MONEY® Magazine (Canada) by MONEY®

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Table of Contents

MONEY®

M A G A Z I N E

M A G A Z I N E SPR I NG

Investing Like The Banks - Part 1

2 0 1 4

The Advantages of Management By Objectives

Selecting a Financial Coach

5 Retirement Mistakes and How to Avoid them

by Kenneth Eng ~ pg. 21

Creating A “Non-Corporate” Corporate Environment

Considering Long Term Care Insurance When Discussing Retirement Plans With a Client

by Mark Borkowski ~ pg. 22

by Jack Comeau ~ pg. 9

by Malvin Spooner ~ pg. 24

by Peter Lantos ~ pg. 5

Would You Accept a Bar Code Implant?

by Heather Phillips ~ pg. 7

What Is Your Money Story?

by Frank Lonardelli ~ pg. 38

Investment Industry needs independent players! ROADBLOCK!

by Carey-Ann Ostereich ~ pg. 10

by Don Shaughnessy ~ pg. 39

Canadian Estate Income Tax Returns I’m Mad As Hell! – Confessions of a Widow

5 Simple Personal Wealth Building Tips

by Jim Ruta ~ pg. 13

Change? What Change?

by Ed Olkovich ~ pg. 40

by Laurie Lee ~ pg. 26

Your Largest Unmanaged Asset

by Robert M. Gignac ~ pg. 37

By Richard (Rick) Atkinson, MBA ~ pg. 43

Getting Tax Credits for Your Unwanted Life Insurance

By Anita Saulite ~ pg. 28

by Ryan Wall ~ pg. 14

Using your equity

Going Beyond SR&ED: It Is Time for a Canadian Patent Box”

by Guy Ward ~ pg. 29

by Trevor R. Parry

Lifting The Veil ON Exchange Traded Funds

Is an Advisory Board good for you and your company?

by Ian R. Whiting ~ pg. 31

by Michael Kavanagh ~ pg. 45

Why The Stock Market Keeps Going Up as The American Economy Keeps Going Down

Mobile Payments on the Move

Money Symbols, Currencies, And Countries By James Dean ~ pg. 15

Time Is Money by Becky Wong ~ pg. 17

It’s Time to Buck the Trend of Increasing Personal Debt

M.A. LL.B LL.M (Tax) TEP ~

pg. 44

by Gerald Trites, FCA, CPA

By Guy Conger ~ pg. 35

by Bert Griffen~ pg. 19

Income investors beware! Perpetual preferred shares are back! by Stephane Ruah ~ pg. 20

Investment Q & A: How Do We Create A Tax Free Retirement Income Account? By Steve Selengut ~ pg. 35

See page 12 for an

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MONEY® Canada Ltd.

MONEY® Media Contact:

Enquiries:

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James Dean, Editor & President

+1 416 360 0000 james@money.ca Mailing Address:

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Head Office 7181 Woodbine Ave., Suite 226 Markham, ON L3R 1A3

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INVESTING LIKE THE BANKS - PART 1 Would You Like to Earn 8% Fixed Interest Every Year? By Peter Lantos, B.Comm, RHU, EPC

Why did the TSX, DJ, S&P and NASDAQ all reach record

heights in 2013? The economy is still struggling to recover. Real unemployment remains high. Personal debt and government debt are at record levels. Rumours continue to persist about another inevitable stock market and housing correction. In my humble opinion, investor speculation, not economic performance, is driving the markets. There are … 15,904 distinct mutual funds in available in Canada; 33,355 total funds and clones; 403 fund companies; and 1,978 fund managers (Fund Library: 11/13/2013). I am always very curious to know why we need so many funds and clones in Canada? Yes, a small percentage of these funds have produced double-digit returns in the last 18 months. But as the prospectus or information folder always states “past performance is not indicative of future performance”, i.e. buyer beware! And why do Canadians continue to pay among the highest MERs in the entire world which can, in my opinion, eat up to 50% of their total returns over a 20 to 25 year period? Are you satisfied with the performance of your investments over the last 3 years, 5 years and 10 years? Millions of Canadian investors have watched helplessly as their investments and retirement portfolios have evaporated and produced significant losses or mediocre returns over the last several years. Many investors have lost trust and confidence in the marketing propaganda of Wall Street and Bay Street. Investors are confused and skeptical. They are looking

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for safety to grow and preserve their capital. But they also would like to earn a modest return and a consistent income stream without putting their hard earned life savings at further risk. Canadians would eagerly like to get off the investment roller coaster and are desperately looking for: • Secure investments that produce more than the low yields of the bond market and the meager returns from money market funds and GIC’s; • Greater stability than the volatile stock market has provided them; • Cash flow that provides stable and consistent monthly or quarterly returns; and • Simplicity and easy-to-understand passive investments with no MERs and low or no fees Is there really such a thing as a low-risk income-producing investment that can return 8% fixed interest every year for the entire term of the investment …with interest paid every month (or quarter) …. and eligible for RRSPs, TFSAs, RRIFs, LIFs and LIRAs? The answer is Yes! But before we discuss this investment, let’s take a look at why banks (and very wealthy individuals) love to invest in mortgages. What is the bank’s risk to lend you hundreds of thousands of dollars for a mortgage? Let’s look at a very simple example. You wish to purchase a $500,000 condo or house with a $125,000 down payment. You go to your local bank for a $375,000 mortgage. Before MONEY® Magazine - Winter 2014 - 5

N IN MO A Z M

the bank agrees to advance you these funds, they will require the following minimal information to perform their due diligence:

credit history and credit score;

2. employment history; 3. verification of your income; 4. background check; 5. LTV, GDS and TDS ratios; 6. conduct an appraisal of the house and property. Everything comes back clean and the bank advances you the funds to purchase the house. In exchange, the bank places a “charge” against your condo or house as collateral in the form of a mortgage for $375,000. You move into your new home and you make your payments for the first 36 months. Then you suffer an illness and are diagnosed that you cannot work for at least 1 year. You do not have sufficient savings, Group LTD or personal disability insurance and you miss 3 or 4 consecutive monthly mortgage payments. What will most banks do at this point? Foreclose! They will sell your condo/house and recoup their $375,000 before you get a single dollar. And what is risk to the bank? Virtually zero! Assuming they did their proper due diligence 3 years ago when you applied for the mortgage. So why don’t YOU become the bank? That’s right! You can lend (invest) your money to a AAA commercial developer, who builds AAA commercial projects, in AAA urban locations. And you will mitigate your risk by securing your principal (investment) with collateral against the land and property, just like the banks do! Why should you invest in commercial mortgages? All markets (stocks, bonds, resources, etc) have cycles and periods of upturns and downturns. Commercial mortgages offer the ability to diversify into an area that is very under-served in many investor’ ‘portfolios and has minimal correlation to mutual funds and the stock market. The ability to have collateral tied directly to a real tangible AAA asset (real estate) makes commercial mortgages an attractive option and an important diversification component of the astute investor’s portfolio of stocks, bonds and mutual funds. Is there really a low-risk income-producing investment that can return 8% fixed interest every year for the entire term of the investment …with interest paid every month (or quarter)? Yes there is! And in addition to the 8% fixed return, many of our AAA commercial developers also pay our investors an end-of-term Bonus of up to 4% per annum at the end-of theterm of the mortgage. A Pooled Mortgage Investments (commercial mortgage) provides direct collateral for investors against a real asset. The investor holds title and a mortgage (just like the banks), that is individually registered in the investor’s name at the Land Registry Office and secured against the land and property. 6 - MONEY® Magazine - Winter 2014

A contractual agreement (a Mortgage) is created between the investors (the Lender) and the developer (the Borrower). The Borrower must pay the Lender on a fixed schedule at a pre-determined interest rate for a set period of time. The Mortgage is secured by the land and real property owned by the borrower. A Pooled Mortgage Investment complements the developer’s own equity and the bank’s financing to provide the additional capital needed for the commercial project. In Phase 2 of the development, the bank provides financing (usually 40 to 60% Loan to Value) for the hard costs such as labor, materials and construction. In Phase 1, the Pooled Mortgage Investment provides the capital for soft costs such as permits, zoning, insurance, performance bonds, marketing, sales centre, architects, engineers, consultants, surveyors, etc. The total combined Loan to Value Ratio varies from project to project but is normally between 50% to 80%. The developer will often use their own equity to purchase the land. How safe is a Pooled Mortgage Investment? What are the risks? Like the majority of investment vehicles, an element of risk is present. The companies and developers (and the advisors/agents) that we deal with must follow a stringent due diligence process (regulated by FSCO) to determine and evaluate if a project is worthy of presenting to qualified and suitable clients / investors. Many precautionary measures are taken to mitigate risk, including full project appraisals performed by independent and professional appraisers. It is also compulsory for each project to have a fully funded interest reserve (for the security of investors) for the entire term of the investment. And for added security for our investors, we make it mandatory that you obtain Independent Legal Advice before investing. We are highly selective about which developers and projects we recommend to our clients. We invest our client’s money only with highly reputable developers who can demonstrate a lengthy and solid track record of on-time and on-budget project completions in AAA locations. Security of your investment is a prime objective. PMIs vs REITs The main difference between a PMI (Pooled Mortgage Investment) and a REIT is that a REIT invests in real property, whereas, a PMI invests in mortgages secured against real property. Unlike REITs, PMIs are not vulnerable to the fluctuations that can occur with property values. The PMI is a mortgage which is contractually stipulated, while real estate is subject to volatility. REITs are shares bought and sold on the stock market; whereas PMIs are fixed mortgages where the investors lend money to AAA developers.

