Wealth Professional 2.5

PORTUS PRINCIPAL SPEAKS OUT Q&A ON THE PERILS OF GREED SUCCESSION ON SHARBOT LAKE W.A. ROBINSON PASSES THE REINS SWITCHING FIRMS? EVERYTHING YOU NEED TO KNOW TO MAKE THE JUMP

WWW.WEALTHPROFESSIONAL.CA ISSUE 2.5 | $6.95

ADVISORS ON FUND PROVIDERS PLAYERS RANKED AND RATED

BY HUNDREDS OF ADVISORS

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PLAYERS WITH THE BEST SERVICE, ACCURACY AND SUPPORT

INVESTMENT OUTLOOK: WHAT TO EXPECT FROM MARKETS IN THE YEAR AHEAD

24/09/2014 3:25:50 AM

Volatile markets. New disclosure rules.

Different business models.

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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The IA Clarington Funds and IA Clarington Target Click Funds are managed by IA Clarington Investments Inc. IA Clarington and the IA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.

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CONTENTS

4 | Forum 6 | News Analysis 8 | Infographic 10 | Q&A: When major hedge fund Portus went down, client money seemed to disappear into a black hole.

16 | A successful succession: When it came time to shift management at well-known family run firm W.A. Robinson, a well-thought plan went into action.

By Jeff Sanford.

62 | The client’s take: Ken Kivenko speaks out. By Nicola Middlemiss

26 | Investment outlook: What to expect from markets in the year to come. By Jeff Sanford

64 | Image consultant: Keeping up with the latest in men’s suits.

Nicola Middlemiss

34 | Actively managed ETFs: Once thought impossible, actively managed ETFs are here. Does the mutual fund have a place in the industry anymore? By Jeff Sanford 48 | The millennials: Will Gen Y take up the equity way of life? By Claire Gagne 52 | Shifting firms: It’s a way to move ahead in your career. Here’s how to do it right. By Liz Brown 54 | Organizing your time for maximum efficiency Doren Aldana

63 | Day in the life: Chris Riddell

43

Growing profits: Farmland investing has been all the rage of late. But is the boom already wilting on the vine?

By Jeff Sanford

58 | Getting inside our heads: Understanding your employees. Jill Fraser 60 | The art and science of mindfulness

20 ADVISORS COVER STORY

WP Survey: Advisors on fund providers 2014.

Our inaugural survey of Canadian fund managers.

issue

2.5

ON FUND PROVIDERS OCTOBER 2014 | 1

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EDITOR’S LETTER

FUND PROVIDERS IN FOCUS COPY & FEATURES EDITOR Vernon Clement Jones SENIOR WRITER Sophie Nicholls WRITER Mark David COPY EDITOR Nicola Middlemiss CONTRIBUTORS Maggie Crowley,

ART & PRODUCTION GRAPHIC DESIGNER Marla Morelos, Joenel Salvador

SALES & MARKETING NATIONAL ACCOUNTS MANAGER Dane Taylor ASSOCIATE PUBLISHER Trevor Biggs GENERAL MANAGER SALES John MacKenzie MARKETING AND COMMUNICATIONS Claudine Ting PROJECT COORDINATOR Jessica Duce

CORPORATE PRESIDENT & CEO Tim Duce OFFICE/TRAFFIC MANAGER Marni Parker EVENTS AND CONFERENCE MANAGER Chris Davis

Editorial enquiries vernon.jones@kmimedia.ca Advertising enquiries dane.taylor@kmimedia.ca Subscriptions tel: 416 644 8740 • fax: 416 203 8940 subscriptions@kmimedia.ca KMI Publishing 312 Adelaide Street West, Suite 800 Toronto, Ontario M5V 1R2 wealthprofessional.ca

Advisors would be nothing without the product they provide or otherwise steer clients toward.

While that’s a statement increasingly up for debate as the industry sees momentum for feebased transactions build, for now, at least, it holds sway. It’s also acted as the key driver for WP’s first-ever Advisors on Fund Providers survey.

Starting page 20, that research, based on direct feedback from hundreds of advisors this September, tracks your impressions around any and every aspect of the services your fund providers deliver to you, and by extension, clients. WP’s goal is to provide a candid snapshot of how the fund industry is doing in terms of meeting today’s needs but also in preparing to meet those of the future.

The results rely on anonymity and don’t profess to be science, but they do point to those players striving ahead in key service areas while others will need to catch up.

In both cases, fund providers are actively interested in your criticism, seen as essential to future growth. I suspect you agree.

Cheers, Vernon Clement Jones Senior Editor

Copyright is reserved throughout. No part of this publication can be reproduced in whole or in part without the express permission of the editor. Contributions are invited, but copies of work should be kept, as IB magazine can accept no responsibility for loss.

CONNECT

Contact the editorial team:

vernon.jones@kmimedia.ca

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FORUM / NEWS

JARISLOWSKY’S RRSP ADVICE SPARKS DEBATE

Advisors speak out on a controversial idea floated on the WP website this month Last month, WP published a Q&A with eminent financial advisor Stephen Jarislowsky. In that interview he provided some controversial advice: according to Jarislowsky, it makes sense to invest funds outside of an RRSP. Jarislowsky maintains that holding investment funds outside of a registered retirement fund sees the returns from those funds not taxed as income (as is the money from a RIF).

This fact can save investors over the long-term. The controversial advice sparked a round of comments on www.wealthprofessional.ca “One can only be impressed with Mr. Jarislowsky’s reputation,” but his comment on RRSPs are “baloney.”

When it comes to RRSPs, “The deduction and sheltering beats the advantageous tax rate…if done properly, most people will pay lesser marginal tax

rate at retirement than while at work. His comment is so unfortunate given that already so few people invest in RRSPs.” — Michel Guimond. “…for most people, RRSPs make sense. One good example: The spousal RRSP. When spouse A earns good income and spouse B very little, it’s tough to find a better solution than a spousal plan,” — John Wallace.

“Advisors need to consider whether the client has a pension plan that will cover their basic retirement expenses, before asking ‘what is the spread between current tax rates and retirement tax rates?’ For the average Canadian without a pension and paying tax at a rate of 25 per cent or more while employed, I’d suggest both an RSP and TFSA. Each client is unique and each situation is also u n i q u e.

K n ow yo u r c l i e n t ,” — Judy Mulder.

“Mr. Jarislowsky might be correct in his assessment if there is no investment of the refunds brought on by RRSP contributions, but once any refunds have been invested in RRSPs, nonregistered funds, or TFSAs, the numbers move towards the benefits of using RRSPs. Without the refund being invested, he is very correct . . . especially if TFSAs are being compared long-term in comparison to RRSPs or non-registered funds,” — Daniel Collison.

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See the broad range of solutions at tdadvisor.com Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated. TD Mutual Funds are managed by TD Asset Management Inc. a wholly-owned subsidiary of The Toronto-Dominion Bank and are available through authorized dealers. Epoch Investment Partners, Inc. (“Epoch”) is a wholly-owned subsidiary of The Toronto-Dominion Bank and an affiliate of TD Asset Management. ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

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NEWS /ANALYSIS

Making friends... with ROBO-ADVISORS? This fall will be remembered as that time the Canadian wealth management industry evolved into a fascinating new digital future

Big Numbers:

0.30% - 0.50%

The average cost, all-in, for asset management and access to an advisor at the new so-called robo-advisor firms

$2B

The amount of assets under management accumulated for the first U.S. robo-advisor firm, after two and half years

It seems as if each week this fall brought news of another launch of a so-called robo-advisor firm. In September, WealthBar gained approval from securities regulators to launch. Wealthsimple launched a couple of weeks later with the help of some of the biggest names in Canadian capital markets.

It was only two and a half years ago that U.S.-based firms Betterment and Wealthfront pioneered this new business model. Computer algorithms slot clients into portfolios. The products are radically low-priced index funds. The new automated low-cost wealth management promises simple and easy wealth management for the masses.

A slew of companies offering such radically low service have arrived in Canada. NestWealth.com has been launched by Randy Cass, a CFA holder and an anchorperson on BNN. Another new name is Smart Money Capital Management, which can be found online at www.smartmoneyinvest.ca. The oldest firm in this space is www.shareowner.com.

But the latest entrants, Wealthbar and

Wealthsimple, take the new model in a new direction.

These companies offer robo-advisor-like service, but add in access to a real advisor through email, phone and Skype chats. Wealthbar has a former Sun Life advisor on board. Wealthsimple is bringing on advisors it calls wealth concierges. “For us, it’s always been about building a full-service offering,” says Chris Nicola, the son of the patriarch of Nicola Wealth, the well-known Vancouver advisor firm. Nicola had been working in the IT department of the firm when he began thinking about the intersection of technology and wealth management. He soon realized he was sitting on a new business niche. “What we’ve found is that people are looking for convenience. They don’t have time, or want, to go into a bank. They always find a way to put that off. Over the last 15 years, people have gotten used to doing things from their laptop.

What they don’t want to do is make an appointment, drive to an advisors office and sit there for an hour,” says Nicola.

The new business is basic: Wealthsimple will take clients with as little as $5,000 in assets, offer portfolio

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management, rebalancing and access to a real advisor, for just 0.35 to 0.50% per cent. “This is transformative,” says Michael Katchen, the CEO of the company. In U.S. the assets under management at Wealthfront went from zero assets to $2 billion in just two and half years. Says Katchen, “We’d like to do that here. There are a lot of people desperate to invest like this. People see it as the future of investing in Canada.” The company has attracted an impressive number of Canadian investment industry veterans. Roger Martin, the former dean of the Rotman Business School, well-known Toronto private equity investor Brett Belzeberg and Eric Kirzner, head of value investing at the Rotman School of Management and a former director of Investment Industry Regulatory Organization of Canada (IIROC). Joe Canavan, former chairman and CEO of Assante Wealth Management, is also on board.

“We’ve got names that have defined the financial industry in Canada over the last thirty years,” says

Katchen.

The target market for the company is early adopters between 25 and 40, the generation that is comfortable with digital tech. These also happen to be the people who don’t have half a million to go to a full-service fee-based advisor. The new lost costs will allow this generation to access advisor-enable wealth management at acceptable cost. “We’re still working out where we want the pricing to be, but we think we can get it down to 50 basis points on investments and 70 basis points including advice,” says Nicola. “The points on investments are a little higher than some index funds, but we’ve got some interesting ones, including funds in real estate. But we think we can get the fees down to about 1 per cent per client, all-in. Companies like ING are providing balanced portfolios for 1 per cent. But I think we can get you advice as well for 1 per cent.”

Will paper-based advisors be able to keep up?

“There are a lot of people desperate to invest like this.

People see it as the future of investing in Canada”

Do you think stability and growth are unrealistic investment expectations?

With TD Asset Management, clients can have both.

Retirement Portfolios and Target Return Funds.

TD Asset Management’s innovative retirement and targeted return products help preserve and grow capital, while mitigating risk for your clients.

See the broad range of solutions at tdadvisor.com Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated. TD Mutual Funds are managed by TD Asset Management Inc. a wholly-owned subsidiary of The Toronto-Dominion Bank and are available through authorized dealers. ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

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OCTOBER 2014 | 7

1

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Round

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Job Description:

Mechanical Specifications:

Contact:

Client: TD

Bleed: None

Acct. Mgr: Christian / Genevieve

Colours: 4C

Producer: Barry D

26/09/2014 12:44:41 AM

BY THE NUMBERS / HEDGE FUNDS

HEDGE FUND HEGEMONY Since 2008, Hedge funds have taken a bad rap both in the U.S. and in Canada, But that segment is pressing onward to claim more and more of the investment dollars advisors help direct. Here’s a snapshot of the current industry plus a recent change stateside that could well rock the hedge fund boat The Canadian Pension Plan Investment Board reported in August of this year that it has $42 billion in private investments, including some alternative investments like hedge funds.

THE BIGGER PICTURE: CANADIAN ASSETS UNDER ADMINISTRATION

Year-to-date assets under administration increased by $131 billion or 13.1%.

The Investment Funds Institute of Canada announced that as of August 31, 2014, assets under management for the mutual fund industry reached $1.13 trillion.

$30 BILLION

Size of Canadian hedge fund industry. This is up from $15 billion four years ago

$42 BILLION

Size of the Canadian Pension Plan Investment Board private investment portfolio (which contains alternative investments like hedge funds)

2 AND 20 Typical fees charged by hedge

funds (2% of assets under management, plus 20% of any

returns)

32%

Percentage of total fees for fund management Dutch pension fund PMT paid to hedge funds. Hedge funds make up just 2% of the fund’s total assets

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*On July 1, changes to the CFP certification program took effect. FPE1 is now known

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fund.

WEALTHPROFESSIONAL.CA

$782 MILLION

CALPERS HEDGES ITS HEDGE FUNDS

The hedge fund industry is reeling Fees the CPPIB pays to external fund managers (including after massive hedge funds) according to a recent report from the Fraser Institute. According to the provocative report this is up from pension fund, $25 million six years ago CalPERS, announced plans to dump its $4 billion hedge fund portfolio.

$4 BILLION

Size of the hedge fund portfolio the California pension CalPERS has announced it will sell-off. The fund has complained fees on hedge funds are too high

If CalPERS sparks a trend, expect those numbers to change.

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We give you a world of opportunities.

U.S. and global equity funds.

Our affiliate, Epoch Investment Partners, Inc., adds a specialized depth of expertise to TD Asset Management’s U.S. and global equity funds.

See the broad range of solutions at tdadvisor.com Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated. TD Mutual Funds are managed by TD Asset Management Inc. a wholly-owned subsidiary of The Toronto-Dominion Bank and are available through authorized dealers. ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

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9/4/14 4:56 PM

OCTOBER 2014 | 9

2

M4544-4E.indd

Round

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Job Description:

Mechanical Specifications:

Contact:

Client: TD

Bleed: None

Acct. Mgr: Christian / Genevieve

Colours: 4C

Producer: Barry D

26/09/2014 12:45:20 AM

NEWSMAKER Q&A

GREED: A tale of leadership disrupted Asset managers have access to vast amounts of money. A oncefallen industry veteran warns about the consequences that accrue when managers put their own interests ahead of the client

In ancient times, Portus was a large artificial harbour in Rome on the north bank of the mouth of the Tiber.

In modern-day Canada, the word Portus came to represent anything but a safe harbour. Almost a decade ago, one of Canada’s largest hedge funds imploded in an epic debacle that spanned the globe.

The massive hedge fund drew in 26,000 retail clients. Many of those investors suffered months of worry and anxiety as it became clear the company, most notably its portfolio manager, Boaz Manor, had sent vast sums of client money offshore. Years on, investors have had anywhere from 98 cents to a $1.04 for every dollar invested returned to them, though they’ve lost the opportunity costs on that money.

Manor received a four-year prison sentence of which he served over a year.

A decade on, the co-founder and former CEO Michael Mendelson, after agreeing to a fraud conviction and serving six months in jail, is speaking about a personal transformation that includes his name change to Mikael Meir. Today he runs a strategy and leadership consulting practice for executives and high-growth entrepreneurs. He is also a part-time university instructor of ethics and finance for an MBA program. With frothy markets and seemingly unstoppable growth, Meir – in an exclusive interview with WP – provides a word of caution to today’s wealth professionals on the seductiveness of greed and the temporary rewards that don`t ever come close to making up for the ensuing losses.

