income trusts that have declined in value.  Others may choose preferred or common shares.  Solid research on blue chip equities has been a long-standing successful approach to equity investing.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors.

Enhancing financial growth through re-investment

Not everyone who purchases investments wants or needs the income today.  In many they’re trying to grow a nest egg to fund a future goal, such as retirement.  These investors may want to see more growth in their portfolios and may not be attracted to investments that pay investment income.

Many investments have both a growth and income component.  Fortunately most of these same companies offer the dividend reinvestment program – often referred to as a “DRIP.”  Growth is often achieved through price appreciation of the investment and also reinvesting the income.

DRIP Illustration

An investor purchased 400 shares of the common shares of ABC Corporation currently trading at $30.  The current quarterly dividend is set at .25 per share.   Based on these values, when the dividend is payable, the investor would receive (400 x .25 / $30) approximately 3 shares of ABC and $10 cash.  After the dividend the investor would own 403 shares.

Tax Effect

Although the investor above may have requested that their dividends be reinvested, the dividend income will still be considered income for taxable accounts in the year the dividend was declared.  Investors will receive the applicable taxation slips and should ensure they have sufficient cash on hand at the end of the year to pay any tax liability.  DRIPs in an RRSP account are ideal as any income is deferred and is not taxed immediately.

Adjusted Cost

The DRIP program has investors acquiring shares at different prices with each dividend being reinvested.  For taxable accounts it is important to keep track of the costs at which the new units were reinvested.  The cost of the original purchase plus the total value of the shares reinvested on the date of the DRIP equals the adjusted cost base.


There are no commission charges for the DRIP program.  Certain investments automatically reinvest distributions without being set up under the DRIP program.  Many investments do not have a DRIP program.  Investors can provide their investment advisor a copy of their statement and request which positions are eligible to be set up as a DRIP.

Fractional Shares

Unlike mutual funds, it is not possible to have fractional shares of common shares.  The illustration above highlights that the fractional portion (less than the amount to purchase a whole share) is paid as cash into the investment account.  Stock splits are generally a good thing for individuals that have the DRIP program.  Share prices are generally reduced resulting in a greater portion of the dividend being reinvested.

Odd Lots

Years ago investors were warned that they may have difficulties selling shares of companies if they had an odd lot.  A lot is generally considered 100 shares.  One can easily see how the DRIP program would result in an odd lot situation.  Today this is less of a concern for any position that has a moderate volume of shares traded daily.  With reorganization, spin-offs and computerized trade execution many investors have odd lot holdings.

Position Size

Investors should take care to monitor their position sizes.  Investors may find over time that certain positions that are set up as a DRIP may become overweight within their overall portfolio.  Investors who have charitable intentions may want to consider donating shares or sell a portion of their holdings as a means to rebalance the portfolio.


A DRIP can easily be cancelled.  An investor may want to cancel a DRIP when they begin to require income from their investments.

Growth oriented investors may find the DRIP a low maintenance way of dollar cost averaging while reducing the costs of investing and employing cash that may otherwise be earning a low return in an account.  The DRIP allows compounding of investment returns which can enhance total returns.

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).

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  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.