Summary In summary there are numerous advantages and benefits to consider a Pooled Mortgage Investment as part of your overall portfolio: 1) A real tangible investment with collateral, security, solid returns and minimal volatility; 2) Fixed term of 3 years … you know you will have an exit strategy in 3 years; 3) Fixed interest rate of 8% per year for 3 years … paid monthly (or quarterly); 4) A fully funded interest reserve held in trust by a 3rd party administrator that provides absolute certainty of interest payments to investors for the entire term of the investment; and 5) The potential for a maturity bonus of up to 4% per annum paid lump sum at the end of the term

Peter Lantos, President of The White Knight Financial Group™ can be reached at 226 721 0883 ..… peter@TheWKFG.com ….. www.TheWKFG.com

Note: Regulations, qualifications, exemptions, and minimum investments may vary by province.

5 RETIREMENT MISTAKES AND HOW TO AVOID THEM Written by Heather Phillips Have you ever wondered if you are ready to retire? I was speaking to a researcher not long ago who told me that people don’t panic about retirement until age 50. I met him when I was 48 and I knew I was close to the panic button!! Since that time, I have been thinking about what my retirement would look like, what things I should do, and what retirement mistakes to avoid.

Mistake #3 – Thinking that Retirement is a destination People may think retirement is the “end game” and once you retire, that’s the end. The truth is retirement is a transition you create in your pre-retirement years with a plan.

While I’m sure that there are more than 5 retirement mistakes, here are the ones I have uncovered:

Mistake #5 - Expecting your Investment Advisor to create your Retirement Plan You are in charge of your destiny. You are in charge of what your future looks like. No one else can create it for you.

Mistake #1 - Procrastination People think about retirement and ask questions like “Am I going to be ok?” And they don’t take action. They are either afraid of the answer or don’t know where to start. Mistake #2 – Not knowing the difference between a Retirement Plan and a Financial Plan People use a financial plan as a retirement plan and the two are very different. The retirement plan answers the question: “What will I do when my pay cheque stops?”

Mistake #4 – Not being emotionally prepared. There are a lot of changes that happen when you retire. Know what those changes are so you can be prepared.

I know these are pretty hard hitting statements, but I feel they move us to take action. If you are already retired and would like to share your retirement story, please feel free to contact me at: www.r101.ca/contact-us. Use the subject line: “I have a story”.

You can download a free audio sample and worksheet of the “5 Retirement Mistakes…” from our website: https://www.r101.ca/moneymag.php

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CONSIDERING LONG TERM CARE INSURANCE WHEN DISCUSSING RETIREMENT PLANS WITH A CLIENT

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by Jack Comeau In my previous article, I briefly discussed the topic of how a client’s financial capacity to take on risk should always be considered when financially advising a client. I now would like to jump to a rather different topic and discuss my thoughts on how a financial advisor, like myself, can shape the strongest and most suitable retirement plan for his or her clients. Specifically, I would like to discuss whether or not the addition of Long Term Care insurance is worth the monetary investment in order to better preserve a client’s wealth and quality of life once they reach retirement age. Many of us have read news articles in the last several years about how an increasing amount of Canadians are choosing to work past retirement age. In some cases, this stems from an actual choice, i.e. the retiree simply enjoys the work that he or she does and, therefore, decides to work past retirement age. In other cases, the decision to work past retirement age is more of a financial mandate stemming from the reality that there are not enough assets in a person’s retirement account to allow for a work-free retirement. Hence, individuals in this scenario continue working at their companies or pick up part-time jobs to help pay the bills. As many of us who work in the financial sector know, Canadians who were near or of retirement age in 2008 were particularly affected by the financial meltdown of that year and the recession that followed it. Pension plans took an enormous hit and, following that, the Bank of Canada pulled down interest rates. Now in a long-standing attempt to revive the Canadian economy, the Bank has refused to raise interest rates back to their pre-recession level. Yes, there was a slight respite in low rates this year. Unfortunately, any hope for a continued increase was quickly wiped away when the Bank of Canada came out in October with a statement saying that they had no plans for raising interest rates further. Needless to say, conditions such as these make it even more critical that assets are not only set aside for retirement, but that they are adequately preserved and protected. Of course, there’s a host of tools and measures that can help in the goal of protecting retirement assets. But, for the purpose of this article, I’d like to briefly discuss one particular tool, and that’s the addition of Long Term Care Insurance (ILTC) to an

individual’s financial portfolio. What is long-term care insurance? Simply put, it is insurance specifically designed and bought for the purpose of helping fund the cost of long-term care. It’s a form of insurance intended to help pay for such services as home care and assisted living care; two types of care that are not covered by traditional health insurance or any other sort of national insurance. That’s a very important fact to consider. The reality is that we are currently seeing two trends forming that are in many ways opposed to one another: one, we are seeing Canadians on average living longer than ever before; on the other hand, with the financial meltdown of 2008 and the slow economic recovery, topped off with low interest rates, we are seeing retirement funds being stretched thin on a more frequent basis. I think it’s for this reason why the addition of long-term care insurance can be such a wise add-on to an individual’s financial portfolio. The fact is that with people living longer, there’s a greater chance that at some point in a person’s life, long-term care will be needed. This can be extremely expensive, and, without something like long-term care insurance to fund it, retirement funds will be the assets used to pay for this care. This has the chance of completely draining retirement funds, or at least, significantly reducing them, which are two scenarios that, as financial advisors, we’d like to have our clients avoid.

MONEY® Magazine - Winter 2014 - 9

N IN MO A Z M

WHAT IS YOUR MONEY STORY? by Carey-Ann Ostereich

Money can be multi-generational. Think aboutsituation; your parents’ relationship with money (forget the reality of their financial focus on express how they viewed what they had). Do you remember hearing your parents a wanting for more? Have you heard, “If I had more money than I could do X or own a aXYZ.” Wasmore? there Now a feeling oryour wordsgrandparents? expressed around a lack of money and desire for look at Do you know what their upbringing was like? Did they experience ‘hard financial times?’ I bet you’ve thought about what you’d do if you won the

What would happen if you had to downsize or settle for less financially? Would your life fall apart? Would you be trapped? Or would you feel like owning less stuff and going back to more of the basics would actually be freeing?

Some people feel like money can buy them security or freedom. But the ironic thing about this is that if you don’t have a good relationship with money, it will make you feel like a prisoner. As a life and executive coach, I work with some very wealthy people and many of them are propelled by an unhealthy relationship with money. They do not feel the freedom you may think money can buy.

Don’t get me wrong, I don’t think money is evil and wanting to have nice things is bad. That would be hypocritical for me to say that. But, I do believe money should be more like the cherry on top versus the contents of the whole ice cream sundae.

lottery? The vacations you’d take, the house you would buy and the people you could help. But, have you put any thought into what your relationship is with money?

Money can be multi-generational. Think about your parents’ relationship with money (forget the reality of their financial situation; focus on how they viewed what they had). Do you remember hearing your parents express a wanting for more? Have you heard, “If I had more money than I could do X or own a XYZ.” Was there a feeling or words expressed around a lack of money and a desire for more? Now look at your grandparents? Do you know what their upbringing was like? Did they experience ‘hard financial times?’ When children grow up in households where there is a lack expressed or felt, they can begin to feel this lack themselves. Even though we may grow up to have more money than our parents, there can still be this mindset that we are lacking or a fear of losing it all. This trend can continue through the generations and for as long as these story-lines of lack live on. The gift in ‘lack’ is that these children will often work hard to make a ‘better living’ for themselves and their families. But, the downside is that it’s usually never enough. Despite having a nice home, a decent car or two and the occasional vacation, they still feel the stress of any debt or that their nest egg is not big enough. When you live and feel the power of money in your life in a negative way, it can be strangling. When you think of your financial situation, you may dwell on your lack of options. But the reality is for most of us in the world that we have a lot of options. We can sell our homes and downsize or rent. We can buy one cheaper, used car instead of owning two vehicles. And for those who wish they had more money to go on more vacations, take a look at what you are really longing for. Perhaps, it is time to unplug and relax or maybe you want to connect with a loved one.