Wealth Professional: How did you meet Boaz Manor? What were your initial impressions of him?

Mikael Meir: We initially met in the late ‘90s at a venture capital conference. I was financing early-stage Internet 10 | OCTOBER 2014

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infrastructure companies, and he was looking to get into the industry. He was incredibly smart, driven and focused. And he had one goal – to make as much money as he could, as fast as he could. I had the same goal, so I hired him. A match made in heaven, or a match made in hell, depending on your perspective. Our story is really a cautionary tale about the seduction and destruction of greed.

WP: As events with the OSC began to unfold, as the legal system began to draw in, can you describe what must have been a roller coaster of emotion?

MM: Well, I was actually operating at two levels. On a rational level, which is where I tried to stay to neutralize my severe angst, I knew the investor’s money was safe. In fact, years later in liquidation, investors got back between 98¢ and $1.04 on each dollar invested - depending on the fund. And on top

of that, in my rational mind, I thought we had a clever, legal scheme. We were buying structured notes at a discount to par value in large $100 million tranches, and then using the discount margin to finance the operating expense of the business. And we had a legal opinion to support our structure. But there is no denying we avoided disclosing what we were doing, which was unethical and dishonest. And at a deeper level, I knew it wasn’t right. So in the ensuing media circus, the main emotion was fear and dread that things would spiral out of control. I thought I might get charged and lose all my money on legal fees and living expenses, or worse case, I might end up in jail. And one by one, each element of my worst nightmare began to come true. Everything just spiraled out of control until the roller coaster came off the tracks and hit rock bottom.

WP: What can you say to those today who are, as

Do you take a balanced approach to generating income for your clients?

TD Asset Management certainly does.

Balanced income solutions With TD Asset Management’s balanced income solutions, your clients can gain from a broad range of asset classes, risk tolerances and global markets.

See the broad range of solutions at tdadvisor.com Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently and past performance may not be repeated. TD Mutual Funds are managed by TD Asset Management Inc. a wholly-owned subsidiary of The Toronto-Dominion Bank and are available through authorized dealers. ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

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OCTOBER 2014 | 11

3

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Round

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Job Description:

Mechanical Specifications:

Contact:

Client: TD Docket #: 112-LTDCICM4544

Bleed: None Trim: 7” x 4.625”

Acct. Mgr: Christian / Genevieve

Producer: Barry D

Crea. Dir: Dave F

Studio: Kim C

Colours: 4C Start Date: 8-12-2014 4:58 PM

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NEWSMAKER Q&A

“As a result of my actions, my employees lost jobs, the dealers that represented our funds took major heat from clients, and many of my investors were legitimately scared of losing part of their life savings” is the case with many advisors, in control of vast sums of money? How does the “opportunity” affect one’s thinking?

MM: I think understanding oneself and the matrix of reality we live in is critical armour for temptation and greed. We’re products of conditioning and we’re conditioned into a scarcity-based, competitive-adversarial paradigm of being early in life. We’re taught that our value, as human beings, in order to be considered “enough” or worthy is a function of how others see us, so we have to go out and acquire success on society’s terms, which implies we’re not enough as we are. And we define success by our ego attachments: our homes, the prestige of our jobs, titles, bank accounts, cars, vacations, clothes, and so on. We believe that stuff will make us feel valuable and happy and it never does; it’s the great illusion. So many of us live in a perpetual state of worry, stress and self-doubt; that we’re not enough, we don’t have enough (often relative to the next person), and so we strive for more. “More is better” has become the mantra of the civilized world, and it’s even more pronounced in the financial industry. This voracious wanting, in my experience, is a hungry ghost, a bottomless pit that can never be satisfied, and that leads to greed.

WP: You were prosecuted and spent time in jail.

How does spending time incarcerated affect who you are? What changes did you undergo in terms of thinking through this period? Presumably you have changed, but how?

MM: The biggest transformation for me, as I alluded to before, was a shift from ego-based, self-grasping and voracious wanting for more money, influence (and) recognition to a realization that that input won’t create the real output I’m looking for, which is mental

peace and happiness. Happiness for me now comes from developing myself as a more virtuous person, and contributing to other people’s lives, no longer from what I can get through cleverness and manipulation. So I’ve dedicated my life to serving, using my skills to help entrepreneurs and executives transform their lives, through my speaking, workshops and executive coaching.

WP: Many in this country were affected by the Portus scandal. Many, presumably, still harbour some residual resentment. How do you manage, psychologically, the damage your actions may have created?

MM: Firstly, as I said before, my investors ended up getting their money back ... I didn’t profit from investor funds in any way. But there’s no denying I was greedy, selfish and dishonest, and wanted to profit through the increase in my equity in Portus. And even though I never intended to hurt anyone, as a result of my actions, my employees lost jobs, the dealers that represented our funds took major heat from clients, and many of my investors were legitimately scared of losing part of their life savings. And for that I have remorse to this day. How do I manage? I just try to be impeccably honest in all my affairs every day, help others, live a life of integrity, be the best person I can be, and actually work on forgiving myself. The shame from something like this runs deep.

WP: Do you ever run into some of those who were caught up in the mess?

MM: I do. And I always apologize and ask for forgiveness.

WP: How do those closest to you treat you today?

MM: My wife, who stayed with me, my kids, my friends and my business colleagues treat me the same way I treat them – with love, care and compassion. A question I get a lot is ‘did you lose close friends because of what you went through?’ And the answer ironically is ‘no.’

Why? I think first and foremost it’s because I was fortunate enough to have supportive people in my life.

But I also had a teacher that told me to be brutally honest and real with everyone. She helped me understand the power in vulnerability – to create connection and trust. So I took her advice and shifted from righteous indignation to humility, really owning my faults and behaviours. And instead of shunning me, those closest to me supported me.

WP: What are the lessons you draw from this

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particular life path? Is there a message you can deliver to those tempted by the vast paper wealth of the modern financial industry?

MM: There are so many lessons. Let me share my top five.

The first lesson is the absolute need to develop self awareness. At the time of Portus, I really wasn’t aware that my primary values were fear and greed. I actually thought they were integrity and honour. But integrity and honour can never live in the same mind as fear and greed. Fear and greed, or the “shadow” as Swiss psychiatrist Carl Jung called it, will always win out.

Jung said, “Until you make the unconscious conscious, it will direct your life and you will call it ‘fate.’ So I would say to practice developing self-awareness through a coach, a mentor, a close friend is vital.

The second lesson I learned is to develop a real service orientation. By that I’m not referring to giving good customer service, I’m referring to a whole attitude of standing inside the intention to serve clients from a place of caring. Working to ensure that the intention is pure, and doesn’t get diluted by the allure of fees and commissions. How does one do that? By being hyper-vigilant in monitoring one’s intentions on a moment-by-moment basis, and course correcting where need be. And there’s a huge upside to becoming aware of how your thoughts drive behaviour. You can then make more-conscious, skillful choices on how you want to be in the world. And I think that’s ultimately what success and great leadership are all about. There’s a fantastic new book by Wharton Professor Adam Grant called Give and Take: A Revolutionary Approach to Success.

The third lesson I learned was to simplify. I had a wise teacher who told me to give up my desire for fflash and brilliance – the Porsche, the Harley Davidson – and be simple. She taught me that peace and fulfillment live in simplicity. Simple, focus, heart. That became my mantra. And for me it’s been a great way to live. It appears to work well for Warren Buffet too.

The fourth important lesson I learned is simply don’t cheat. Harvard Business Professor Clayton Christensen wrote one of the most widely read articles on HBR ever called How Will You Measure Your Life?

He talks about three questions he poses to students on the last day of class. First, how can your career provide real satisfaction? Second, how do you ensure your relationships will provide a source of sustainable fulfillment? And third, how will you stay out of jail?

On the jail question, he tells a story of his days at Oxford as the captain of the basketball team in the final game

of the playoffs, which were scheduled to begin on Sunday. Being a religious man, he vowed never to play on Sunday, and processed his dilemma by realizing that if he sacrificed his integrity just this once, it would be a slippery slope, and he may get into the habit of adjusting his values for different situations in the future like his HBS classmate Jeffrey Skilling. So he stayed true to his word, and warns of “the opportunity cost of just this once.” And by the way, the take-away from the article on how Christensen measures his life, is the people he helps make better.

The final lesson comes from Harvard Business School dean Nitin Nohria’s TED Talk called Moral Humility. Interestingly, he was actually made dean based on his well-reputed moral integrity after the 2008 Credit Crisis when the Harvard Business School did its own soul searching, knowing they produced some graduates who contributed to the breeding frenzy that almost brought down the world’s financial system. In his talk, Nohria puts forth that most people believe that a person’s character is set, and people are either virtuous or not. He asserts that most people suffer from “moral overconfidence.” And then he proves through a famous empirical study, the Milgram Experiment, that character is not set; it’s malleable and shifts based on the situation. He suggests that we’re all capable of ethical missteps, and to counter that possibility, we should all maintain an attitude of moral humility. That perhaps is my biggest lesson of all, recognizing that at any moment in time, I’m a fallible, imperfect human being. And in that awareness, I have the space to make more-skillful choices.

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Committed to brokerage

We choose to foster a culture of entrepreneurship and success by partnering with our advisors.

As Martin Lavigne, President of NBF Wealth Management explains: “Our advisors have the freedom to set their own priorities and brand themselves as individuals. Our bottom-up entrepreneurial culture encourages them to select and develop their own business model, with our support along the way. Here, management is always accessible, and we cultivate true consultation and partnership.”

Payouts at National Bank Financial exceed the average at other bank-owned firms. In 2013, the average payout for our top 100 investment advisors was 56.3%, and for some, it reached up to 61%. Moreover, our competitive payouts come backed by the stability of National Bank. Operating from coast to coast, it’s no wonder we have been entrusted to manage over $85 billion in assets. In fact, almost 50% of our assets under management now come from provinces and territories other than Quebec.

We understand the entrepreneurial spirit – we have it ourselves! As one of the largest investment advisory firms in Canada, we are truly committed to brokerage. We have grown steadily over the course of the last half-decade, benefitting from six major acquisitions in the past six years. Our ability to attract competitive and knowledgeable entrepreneurs to our thousand-strong community of investment advisors can be attributed to the fact that we, like them, are always looking for the next opportunity to grow.

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24/09/2014 2:39:03 AM

Leading-edge advice-based platform Delivering value is key to building long-term, trusting relationships with clients. To that end, we have rolled out a new advice-based platform; we call it myWEALTH. Our unique approach to clients’ householding helps deliver investment advice to all generations of a family. It also rewards clients’ asset consolidation through automated dynamic tiered pricing, while greatly reducing the qualifying threshold of assets required for advice-based accounts ($50,000 minimum).

Discretionary management “In addition to myWEALTH, our discretionary management block trading and modeling platform is, in my opinion, the best in the business”, asserts Martin Lavigne.

Furthermore, over 20% of our advisors are discretionary portfolio managers with the ability to create their own portfolio “baskets”, a truly unique investment solution.

Join our forward-thinking firm, and let us help you navigate through major upcoming industry changes; together, we can turn them into incredible growth opportunities for you and your clients.

Make NBF Wealth Management your destination of choice, and give us a call to become part of our community. It may be the most important call you make today.

In 2013, the average payout for our top 100 investment advisors was 56.3%, and for some, it reached up to 61%.

John Rothwell Vice President, National Business Development

Tel.: 416-869-8528 John.Rothwell@nbc.ca

nbfwm.ca/destination National Bank Financial is an indirect wholly owned subsidiary of National Bank of Canada, which is a public company listed on the Toronto Stock Exchange (NA: TSX). National Bank Financial is a member of the Canadian Investor Protection Fund (CIPF).

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24/09/2014 10/09/2014 2:39:08 3:28:14 AM

FEATURE / SUCCESSION

GETTING SUCCESSION RIGHT

When Kawartha Lakes-area firm W.A. Robinson decided to pass on the reins a long, thought-out process came into play The W.A. Robinson group of companies has been helping residents of the Kawartha Lakes region of Ontario achieve their financial goals for decades.

Operating from a compound on the shores of Sharbot Lake in the beautiful lake district of northeastern Ontario the company came to be when Wayne Robinson incorporated the group in 1980. Since then the organization has grown to four companies. Mathew Robinson, the son of the founder, explains that his father, “has a love for counselling people. He was one of the first financial planners, before the big banks took over. It wasn’t institutional. He had some clients, started out; he had a rapport with these people.”

Pillar Financial Services specializes in mortgages to individuals and businesses require mortages that Schedule A banks do not service, such as loans on homes that are under construction or large loans for renovations, or mortgages.

Another Robinson company, Frontenac Mortgage Investment Corporation packages mortgages into a security that offers a steady stream of income to investors. The fund has

been in existence for more than 25 years, boasts $123 million in assets while earning a 10-year annualized return of 6.04 per cent. The fund is the only prospectus sold MIC not listed on the TSX. The supremely conservative approach—there is no leverage in the fund—has offered investors a steady 6.5 per cent return for years. “There is a certain pace of growth that is necessary. We could have grown just to grow. But that’s where you lose your focus.

If you look at our line, it’s a nice straight line. The Sharpe ratio is nice. It puts the rate of return at 5-7 per cent,” says Robinson. “And we’ve seen a few cycles over 30 years.” The business is strong today.

“We’re satisfying a niche that’s been growing. CMHC is tightening up on mortgages, and that’s opening up space for us. Same with banks....they’re tightening up, and that’s opening up deals. We have a really strong network of advisors,” says Robinson.

Another of the family’s companies is W.A. Robinson Asset Management Ltd., an investment fund and portfolio management company that acts for high-net-worth clients. The final piece is Lake District Realty, a specialty service designed to meet the needs of sellers and buyers of waterfront properties. All in, there are 30 employees as well as several hundred shareholders. All of these lives are, in some way, wrapped up in group of companies and considered family by the Robinsons.

So when it came time to think about what to do when the founder stepped aside it was with a bit of trepidation. The company had to get the succession right.

The intention had long been to hand the management of the company from Wayne, to his son Matthew. For clients, family and employees, this moment could have been fraught with anxiety. But the company was careful to take the same measured, planned, conservative approach that has proven so successful in the business. Turns out, prudent and deliberate planning is not just key to business, but to succession as well.

Matthew Robinson first started working for the family firm while still in his teens. He started in marketing. “I came in at 16. Instead of cutting lawns, I put up real estate signs,” he says. He subsequently moved on to other positions. Over the years he’s been privy to the conversation about the company, often around the dinner table. Eventually Matthew did a commerce degree and obtained his real estate broker licence in January 2000. He sold real estate

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The firm Doherty & Bryant is riding high on industry acclaim, winning the Consumer Choice Award in the Calgary “Financial Planning Consultants” category for a third consecutive year. Tim Faunt from Doherty & Bryant received personal recognition as well. He was named Calgary’s top financial advisor by the Top Choice Awards this year.

It’s no surprise that Tim’s decision to join the firm was based in part on Doherty & Bryant’s choice of software: “They’ve been using FP Solutions for years, and I knew what a difference it would make to my practice.

There really isn’t any comparison with what I used before,” says Faunt.

“It takes about half the time, and is so much more powerful.”

Learn more about how FP Solutions powers Doherty & Bryant’s practice at cch.ca/FPSolutions or call 1 800 268 4522.

FP Solutions is a trademark owned by Wolters Kluwer Limited. 1344

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FEATURE / SUCCESSION

“We like each other as family. But if there is someone that wasn’t in to it, it wouldn’t work” before earning his mortgage broker designation in October 2004. As an independent mortgage broker he has learned some lessons along the way. “I had my ass handed to me early on,” he says. That is, he learned that key lesson so important to anyone working in the wealth management industry—no one is smarter than the market. It is a humbling lesson that can only be learned through loss.

Eventually Matthew came back to the family firm. A conversation began to take shape about how the company would be led into the future. “There were no health issues. But people started to ask, ‘what’s next?’” says Matthew. Five years ago a formal plan began to come together. An outside company was hired. Matthew was asked to come into the business on the portfolio side of the company to help develop the skills necessary to manage the Frontenac fund. The top job was not promised to Matthew. It would only be his if he was able to prove he could prove he had the skills. “I had to have real experience.

If we didn’t get this right, there would be no succession,” he says. “We like each other as family.

But if there is someone that wasn’t in to it, it wouldn’t work.” None involved was going to risk damaging the reputation of the firm. “Our fund has a record of going on thirty years without losing money. That’s a good track record. My father has generated a lot of trust over the years,” says Matthew.

The son began absorbing the lessons. He listened to the counsel of the founder, the long-time employees. In recent years Matthew he took on more of the daily duties. Most recently he has been defining strategy, building a strong management team and managing the day-to-day operations. “You have to have a good plan, and love it. When your last name is on the wall…you have to take it seriously. We’ve had people here for 30 years. You just can’t blow this thing up,” he says.

It would become clear that Matthew had absorbed the thinking of the founder. The company recently

held its AGM. The firm flew out its portfolio managers. One-quarter of the company’s investors showed up. Almost 400 people gathered in a local church. “I knew everybody there. It was a party.”

The gathering was a demonstration of the values that have defined the firm, which has always been the close and direct communication with clients.

The personal touch is what sets the firm apart. “You really have to like the client. Our mandate is capital preservation with a reasonable return. We could sell out to a big institution. But that’s never been in the plan. This is a family business. There’s something more here than the mighty dollar. It’s typical of my generation that there are people’s needs that we take for granted. But you have to have a conservative mandate. You have to understand we’re just one part of it,” says Matthew. You need to know your client.

You have to know a bit more than asset allocation.

You have to know the kids’ names. Our claim to fame is that we’re still at that level where you can get me on the phone. We call our clients, they don’t call us.

You can’t buy that. I don’t think big institutions have that...If you take care, if you’re careful, you’ll have clients for a long, long time.”

The challenge ahead will be reaching out to the younger generation. The clients that his father brought to the firm will eventually pass. “You’ve got to reach out to the 40-year-olds,” he says. But it is clear the lessons of the father have been passed along. “A lot of things have been carried forward through this succession. I’ve done this all my life.

It’s been a lifelong learning curve. The plan started the day I was born,” he says. Experienced hands at the firm will continue to work with him. His parents still live across the parking lot from the main office, so the founder will always be available as senior counsel. So eventually word did come down, and on July 1, Canada Day: W. A. Robinson Asset Management Ltd. would now have a new CEO, Matthew Robinson.

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SURVEY / ADVISORS ON FUND PROVIDERS 2014

ADVISORS ON FUND PROVIDERS Proudly sponsored by

The Inaugural issue of what will be an annual survey was conducted this past September. What follows is a summation of what it is advisors in Canada think of their fund providers

As a financial advisor your job is to maintain the pension promise for clients.

Doing this is a matter of finding the right financial products to allow a client’s assets to grow and bear fruit later in life. Today, dozens of companies are vying for your business. So why not find out what you and your peers think of the ones delivering the products you sell?

To this end, this past September, WP ran an online survey at wealthprofessional.com. Canadian advisors turned up the hundreds to offer their opinions on the products, funds and companies that generate the products sold to advisor clients in this country. The answers will fascinate. The opinions are sharp. But hey, this is the business of providing the pension promise—advisors deserve a chance to have their say, anonymously, of course.

What follows is a summary of how advisors ranked and rated their Canadian fund providers in several categories -- from advisor support and product offerings to processing accuracy and technological interfacing. Each was accorded a mark out of a total possible score of five points. Note, all fund providers represented received a minimum number of individual advisor ratings to win inclusion in the final rankings.

This will be an annual survey of the state of advisor opinion on the companies generating the product. But here’s what advisors are saying about their fund managers this fall of 2014.

Enjoy!

20 | OCTOBER 2014

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WEALTHPROFESSIONAL.CA Proudly sponsored by

ABOUT IA CLARINGTON At IA Clarington, we believe that investing has changed.

Shifting investor demand and unprecedented access to information and products have created new challenges and new opportunities. We believe that the best results for investors will be achieved by being invested – not just in the markets, but in distinctive and outcomebased product solutions, and in active, trusting relationships with advisors.

We market a wide range of investments to individual investors through their advisors, including actively managed mutual funds, portfolio solutions, socially responsible investments and target date funds. IA Clarington manages over $15 billion (as at August 31, 2014) and is a wholly-owned subsidiary of Industrial Alliance Insurance and Financial Services Inc., Canada’s fourth largest life and health insurance company.

BACK OFFICE EFFICIENCY SCORE

RANK

RBC

4.75

GOLD

CI

4.66

SILVER

MACKENZIE

4.63

BRONZE

FIDELITY

4.50

4

DYNAMIC

4.40

5

IA CLARINGTON

4.19

6

INVESTORS GROUP

4.08

7

FRANKLIN TEMPLETON

4.05

8

INVESCO

4.00

9

BMO

3.71

10

MANULIFE

3.71

10

SENTRY

3.67

12

SUN LIFE

3.50

12

AGF

3.50

12

TD

3.33

15

B

ack-office efficiency might sound boring. But it is the basic administrative procedures like trade processing, order handling and account settlement, that are the heart of any practice. A mistake in the back office is the kind of slip-up that sends clients into fits, in turn keeping advisors up at night.

How did the industry do?

Canada’s traditional “blue chip” firm Royal Bank came out on top in this category with a strong score of 4.75. Way down at the bottom of the list TD trailed the pack chalking up a less-than-thrilling 3.33.

Our survey also asked wealth professionals a simple question: “What is biggest challenge you’ve had with a fund provider’s service in the last 12 months?” The complaints varied. But when it came to the back office, one advisor suggested that a “lack of back-office documentation” was an issue. Another mentioned that “continuity in back-office knowledge” was lacking. Another advisor related a horror story: “[I] had a segregated fund provider lose transfer cheques. It has been a month and still no replacement cheques.” One advisor suggested the back office was having trouble handling new RESP accounts. Another advisor suggested it was a “challenge getting accurate client contribution numbers.” Complaints about “slow and lacking” information and service around fund transfers in the case of closed accounts were also common. The scores on back-office efficiency may be solid, but it seems there is some work to do.

It is a challenge getting accurate client contribution numbers

*All scores represent an average based on respondent marks out of a possible five points

OCTOBER 2014 | 21

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SURVEY / ADVISORS ON FUND PROVIDERS 2014 Proudly sponsored by

22 | OCTOBER 2014

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Dan Bastasic

Brad Radin

Jeff Sujitno

Leon Frazer

QV Investors

Larry Sarbit

David Taylor

Ben Cheng

m a e t Our ive t c a of s r e g a n a m 26/09/2014 12:49:42 AM

WEALTHPROFESSIONAL.CA Proudly sponsored by

Success depends on bench strength.

In sports and investing, winning streaks can be exciting. But the best teams have the underlying bench strength to perform consistently. IA Clarington has recruited a team of active portfolio managers who each use their exceptional skill and conviction to create opportunity. Together, they’ve developed a playbook of investing strategies for a balanced attack on offence and defence.

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Visit www.iaclarington.com/benchstrength or contact your IA Clarington wholesaler at 1 888.860.9888.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The IA Clarington Funds and IA Clarington Target Click Funds are managed by IA Clarington Investments Inc. IA Clarington and the IA Clarington logo are trademarks of Industrial OCTOBER 2014 | 23 Alliance Insurance and Financial Services Inc. and are used under license.

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SURVEY / ADVISORS ON FUND PROVIDERS 2014 Proudly sponsored by

B

uilding an advisory business is tough. The typical office is a one-man (or woman) show. So it’s no wonder fund providers have long advertised the support they can offer advisors—this is a basic way the fund companies attract business. Helping the entrepreneurial, small-business advisor has long been a key point of differentiation in the industry.

Who is doing the most to help advisors build their business?

According to our survey, mighty insurance giant Investors Group is the leader when it comes to advisor support. The company posted a solid 4.57 score. Massive mutual companies CI and Fidelity are right behind with scores of 4.50 and 4.41, respectively. Trailing the list at 3.56, 22% off the leader, is fund company AGF. When it comes to “advisor support” this is what our advisors had to say: “Need more information concerning the fee regulations taking effect in 2015” “Fund rep is unavailable” “No wholesaler contact…lack of contact from wholesalers” “Rep was let go, no service followed for quite some time” “… in fighting between two reps from the same firm” Some advisors want “to go to more roadshows” Advisors also had some nice things to say such as: “[The company] offered free continuing education courses that were relevant and interesting to complete” “They co-sponsor events” “They support business building strategies” “Company provides direct access to their fund managers and an ability to ask questions directly.”

“They understand my business. Met with me to help me review my client’s accounts and suggest improvements or changes.”

“Highlighted an area where client fees would be reduced.”

“I see all the wholesalers regularly and they call or meet to keep me up to date.”

“A one-day seminar on building efficiency into the business included a follow-up call and marketing assistance.”

ADVISOR SUPPORT SCORE

RANK

INVESTORS GROUP

4.57

GOLD

INVESCO

4.50

SILVER

CI

4.41

BRONZE

FIDELITY

4.41

BRONZE

IA CLARINGTON

4.26

5

FRANKLIN TEMPLETON

4.17

6

RBC

4.15

7

BMO

4.15

7

DYNAMIC

4.14

9

MACKENZIE

4.11

10

SENTRY

4.08

11

MANULIFE

4.08

11

SUN LIFE

4.06

13

TD

4.00

14

AGF

3.56

15

*All scores represent an average based on respondent marks out of a possible five points

24 | OCTOBER 2014

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2/10/2014 5:11:14 AM

WEALTHPROFESSIONAL.CA Proudly sponsored by

At Dynamic Funds, we believe in challenging the status quo.

We constantly reassess our views, assumptions and actions in pursuit of portfolio construction excellence. Our Portfolio Managers are empowered to provide you with their very best ideas, delivered with conviction and passion. Join the movement and see the difference legitimately active management can make.

Active Matters. Speak to your Dynamic Representative today. dynamic.ca/ActiveMatters

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license, and a division OCTOBER 2014 | 25 of 1832 Asset Management L.P.

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SURVEY / ADVISORS ON FUND PROVIDERS 2014 Proudly sponsored by

OVERALL SERVICE LEVELS

W

hat matters more to an advisor than service levels? In this industry service is everything. When advisors were asked to rank their fund providers on the levels of “overall service,” industry heavyweight Invesco came away with the gold, posting a solid score of 4.50. But CI and Fidelity were close behind, at 4.39. Interestingly, a majority of the big firms scored over 4. Only the last three in the group fell below. Trailing the pack, by a full point was independent mutual fund company AGF. Comments on overall service levels were both positive and negative. The topics of discussion ranged from—believe it or not—baseball to the heavy-hitting issue of the day, CRM2.

Some of the complaints as voiced by advisors: »» Wait time is too long on the phone »» Need help with CRM »» Trouble setting up private investment/wealth accounts »» Availability and follow-through spotty »» Processing error took “two weeks to correct” »» Trouble managing non-resident accounts »» Lack of communication »» Change of personnel disruptive »» I cannot take a wholesaler’s word at face value. I have to do my own due diligence every time.” »» Need more flexibility over high-net-worth client platform thresholds »» Improved training on new funds »» Communication as to why the public is best served by qualified advisors

SCORE

RANK

INVESCO

4.50

GOLD

CI

4.39

SILVER

FIDELITY

4.39

SILVER

INVESTORS GROUP

4.36

BRONZE

DYNAMIC

4.24

5

IA CLARINGTON

4.20

6

FRANKLIN TEMPLETON

4.07

7

MACKENZIE

4.07

7

RBC

4.07

7

SUN LIFE

4.00

10

SENTRY

4.00

10

BMO

4.00

10

TD

3.93

13

MANULIFE

3.77

14

AGF

3.50

15

*All scores represent an average based on respondent marks out of a possible five points

26 | OCTOBER 2014

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WEALTHPROFESSIONAL.CA Proudly sponsored by

ABOUT OUR RESPONDENTS

4.4%

LESS THAN A YEAR

Today’s advisor force is mature (see pie chart). This is a good thing. There is lots of experience in the industry.

Advisors are also sourcing product from a wide range of providers.

5.9%

2.2%

1

1-2 YEARS

10.3%

11%

2

2-5 YEARS

HOW MANY MANAGERS HAVE YOU BOUGHT PRODUCT FROM IN THE LAST 12 MONTHS?

HOW LONG HAVE YOU BEEN A ADVISOR?

47.1%

3

20.6%

5 OR MORE

82.4%

16.2%

4

5+ YEARS

Cecilia Mo embodies active management, applying it to everything she does – her opinions, process and philosophy. Look no further than her impressive results for proof.

1 YR

2 YR

3 YR

5 YR

10 YR

Inception

11.0%

9.5%

10.8%

11.2%

8.3%

8.5%

8.0%

8.1%

11.3%

10.1%

11.4%

10.0%

n/a

n/a

19.0%

Dynamic Value Fund of Canada* 20.4%

21.9%

Dynamic Value Balanced Fund* 14.9%

14.6%

Dynamic Canadian Value Class* 21.2%

22.6%

Dynamic Dividend Advantage Class 29.0%

21.6%

n/a

Access Matters. Speak to your Dynamic Representative today. dynamic.ca/Cecilia * Assumed portfolio management as at October 2011. All information shown for Series A units to August 31, 2014. Dynamic Value Fund of Canada inception date: July 1957. Dynamic Value Balanced Fund inception date: February 1992. Dynamic Canadian Value Class inception date: February 2001. Dynamic Dividend Advantage Class inception date: December 2011. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.