10 - MONEY® Magazine - Winter 2014

If you find yourself saying, “I’d like to have nicer clothes or a nicer home,” you have two options. One is make more money. Anyone can make more money by either seeking a promotion or being innovative with a second side job. But if those options don’t seem appealing to you, then maybe it really isn’t money that you seek. For me, upon reflection, I realized that money was fueling my own value a bit. If I was making a lot of money in my career, I felt good about myself and more independent and respected. But I realized upon examination that this was actually just my ego talking. Being impressed by making money and by those who do make money is ripping yourself off from the chance to really enjoy the most important things in life. When you can release the power money may hold over you, and not become so attached to where you live, things you buy and the places you want to go, it can be really empowering. And in fact, this is the real path to freedom! That is the bottom line. Recipient of a Top 40 Under Forty Business Achievement award and ranked a Top Forbes Women Online Influencer, Carey-Ann Oestreicher, owner of the career development firm for women, Potential Unlimited (www.potentialunlimited.ca), holds a MBA and has worked in a variety of senior positions including vice-president level. Her focus is her family and helping people in business find true peace and happiness in their lives while achieving new heights in their careers. Carey-Ann has been featured in a variety of media because of the success she has experienced with her holistic approach to developing women leaders and entrepreneurs. Her appearances include: CTV’s Canada AM, TSN, CBC News, Global Television, City TV News, The Globe and Mail, Canadian Business magazine, The Toronto Star and The Canadian Press.

Proud Members of the RDBA GIC Wealth Management Inc. is a member of the Registered Deposit Brokers Association. The RDBA is the professional standards Self-Regulatory Organization (SRO) for the Canadian Deposit Broker Industry. Membership in the organization includes Financial Institutions, Deposit Brokers and their representatives. The organization is a strong supporter of a regulated industry and strives to work closely with federal and provincial governments and other regulators to insure investor safety and compliance with regulatory mandates. With every deposit we make on your behalf, a Client Consent and Information Form issued by the RDBA and signed by the client is required. If you have any questions about the RDBA, or the required form, please contact us.

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YOUR LARGEST UNMANAGED ASSET by Jim Ruta Avoid the pitfalls and take advantage of the possibilities by reviewing it regularly “Has anyone reviewed your life insurance portfolio lately?” If you are like most life insurance consumers, the answer is almost certainly “No”. According to a recent Life Insurance Marketing and Research Association, 62% of life insurance consumers don’t know what life insurance they have nor why they have it. No one talks about life insurance any more. Financial advisors aren’t fond of the topic and prefer investments. Consumers don’t like talking about their mortality and aren’t likely to start the discussion either.

It’s a stand-off. No one likes it. No one talks about it. Nothing is done. Yet, we still read those ten sad words at the end of obituaries, “A trust fund has been set up for the children”. It doesn’t have to be that way. Life insurance is your largest unmanaged asset. Where else does your estate have easy access to that kind of cash when it’s needed? If pay your premiums on time, your policy will spring to life to do what it was created to do at just the right time. It’s taxfree cash at death when you need it the most but have it least.

Life Changes Planning Life insurance may not need management but it does need regular review. Life changes planning and your life insurance needs. Changes to life and the life business can mean you are missing opportunities or falling for policy traps. Reviews ensure you get value for money. • If you can answer yes to any of these questions, you probably need a policy review: • “Since your last insurance review… • Have you moved your residence or bought a new home? • Have you or your spouse changed jobs? • Have you or your spouse taken “Early Retirement” or expect to soon? • Have you or any of your children married, separated or divorced? • Have you and your spouse had Wills or Powers of Attorney prepared or updated? • Have any of these changes happened in your immediate family or do you expect any of them? (Births, Adoptions, Deaths, Graduations, New Jobs, Inheritances, Lottery Winnings, Retirements, Name Change, Serious Illness, Injury or other Health Challenges, Major Unforeseen Expenses, New Cottage, New Vacation Home) • Have you had important ownership or performance changes to your business? • Is there any other reason you want to reconsider your lifestyle protection and personal legacy? If you say “Yes” to any of these questions, it’s time to update your portfolio. Call your life insurance agent.

L O G

Changes happen both ways

O TI

Whether or not you’ve changed, the insurance industry sure has. Life Insurance policies and pricing have changed dramatically over the past decade. These changes can mean improvements in your coverage, reduction in your costs or both. It can pay off handsomely to find out. A good life insurance agent will update you on the changes since your last review and tell what, if anything they mean to you.

A Portfolio Review Answers These Questions: • Do I still have the right product(s) for my circumstances? • Do I still have the right amount of coverage for my purposes? • Am I paying too much or are my policies reasonably priced? • Can my portfolio be improved with the existing insurer? • Are there any upcoming benefits to consider? • Is the ownership of my policies still correct in my circumstances? • Are the beneficiary designations the way I want them? • Are you missing out?

Unless you check, you can miss these benefits and others, depending on your portfolio: • Term renewal options that can save you tens of thousands of dollars • Easy ways to decrease the cost of your term insurance without re-qualifying • Valuable policy benefits and riders that you haven’t activated • Potential cash available • Discover if it makes sense to pay off a policy loan • Make your universal life policy work for as long as you need it • Increase your protection without added cost

Peace of Mind Equals Quality of Life A good life insurance portfolio review eliminates that gnawing worry in the back of your head that something in your personal affairs just isn’t right. Remove that concern and you add to your peace of mind. If that’s what you want from life, ask a competent life insurance agent to review your largest unmanaged asset today. Avoid the pitfalls and take advantage of what is yours while you can. Time is always of the essence. Money may pay for life insurance, but it’s your good health that buys it. Jim Ruta, BA, RHU, EPC Jim Ruta is a veteran financial industry consultant, speaker, writer and media commentator. Starting in the life insurance business at age 22, he led one of Canada’s largest insurance agencies by age 40. Jim has been featured around the world including the Million Dollar Round Table Main Platform and has several best-selling consumer and advisor books to his credit. He is Managing Partner of Bostonbased InforcePRO Software and lives in Burlington, Ontario.

MONEY® Magazine - Winter 2014 - 13

ÂŽ

N IN MO A Z M

GETTING TAX CREDITS FOR YOUR UNWANTED LIFE INSURANCE by Ryan Wall

Ten or twenty years ago, you purchased a life insurance

policy. It was part of a good financial plan to keep your family protected in case of the unthinkable. Today, the mortgage is paid off, your family is grown, your retirement plan is in place and the insurance that once provided peace of mind is no longer required. What should you do with the policy? For most Canadians, the answer is to collapse the policy. Between 85% and 88% of permanent policies never pay out a death benefit. In some cases, allowing the policy to lapse makes sense. Term policies may have no value and served their purpose. Whole Life policies may have significant cash value that youâ&#x20AC;&#x2122;d rather collect now. In these scenarios, the best course is frequently to relinquish the policies. There are, however, other situations in which you have a valuable policy and lapsing the policy gives you little, or nothing, in return. The only benefactor is the insurance company who receives your valuable policy at no cost. Rather than providing a gift to the insurance company you should consider donating the policy to charity. The charity receives a valuable asset and you receive a worthwhile tax credit. There are three ways to donate a life insurance policy of charity: 1. Name the charity as the beneficiary of the policy 2. Have the policy pay to your estate and have your estate make a donation to the charity 3. Give the policy to charity now, making the charity both the owner and the beneficiary Each method has advantages and disadvantages; the best option will depend on your own circumstances. We will touch on two important tax considerations. Premium Payments Tax Credit Under the first two methods, you keep the policy in force and donate the proceeds upon death. The first method is typically preferred over the second, as it avoids possible taxation, probate and creditor issues in the estate. You will receive a tax credit in the year of death equal to the amount donated, but you do not receive a credit for the premiums that are paid every year. One advantage of the third method, donating life insurance 14 - MONEYÂŽ Magazine - Winter 2014

now, is that each premium payment provides you with a tax credit. The majority of charities require that you continue to pay the premiums after donating the policy. The policy does not affect the 3% minimum distribution of assets requirement for the charity, as the policy is deemed to have nil value for that purpose. If you will pay the premiums, most charities will be happy to accept the policy and provide a donation receipt for the fair market value of the policy. For smaller charities not experienced in receiving life insurance, outside advice may be required to help facilitate the donation. Policy Value Tax Credit Under the first two options, the tax credit will equal the death benefit that the charity receives. The tax credit that you can use is limited to 100% of income in the year of death and the preceding year. The potential downside is that the tax credit can be a large amount which could exceed the income limit. If you will not have significant taxable gains triggered upon death, or a spouse with income to use the credit, then the tax credit will be lost. One of the advantages of the third method, giving the policy now, is the ability to make better use of the tax credits. Rather than being limited to 100% of income over two years, you can use the credit to offset up to 75% of income in the current year, and in the subsequent five years. Additionally, the donation is made at a time of your choosing, when you know your income will be sufficient to make use of the tax credit. The tax credit in this case is not the death benefit, as under the first two methods; it is the fair market value of the insurance policy. The fair market value of life insurance is less than the death benefit, but can be substantially higher than the cash value. Which policies have value more than their cash value? Policies with guaranteed costs, such as level cost universal life, and term to 100 policies can have significant value, despite having low cash values. If your health has worsened since the policy was issued, then almost any policy has extra value. A fair market valuation actuary specialising in donating insurance can be consulted to help you determine whether your policy would be valuable to a charity, and how much of a tax credit you would receive.