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SURVEY / ADVISORS ON FUND PROVIDERS 2014 Proudly sponsored by

FEES SCORE

RANK

RBC

4.07

GOLD

CI

4.00

SILVER

INVESCO

4.00

SILVER

FIDELITY

3.96

BRONZE

SUN LIFE

3.88

5

“Offer low-fee options. Combine this with a re-positioning around good fixed-income options”

IA CLARINGTON

3.78

6

“Provide more of these easy to produce marketing reports that are compliant with all the fee schedule info on it”

BMO

3.77

7

“MERs are just too high! Fund companies make a killing. The math is simple and the public isn’t stupid. If they lowered their fees by just 1 per cent, they’d very likely see more net inflows”

TD

3.73

8

FRANKLIN TEMPLETON

3.67

9

INVESTORS GROUP

3.57

10

MACKENZIE

3.56

11

MANULIFE

3.54

12

SENTRY

3.50

13

DYNAMIC

3.48

14

AGF

3.39

15

T

he subject of fees has long been a point of contention in the industry, as well as among the wider public. Fees on product determine what clients will have in retirement. Fees influence what advisors take home in compensation.

Is it any surprise advisors handed out scores that were, overall, much lower than in other categories? Probably not. Only the top three big firms in this category – RBC, CI and Invesco – scored above 4. Royal Bank took gold with a 4.07. CI and Invesco both scored a straight 4. The rest of the firms on the list ranked lower, with scores differing by 20 per cent as they fall to the 3.39 posted by AGF. As for comments: “They [fund companies] seem to be living in the ‘90s”

And of course, “Lower fees to compete with the shift to ETFs”

*All scores represent an average based on respondent marks out of a possible five points

28 | OCTOBER 2014

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WEALTHPROFESSIONAL.CA Proudly sponsored by

THE REST OF THE GANG While fifteen companies garnered enough mentions to make it onto our final list, many more companies were named by advisors. The rest of the companies mentioned by advisors: Nexgen, Montrusco, PIMCO, O’Leary, Putnam, AIG, NorthWest Ethical, Counsel, OceanRock, CCL, Picton Mahoney, Waratah, Standard Life, Richard Belding, Norrep Funds, NEI, London Life, Front Street, Edgepoint, Desjardins, Capital Group, Bissett, Beutel Goodman, Aston Hill, Value Partners, Todd Green, Franklin Templeton, Stone & Co., Russell, Royal, Renaissance, Quadrus, MFRP, Empire Life, Dynamic, Dimensional, CIBC, Canoe, Barometer Capital

THE QUESTION: WHAT IS ONE THING YOU WOULD LIKE TO SEE FUND PROVIDERS IMPROVE ON IN THE NEXT 6-12 MONTHS?

(note: the bigger the word, the more responses it represents)

Disclosure Sheet

CRM2 MERS Public

CommunicationCompensation Advisor Assets Sustainable Tools Offerings

Clients

Funds Fees Education

Banks

Service

Product Ideas Managers Portfolio

With the changing regulatory environment impacting your business, Dynamic Funds has created “Standing up for Advice”, a special resource centre on our advisor website. The wealth of valuable content you will find there helps you navigate the regulatory landscape and demonstrate why advice is more valuable than ever.

Advice Matters. Speak to your Dynamic Representative today. dynamic.ca/Advice Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.

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09-19-14 11:15 AM

OCTOBER 2014 | 29

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SURVEY / ADVISORS ON FUND PROVIDERS 2014 Proudly sponsored by

PRODUCT RANGE

T

he number of mutual funds and ETFs in Canada is greater than ever. The number of those funds (and clones of funds) in the Fundlibrary.com database is now 35,094. Each year seems to bring a new fund family, a new investing style or a wealth of new products. What companies do advisors think are getting the “range of product” right? According to the numbers in the WP survey, CI, with an extremely solid score of 4.75, is the company right on the ball. Also doing well was BMO, with a score of 4.69, and Dynamic, with a score of 4.62.

As for what advisor had to say on the issue, ideas about the length of the product shelf were numerous. One advisor though that “trying to narrow the overall product offering so I can deliver a more targeted value proposition to clients” was important. Another advisor suggested fund providers, “continue sharing ideas, while backing off on the flavor-of-the-month approach.”

Other selected comments: “Develop more guaranteed products” “More Canadian balanced funds … they’re all my clients want to buy!”

“More guaranteed options with various fee structures” “More lower-risk funds without having a majority of holdings in fixed income” “Offer and explain new income funds” “Reduce their offerings” “Income portfolio designs” “We need new products that address the concerns of the people that are soon to retire and are concerned about how long the money will last” Advisors also had this to say on product: “More in-depth conversation on fundamentals” “Provide talking points for clients” “Offer material that supports the usefulness of the funds in portfolios and clearly outlines how where the fees are applied” “I’d like to see compensation disclosure for money managers” “Provide advisors more specialized commentary and not just what the general public has access to” (More quotes available at wealthprofessional.ca)

SCORE

RANK

CI

4.74

GOLD

BMO

4.69

SILVER

DYNAMIC

4.62

BRONZE

INVESCO

4.57

4

INVESTORS GROUP

4.50

5

FIDELITY

4.46

6

MANULIFE

4.46

6

FRANKLIN TEMPLETON

4.37

8

IA CLARINGTON

4.35

9

TD

4.27

10

RBC

4.21

11

MACKENZIE

4.15

12

SENTRY

4.08

13

AGF

3.61

14

SUN LIFE

3.44

15

*All scores represent an average based on respondent marks out of a possible five points

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PROCESSING ACCURACY SCORE

RANK

CI

4.54

GOLD

FIDELITY

4.44

SILVER

BMO

4.38

BRONZE

SENTRY

4.33

4

INVESCO

4.31

5

DYNAMIC

4.29

6

INVESTORS GROUP

4.29

6

IA CLARINGTON

4.28

8

FRANKLIN TEMPLETON

4.22

9

MACKENZIE

4.22

9

RBC

4.21

11

MANULIFE

4.08

12

TD

3.93

13

AGF

3.78

14

SUN LIFE

3.75

15

G

etting the order right—such a basic task. Still, wrong orders are leaving clients worried, anxious. But processing them correctly is no small thing, with fund providers across the board seeming to be excel here. In fact, the range of scores on this measure was tight in our survey. There was less than a point difference between the top and bottom players on the list. Inhabiting the winners circle in this category were CI, Fidelity and a big Canadian bank, Bank of Montreal.

Respective scores were 4.54, 4.44 and 4.38. Coming up in last place was Sun Life, which managed a 3.75 rating.

When advisors were asked to identify, “What the biggest challenge” they had with a fund provider’s service in the last 12 months, dealing with “back-office errors and dealing with corrections” were very common themes. One advisor complained that a processing error “took two weeks to correct.” Another said: “I haven’t had any large challenges. Simple mistakes are still being made.”

I haven’t had any large challenges. Simple mistakes are still being made

*All scores represent an average based on respondent marks out of a possible five points

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PRODUCT PERFORMANCE SCORE

RANK

SENTRY

4.83

GOLD

CI

4.63

SILVER

FIDELITY

4.41

BRONZE

IA CLARINGTON

4.21

4

INVESCO

4.15

5

BMO

4.15

5

MANULIFE

4.15

5

“More information on top-ranked funds and why they have outperformed” “Honesty and integrity. Fund providers need to focus on the value of their funds and the long-term expectations. There will always be a fund better than the one they have.

They need to stop trying to tell us that they have the best fund. It will never be the truth.”

FRANKLIN TEMPLETON

4.15

5

INVESTORS GROUP

4.14

9

“Better tax-efficient distributions with less ROC”

RBC

4.14

9

DYNAMIC

4.05

11

TD

3.87

12

MACKENZIE

3.81

13

SUN LIFE

3.61

14

AGF

3.61

14

N

o one can predict the future or the direction of the markets. Even so, the notion that companies can actively manage their way to superlative performance is still widely assumed in the industry. Which provider do advisors think stands out with the best product performance? When it came to the strength of the funds on offer, wealth professionals selected Sentry as the star player among the biggest fund companies. The relatively small, independent, upstart family-owned Sentry posted a big 4.83 to take gold in the category. That the company’s investment style proved its worth through the Great Recession was certainly a big consideration in the company’s win in this all-important category.

Rounding out the top three were CI and Fidelity.

As for comments, advisors did not hold back: “Some fund providers spin data to give the impression that their funds are better than they really are. They should spend more time talking about fees and benchmarks rather than performance and the long-term expectation of the funds” “Detail ‘active share’ of the fund”

*All scores represent an average based on respondent marks out of a possible five points

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FEE MODEL SCORE

RANK

INVESCO

4.36

GOLD

CI

4.26

SILVER

SUN LIFE

4.07

BRONZE

FIDELITY

4.06

4

BMO

4.00

5

T

he eternal debate in the advisor industry is the debate over compensation models. There are those who argue the embedded-comp model allows wealth management services to be offered to the vast bulk of modest-income Canadians. There are those who swear by the fee-only model, equate that structure with the face of God. When it came to ranking companies on their compensation model, the results are interesting. The top three places were taken by two of the largest and oldest mutual fund companies, along with one of the major insurers.

Taking gold, silver and bronze, in that order, were Invesco, CI and Sun Life.

The comments offered up by advisors were typical and contrasting: “Do away with the DSC fee structure” “Include trading fees in MERs”

IA CLARINGTON

3.96

6

DYNAMIC

3.95

7

“Cut trailers to zero and impose a fee-only model now” “Support advisors and keep compensation the way it exists today” “Completely abolish DSC funds”

RBC

3.92

8

FRANKLIN TEMPLETON

3.81

9

MANULIFE

3.77

10

SENTRY

3.75

11

MACKENZIE

3.67

12

TD

3.67

12

INVESTORS GROUP

3.57

13

AGF

3.39

14

*All scores represent an average based on respondent marks out of a possible five points

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IT/TECHNOLOGY

T

he last two decades represent a period of rapid technical advance. The investment industry has changed both radically and fundamentally. The rise of self-directed investment channels has had an effect on the business. The vast amount of information available to investors has bolstered the “equity-investing culture” that has emerged so forcefully since the 1980s. The distribution of funds and trading is now often fully digitized. Today, the complaints of advisors often concern the websites that represent the “front door” to the fund provider and its products. When it came down to voting on who has the best tech, CI came out on top. Dynamic came in second, with Investors Group grabbing the bronze.

Complaints from advisors on IT: “Poor website design; important information not available online” “As someone who isn’t the most technologically savvy, I am sometimes frustrated by the lack of user-friendliness of web sites” “We need better online planning tools” “The ease and accessibility of information from websites could be improved” “The self-serve section on some websites is an issue for some companies”

SCORE

RANK

CI

4.43

GOLD

DYNAMIC

4.40

SILVER

INVESTORS GROUP

4.36

BRONZE

INVESCO

4.31

4

FIDELITY

4.26

5

SENTRY

4.08

6

IA CLARINGTON

4.07

7

RBC

4.07

7

MACKENZIE

4.04

9

FRANKLIN TEMPLETON

4.01

10

MANULIFE

3.85

11

TD

3.67

12

AGF

3.56

13

BMO

3.54

14

SUN LIFE

3.19

15

*All scores represent an average based on respondent marks out of a possible five points

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MARKETING

T

he advertising Canada’s fund companies do is now very much part of the culture. The AGF tiger, IG’s shade of blue—we’ve all come to recognize the campaigns. The financial industry’s support of the Canadian publishing industry is, let’s be honest, profound. Who does it best? According to advisors the Fidelity is the champion marketer, with a score of 4.43. Taking home silver in this category was Invesco, with CI rounding out the top three.

The average advisors may not be as concerned as the fund providers are about the marketing they do. Still financial advisors are looking for a PR boost from those partners.

“Communicate to the public why they are best served by qualified advisors” “Provide more support and ideas to help me market myself in my community” “Help the advisor explain to clients how their funds fit within a retirement plan”

SCORE

RANK

FIDELITY

4.43

GOLD

INVESCO

4.38

SILVER

CI

4.21

BRONZE

MANULIFE

4.15

4

DYNAMIC

4.14

5

INVESTORS GROUP

4.14

5

TD

4.07

7

IA CLARINGTON

4.02

8

FRANKLIN TEMPLETON

3.97

9

RBC

3.93

10

SENTRY

3.83

11

MACKENZIE

3.81

12

SUN LIFE

3.75

13

BMO

3.62

14

AGF

3.14

15

*All scores represent an average based on respondent marks out of a possible five points

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10.3%

INCREASE

30.1%

MOVE TO A FEE-ONLY STRUCTURE

HOW DO YOU PREDICT COMPENSATION WILL EVOLVE IN THE NEXT ONE TO TWO YEARS?

33.1%

DECREASE

26.5%

STAY THE SAME

A

large proportion of advisors think there are two unavoidable trends in the industry: A coming shift to fee-only compensation models, a constant downward pressure on fees. Overall, scores across the group of fund providers were strong. The lowest macro score was a 3.71 in the “fees” category.

CANADIAN FUND PROVIDERS RATED AS A GROUP BACK OFFICE EFFICIENCY

4.26

ADVISOR SUPPORT

4.04

OVERALL SERVICE LEVELS

4.03 3.71

FEES PROCESSING ACCURACY

4.16

PRODUCT RANGE

4.11

PRODUCT PERFORMANCE

4.08 3.78

FEE MODEL IT/TECHNOLOGY

3.93

MARKETING

3.91 0

1

2

3

4

5

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OVERALL STANDINGS

H

ere we are, the moment we’ve all be waiting for—envelope please. Crunching the numbers submitted by advisors we came up with a final, overall, ranking of Canadian fund providers. Before we get to the winners, it should be noted that the list includes only the biggest fund providers. More than fifty names of fund companies were submitted by advisors in the survey. We took the fund providers that received the most entries. Of those included on this final list, the companies at the top and bottom are separated by less than one point. Coming in number one was CI, with an overall score of 4.43. Fidelity took the silver medal with a score of 4.33, Invesco grabs bronze with a 4.31. Coming in at the bottom of the list was AGF with a score of 3.50, less than a point out of first place. That is to say, one take-away from this list—the Canadian fund provider industry is a competitive place. The big players are all, relatively, tightly packed in terms of scores attributed by advisors. This is a credit to the competitiveness, maturity of the Canadian fund industry. Congratulations to all.

Sure, some advisors will always complain. One advisor suggests that, “…fund companies need to find a less invasive way to contact advisors…I feel hounded most of the time.” But it would be rude not to run some of the many positive comments that came in. As antagonistic and contentious as the industry can sometimes be, there is also a great deal of good will on both sides of the advisorprovider fence. So, until next year, let’s go out on some of the positive comments advisors submitted to the WP survey: “Fund companies bend over backwards to help advisors. There is good service due to competition” “I have found fund companies very helpful. I think all you have to do is ask” “All the fund providers have done well in the last twelve months. I hope this will continue” “My wholesaler is right on top of my business & really knows his products!”

“The fund companies, understandably, have a tough job…and for the most part do outstanding work”

SCORE

RANK

CI

4.43

GOLD

FIDELITY

4.33

SILVER

INVESCO

4.31

BRONZE

DYNAMIC

4.17

4

INVESTORS GROUP

4.16

5

RBC

4.15

6

IA CLARINGTON

4.13

7

FRANKLIN TEMPLETON

4.05

8

SENTRY

4.02

9

MACKENZIE

4.01

10

BMO

4.00

11

MANULIFE

3.96

12

TD

3.85

13

SUN LIFE

3.74

14

AGF

3.50

15

*All scores represent an average based on respondent marks out of a possible five points

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WHERE DO WE GO FROM HERE?