L O G ED

Money is a big, important and popular subject often described by symbols and recognized by countries universally as a way and means to transact goods and services for cash, with some sort of real currency being the most common form of trade. There are over 180 countries compared to nearly 6500 languages and dialects. The world accepts the fact countries recognize cashmoney and economies need to trade products and services in different languages and in different currencies. Coins, paper money, gold, silver and other salable goods and commodities are all used in this exchange. With all the speed of modern business trends and progress pushing them into our daily lives, we are now inundated with credit, plastic and virtual money. But money has a marvelous and storied past in North America. Author of the best seller ‘Ascent of Money’ Niall Ferguson said, “I wish I had more time to explore, explain and study Canadian money”. The English, the French and the Spanish; all colonial powers conquered, fought on and fought over these great lands ultimately for money, power, and riches. You may speak any number of languages in the world, yet there are few symbols so common and synonymous with their exact meaning and when it comes to MONEY than dollar sign - $. And when you have to trade or exchange money in one of about 180 official currencies, remember there is math involved and usually an exchange fee charged beyond the exchange rate. How did this current, accepted symbol for money, cash or currency become so important and commonly accepted? There are different interpretations of how the $ symbol that we know and love came to be. The dollar symbol $ originally comes from the figure 8, representing the Spanish ‘piece of eight’. MONEY® Magazine goes to great lengths put out a powerful Front Page Cover with a unique keepsake perspective alongside a simple and meaningful article. See some of the world’s most popular and powerful countries, and their currencies are represented in gold!

MONEY® Magazine - Winter 2014 - 15

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By Becky Wong

Let’s take a moment to visualize the following: A middle-

aged man in a t-shirt and shorts relaxing on the couch lying down with one arm behind his head and the other arm hanging over the edge of the couch. His wife is looking down at him from behind the couch and he says to her “I’ll have you know you’re talking to the leader of the largest nation on Earth.” She asks, “What nation is that?” He responds, “Procrastination.”

expected it to reach 6% by the end of 2016, from the 5.5% Statistics Canada reported in the first quarter of 2013. Although the number still is low, it is a positive improvement to the 4.8% savings rate in 2009. The sooner we begin some kind of savings program, the more we allow time to work for us. Time is the one thing that is non-discriminatory. No one gets more or less of it. Time is something that you can never get back and that is why it is

“The secret of getting ahead is getting started.” Sally Berger I’m sure none of us aspire to be such a leader. So why do many of us “wait until later” to either plan for our financial future or save for our retirement? Is it really procrastination or something deeper? Let’s first define what it means to “procrastinate.” According to Merriam-Webster’s Dictionary, it is “to put off intentionally or habitually” or “to put off intentionally the doing of something that should be done.” Most of us know that we should put aside some savings for a rainy day or to save for our future retirement. Yet, there are a large percentage of us who wait to do this. What are you waiting for? Some real-life responses that I have heard over the years include the following: • • • • • • • • • •

I’m getting a promotion, wait until then. I’ll wait until I can put aside $100 per month. I have to open a checking account first. It’s too late, I should have done this when I was younger. I’m expecting a pay raise after by job evaluation next month. It’s not in my genes. I really want to but just can’t right now. I don’t know how long I will live, so why should I save? I’m not worried, the government will look after me. My bonus should be paid out soon.

According to a 2013 report from TD’s economist, personal savings rate in Canada is close to a 16 year high. It is

so important to use it wisely. Let’s take a look at an example I use frequently. A set of twins make different choices. One decides to save $2,000 per year starting at age 22 and for the next 8 years – to age 30 – then leaves the money alone until she reaches age 65. At 8% per year, this grows to $398,807 after only contributing $18,000. The other twin decides to WAIT 8 years and start saving at age 30 and continues faithfully for the next 35 years. By age 65, this has grown to $372, 204 BUT the second twin had to invest $52,000 MORE than the first twin and ended up with 6.7% LESS money at age 65. What happened? The passage of time happened. You can easily verify these numbers with any financial calculator or in an Excel spreadsheet. The twins have clearly shown that time is money. Use time wisely. It is not necessary to wait until you have $50 or $100 or 10% of gross income to save. If your budget allows for $10 a week, then save $10 a week. Did you realise that is you saved just $10 per week for 20 years you would accumulate more than $20,000 assuming 6% interest? Therefore, if you are only able to put aside 2% or 3% of your income, do so. There is no prerequisite that says you can only save if you can save 10% or more of your gross earnings. There are all sorts of programs that are extremely flexible to accommodate your savings cash flow. It is not uncommon for investors to think that they just do not have enough to invest. If you can start with only $25 per month, then start. Do not procrastinate. MONEY® Magazine - Winter 2014 - 17

E IN

The cost of waiting is severe. Time IS your best friend when it comes to saving money.

Here are some key findings from a recent poll carried out by Ipsos Reid on behalf of a number of Canadian credit unions and interviewed 1,527 Canadian adults, including 431 parents, from coast to coast from March 19 to 26, 2014. The survey is considered accurate to within +/- 2.9% had all Canadian adults been polled and within +/- 5.4% had all Canadian parents been surveyed.

3. Expect the process and/or outcome to be pleasant. The one comment I always get after a comprehensive financial meeting with clients is “that felt so good – why didn’t we do this sooner?” There is a sense of achievement and peace of mind that encourages future action. “The secret of getting ahead is getting started.” Sally Berger

• Over half (53%) of Canadians say that savings and debt are equal financial priorities for their household, although more Canadians (27%) prioritize reducing debt exclusively to increasing savings (20%). • Only four in ten (40%) Canadians set and follow a budget, and only 29 %discuss their finances with a financial advisor. Age Twin #1 • 61% of parents agree that they wish they had been instilled with the importance of savings at a 22 2,000 younger age. 23 2,000 24 2,000 • 94% parents agree that if 25 2,000 Canadian youth are taught about 26 2,000 savings at an early age it will lead 27 2,000 to better financial management 28 2,000 practices in the future. 29 2,000 30 2,000 • Only 44% of parents speak with 31 0 their children about money, 32 0 finances, budget and savings, with 33 0 only 16% involving their children 34 0 35 0 in money management decisions. 36 0 One in five (19%) Canadians do 37 0 none of these things. 38 0 • 67% of parents state their children 39 0 40 0 do not save any money each 41 0 month. 42 0 Here are a few tips to get you off the 43 0 road of procrastination: 44 0 1. Recognize that you are procrastinating. This is the first step of any challenge – admitting that there is a problem. This allows us to get out of the mode of denial and then we can take action. 2. You do not have to do this on your own. There may be anxiety and discomfort at first or you feel incompetent, hence, you put off getting started altogether. Work with a professional financial planner whose job is to help you move forward, become comfortable and ultimately competent.

18 - MONEY® Magazine - Winter 2014

45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

18,000

Becky Wong, B.Comm (Hons), CFP, FMA Independent Financial Planner Vancouver, BC, (778) 227-7087, becky.cfp@shaw.ca.

Value at

2,160 4,493 7,012 9,733 12,672 15,846 19,273 22,975 26,973 29,131 31,461 33,978 36,697 39,632 42,803 46,227 49,925 53,919 58,233 62,892 67,923 73,357 79,225 85,563 92,408 99,801 107,785 116,408 125,721 135,778 146,640 158,372 171,041 184,725 199,503 215,463 232,700 251,316 271,421 293,135 316,586 341,913 369,266

398,807

Twin #2

0 0 0 0 0 0 0 0 0 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

70,000

Value at yearend

2,160 4,493 7,012 9,733 12,672 15,846 19,273 22,975 26,973 31,291 35,954 40,991 46,430 52,304 58,649 65,500 72,900 80,893 89,524 98,846 108,914 119,787 131,530 144,212 157,909 172,702 188,678 205,932 224,566 244,692 266,427 289,901 315,253 342,634

372,204

IT S TIME TO BUCK THE TREND OF INCREASING PERSONAL DEBT

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Written by Bert Griffin

As a financial planner with over 18 years of experience, I know the type of toll personal debt takes on an individual’s well-being and state of mind. A major part of my job as a financial planner is to assist my clients in the growth and protection of their wealth and, in the situations in which debt exists, to look for solutions that will effectively reduce it. Over the years, I’ve been proud to know that, on average, Canadians have managed to steer away from taking on heavy loads of personal debt, an historical trend that has been quite the opposite of our American neighbors.

That’s why it’s so unfortunate to learn that in the last several years, Canadians have proven increasingly willing to veer into the red when it comes to their personal finances, and to veer into it in a major way. According to TransUnion, one of Canada’s two credit bureaus, the average Canadian’s consumer debt (that is non-mortgage debt) rose by more than $1,500 to a record $27,485, between 2011 and 2012. This is a number that many believe will likely increase in the future. The fact that Canadians are quietly though quickly catching up to Americans as far as their level of personal debt is indeed troubling. After all, a broad rise in consumer debt has the possibility of threatening many aspects of our economic environment. It has the possibility of threatening our economic recovery, the vibrancy of our real estate market, the likelihood of students to attend programs of higher education, and the list goes on. Because personal debt is so insidious and because I find it so alarming that more Canadians are taking on higher amounts of it, I thought it would be an apt time to quickly talk about debt reduction strategies. These are debt solutions that I consistently recommend to my clients and which have been known to work. Pay More than the Minimum on Credit Card Debt We all know the danger that high interest rates on credit cards can pose. We also know the unfortunate situation of being able to only pay off the interest on a credit card debt and never the principal. That’s why being able to put oneself in a financial situation in which one can pay off on a monthly basis more than the minimum amount on a credit card(s) is so incredibly important. Even if the amount is $30 or $40 more than the minimum, over time the principal will be reduced.