Markets are at record highs. Interest rates are at record lows. The multi-trillion-dollar question: Can fixed-income deliver? Oh, and will stock markets continue to grow? Jeff Sanford investigates

We are, as the saying goes, living in interesting times.

Six years after the Great Recession, the economy has yet to fully shake off the effects of the downturn.

The Cold War is reasserting itself. But as sluggish as the economy is, the TSX is trading near record highs.

The S&P 500 recently traded above 2,000 for the first time in history.

Does any of this make sense? What can be deduced about future market direction?

“There is so much going on in the world today.

The macro stuff overlaid on the geo-political stuff, it’s a complicated, interesting time,” says Shailesh Kshatriya, an associate director at Russell Investments.

Working through the second half of 2014, rounding into the year ahead, investors can be forgiven if they find themselves confused and bewildered about the state of modern markets. The Federal Reserve has become so important to market sentiment that stocks now increase on bad news rather than good. The assumption on the part of traders seems to be that dismal economic news will incite the Fed to loosen

monetary policy, leading to improved market performance, which is not normal. This goes against conventional wisdom. But such is the odd, unique state of modern markets.

Is it possible to derive any sense of direction?

“I think after a five-to-six year bull market run, stock markets are not going to grow as easily as they have been going forward,” says Kshatriya. “This is not to say panic, but I don’t think it’s going to be as easy in the year ahead as it has been. I think that’s a safe assessment.”

This is not what advisors would like to hear, but it seems to be a safe assumption. The bull market that got underway post-2008 is getting long in the tooth. That’s just fact. But the really bad news is that investors are not going to find refuge beyond the equities market either.

Today, rates are radically low levels. A short-term German paper is offering a negative interest rate and fixed income portfolios, so key to modern portfolio theory, are delivering lower returns than ever. This OCTOBER 2014 | 41

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“It is difficult to be a fixed income manager these days” is a challenge for any wealth manager, as it has become tougher to deliver on the pension promise through fixed income. But don’t expect big changes in bond markets anytime soon. The trendy talk now is about the idea that rates are going to be lower for longer.

Jeff Sujitno is a portfolio manager and vice president with IA Clarington. Sujitno has experience in senior bank loans, a bit of experience that is helping navigate these weird waters. Sujitno’s new fund, the IAC Core Plus Bond Fund, holds 75 per cent investment grade bonds and 25 per cent senior loans.

This is a method of squeezing some yield out of fixed-income in an era when interest rates are radically low. The fund will also invest in derivatives as a way of manager a potential turn in the market if rates rise. But he doesn’t see rates rising anytime soon.

Speaking the morning of a mid-September Federal Reserve meeting, Sujitno notes, “This Fed meeting was very important. Quantitative easing ends after October, everyone knows that,” he says. “But core CPI came in lower than what people were expecting.

Growth is still a little soft. The takeaway for me is that the Fed pledged to keep rates low. Interest rates probably won’t be going up quickly. I wouldn’t say ‘lower permanently,’ but any rises will be slow and gradual.”

That is, returns from fixed-income are not going to rise quickly any time soon. “It is difficult to be a fixed-income manager these days,” says Sujitno. The low rates are good for first-time homebuyers, but a tragedy for those hoping to generate income from a portfolio.

“A lot of advisors I talk to are in cash and don’t know what to do,” says Sujitno. “I look at what pension funds are doing. People talk today about unconstrained bond funds that are not as closely tied to benchmarks or durations, but can generate return in an extremely low-rate world. This is what a lot of people are thinking about.”

The key to markets in the year ahead will be to preserve the current “Goldilocks situation.” Growth is slightly positive, but not high enough to trigger

inflation. This benign, non-volatile environment has allowed the Fed to unwind the quantitative easing measures at a deliberate pace, which is good. But it is making it tough to grow assets. Some tips and tricks for managing this environment are in order.

“If the lid can be kept on inflation, this should be a positive backdrop for riskier assets,” says Kshatriya. “Wages are growing at a tepid pace, so there is no concern for above-trend inflation. There is no reason to think that the Fed’s policy indications are at risk. Our outlook is still positive on equities, rather than safe assets. We are little worried about valuation. This is not anything like the dot-com years, but the market is no longer cheap. Overall, we expect the growth to continue. From a tactical perspective, we’d love a bit of a sell-off, to buy the dip.

“Investors would be well-served to look beyond North America for equity exposure. North American equities are trading relatively high,” Kshatriya continues. “That region is expensive. But the central bankers at the ECB have started to get much more engaged.”

Central bankers in Europe are easing up a bit on the austerity policies that pushed the EU zone to the point of another recession. “They are finally making true on their comments from a couple of years ago. Now we can see a positive reaction in EU equities as a result. Valuations there are a little better than in North America. That’s something investors here in Canada should keep an eye on. We are in a global world. For a long time investors were shunning EU equities, but this might be time to look at that a little closer,” says Kshatriya.

What else can one do? Bonds had a great run, defying the naysayers. But rates can’t fall much further, and so bond markets are not going to provide the return necessary in the future. According to Kshatriya, dealing with longevity risk, is more of a challenge than ever. “If you are a conservative investor and close to retirement, I think going forward that might be a little more challenge,” he says. “You might have to have exposure to grow in the portfolio.”

Adding equities to a portfolio to reduce risk?

Seems odd. But then again, we live in a strange world. The mighty Chinese economy seems to be wobbly. The geo-political scene is spinning off into pure craziness. Russia and the West are engaged in a retro-Cold War stand-off over the Ukraine. In the

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“That’s something investors here in Canada should keep an eye on. We are in a global world.

For a long time investors were shunning EU equities, but this might be time to look at that a little closer” Middle East, ISIS is beheading anyone who is not a Sunni Muslim. The Ebola contagion is raging. At the same time, there are record levels of cash on the balance sheets of many companies.

If the geo-political noise can be reduced, this cash could be deployed. Employment and capital spending will pick up. The economy will roll into a new and stronger growth phase. As it is, the long-

moribund merger and acquisition and IPO markets are showing some signs of life. Some key manufacturing indicators are pointing to more steady growth. Jeremy Siegel, he of the “stocks for the long run” theory, recently suggested he could imagine the Dow at 19,000, which suggests stock markets could yet grow. That is, markets could hang in and advance to a new growth phase.

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OCTOBER 2014 | 43

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7/10/2014 12:23:45 AM

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THE RISE OF THE ACTIVELY-MANAGED MUTUAL FUND When ETFs came on the scene it was assumed active management was out of the question. But the technical barriers are falling. Actively-managed ETFs are proliferating. Is there any space left for the traditional mutual fund industry?

Arguably, there has been no bigger event in the investing world in the last two decades than the rise of the exchange traded fund. Not since Massachusetts Investors’ Trust created the first North American mutual find in 1924 has the modern investment industry adopted a major new product so rapidly.

In just a decade and a half, the number and type of ETFs has exploded. By June of this year, ETFs listed globally held a record high of US$2.55 trillion in assets.

These assets were held in 5,283 different funds, provided by 219 firms, distributed on 59 different stock exchanges. The creation of radically cheap indexing product has changed the financial industry. Fee-based advisors have engineered new practice models based on ETFs; because the advisor can unbundle their feeds, investment and advice can be separately disclosed, the industry moves into a whole new era.

For many, this ability to unbundle fees has been the key to the ETF revolution, at least in the case of advisors.

But as popular as ETFs have been, few have worried these products would replace the standard, traditional mutual fund. So far, ETFs have been confined to the “indexing” sector of the market. So-called activelymanaged mutual funds (where the manager is making stock calls in a bid to beat the market) have never had to worry about ETFs encroaching on their space—it has been a deeply-embedded assumption in the industry that exchange traded funds could not be

actively-managed for basic technical reasons having to do with disclosure rules on stock markets.

Securities listed on stock exchanges have to disclose their holdings (every 15 seconds in the U.S.). As a result, it has been assumed that a fund manager trying to actively manage an ETF would easily be “front-run” by other funds. Other funds would see if an activemanager of an ETF was building a position in suchand-such a company, or would try to get out and trade in front of that fund. The potential mispricing to be exploited would be arbitraged away by the other funds before the actively-managed ETF could harvest any “alpha.” As a result, many have long been convinced the traditional actively-managed mutual fund would always have a place in the industry.

That is, until recently.

On a bright, sunny and warm September afternoon in downtown Toronto, just a couple days before the Toronto Film Festival, people are in the street and there is a bit of a buzz in the air. In a boardroom overlooking the east side of Yonge and King, Howard Atkinson, CEO of Horizons ETFs Management, sits back and reminisces about his early, pioneering days in the Canadian ETF industry.

A decade ago, Atkinson was working for Barclays Global Investors (BGI), a company that, along with State Street Global Advisors, was key in the creation of the ETF space. The deep roots of the industry go back to a former BGI board member, former physicist

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and engineer, Nathan “Nate” Most, the man considered the creator of the ETF. During World War II, Nate was in the U.S. Navy, where he specialized in sonar. When he came back from the war, he went to work for the Pacific Commodities Exchange and the American Stock Exchange, toiled away in new product development there through the 1970s. It was during this time that he came up with a revolutionary idea: create a “receipt” of stocks that could trade as a security on a stock exchange. If a fund company maintained a balance of stocks in a fund that represented what was claimed to be in the traded security, the fund could use the stock market as a “settlement” service. The back-end computers of brokerages would act as custodians and record keepers. The stock exchange would be the fund distributor. The expensive settlement, record keeping and back-end infrastructure that traditional mutual fund companies maintained to distribute their products could be done away with. Costs in the fund industry could be permanently cut or reduced.

It was a great idea. These are the basic ideas behind every ETF today. It was not immediately picked up on as an industry-shifting product, not even by the father of index investing, John Bogle.

In the mid 1980s, Nate set up a meeting with Bogle, the famous head of Vanguard Group. It was Bogle who began selling funds that mimicked popular stock indices. As such, Bogle is considered the Godhead of so-called index, or passive investing, where an individual simply “buys the index” out of a realization that no single person can beat the market. No one can process more information than the market as a whole.

There is no hope that active management can beat the market over the long term. The best thing to do is invest in a broad index cheaply and profit from the general, overall growth.

Today, the debate between the passive and the active stock-pickers goes on. It is now a deep philosophical debate over the true nature of stock markets. Nate understood all of this this. He assumed Bogle would be interested in his new idea. As Nate saw it, ETFs took the passive investing idea into a new more pure realm – indexing, or passive investing, could be done even cheaper than through traditional mutual funds.

Famously, Bogle didn’t bite. He was the first to point out the basic criticism of ETFs: because the holdings of ETFs would have to be disclosed every 15 seconds according to stock exchange rules, traders would be able to see what a manager was collecting and could front-run the fund, thereby driving up costs. Bogle

The impracticability of an actively-managed ETF was accepted as the conventional wisdom. No one questioned that, except for Howard Atkinson didn’t think ETFs could work.

But Nate would not be dissuaded. As the lore of that meeting has it, it was while he was in Bogle’s office that Nate first came up with the idea key to the creation of the modern ETF. Nate would create an arbitrage mechanism that allowed the price of an ETF to trade in concert with its respective index as a way of avoiding the front-running issue. He took the idea, ran with it. The first ETF was launched on the Amex in 1993. The explosion in the ETF market since then is history.

The growth in ETFs in subsequent decades has been profound. The radically low prices would see ETFs quickly adopted by major institutional funds, who realized the product was a perfect way to achieve cheap indexing. Eventually retail investors caught on, and the number and of ETFs ballooned. Legions of so-called index-investors, swearing by the advantages of passive investing, came to be. The amount of assets in the space boomed. Nate Most ended up as chairman of the board of for iShares Trust at BGI before he passed away at age 90.

Nowhere in this history did anyone talk about an actively-managed ETF. The impracticability of an actively-managed ETF was accepted as the conventional wisdom. No one questioned that, except for a select few, among them Howard Atkinson, then at BGI. Atkinson didn’t buy the conventional wisdom. He assumed the vast amount of money in actively managed mutual funds would drive the innovation necessary to do actively-managed funds. He began writing and speaking out about the potential for an actively-managed ETF. “At the time everyone said no way, this will never work; this is not going to happen.

But I didn’t believe that,” says Atkinson. “I would say, ‘I’ll give you 10 trillion reasons why this will happen.’

It will happen. This was a belief I shared. Now here we are.”

Atkinson, of course, left BGI, founded Horizons ETFs, and put his ideas into practice. Key to the OCTOBER 2014 | 45

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development of this sector in Canada is the slightly different rule around disclosure on exchange. In the United States the disclosure happens every fifteen seconds. In Canada, disclosure only has to happen at the end of the day. This difference has allowed the actively-managed ETF space to develop in Canada even beyond the U.S. Horizon has been the company at the front of the charge. In January 2009, the company launched the Horizons Alpha Managed S&P/TSX 60 ETF, a fund the company argues is the first actively managed fund in Canada. There was another fund from a competitor in 1998, but that one has since closed.

Horizon originally developed actively-managed funds for the smaller Canadian fixed-income market.

Active management has an advantage in this space, even for those looking to index the space. “Some spaces…as soon as you put money at it, begin to shift market,” says Howard. “There is a market impact by moving in and out. A lot of these indexes…as normal money gets into them it change the market itself, so that space can benefit from some active management.”

Since then, however, the company has been producing all kinds of actively managed ETFs, as well as more traditional, or, ‘pure’ actively-managed funds.

Today, Horizons ETFs Management Inc. and its affiliate AlphaPro Management Inc. have $2 billion in assets under management in actively-managed ETFs. Horizon’s total is approximately $4 billion in AUM, but the evolution continues.

Atkinson recently contracted Front Street Investment Management in Toronto to manage some of its funds. Front Street boasts a co-chief investment officer, Frank Mersch, who has a long history as one of the most famed of active stock fund managers in Canadian capital markets. The disciples of passive index investing swear by data that suggests most managers cannot beat the market.

Mersch, the manager of the Altamira Equity Fund from 1988 to 1997, is the exception to that rule. He is famous for earning a compound average growth rate of 20 per cent over a time when the S&P/TSX Composite Index gained 9.5 per cent. Mersch also managed the Front Street Canadian Hedge Fund from 1999 to present, a period of time in which the fund chalked up a CAGR of 14.6 per cent versus 4.8 per cent for the Composite. All-in, Mersch has beat the TSX index in 18 of the last 21 years, is one of those real examples of the rare manager that can reliably beat markets. That he is managing an ETF for Horizons is the ultimate sign that active-managed has arrived in

the ETF world.

Actively-managed funds are slightly more expensive than straight-indexed ETFs, but they are still generally cheaper than traditional mutual funds, which has to be a concern for those in the traditional mutual fund sector. Actively-managed ETFs exist, and do work.

Turns out this beast is not so mythical. The old conventional wisdom that an actively-managed ETF cannot work has broken down. A flood of activelymanaged ETFs have come on the market, especially here in Canada. All of a sudden some are beginning to wonder, if an actively-managed ETF can exist, does a traditional, generally-higher-priced, mutual fund industry have a place in the industry?