Buy a Practical, Used Car as Opposed to a New Car And, If You Can, Consider Moving to a One-Car Household This is another point that some may consider as Personal Finance 101, but it’s important to mention. Many people fail to realize just how expensive a car can be and just how much of a chunk it consumes in one’s finances. The initial cost of buying a car is obviously one expense; but, a host of other costs follow the car’s purchase, such as its regular fuel costs, the costs to insure it, as well as repair it and, again, the list can go on. It’s for this reason that in order to reduce personal debt, if there’s an opportunity for a household to go from a two or three car household to a two car, or ideally, a one car household, it should be strongly considered. The savings that result can be truly significant. To add to this point, an individual or family that is in serious debt would be advised to not consider buying a brand new car. We all know how quickly the value of new cars deteriorate and for an individual or family that is in the red, throwing money out the window on a new car will simply add fuel to the fire. See If You Can Consolidate Your Loans A final debt management solution that I would like to mention is the idea of consolidating a number of consumer debts into one loan at a reasonable interest rate. Although this can be a great strategy for debt reduction, it truly requires a sit-down with a financial advisor in order to make sure that, one, an individual can actually consolidate their debts and, two, that a proper financial plan is in force, once the debt is consolidated, to actually pay off the loan. MONEY® Magazine - Winter 2014 - 19

N IN MO A Z M

INCOME INVESTORS BEWARE! PERPETUAL PREFERRED SHARES ARE BACK! by Stephane Ruah

After 3 years of issuances of rate-reset preferred shares,

perpetual preferred are making a comeback, but are investors fully aware of the risks? In 2013, 2 major issuers, both Power Financial Corp and Great-West Lifeco announced a $150-million deal for perpetual preferred shares. Both deals were way oversubscribed, pushing both firms to upsize the original deal. Are perpetual shares a good buy? Depends… The good: These kinds of preferred shares issue dividends which are fixed at a set rate when they’re issued. Second, preferred share dividends are more reliable than the dividends paid on a company’s common shares. If a company runs into financial difficulties, it first cuts common share dividends, then it cuts preferred share dividends. Third, they are taxed efficiently. You benefit from the dividend tax credit, and this is their key advantage. Fourth, perpetual preferred shares usually will pay more than retractable or rate-reset preferred shares. The bad: First, perpetual preferred shares have no maturity date. That’s great if you want to lock in a set dividend for a long period. But it also makes the dividends very sensitive to interest rate changes. As a consequence you can be victim to major price fluctuation. This is very important to consider. Second, for a perpetual preferred share, the most common way you can get your principal back is to sell your shares on the market—and you might get less than you paid. In most cases the issuing company can “call” or buy back the shares at a set price after a period of time if the price gets too juicy

20 - MONEY® Magazine - Winter 2014

in relation to the share’s face value. Third, rates are at an all-time low. This most likely means that based on historical observations, it is expected that rates will eventually go higher. This would have a negative impact on the price of the preferred share. In conclusion, although preferred shares seem to have a safe nature to them, perpetual can actually be very risky if you buy them at the wrong time. Our group has access to extensive research that helps us navigate through all the different issuers. We also possess historical returns of all preferred shares on the market. Given the risk involved it is important to seek the help of a professional experienced with this type of investment. If you choose not to get professional advice, ensure that you do your homework and have as much information as possible. To help you make sense of it all, I invite you to subscribe to our free bi-weekly newsletter and visit our website: www.thermgroup.ca. Stephane Ruah is Director, Wealth Management and Investment Advisor at Richardson GMP Limited You can reach him directly: 514.288.4018 or Stephane.Ruah@ RichardsonGMP.com. The opinions expressed should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this not be relied upon as such. Before acting on any recommendation, you should consider is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons, Limited. GMP is a registered trademark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

THE ADVANTAGES OF MANAGEMENT BY OBJECTIVES

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by Kenneth Eng

In an earlier article, I talked about managing change in a

business setting (remember “Kenneth Eng from Vancouver, BC – Change Manager”?). This change can be as simple as adding an employee or changing break room procedures or as complex as installing new management or establishing a new direction for the company. Regardless of the task, some type of change management is necessary. There are different processes that can be put to use for this purpose. In my work with companies such as Re/Max, the David Suzuki Foundation, Second Wave Sports and North Shore Disability, I have found that one of the most flexible – and therefore most useful – processes is Management by Objectives (MBO). Management by Objectives is a process of defining goals within an organization so that management and employees agree on said objectives and understand what needs to be done – within the business environment – in order to achieve them. Underlying the principle of MBO is the idea that all employees have a clear understanding of the roles and responsibilities expected of them. When they understand how their activities relate to the achievement of the organization, they are more apt to fulfill the task assigned to them. The MBO process has many advantages that can be leveraged to help manage the change that a business looks to undertake. 1) Motivation MBO involves employees in the management process which increases employee empowerment, job satisfaction, and commitment. 2) Communication and coordination MBO encourages frequent reviews and increased interaction between superiors and subordinates. This helps to maintain

harmonious relationships within the organization and mitigate any problems that may arise. 3) Clarity This one is fairly self-explanatory. It revolves around goals – setting them, maintaining them, and fulfilling them. As mentioned, when everyone is clear on the task at hand, more effort can be applied to moving forward rather than trying to figure out why this task is necessary. 4) Commitment When employees have input into the objectives on which they are to work they tend to have a higher commitment. When objectives are imposed on them from above, commitment tends to waver. MBO provides employees with the input they need to remain committed. 5) Objectives identical Using MBO, managers can ensure that the objectives of the subordinates are relevant to the overall objectives of the organization. 6) Common goal Management by Objectives provides a common goal for the entire organization. This means that the common goal becomes a directing principle of management at all levels. Everyone is pulling for the same purpose. The nameplate on my door reads, “Kenneth Eng of Vancouver, BC – Executive Management Professional”. Though this title may sound specific, its application is actually very broad. As indicated above, the knowledge can be applied to many and varied situations. Management by Objectives works equally well when applied to small matters as well as large. Though it is not the only option available for managing change, it is one I would recommend for its utility, flexibility, and focus. MONEY® Magazine - Winter 2014 - 21

N IN MO A Z M

WOULD YOU ACCEPT A BAR CODE IMPLANT? by Mark Borkowski

In a perfect world, universal implantation of the implantable microchip radio frequency identification device (RFID) is activated by a chip reader.

It is tamper-proof, practically undetectable and indestructible, and is implanted under the skin. This device as claimed would be used only for legitimate, legal and noble purpose, could make life better for all of us, provide better security and peace of mind for us and our loved ones, and even save lives, and tremendously benefit mankind as a whole. However, this is not a perfect world. Bar codes for human beings? But no one wants to be treated like a human bar code by the authorities. The most serious threat to liberty could be an all -inclusive database mandated by government–a national identification card with biometric identifiers. Such an ID will increase unsolicited surveillance, will blur the distinction between public and private databases, and will undercut a presumptive right to maintain anonymity. The ID would devolve into a general law enforcement tool having nothing to do with response to terrorism. The resulting level of intrusion necessitated by implantation would impinge on our many legal rights. It is plausible that, since the technology has not yet been perfected, we as a society would believe there is no need to address the incipient legal problems until devices are used. Justice Rehnquist adopted this view in a U.S. Supreme Court decision concerning beeper surveillance where the respondent had indicated that if beeper surveillance were constitutional, “twenty-four hour surveillance of any citizen of this country will be possible, without judicial knowledge or supervision. However, because of the very sweeping reductions in personal liberty and privacy that such implantation represents, the legal ramifications need to be explored now. Although the Canadian Charter of Rights and Freedoms and the U.S. Fourth Amendment protects individuals from unreasonable searches and seizures, a national identification system via microchip implants could be achieved in two stages. 22 - MONEY® Magazine - Winter 2014

A system using the technology, although introduced as a voluntary procedure, may be difficult to dislodge despite limitations of individual freedoms because its advantages will be extremely attractive. The positive applications may be said to outweigh the detrimental legal consequences at that time. Therefore, it is not too soon to consider the repercussions that mandatory microchip implantation would have, as a preemptive measure. Upon introduction as a voluntary system, the microchip implantation will appear to be palatable. The U.S. Fourth Amendment has been invoked with reference to internal intrusions upon individuals to obtain evidence, which could be used against them. Examples include the withdrawal of blood and body searches, which require surgical procedures or other means to extract substances from the body. English Common Law and the U.S. Fifth Amendment provides in principle that no citizen shall be compelled in any criminal case to be a witness against himself, an U.S. Supreme Court justice once noted that “[A] person is compelled to be a witness against himself not only when he is compelled to testify, but also when… incriminating evidence is forcibly taken from him by a contrivance of modern science.” To avoid a governmental mandate, citizens may advocate for an outright ban. This drastic measure may also be necessary in a system that is initially voluntary, for it may well be the precursor to a mandate. Short of that, the best way of preventing incipient problems is to protect rights before desensitization. Although use of such a device at first appears far-fetched, examination of the existing technology and the potential utility proves that microchip implantation is both possible and, for some purposes, desirable. Beginning with voluntary introduction, Americans and Canadians may be lulled into accepting them. This article thus sounds a warning bell. The time to prevent grievous intrusion into personal privacy by enacting appropriate legislative safeguards is now, rather than when it is too late. Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mark can be reached at www.mercantilemergersacquisitions.com

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N IN MO A Z M

INVESTMENT INDUSTRY NEEDS INDEPENDENT PLAYERS! By Malvin Spooner

The most recent print issue of MONEY® Magazine noted

companies. Furthermore, the regulatory cost burden is increasing at a time that industry-wide revenues are declining. On balance, it makes sense for our shareholders to re-deploy their capital.”

“There is no question that Canadian banks play a vital role; locally, provincially, nationally and inter-nationally. Without the banks, our economy could simply not function efficiently or effectively. But are the banks getting too big and going too far to gain market share and profits at the expense of their own customers?” (Quote from Spring 2013 issue of Money Magazine.) Chart 1 In November of last year I published a piece entitled Banks own the investment industry! A good thing? In many respects allowing the banks to provide everything from our mortgage to investment services is incredibly convenient. But at what price? It has become near impossible for many smaller investment dealers to stay in business. Fraser Mackenzie is a recent victim of an industry that requires scale in order to compete: At their shareholder meeting on April 29th, 2013 it was decided: “Our assessment of the current business climate has led the owners to conclude that deploying our capital in the continuance of our regulated investment dealer businesses can no longer generate an acceptable rate of return. Institutional interest in early stage mining and oil & gas companies, sectors to which we have been heavily committed, has dried up: as has the associated trading in the equities of early stage resource

Indeed, well over half of the total value of trading done on the TSX in a typical month is conducted by the banks.

that the big Canadian banks managed to earn $31.7 billion in 2012, just a few years after there was grave concern that they’d even remain solvent.

24 - MONEY® Magazine - Winter 2014

(see Chart 1)

My guess is their actual market share of all trading is far above half if we were to also include trading platforms not part of the Toronto Stock Exchange. The banks keep growing,

and the regulatory burden also grows more onerous. In my estimation, the larger financial companies relish regulation as an additional barrier to entry. Regulatory oversight is a minor inconvenience to the big banks, whereas for less diversified specialty businesses (mutual fund companies, standalone investment dealers, investment managers) the added expense can be devastating. Obviously there are huge benefits to scale – but do consumers really benefit or are these economies of scale all kept as bank profits? MERs for their proprietary mutual funds might appear very reasonable, but it’s impossible

to determine whether or not the plethora of fees I pay for other services are subsidizing these seemingly lower expense ratios. Transparency is near impossible. Although many banks did collapse as a result of the financial crisis, the massive rebound in the profitability of those surviving banks (even though they lost ridiculous amounts of capital doing stupid things with asset backed securities, derivatives trading etc.) suggests that those everyday fees paid by consumers and businesses must exceed the marginal cost of providing these services by quantum leaps and bounds. Another concern I have – besides the demise of competition in the financial services industry – has to do with motivation. It’s true that every business is designed to make money, but in days of yore a mutual fund company, investment manager or stock broker had to have happy customers in order to succeed. If they didn’t help the client make money, the client would go somewhere else. I believe that as each independent firm disappears, so does choice. Making a great deal of money from you no longer requires you to be served well. What are you going do? Go to another bank? The prime directive (to borrow an expression from Star Trek) of the financial services Chart 2 behemoths is profits. The financial advisor’s role is to enhance corporate profitability. Financial advisors today are increasingly handcuffed not just by regulatory compliance, but also ‘corporate’ compliance. Wouldn’t an investment specialist whose only mandate is to do well for his client be more properly motivated (and less conflicted professionally)? Would your investment objectives be better served by an independent advisor who is rewarded only because you the client are earning profits (and not because you are earning his employer more revenues)? It isn’t necessarily true that an independent advisor is any better than one employed at a bank. I personally know of hundreds of outstanding advisors working at banks and insurance companies. But it must also be true that a satisfied, properly motivated, objective and focused financial professional will do a better job whether he/she is at an independent or a bank. We can’t begrudge the banks their success but left to their own devices, they’d all have merged into one by now. In December of 1998 then Canadian Finance Minister Paul Martin rejected the proposed mergers of the Royal Bank with the Bank of Montreal and CIBC with the Toronto-Dominion Bank. We know from our U.S. history that government

and regulatory authorities are frequently frustrated N by the political muscle O I (lobbyists, lawyers) IT D of the large financial E firms. Ultimately having one gigantic Canadian bank – providing all our financial services, investment needs, insurance requirements – might (or might not) be a worthy corporate ambition, but it’s hard to imagine such a monopoly being good for the likes of us. After all, just consider the progress that has been made in telecommunications since Bell Canada (or AT&T) was forced to reckon with serious competition.

L O G

The banks need independent players. Not only should banks discourage the obliteration (by bullying or by absorption) of non-bank competition, they should use their political muscle to keep the regulators from picking on Independent players. Government agencies cannot help themselves – if they are impotent against the strong they naturally attack the weak – even though when all the weak are dead the regulators would have no jobs. You don’t need a police force when there’s nobody you can effectively police. Independent players create minimum standards of service and ethics, and fuel industry innovation. In every instance, the independent is a bank customer too. Mutual fund and investment managers pay fees to banks, buy investment banking offerings, custodial services and commercial paper and also trade through bank facilities. Independent dealers provide services and financing to corporations deemed too small to matter by larger financial companies; that is, until these businesses grow into large profitable banking customers. Put another way, why not adopt the Costco model where smaller independents can shop for stuff to sell to their own customers, and higher end specialty shops and department stores can all remain standing, rather than the take-no-prisoners approach of Walmart? Let’s hope that the few surviving independent firms can be allowed to thrive, and if we’re lucky perhaps new players will arise to provide unique services to Canadian clients and homes for advisors who are inclined to specialize in managing and not just gathering assets.

MONEY® Magazine - Winter 2014 - 25

N IN MO A Z M

ROADBLOCK!

Imagine that you are sitting down for

another job interview. You have worn your best outfit, you are aware of your body language; you have reviewed over and over again your responses to the most common interview questions. You are prepared! Without fail here comes the dreaded question, “What are your strengths and weaknesses” and just like that you have sweaty palms! Most of us have faced this type of situation but depending on the kind of person you are it might be harder to talk about your strengths while for others it’s their weaknesses that really make them feel anxious. The point here is that we all have gifts and we all have challenges and that is what makes us each unique. I am a true believer that we all have our God-given talents, the strengths that shine without much effort. Who knew that my daughter who is gifted artistically, could sit down at a piano that was given to us (yes given) and play a song just because she likes how it sounds! My point here and what I tell my clients is “know your strengths and then surround yourself with others who shine at your weaknesses”. I am one of those highly detailed, numbers people so it used to surprise me when people found themselves completely stuck, overwhelmed and who had literally thrown in the towel on their finances. What I have realized is that for those who “numbers” do not come easily to them no matter what the task: completing their taxes, finding gas receipts or filling out a student loan interest relief form; there always seems to be a roadblock that completely immobilizes them from staying on top of their finances. Unfortunately then the snowball effect happens, not completing one form, leads to not opening mail, which then leads to not paying bills on time till the inevitable happens - the threat of losing your home or having your wages have been garnisheed. Sadly there have been many times that I have sat down with self-employed individuals who are absolutely amazing at their skill or trade but dread paper work. The end result is a business going under because they have no accounting system and have not been paying their taxes etc. The most 26 - MONEY® Magazine - Winter 2014

by Laurie Lee

disheartening moment is to see someone lose their passion for their skill/talent because they are bogged down and struggling with the administrative side of their business. So ask yourself: “what are my strengths and weakness when it comes to their finances” and like that job interview, prepare yourself and take the time to write down your answers. If organizing paperwork is not your strength, take one hour and get twelve boxes/bins (whatever works!) and put your paperwork in the right bin for each month. Done! Then go out and hire a bookkeeper. If writing up a menu and planning your grocery shopping bores you even though you know not only will you have a healthy diet but you won’t impulse shop, then take one hour and write down your favorite recipes, search out others and then repeat the menu over and over till you are ready to move on to a new menu. If we are all honest with ourselves we know that the tasks we struggle with are always the very last things to get done on the to-do list. There is NO SHAME in asking for help with these tasks, or hiring people to support you. It is better to pay someone to complete the job rather than allowing avoidance to overtake your joy and passion. What is your roadblock? What are you avoiding? Know that no one is good at everything, ever! So play to your strengths and thrive in what you do best and get the help you need for the rest. Take me, I am great at managing my finances and creating budgets but I am not a naturally gifted writer. I struggle with grammar and spelling - just ask my friend Cathy that I hire to edit my articles! The draft copy is so rough that I feel completely overwhelmed and frustrated. Then I take my own advice and give it to the expert and magically the good copy is sent to me with no spelling mistakes, all the correct punctuation, and grammar. Voila! This is a huge burden off my shoulders and without this support I would not even consider sending articles to a magazine that is published across the nation! I encourage each of you to allow yourselves to move forward with your gifts and do not dwell on your weakness; simply put the appropriate systems or people in place so that your weaknesses do not become your downfall.