So far, traditional mutual fund managers have downplayed the impact of exchange-traded funds on the traditional mutual fund industry. They claim ETFs haven’t had much of an impact. But management expense ratios (MERs) have been declining across the industry. The pressure for lower costs is mighty.

Eventually, there will have to be some impact. In fact, executives of traditional mutual fund firm, CI, indicated in a major Globe and Mail article that while ETFs haven’t had “an impact” on their firm, it was not clear what would be the case in “five years.”

Atkinson has some ideas about what the future might bring. As it is, there is a much higher proportion of money in actively managed ETFs in Canada than is the case in the United States. “All along, I’ve insisted that these are about…the ETF is a structure,” he says.

“If you look at it as a modern day mutual fund, it is a better way to deliver a fund. It is cheaper, transparent, and you don’t need the sales and marketing support if you’ve got good performance numbers An Ernst and Young report suggests the ETF industry could eventually overtake the mutual fund industry in terms of assets under management. Some major players with large mutual fund arms are beginning to make the shift. Here in Canada BMO and RBC are embracing ETFs, as is PIMCO, Fidelity and JP Morgan in the United States.

“All of these people are looking at this space. I think it’s going to happen over the next three years, more traditional mutual fund shops will have to go this way,” says Atkins. Mutual fund companies will have to face up to the basic infrastructural realities that allow a fundamentally lower cost structure in the ETF industry. “I think you’re going to see have a lot of traditional fund managers who will develop actively managed offerings. From a money managers view point it’s far easier. The settlement structure is there.

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Costs are lower. I think you are going to see a lot of traditional fund management firms go this route.”

Also key to the shift is a push to re-think disclosure rules on stock exchanges in the United States, which would benefit the development of the activelymanaged ETF industry there. “We’re sitting on right side of curve. We’re starting to get to three, four, five years in terms of track record on some of these funds, which is important for marketing these. So that’s good.”

The model is maturing. Also, potentially huge are the coming changes in the way advisors have to disclose their compensation to clients.

“CRM2 is going to change things. I think a lot more people are figuring that out. CRM is big. I think that’s a challenge to this sector,” says Atkinson. “When CRM2 comes out and people start to look at their costs, I think they’re going freak out. Some of those will be mutual fund investors. There are going to be a lot of people looking for answers.”

He suggests his company can help advisors who are looking for advice on what to do. “One of the things you can actually control, is you cost. You can’t control returns. You have to exercise control where you can, and cost is one of those areas,” says Atkinson. Shifting to a more “unbundled” practice, where ETFs are used and pure advice costs listed, will become more common. “That might not work for people with accounts under $100,000. But the higher-end of the market will go this way.”

He goes on to group the current Canadian advisor population into three different groups. “There is one group who are out in front and welcome CRM2,” says Atkinson. “These advisors tend to have higher client accounts and are already disclosing their advice costs.

Then you’ve got a group of advisors who don’t know exactly what to do, and need help. These are the ones who are terrified about what’s coming... And these are the ones we want to help. We’re trying to talk to these advisors.”

And that third group?

“Then there are those who don’t have any clue about what’s going on. The CRM2 stuff hasn’t even registered yet. I don’t know if that advisor will be able to adapt quickly enough. They might be in trouble,” he says. “We welcome CRM2. ETFs are all about transparency, disclosure. It makes total sense. If Australia is any lesson, things look good for Horizon. I was looking this morning at our Australian division. Their version of CRM2 is far more advanced…and if you look at the line, at the sale graph, in July, when latest regulations kickedin, the ETF assets start taking off….and at double the

long-term rate of growth in US and Canada, which has already been 5 per cent for ETFs.” He assumes a similar boom here. “The reason people want an advisor, they want to delegate do someone who knows what they’re doing. They don’t have time or knowledge to do it themselves,” he says.

“The other reason, they have complex situations… successions, businesses, cross-border issues, taxation issue, wills and estates. They are going to seek that out, to help find the insurance guy, the real estate guy.

The advisor of the future is a true wealth manager…. they will look at it all holistically. If you just need production, you can get it yourself. The advisors who have critical mass, who are on the right side of the curve, will be looking at ETFs. I don’t know what the numbers will be. But will there be fallout? I think so.

It will come down to…how many advisors does the country need? At a certain point it’s all economics, supply and demand. The only thing for sure, fees are more likely to go lower. Like payouts on the grid, there will always been downward pressure. I think the one thing you can say is that, the price of oil advice is unlikely to go higher.”

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The manager selects companies that are believed to offer superior risk adjusted returns relative to passively managed corporate bond indexes. If sub-advisor believes that interest rates will increase, the manager will choose securities with shorter terms. If interest rates are expected to decrease, the sub-advisor will choose securities with longer terms in a bid to generate some extra return beyond what a standard passive bond index fund would.

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FEATURE / HOPEFUL HARVEST

GROWING PLUMP RETURNS

The price of farmland grew at record rates last year. Agriculture-based investments have boomed. But is the farmland investment boom already beginning to wilt on the vine?

It was way back in 2007 that renowned global commodities investor Jim Rogers was the keynote speaker at a meeting of the Toronto Society of Financial Analysts. At that meeting he made a remarkable, memorable prediction: a coming boom in commodities and farmland-related investments would go on years into the future.

How right he was. Since that time farmlandbased investments have become all the rage in the wealth management industry.

Here in Canada Agcapita began offering investments in Saskatchewan farmland through RRSPeligible exempt market funds. Bonnefield Financial Inc., formed in 2009, claimed to be Canada’s largest farmland investment manager. In Quebec, Charles Sirios, the chairman of the board of CIBC, is involved in Pangea, a firm launched in 2012 that is dedicated to investing in farmland. Most memorably, a few years ago Sprott Investment Corp. launched an ambitious plan to create One Earth farms, a massive farming operation that would partner with First Nations groups and create a new and radically efficient farming machine that would tend one million acres in northern Canada. According to the announced plan, Sprott-owned combines would harvest the province from south to north each fall more efficiently than had ever been done before.

Farmland as an asset

class had arrived.

The new investment vehicles have been eagerly snapped up by investors. Return-hungry accredited investors and institutions recognize the unique attributes of the sector; as investments outside of public capital markets farmland is remarkably uncorrelated to typical markets (the Sharpe ratio is remarkably low on farmland). As public capital markets offered only higher risk for less return, farmland-related investments became massively popular. Good times and good returns have been the order of the day, especially last year.

A recent report on farmland prices released by Farm Credit Canada highlights the remarkable return numbers in this space. According to the FCC report, nationally, Canadian farmland has, overall, risen by an average of 12 per cent a year since 2008.

This is more than five times the rate of inflation. The average value of Canadian farmland increased by 22.1 per cent in 2013, an annual change in value that is the largest increase since FCC began reporting farmland values in 1985. The second highest increase was the 19.5 per cent return enjoyed the year previous, in 2012. Saskatchewan farmland, only recently able to be sold to owners outside the province, experienced the highest average increase at 28.5 per cent. In a world where rates on fixed income are at historical lows, the double-digit increases were a bright spot in the investment universe.

But as the interest in farmland funds has grown, some are wondering now whether the bountiful harvests can continue. Critics are beginning to murmur that the best days of the rush to farmland as an asset class are behind us. Has the bloom already come off the rose?

There are worries. The record high prices for grain have led to a boom in production. America’s corn crop this year will be the largest ever. As a result, some suggest the boom in grain prices has peaked.

As grain prices drop in the years ahead, so will the receipts on farmland. Already, this year, the price of soybeans, after seven years of increases, dropped. If the receipts on farmland drop, so does the value of the land.

A recent blog post on the Bonnefield website delves into this issue. According to the firm, “2013’s blessing of the largest-ever grain crop produced in Canada has turned into a curse for some Western Canadian farmers.” The farmers face delivery bottlenecks and lengthy delays in getting crops to market. Newspapers have been filled with stories

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Canada Annual % change in farmland values 2004

4.60%

2005

3.10%

2006

11.70%

2007

11.60%

2008

4.70%

2009

6.60%

2010

19.50%

2011

14.80%

2012

5.20%

2013

22.10%

0

5

10

15

20

25

about how it is limited rail capacity in parts of Western Canada, along with a harsh winter, forced rail companies to cut back on operations. As railroads increasingly turned to shipping fracked shale oil out of central North America by rail, the grain crops were not getting to market. These delays turned into serious cash flow challenges for farmers who haven’t received payment for last season’s crop yet.

Farm Credit Canada and commercial banks have had to introduce cash advance facilities to help farmers finance new seeds for the coming season.

That is, many Western farmers find themselves in a temporary cash squeeze. The growing business case for farmland investments has hit a stump.

No wonder then, some have already taken cash off the table. Assiniboia Farmland Limited Partnership, headquartered in Regina, was established in 2005 to provide investors with a “turnkey” opportunity to gain exposure to Saskatchewan farmland. The company raised several funds, bought up 115,000 acres. But Assiniboia has already closed its funds and in December of 2013 sold its entire investment portfolio to the Canadian Pension Plan Investment Board for $128 million. The Partnership is now in the process of winding down its operations.

On a slightly more desperate note, the ambitious One Earth farm plan from Sprott has been radically restructured over the last few years. A new CEO

now was brought it, the focus shifted—the company will now concentrate on cattle operations in Alberta and Saskatchewan and the retail distribution of meat products in Ontario and British Columbia. The hope is that by focusing on higher value products— antibiotic and hormone free beef—rather than grain production, the company will bloom..

The question for investors, are the recent shifts indicative of long-term shift in sentiment and opportunity?

Farm Credit Canada chief agricultural economist J.P. Gervais, has sounded the alarm on the future of the market. He cautions producers not to use the past few profitable years—when crop prices were abnormally high due to the 2012 U.S. drought—as the basis for purchasing more land. “Recent longterm outlooks for crops suggest world stocks of grains and oilseeds will rebuild, bringing prices closer to their long-term average. Margins will be tighter and eventually interest rates will increase,” he said. “Producers need to look at their operations and ensure they can manage through a number of scenarios when it comes to revenues and expenses.”

Tighter crop margins may well see the rental agreements that underpin some of these securities move over time in the same direction as crop receipts.

“For the next several years, we expect the demand for farmland to slow down, which supports a socalled soft landing scenario,” Gervais said. “We don’t anticipate farmland values to collapse ...but, the warning is clear—don’t expect the double-digit increases to continue.”

This is the kind of straight talk that defines the farming industry. Those in the sector mutter grimly about the time in the late 1980s when land values actually crashed after a multi-year boom.

The principals at Bonnefield address the worries about a coming crash. They point out the financial metrics that prevailed during the 1980’s farm crisis and today’s current conditions. According to Bonnefield, recent corn prices may have fallen significantly from 2012 levels. But they are still high by historic standards. In fact, prices remain in the third quartile of prices since 2005. Farmers remain highly profitable and bullish about the future. This is much different from the 1970s when the farm price boom then was driven by an accumulation of debt.

Today, the boom has been driven by an increase in farm profits. That is, farmland is “no less affordable for farmers than it was in 2006 when measured as a ratio of farmland price to real gross income... The contrast with the 1970s could not be more dramatic.”

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FEATURE / HOPEFUL HARVEST

“The early discussions we’ve had with Chinese importers, who recognise there’s a protein deficiency in the country, are up around 100,000 head of cattle or more”

Or, to put it another way, the current investments are stable, sustainable—there is more room yet to grow.

Globally, major sovereign wealth funds continue to do deals. China’s sovereign funds continue to buy up food related assets in South America, South Africa, and Ukraine, as China struggles to feed 1.3 billion, many more of them among the middle class (and therefore eating grain-intensive beef and pork rather than just grains). Argentina or Ukraine, two of the world’s leading agricultural producers, either have serious currency problems are the site of the most heated proxy war between Russia and the West since the Cold War. Brazil and Southern California are dealing with debilitating droughts. Considering the vast majority of North American fruits and vegetables come from a place suffering a once-in-a-couplegenerations drought, there is lots of opportunity yet.

The bulls are still in the pasture.

Backing the optimistic take is Agriculture Canada’s recently released Medium Term Outlook on grain prices. According to the government, while grain prices have come off, they are not going to plunge.

In fact, prices for grains and oilseeds from the current decline as robust global growth and rising demand continues to support generally rising prices. Another of the trends driving current price increases has to do with fundamental market structure. For decades crop yields have been rising, ever since the so-called Green Revolution kicked off in the 1960s, when cheap and widely available natural gas-based fertilizer was distributed in great amounts. Crops yields have continued expand for decades. But the long-term trend toward higher yields as a result of the shift to “widespread, global, hydrocarbon-based farming” is also beginning to level off. Decades after the dramatic advances in crop yields that defined the Green Revolution are coming to an end. According to a 2012 article in the journal Nature Communications, today 40 per cent of global wheat land is experiencing either flat or declining yields. Supply is no longer growing as easy as has been the case in the past. As the global population continues to skyrocket past 7.5 billion, demand continues to grow. Throw in the effects of climate change and environment damage— in China smog levels have risen so high they are blocking natural light, potentially impeding photosynthesis in the world’s most populous country—and the outlook is still good for investors in farmland. As an executive involved in farm investments at Aquila Capital, recently suggested, “There are powerful macro trends supporting

farmland as an investment: every day, 30,000 hectares of farmland are lost as a net 200,000 is added to the world’s population.”

Some major investors continue to put their money down. Late this summer Berkshire Hathaway was forced to issue regulatory documents noting it now holds 3.98 million shares of the Moline, Illinois- based John Deere Co. at the end of the third quarter of 2014.

Deere is the world’s largest maker of farm implements.

Buffett famously built Berkshire on huge long-term equity bets on companies basic to modern economy.

In the past it has been consumer staple companies like Johnson & Johnson, Coca-Cola Co. and American Express Co. Now Berkshire is, apparently, making one of those big, fundamental bets on the farming sector. Warren Buffett is going all in on farmland. Also worth noting is the new obsession of Australian mining billionaire Andrew “Twiggy” Forrest. He famously made billions off of mining the minerals that China used to overbuild its physical infrastructure.

But the one-time build out of Chinese infrastructure (which drove up the price of commodities like copper used in homes and telecom systems) has abated now that the country is home to vast unpopulated cities.

What the country will need in the years to come is, instead, food. Intriguing is Forrest’s proposal to sign an epic “100-year Sino-Australia agricultural partnership” that would see China commit to paying 10 per cent to 15 per cent more for Australian agricultural commodities, while Australia would guarantee food products for the growing nation. The plan, according to Forrest, would radically restructure the Australian farming sector and set it up for generations of prosperity, while allowing Chine to continue to develop a higher standard of living. Forrest has been quoted as saying the Chinese premier has been “taken by” the concept. “The early discussions we’ve had with Chinese importers, who recognize there’s a protein deficiency in the country, are up around 100,000 head of cattle or more…Now, we’ve never seen in the history of Australian agriculture orders this big. This is what could change the Australian agriculture industry. This is what could change the Australian economy,” he is quoted as saying.

Thinking back to Jim Rogers’ address to the Toronto CFA meeting it is interesting to note that the famed investor suggested that only when the number of farm-based securities listed on the TSX rivalled the number of tech firms listed at the height of the dot-com bubble should investors think the commodities boom is a bubble.