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N IN MO A Z M

5 SIMPLE PERSONAL WEALTH BUILDING TIPS By Anita Saulite

Getting on the road to financial success starts with taking

control over your money and forging a future for yourself base on your life goals. In order to move forward, we must prepare ourselves thinking and leaving the past behind is an essential way of freeing yourself of things that may be holding you back. With spring around the corner, and the days getting longer and warmer, now might be a great time to make a fresh start and get to where you want to go in life. Many of us feel drained and trapped by our money, and can’t seem to get beyond living paycheque to paycheque, and want to save more, live better and create more personal wealth. You may even dream of buying a home, paying off your mortgage or traveling the world. Sometimes these goals may feel unattainable or not within your reach. It doesn’t matter whether you overspend, can’t stick to a budget or are deep in debt, there things you can do RIGHT NOW that will help you start building more personal wealth. Creating wealth is often a matter of shifting your mindset and simply adopting a winning mindset around your money. Most people want and crave something better in their lives. For many of us it is not that we are unhappy with what we have or where we are in our lives, we just know things could be better. For some of us we may be unhappy in our lives, jobs or current circumstances. We keep hoping for more, but the only way to GET MORE is to do things differently with the direction our lives are taking. Money matters can be very complex, complicated and at times overwhelming. There is so much information. It is hard to know where to start or for that matter who to turn to. Most of us turn to our friends and family for advice. In order to help you spring forward and get a fresh start planning your future, here are some helpful tips you can do today to get on the right path and get your life moving in the right direction. 5 Simple Personal Wealth Building Tips: 1. Adopt a winning mindset around your money. Having the right mindset and attitude in life is essential for finding greater success and building your personal wealth. All of us have made money mistakes or decisions that may have resulted poorly. That’s the past talking. With a positive attitude, a winning mindset you can find more personal wealth. 2. Visualize your Success. When you can visualize yourself easily reaching your goals, you actually create a mental road map to success. By expanding your mind, you can expand your savings. By focusing on your goals, you will better manage your spending and save more. 28 - MONEY® Magazine - Winter 2014

3. Pay Yourself First. Building personal wealth requires a disciplined savings strategy as well as time and money. So start today. For every $100 you earn, pay yourself $10. Ten dollars may not seem like much – and you won’t miss it – but it sure adds up! Put it in a savings account. Once you have grown your savings celebrate your success and shift your strategy towards investing. 4. Pay Cash. Use your credit card only for convenience for example, when you can’t pay using your debit card or cash. Often we spend on our credit cards, and forget what we have purchased something only to find when the bill comes in we have overspent. When it comes to your credit cards, use them for convenience and essential items only – NOT for impulse purchases. And pay your bill in full at the end of every month. If you can’t afford to, then don’t use it. 5. Find Joy in Saving Money. Many of us feel that saving money is difficult and may feel restricted, like a diet. Growing your saving may take some time. The more you start to see saving money as way to help you to build more personal wealth and achieve your goals, you will be motivated to stick to it. You can also find joy in NOT spending. Look for free things to do and be thankful for what you have. Building greater personal wealth is within your reach. All it takes is a few simple changes. Take control of your money, and take charge of your life. Anita Saulite, MBA is an experienced Business and Financial Services Consultant, and author of The Savvy Money Gal: 6 Savvy Money Strategies for Successful Women available at Chapters, Amazon and Barnes & Noble. She offers a fresh perspective on personal finance and holistic strategies to manage money. As a certified life coach, who champions emotional well-being Anita Saulite is committed to strengthening women’s financial knowledge through skill based learning. An engaging speaker, who has presented money management strategies and Employee Money Wellness programs, she understands the issues surrounding the psychology of money. Anita teaches how to navigate change and get on the road to financial success. She is a subject matter expert on women and money! For 20 years Anita worked in senior positions at major financial institutions in Toronto Canada, and has developed award winning programs. She has been featured on CTV News, Global BC1, The Huffington Post and other media to discuss women and personal finance.

USING YOUR EQUITY

L O G

by Guy Ward

Is it time to renovate that kitchen or put an addition on your home? Or maybe you’re tired of paying those high-interest credit cards. Or you’re considering purchasing an investment property. If you’re selfemployed, you might need a cash infusion. So where do you get the money? Well, if you have enough equity in your home you might be able to borrow against it. Your home’s equity is an asset you can use either by borrowing against it with a second mortgage or a home equity line of credit (HELOC) or by refinancing. There are pros and cons to all three options. Let’s take a closer look at the options: Refinancing This is an entirely new loan on the property and pays out the existing mortgage. You can choose to refinance to take advantage of a lower interest rate or take out cash to pay off debts or to renovate. There has to be sufficient equity since you can only refinance up to 80% loan-to-value (LTV) through conforming lenders. However, if you’re in the first year or two of a fixed-rate mortgage, the penalty to refinance may be onerous. Second Mortgage A second mortgage is a separate loan on the property, but is still secured by the property. This is a popular way to get much-needed cash quickly — the application process is fast, as is the turnaround time. Second mortgage lenders focus on the property and the equity available. The interest rate will likely be higher because a second mortgage is riskier than a first. For example, in case of default, the first mortgage lender has the first right to proceeds from a sale or power of sale. However, there are situations when a second mortgage can be advantageous, especially if you already have a great mortgage rate on your existing first mortgage. Home Equity Loans and Lines of Credit (HELOC) A HELOC can be a standalone first mortgage or an all inclusive collateral mortgage. The loan is approved using the same basic criteria as a mortgage loan. The full amount of the money is made available up front, and you can access as much or as little as you want. It’s an installment loan that acts as a revolving line of credit. You access the credit line online, by using a cheque, credit card or by using your debit card. The “credit limit” is determined by the equity, but you’ll only pay interest on the funds you use. Whether you choose any of these options depends on your financial needs and situation. For example, if current interest rates are lower than the rate on your existing first mortgage, refinancing may be the best choice. However, if rates are up,

taking out a second mortgage might make more sense. Or,

O TI

depending on what your needs are, selecting a HELOC may be the way to go. Together, we can determine the best option that fits your needs. I will work closely with you to ensure you’re achieving your financial goals. To find out which of the three options suits you, call me today. CMHC CONSUMER NEWSLETTER What is your credit score, and how can you improve it? Your credit score is a number that illustrates your financial health at a specific point in time. It is also an indicator of how consistently you pay off your bills and debts. Your credit score is one of the factors lenders consider when qualifying you for a mortgage. A good credit score, for example, can help improve your chances of being approved. To find out your credit score, contact Canada’s two creditreporting agencies: Equifax Canada and TransUnion Canada. These agencies can provide you with an online copy of your credit score as well as a credit report – a detailed summary of your credit history, employment history and personal financial information. If you find any errors in your report, notify the creditreporting agency and the organization responsible for the inaccuracy immediately. If you want to improve your credit score, •

always pay your bills in full and on time;

•

pay off your debts as quickly as possible;

•

never go over the limit on your credit cards;

•

and try to reduce the number of credit card or loan applications you make.

Once your credit score has improved, work with your mortgage professional to obtain a mortgage that works for you. Find Out More To find out more about credit scores and reports, visit the Financial Consumer Agency of Canada website and download or request a free copy of their guide, Understanding Your Credit Report and Credit Score. This guide provides practical, straightforward information on how to obtain and understand your credit report and score, as well as how to build and maintain a good credit history. Guy Ward is a Mortgage Broker in Calgary, Alberta with TMG (The Mortgage Group Alberta). MONEY® Magazine - Winter 2014 - 29

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LIFTING THE VEIL ON Written by Ian R. Whiting, Senior Editor

L O G ED

O TI

EXCHANGE TRADED FUNDS What is an index?

Recently, one of the big 5 banks did a customer survey on

ETFs and one of the questions was: “What do the letters ETF mean?” The responses shared were interesting to say the least! Most thought they stood for Emergency Task Force! Another group though it was an abbreviation for Energy Transfer Fund (like a carbon offset trading scheme I presume), some said it was an Environmental Trust and still others suggested Electronic Transfer of Funds. Apparently, less than 5% correctly identified the letters as meaning Exchange Traded Funds! Interesting to say the least since ETFs are attracting lots of attention these days, for various reasons – some accurate and others not. They’re still quite new and would-be investors are bound to have lots of questions. In this article, I am only going to touch on the generalities of ETFs and some of the more common versions. Future issues of Money Magazine will delve more deeply into each area discussed here. An (ETF) is an investment fund traded on a stock exchange much like a stock. It holds assets such as stocks, commodities or bonds and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their apparent lower costs, potential tax efficiency and stock-like features.