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FEATURE / SHIFTING FIRMS

MOVIN’ ON

Every advisor will feel the itch at some point—the urge to shift firms as a way of achieving a better payout or title.

But how can advisors manage this shift correctly? Liz Brown explains

When the markets crashed in 2008, Gary deWitt was let go from his advisor role at Wood Gundy. “It’s not a normal thing to happen, but they were deleveraging all over the place,” he says. “I’m sure if I had a $50 million book, they wouldn’t have let me go, but I was new and had a smaller book.”

His manager allowed him to port his client information over to the next firm he joined, Raymond

James in B.C.’s Comox Valley. “He told me he wasn’t going to stop me from calling my clients, so I took that as an okay to go ahead and make contact.”

Many of deWitt’s clients followed him to his new firm, including those who were initially nervous about the switch. “It can be discomforting for some clients to make that change, but that’s where the relationship with the advisor comes in,” he says. “When you build a relationship, the relationship is with you and not the firm, so that makes a shift a lot easier.”

While deWitt’s move was mostly seamless, others are anything but. In fact, when advisors decide to move dealers, it can provoke animosity and costly legal battles. “Dealers and managers can be surprised by moves and will often have a knee jerk reaction,” says Harold Geller, an Ottawa-based lawyer specializing in financial advisory services. “When surprised, it is a common human response to react negatively. They’ve been building up a sales chain and now the advisor is taking it away.”

Because moves can get sticky, it’s important for advisors to carefully plan a transition so as much as possible they avoid upset managers and costly legal battles. Most importantly, the advisor needs to always put the best interests of the client first. “Inevitably, it’s the client’s choice,” deWitt says of moving firms.

“It’s all about what’s best for the client and who they want to work with.”

SEEK ADVICE “Advisors are notorious for not getting legal advice for moves in advance,” says Geller. “It’s quite well known within the industry, and it costs them a fortune when they make the slightest mistake. So it’s penny wise and dollar foolish.”

When an advisor is first considering a move, Geller recommends bringing the contract with the present dealer to a lawyer for interpretation. “I can tell you that almost every advisor who’s called me has no knowledge of what the true contract terms are,” he says. “They have an impression, but they don’t understand the details and the significance of the details.”

The most important clauses of a contract that could influence a move include: non-competition and non-solicitation clauses; notice provisions;

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indications of who, in fact, owns the book; and administrative moving costs that can be attributable to the advisor.

Non-solicitation and non-competition causes spark the greatest fear and confusion in advisors because they are unaware of what constitutes solicitation, and the wording of the contract can be quite severe. However, Geller says that a huge proportion of these clauses are not viable. “They’re not valid and that’s because of the sloppiness in the contracting process.”

The clauses also contain unreasonable restrictions which will not hold up in court. “For example, a clause might include something like you can’t work within 250 kilometres of the GTA, but the court will say that’s ridiculous,” says Geller. “It’s quite common that clauses like these are struck down by the court as meaningless. This is why it’s important to consult a lawyer and know what your rights are.”

CLIENT INFORMATION Another problematic area is when an advisor tries to port over confidential client information to another firm. Dealers and advisors may fight over who actually owns the information in these files, but ultimately, it is the client’s information and this can be used to the advisor’s advantage, according to Geller.

Geller cites one example, where an advisor knew he was going to be leaving a year in advance, so he met with each client individually to go over their files and then made a copy of the file for the client to take home.

“Forget about the privacy and contractual issues, meeting with clients and giving them their files just makes a heck of a lot of sense on a sales basis,” says Geller. “If you’re potentially moving, go in advance to your clients and show them your professionalism by making sure everything is suitable for them and that your relationship is strong and provide them a copy of their file.”

In this case, however, the advisor has to be careful to avoid telling the client about the impending move, because this can be a violation of the contract between the advisor and dealer. Instead, when the advisor moves, the advisor can reach out to the client to

discuss continuing the relationship after the notice period is up.

As for confidential information owned by the dealer, Geller advises complete hands off to prevent any potential legal action from the dealer. “It’s not yours and you don’t need it,” he says.

BY THE BOOKS

Recently, Geller has seen a new trend developing “When within the industry: applying for what are called you build a interlocutory injunctions through the courts, a legal move by which dealers try to block advisors moving relationship, clients by flagging NRD information.

“They effectively say ‘we found a problem with the this guy’s book and the OSC shouldn’t re-register or, you should investigate before you re-register relationship him, him,’” says Geller. “And every single rep has a problem book, if you want to find one. This is what is with you inI’mtheir seeing; you can tell there are lawyers behind things. and not the these “If the dealer can disrupt that process and create gap they’ll have the opportunity to parachute firm, so that asomebody else to build a relationship with that client and they’ll have a better chance of keeping the makes a clients,” Unfortunately, there isn’t much advisors can do shift a lot to prevent this, aside from having their books in impeccable order, which will discourage such a move easier” from the former dealer. Also, trying to maintain positive relationships through the move can help prevent action that may be taken out of spite.

SMOOTH TRANSITION By providing clients with their files and waiting for the notice period to pass, advisors can ensure as smooth a transition as possible when moving from firm to firm. The most important thing, according to Geller, is to seek out advice. “A lawyer is best, but barring that, consult with the new dealer, because they are aware of these issues,” he says. “The big risk for all of us when doing these things is that we’re salesmen and we convince ourselves of what should be, and we think we’re being objective but a third party might raise a lot of red flags you haven’t considered.”

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MILLENNIALS

WILL GENERATION Y TAKE UP THE EQUITY WAY OF LIFE?

The investment attitudes of millennials are still being formed. But one thing’s for certain, reports Claire Gagne. The advice giving game will never be the same

As a personal finance author and speaker, Lesley-Anne Scorgie understands why her generation may be turned off by saving and investing. Generation Y kids, also called “millennials,” grew up watching their parents work hard, diligently save for retirement and dutifully contribute to RRSPs, only to see the market crash during the 2008 recession, taking the bulk of their savings with it.

“I saw my own parents fall victim to this,” says Calgary-based Scorgie. “They also both lost their jobs in the recession.”

While many people’s investments have rebounded to pre-2008 levels, “they (millennials) seem to have forgotten that, and the principle of buying and holding,” says Scorgie.

In fact, in a November 2013 survey of Canadians with $100,000 or more in

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household investable assets, conducted by MFS Investment Management, 46 per cent of millennial investors said they would never be comfortable investing in the stock market. Furthermore, 40 per cent defined “long-term investing” as less than five years, which was the shortest period for any age group in the survey.

As a practical point, many Generation Yers are also still too young to have collected the requisite coinage to stash into investment vehicles. High tuition fees and a tough job market have left many of them paying down student loans and simply trying to catch up.

“They know they need to save but struggle to actually do it,” says Andrew Novick, founder of the Investment Connection, a fee-based financial planning and investment management firm in Centre Valley, Pennsylvania. “They are younger and just starting in their careers and maybe starting a family.”

They are also a generation known for their penchant to buy the latest technology, indulge in high-priced clothing and indulge in all-inclusive vacations. But for those Generation Yers who are investing, and the others who will as they mature, get stable jobs and begin to think about their future, where will they park their money? Has the recession of 2008 soured them on the stock market altogether, or has it heightened their desire to take charge of their investments? Will the instant gratification generation ever buckle down and buy into mutual funds or, even exchange-traded funds?

CASH STASHERS There have been many headlines in the last few years spelling doom and gloom about Generation Y and its penchant to hold on to cash.

“I think there is a healthy level of skepticism when it comes to the stock market now,” says Alan Moore, co-founder of the XY Planning Network, a group of fee-only financial advisors that specialize

“They know they need to save but struggle to actually do it” in working with generation X and Y clients, and the president of Serenity Financial Consulting. “This generation has seen some really impressive market crashes in its very short lifetime.”

But he insists fears of generation Y hoarding cash and not investing for their future are overblown.

“I actually think they’re learning from their parents,” he says. “They are holding cash, and they need to be holding cash. It’s not because they are not risk takers, or not taking the appropriate level of risk; it’s because they have the cash as insurance.

It’s there for emergencies.”

Moore points to the fact that generation Y is a mobile generation, changing cities often, changing jobs frequently, jumping into whole new careers at a moment’s notice and starting their own businesses.

“Life happens to Gen Y a lot faster than it happened to previous generations. They need that cash on hand to be able to live their lives.”

WORKING FOR TODAY Moore also believes Generation Y has a different take on retirement than their parents did. “Gen Y is the first generation that is taking responsibility for their own financial independence and financial security, especially into retirement,” says Moore.

This generation is not counting government or company pension plans to sustain them. But Moore also thinks that the whole concept of retirement is changing for this generation. No longer believing in the ideal that 30-40 years of hard work will guarantee you comfort in your golden years, this generation wants to spend more time living life now.

“I think Gen Y is looking out toward retirement

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MILLENNIALS

“I think Gen Y is looking out toward retirement age, but not as this concept where (they say) ‘OK, I need to have $2m saved so I can quit” age, but not as this concept where (they say) ‘OK, I need to have $2 million saved so I can quit work.’

They’d rather have some of those ‘mini-retirements’ today and experience life.”

Scorgie agrees. “They want to just live for the moment and it’s because they watched their parents work so hard and lose everything.”

To Moore, it’s a shift away from the concept of retirement as a whole, and a shift toward financial independence. “Financial independence is found when you have either saved a ton of money or have created your own income stream,” says Moore. “I’m seeing people in Generation Y do this by starting businesses, having side gigs and really owning their own careers.”

MILLENNIAL MINDSET

88%

are looking to grow their assets

12%

prioritize wealth preservation over growth

63%

willing to take on greater investment risk for the potential of higher returns

PASSIVE INVESTORS So if the millennial generation is living for today and not believing in saving for the future, is there a future for mutual funds?

Scorgie says mutual funds and ETFs suit this group of investors by nature. “I believe that the diversity in mutual funds, in particular, is why they are attractive to our generation.”

But rather than using mutual funds to get rich, Moore believes Gen Y will use entrepreneurship and creativity to build an asset base and income streams well into retirement age. Mutual funds, to this generation, are passive vehicles for steady growth.

Novick agrees. “The older generation was always looking to beat the market. And most of the time, that doesn’t really work out,” he says. “Their parents invested in a variety of funds and were comfortable buying and selling regularly to ensure they were positioned properly. Their parents often chased top performing funds and were less concerned about fees as long as they ‘might’ beat the market.”

MERs means more to this new generation.

This group is looking for low-cost investments where they don’t need to do a lot of research, such as exchange-traded funds and index funds. “In my experience they are looking for simple solutions, and/or cheap solutions, they just don’t want to spend a lot of time on it,” Novick.

“The days of high-fee mutual funds for our generation are long gone,” says Scorgie. Moore agrees. “This generation is looking for the “all-in one, set it and forget it types of investment,” he says.

“We’re finally getting enough information out there that beating the market is really hard, if not impossible, and so paying high fees to have someone manage your money and try to beat the market is not a good investment of time and money.”

PLANNING FOR THE FUTURE

37%

prefer lower investment risk, even with lower potential returns

78%

make investment diversification a priority in order to reduce risk

40%

rely on “buy and hold” investment strategy (Source: Merrill Lynch Private Banking)

If Gen Y-ers aren’t looking for people to pick stocks and build winning portfolios, what is the future for the investment advisor? Moore says there needs to be a shift way from investment advice and toward financial planning. “Gen Y needs advisors that help them set goals, live the life of their dreams, and use their investments in the best way to support those goals.”

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Are you one of Canada’s Top

50 advisors?

Get ready, the Top 50 Advisors ranking is coming soon.

For the second year, Wealth Professional will rank the Top 50 individual advisors based on assets under management, client retention, revenue contributed and number of new clients introduced to the business during the 2014 fiscal year.

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TOP

50

ADVISORS 2014 54-57_Millenials.indd 57

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BUSINESS STRATEGY / LEADERSHIP

GETTING INSIDE OUR

HEADS Taking your team to the next level means understanding your employees and yourself. Jill Fraser reports

“A good leader possesses two key attributes, the ability to set direction and the skill to drive people towards that direction, motivate and align them and ensure that the direction appeals to their hearts as well as their heads.”

Their hearts?

Twenty years ago, an article on leadership would have reflected the domination of boardrooms by alpha males who believed that emotions and feelings in an office environment were about as relevant as children’s storybooks and as welcome as T-shirts, and probably kicked off with something like: “A good leader recognizes that business strategy is a highly rational process of eliminating variables and maximizing opportunities.”

Leadership in 2012 is a much more holistic concept: leadership training institutions such as Deloitte’s Leadership Academy use the analogy of children’s stories to encourage business leaders to tap into their own stories in order to become more open, honest, transparent and real—whereas employees wearing T-shirts is now a universal sign in major corporations around the globe, showing that a relaxed dress code lifts staff morale, acknow­ ledges individuality, and potentially increases creativity and productivity.

Today, as expressed in the opening quote by Deloitte’s Leadership Academy chief and founder, Tom Richardson, good leadership engages the heart as well as the intellect, and encompasses a number of key qualities.

Richardson established the Deloitte Leadership Academy to expand the capabilities of leaders after recognizing that ‘people, not PowerPoint’ drove organizational performance. He has years of experience in the leadership stratosphere—working intimately with 15,000 top business leaders—and so is uniquely placed to explain why leadership is a people game.

“The characteristics and capabilities of good leadership are universal across almost all indus­tries,” he says. “But it’s become more and more important in the finance industry because of the pressure around bonuses and remuneration.

“People will only stay in an organization if they feel connected and engaged. They’re not being paid

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to stay there with bonuses anymore. The need for leaders in the financial services industry to build up their people skills has become increasingly important.”

Andrew Henderson, a veteran of leadership management, introduces the term ‘leadership charisma.’

“It’s to do with connection: a connection that makes me feel that my leader is charismatic and the only way that connection will be established is if my leader has the emotional intelligence to understand me—what motivates me, why I’m here, how I react.

“Unless leaders understand and invest in their people, they will not be able to influence them because when they want to rally their team to do something, the reaction will be ‘you only want us to do this because of what you will gain,’ ” he adds.

“But, if each individual knows from experience that their boss is invested in them, listens to them (consultative leadership) and honestly cares about them, they will trust the leader’s decision on behalf of the team. That’s leadership charisma,” Henderson maintains.

NEUROSCIENCE IN ACTION A high-trust factor is paramount in the leaderemployee equation in the financial advice industry, says John Toohey, professor of business psychology at the Graduate School of Business and Law, RMIT University, because of the nature of the business and the fact that a culture initiated and practiced at the top is mirrored down the line and will eventually shape customer relations.

Toohey familiarizes his graduate MBA students with neuroscience to add weight and credibility to the argument that the most effective, charismatic leaders function from their emotions.

“Through neuroscience, which looks at how the brain operates, we have come to realize that decisionmaking is primarily emotion-based,” explains Toohey.

“The emotional parts of our brain kick in long before the rational parts. The rational parts follow and try to make sense and contextualize.

“A lot of men in business are afraid of that component, and don’t want to know about it. The executive education I’ve done in this area is

LEADERSHIP: KEY QUALITIES

EMPATHY COMMUNICATION PROCESS & TACTICAL ORIENTATIONS

LOGIC

EYE FOR DETAIL

INSPIRATION

EMOTIONAL INTELLIGENCE & SELF-AWARENESS ‘BIG PICTURE’ VISION

AUTHENTICITY

fascinating: people have quite bemused smiles when I first tell them this, but as they dig into it and I show them the research they begin to look more bewildered than amused.”

Toohey contends that an area of critical impor­ tance in business education is the nature of beliefs and biases. He teaches that the brain is highly plastic/ durable. Beliefs belong to the irrational/emotional world, and a strongly held belief can change the neural pathways of the brain (thus the plasticity).

“Leaders usually don’t understand this and therefore don’t get the impact,” he says.

The significance of all this, Toohey says, is to highlight the relevance of self-awareness (what we believe, how we behave, and why) in what he refers to as the “psychology of strategy” for leaders to “inspire people to act in predictable ways.”

“I challenge managers and executive MBA students because usually they are very good at identifying biases in others, and very poor at identifying them in themselves,” adds Toohey. “I tell them, ‘If you don’t understand yourself, go and grow cabbages or do some other solo job.’

“Don’t pretend that you can go into a business and take a leadership role, because you’ll only make a mess of it. If you don’t understand yourself you’re never going to understand others; you’re never going to be able to motivate them.”

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PEOPLE MANAGEMENT / MINDFULNESS

The art and science of

MINDFULNESS

Most wealth professionals are aware of the importance of emotional intelligence – but mindfulness is perhaps the ultimate in brain training for better personal and professional outcomes neuroscience.

Detailed brain scans show that the practice of mindfulness changes both the physical structure and activity of regions of the brain associated with emotional regulation, memory, learning and decisionmaking. In addition, mindfulness practice reduces reactivity, giving us a bit of space to choose our responses rather than reacting automatically. These capabilities are critical for effective leader­ship and, with mindfulness training, they can be enhanced, regardless of where you’re starting from.

“Mindfulness practice is essentially attention training combined with attitudes which promote awareness and self-control,” says Eric Winters, trainer and coach, Chocks Away Mind Skills Consulting.

“The result of mindfulness is greater awareness – of self, others and context – and less reactivity. These mindfulness skills are foundational to greater emotional intelligence.”

We’ve all done it. In a fit of fury or just plain annoyance, we’ve hastily typed a snarky email to a colleague and hit ‘Send’, without first thinking of the repercussions. It’s known as action addiction: often when things happen we want to fix it immediately. There’s even a neurological incentive to do so: we get a hit of dopamine from feeling like we’ve taken quick, decisive action.

It’s human nature to act before thinking, right?

It is, but it doesn’t necessarily have to be. The concept of mindfulness is not new; in fact, as a concept it is over 2,500 years old. However, its relevance to the corporate world is increasingly being recognised thanks to recent developments in

TEAM BENEFITS For wealth professionals, being aware of your own state, your intuitions and strengths, and having a greater ability to manage your emotions and behaviour, supports the notion of authentic leadership – that is, being able to more consistently walk the talk.

“Teams respond well to people they experience as genuine,” says Winters. “Relationships with teams improve as people sense they are truly being listened to rather than neglected or taken for granted.”

Mindfulness also develops empathy for others, a vital trait for sustaining productive working

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relationships. And noticing how others respond to your leadership is valuable feedback in recognizing what’s effective and what is less helpful leadership behaviour.

STRESS BUSTER, INNOVATION BOOSTER Life is stressful and so is work. An acronym helps to sum up what we all face: PAID – that is, Pressure, Always on, Information overload, Distracted.

“These pressures impact our productivity, creativity and even our wellbeing,” says Gillian Coutts, senior trainer, The Potential Project. “The pace of change externally now is constant and organizations need to adapt, so this idea that we’ll be able to control and get all the ducks lined up in a row and then life will be great is not the reality.

We can’t use the methods we’ve used in the past to grapple with the issues we currently face.”

For all employees, the enemy of innovation and creativity is stress. When we’re stressed our minds narrow to focus on the threat at hand, and our thinking is habitual. Mindfulness can help diminish stress and nurture the broad, open and flexible thinking required for innovation. Indeed, Winters notes that one of the most important aspects of mindfulness is that it helps us to step out of autopilot, when we behave and think in routine ways, and instead step into more flexible thinking and behaviour required for innovation.

DISPELLING MYTHS Despite being picked up and utilised in companies like Sony, Microsoft, GE and Amex, there is naturally scepticism from many when anything to do with changing the way the brain functions is proposed, and mindfulness is no different. Yet neuroscience provides a rigorous scientific evidence base for the effects of mindfulness practice.

Winters welcomes skepticism and says there is wisdom in not believing everything we’re told. He feels it’s better to check the evidence, to have your own experience of mindfulness and make your own mind up as to whether it’s helpful or not.

There are, naturally, some misconceptions that need to be cleared up. Mindfulness is not, for example, an approach to empty the mind. It’s not an approach to make you feel better. It doesn’t require any odd sitting postures or chants.

“The objective is not to reach some sort of

“The result of mindfulness is greater awareness – of self, others and context – and less reactivity” Eric Winters enlightened state,” says Winters. “It’s not some­thing you have or do not have. Mindfulness is a skill, a capacity we all have to some degree. Mindfulness practice allows us to develop that skill to improve our ability to make better choices and live and work more effectively.”

MINDFULNESS TRAINING Mindfulness can be learnt either in groups with a mindfulness teacher guiding its practice, or by listening to a recording guiding your attention. The ideal approach involves a combination of the two.

Group practice with a teacher is particularly effective because questions can be addressed regarding optimal practice and students learn a great deal about the human mind from listening to each other’s experiences. Group training sessions are typically held weekly with daily home practice.

The Potential Project, for example, advocates an eight-week program, in which a group of people meet for an hour each week to cover the concepts and undertake training. Coutts says people are keen to learn how to sharpen their ability to focus, but she is often asked at these sessions what this means in the workplace. For example, what does it look like if you place that focus and awareness in a boardroom meeting? What does it mean if you’re managing change?

“It’s taking that capacity you’re building neurologically and placing that within the workplace setting, so you then end up with both an individual impact, and at the same time there starts to be an organizational cultural shift where you start to move towards these enhanced behaviours. It helps to move it away from the airy-fairy,” she says.

Like most things in life, mindfulness can be sustained, but it requires the discipline of regular daily practice. The Project Group recommends daily 10-minute practice, which can be done at home or in the office. “It’s like a muscle-building or physical exercise – once you stop training you lose the benefits after a while,” says Coutts.

TOP TIPS »» Don’t feel that you need to fill up all your time with doing. Take some time to simply be.

When your mind wanders to thinking, gently bring it back to the flow of your breath. »» Recognize that thoughts are simply thoughts; you don’t need to believe them or react to them. »» Notice where you tend to zone out (eg driving, emailing or texting, web surfing, feeding the dog, doing dishes, etc.).

Practise bringing more awareness to that activity.

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FEATURE/ A CRITIC’S TAKE

A CRITIC’S TAKE SIPA chairman Ken Kivenko sounds off on the sins of the industry.

Nicola Middlemiss reports

Successful and self-directed, veteran investor Ken Kivenko ditched his financial advisor decades ago. Will your clients soon be doing the same? Here, the outspoken entrepreneur reveals why he went solo and what you’ll have to do to stop others following suit.

INDEPENDENT INVESTING While he’s worked with a financial advisor in the past, it didn’t take Kivenko long to fly the financial nest and begin investing independently. “I was able to do the analytics, the mathematics, the statistics and the risk analysis better than my advisors,” he explains.

Most of your clients probably aren’t as clued-up as Kivenko, but that doesn’t mean they won’t try and spread their wings sometime soon, especially with the recent arrival of robo-advisors and the unlimited amount of information available online. So how can you keep business booming? According to Kivenko, it calls for a complete overhaul of the industry.

INDUSTRY INTEGRITY As chairman of the advisory committee for the Small Investors Protection Association (SIPA), Kivenko says he received 60 complaints about advisors following the TFSA penalty scandal. “Thousands of people pulled money out of their TFSA and then put it back again,” he says. “Their advisors told them to do it. In other words, they did not understand the TFSA rules, but these are the people calling themselves advisors.”

Even if you didn’t stumble at the TFSA hurdle, an over-saturation in the market means underqualified peers may have led your expertise to be called into question. “Everybody’s an advisor today,” says Kivenko.

“In fact everybody’s a vice president today. They (advisors) create these designations and false titles; this has to be cleaned up and turned into a profession again.

The CFAs and most of the CFPs, they’re what I call professionals.”

Kivenko insists that professionalizing the industry is the only way forward. “If financial advisors professionalize their industry, there is certainly a place for them,” he says. “There is no doubt that a good advisor can add value, but not the way they’re doing it now.”

SLIPPING STANDARDS Kivenko is concerned that real, seasoned professionals are unlikely to work with people who have limited funds to invest, leaving small time investors with underqualified advisors who may not work in the best interest of their client.

“The people who are selling the mutual funds, a lot of the people who work for brokers and just have to pass some basic tests, I question whether they’re really advisors,” says Kivenko. “They’re really dealer representatives or salespeople, and they don’t have a fiduciary duty.”

So what’s the solution? Investor advocate group FAIR Canada have proposed a statutory best interest standard which Kivenko staunchly supports. “There has to be a new standard,” affirms Kivenko. “You have to be competent to give advice, have better qualifications and have a duty to act in the best interest of the client, not the company.” Among other things, the standard would consider whether embedded commissions are compatible with working in a client’s best interest.

THE PERSONAL TOUCH Along with a statutory best interest standard, Kivenko showed early support for robo-advisors and identified the controversial tool as a great, low-cost opportunity for small investors. However, he also recognizes the importance of the personal touch and believes that investors value being able to talk to their advisor.

It’s important to be empathetic and understanding towards your clients. But above all, you must also build a relationship of trust. This will prevent them from fleeing to an electronic alternative. “You’re not talking to a human, so you can’t say you’re a little stressed or worried,” says Kivenko. “This is why (robo-advisors) are at a disadvantage. It’s nice to be able to talk to someone, but only if you can trust that person.”

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Day in the life of...

Chris Riddell, Group pensions and individual insurance advisor, Wise Riddell Financial Group 6:15 a.m. My alarm goes off. The following 20 minutes are spent getting the boys out of bed and ready, while getting myself dressed and ready for the day.

7:10 a.m. My boys and I sit every morning for breakfast together. I fill them in on what my day looks like and they tell me about which friends they are going to play with. This is quality time with them, but also allows me to get my mind geared towards what needs to be done.

7:30 a.m. We are on the road to daycare and I head into the office.

8:15 a.m. I take the first part of every day to have a coffee and filter through my emails. I catch up and speak to any necessary business from the prior days.

9:15 a.m. I’m back on the road for the day’s meetings.

I will arrive at our client’s office, usually a half hour before my first meeting, to organize myself and prepare for the first of usually 10 member meetings that day.

10:00 a.m.My first meeting starts. In my position, it is important to be approachable as well as focused and energetic, which rubs off on the members and influences how productive our time is together.

Establishing a relationship with them is the key to being able to have productive meetings.

12:30 p.m. I break for lunch to refuel for the afternoon. I try not to bury my face in my phone, like I see so many other people doing today. I’ve always been a people watcher and take this time to

observe the world around me. This allows me to recharge the batteries for the latter half of the day.

2:45 p.m. With the day’s members looked after, I spend a couple minutes finishing up my notes from the day. As I make my way back to the car I make sure to stop and chat with other employees.

Creating a personal relationship with members builds trust and allows me to do my job more efficiently.

3:15 p.m. On my way back to the office, I call my assistant to fill her in on the day’s meetings and make sure she gets going on any pressing paperwork that needs to be processed or sent off for the members.

5:00-5:30 p.m. I’m on my way back to daycare to pick up the boys. The rest of the day is family time. Some nights we’re at the pool or rink for lessons, but on offnights, we will prepare dinner together or go and play outside. This time is so important. I feel having that balance keeps my stress down to a controllable level.

8:00 p.m. Either my wife or I will bathe and get the kids off to bed. We then will sit down together and talk over a glass or two of wine. This wind-down time gives us an opportunity to talk.

10:30-11:00 p.m. I get cleaned up with a hot shower to wash away the day and relax before I climb into bed for a good night’s rest.

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IMAGE CONSULTANT

Swimming in your suit?

Nothing dates an advisor more than a boxy suit that’s one size too big, reports Nicola Middlemiss. Time to appeal to the next generation of young professionals by staying in line with key trends The mark of a top advisor is increasingly a fitted suit.

Well, at least that’s the consensus of leading stylists helping financial planners update their look and better appeal to the next generation of young professionals seeking counsel

“Don’t be afraid to pop some colour, especially with accessories,” Tom Kearnan, director of merchandising at Indochino. “It adds a new level of elegance and sophistication to your outfit. It says you’re a man who knows how to dress and it speaks of experience.”

Andy Chung, a stylist with Brooks Brothers, recommends opting for a light or neutral tone for your suit, particularly during the fall and winter seasons.

“Try light grey and light brown, even steel blue is more up to date than the traditional charcoal,” he advises.

“Try a new shoe style like the monk strap,” suggests Alice Kim of Veritas Image Management. “Monk strap shoes are formal enough for business, yet have an elegant flair that surpasses conventional laceups and dress loafers in the style department.”

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Pay

less

Earn

more

With low-cost ETFs from Vanguard, investors can earn more over time by keeping more of what they make. And the savings can really add up. Over the next 20 years, the average Canadian portfolio could be ahead $237,560. Now that’s a conversation worth having.

Visit vanguardcanada.ca/costcompare to learn more Winner - Canada Vanguard Investments Canada Inc. 2013 Morningstar ETF Provider of the Year 2013 Morningstar Best Equity ETF

Morningstar Awards 2013 ©.

Morningstar, Inc. All Rights Reserved. Awarded to Vanguard Investments Canada Inc. for Morningstar ETF Provider of the Year and Best Equity ETF, Canada. For further information about the Morningstar Awards, including information relating to the criteria upon which the awards are based, please visit www.investmentawards.com. The hypothetical example does not represent any particular investment. The cost savings reflect a comparison between Vanguard ETFTM fees and average Canadian mutual fund fees. The comparison is based on a 6% annual return, an initial investment of $250,000, an average 2.01% MER for mutual funds and an average 0.22% MER for Vanguard ETFs. The MERs are asset-weighted as of December 31, 2013. Vanguard ETF MERs were sourced from the Management Reports of Fund Performance. The mutual fund industry MERs were sourced from Investor Economics. Without waivers and absorptions, the Vanguard ETF MERs would have been higher. Vanguard Investments Canada Inc. expects to continue absorbing or waiving certain fees indefinitely, but may, in its discretion, discontinue this practice at any time. For more detailed information visit, vanguardcanada.ca. Inflation and other potential costs are also not considered. Investments in the Vanguard ETFs can be made through a financial advisor or on-line brokerage account. © 2014 Vanguard Investments Canada Inc. All rights reserved.

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