You probably know terms such as the S&P/TSX Total Return Index (the most quoted Canadian index) or the S&P 500 Index in the US on the news. Those are indexes. An index is a selection of stocks or bonds that represents a given market. Each index has rules about how many securities are included and how they are weighted. Indexes are mainly used to measure changes in the market they represent. Remember, an Industrial Average (such as the Dow Jones Industrial Average {DJIA} is NOT an index, but that is a subject for another review!). An ETF combines the valuation features of a mutual fund which is bought or sold at the end of each trading day for its net asset value, with the tradability features of a stock or bond which trades throughout the trading day at varying. Structure ETFs offer investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds except that shares in an ETF are bought and sold throughout the day through a broker-dealer. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value, or NAV. Instead, brokers purchase and redeem ETF shares directly from the ETF. Index ETFs Most ETFs are index funds that attempt to replicate the performance of a specific index. They may be based on stocks, bonds, commodities or currencies. An index fund seeks to track the performance of an index by holding in its portfolio either the contents or a representative sample of the securities in the index. Some index ETFs, known as MONEY® Magazine - Winter 2014 - 31

N IN MO A Z

leveraged ETFs or inverse ETFs, use investments in derivatives to seek a return that corresponds to a multiple of, or the inverse (opposite) of, the performance of the index. M

Some index ETFs invest 100% of their assets proportionately in the securities underlying an index, a manner of investing called “replication”. Other index ETFs use “representative sampling”, investing perhaps 80% to 90% of their assets in the securities of an underlying index and investing the remaining 10% to 20% of their assets in other holdings such as futures, option and swap contracts and securities not in the underlying index. There are various ways the ETF can be weighted, such as equal weighting or revenue weighting. Stock ETFs The first and most popular ETFs track stocks. Many funds track national indexes. Bond ETFs Exchange-traded funds that invest in bonds are known as Bond ETFs. They thrive during economic recessions because investors pull their money out of the stock market and move into bonds (for example, government treasury bonds or those issued by companies regarded as financially stable). Because of this cause and effect relationship, the performance of bond ETFs may be indicative of broader economic conditions. There are several advantages to bond ETFs such as the reasonable trading commissions, but this benefit can be negatively offset by other fees and costs. Actively managed ETFs Most ETFs are index funds and as such, there is no “management” involved. Some ETFs, however, do have active management as a means to hopefully out-perform the nominal bench-mark index. Actively managed ETFs are at risk from arbitrage activities by market participants who might choose to front run its trades as daily reports of the ETF’s holdings reveals its manager’s trading strategy. The actively managed ETF market has largely been seen as more favorable to bond funds, because concerns about disclosing bond holdings are less pronounced, there are fewer product choices and there is increased appetite for bond products. Leveraged exchange-traded funds (LETFs), or simply leveraged ETFs, are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs. Leveraged index ETFs are often marketed as bull or bear funds and because of the leveraging involved, returns and losses are magnified!

ETFs compared to mutual funds Costs The first rule to remember – NOTHING is free! Since ETFs trade on an exchange, each transaction is generally subject to a brokerage commission. Commissions depend on the 32 - MONEY® Magazine - Winter 2014

brokerage and which plan is chosen by the customer. Full-service brokers typically charge a percentage commission on both the purchase and sale and may be negotiable depending on the dollar value involved. A typical flat fee schedule from an online brokerage firm $10 to $20, but it can be as low as $0 with certain discount brokers with minimum account values. Due to this commission cost, the amount invested has great impact on costs. Someone who wishes to invest $100 per month may have a significant percentage of their investment destroyed immediately, while for someone making a $200,000 investment, the commission cost may be negligible. ETFs generally have lower expense ratios than comparable mutual funds. Not only does an ETF have lower shareholderrelated expenses, but because it does not have to invest cash contributions or fund cash redemptions these costs are eliminated. Mutual funds may charge 1% to 3%, or more. Index fund (which by the way are NOT the same as ETFs – see future edition of Money Magazine) expense ratios are generally lower, while ETFs are normally in the 0.1% to 1% range. The cost difference is more evident when compared with mutual funds that charge a front-end or contingent back-end load as ETFs do not have any additional loads at all. Potential redemption and short-term trading fees are examples of other costs that may be associated with mutual funds that do not exist with ETFs. Traders should be very cautious if they plan to trade inverse and leveraged ETFs for short periods of time. Close attention should be paid to transaction costs and daily performance rates as the potential combined compound loss can sometimes go unrecognized and offset potential gains over a longer period of time. Taxation By their nature, ETFs are tax efficient and can be more attractive than mutual funds. When a mutual fund realizes a capital gain that is not offset by a realized loss, the mutual fund must allocate the capital gains to its shareholders. These gains are taxable to all shareholders, even those who reinvest the gains distributions to purchase more shares of the fund. In contrast, ETFs are not redeemed by holders (instead, holders simply sell their ETF shares on the stock market, as they would a stock), so investors generally only realize capital gains when they sell their own shares for a profit or when the ETF trades to reflect changes in the underlying index. Trading An important benefit of an ETF is the stock-like features offered. A mutual fund is bought or sold at the end of a day’s trading, whereas ETFs can be traded whenever the market is open. Since ETFs trade on the market, investors can carry out the same types of trades that they can with a stock. For instance, investors can sell short, use a limit order, use a stop-loss order, buy on margin and invest as much or as little money as they wish.

L O G

Risks

Effects on stability ETFs that buy and hold commodities or futures of commodities have become popular. The commodity ETFs are in effect consumers of their target commodities, thereby affecting the price in a spurious fashion. In the words of the International Monetary Fund (IMF), “Some market participants believe the growing popularity of exchangetraded funds (ETFs) may have contributed to equity price appreciation in some emerging economies, and warn that leverage embedded in ETFs could pose financial stability risks if equity prices were to decline for a protracted period.” Regulatory risk Areas of concern include the lack of transparency in products and increasing complexity, conflicts of interest and lack of regulatory oversight. You must take the time to do your own research before investing to fully understand these risks. Criticism John C. Bogle, founder of the Vanguard Group, a leading international issuer of index mutual funds (and, since Bogle’s retirement, of ETFs), has argued that ETFs represent shortterm speculation, that their trading expenses decrease returns to investors, and that most ETFs provide insufficient diversification. He concedes that a broadly diversified ETF that is held over time can be a good investment. The Wall Street Journal reported in November 2008, during a period of market turbulence, that some lightly traded ETFs frequently had deviations of 5% or more, exceeding 10% in a handful of cases. According to a study on ETF returns in 2009 by Morgan Stanley, ETFs missed their 2009 targets by an average of 1.25 percentage points, a gap more than twice as wide as the 0.52-percentage-point average they posted in 2008. Part of this so-called tracking error is attributed to the proliferation of ETFs targeting exotic investments or areas where trading is less frequent such as emerging-market stocks, future-contracts based commodity indices and junk bonds. Warning about the fees and costs of ETFs The expense ratio is not the only cost of investing in exchange traded funds. ETF shares must be purchased through a regular stock brokerage account. There will be commissions to both buy and sell ETFs. The commissions on buying and selling ETFs are the same as for buying and selling individual stocks. An investor who does a lot of trading in and out of ETFs will see a greater impact from brokerage commissions than from the expense ratios of the funds. Unfortunately, the costs of Canadian ETFs are not as straightforward as one might think. Most investors don’t realize that iShares, Claymore and BMO (to name a few), disclose their fees in different ways, making apples-to-apples comparisons difficult.

O TI

The first point to understand is that Claymore, BMO and others only list their ETFs’ management fee on their websites. iShares, on the other hand, lists each ETF’s management expense ratio, or MER. The two terms are not synonymous. The management fee is only part of a fund’s overall MER. It’s usually the largest part, for sure, but it’s not the whole picture. The management fee typically covers all of the administrative costs, the manager’s compensation, index licensing fees, all fees paid to the custodian (the investment firm that holds the securities), the registrar and transfer agent (the firm responsible for keeping shareholder records). These make up the vast majority of an ETF’s expenses. However, the management expense ratio or management fee also includes some additional costs, such as GST and the fees payable to the fund’s independent review committee (IRC), a legal requirement designed to protect investors from conflicts of interest. Read the Prospectus carefully to avoid unpleasant surprises! There is also a Transaction Expense Ratio or Trading Expense Ratio (TER) that is not quoted in the Prospectus as it is only determined in arrears. Most prospectus’ provide an estimate of this cost – but you only learn the exact amount at the end of the year and it reduces the value of your investment. This could add up to an additional 1% or so to your costs. These expenses are primarily the costs involved with trading commissions paid by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index. It is important to add the TER to the MER for a more accurate picture of the fund’s costs. Other fund expenses may not be included in the management fee, something you may only learn if you scour the funds’ regulatory filings and Prospectus. These may not add up to much, but ETF providers trumpet their low fees as a selling point and four or five basis points is enough to make a competitive difference and cost is cost. Remember, NOTHING is free! Visit with me again in future issues of Money Magazine is I explore many of these issues in more detail including the difference between an INDEX FUND and an ETF. With courtesy to: Wikipedia, The Wall Street Journal, Morgan Stanley, iShares, Claymore, BMO, The Vanguard Group and the International Monetary Fund.

MONEY® Magazine - Winter 2014 - 33

MONEY®

MUTUAL FUND REVIEW

March 2014

Starting assets (February 28, 2014) + Net sales +/- Estimated market effect = Ending assets (March 31, 2014)

M A G A Z I N E

Asset Growth ($)

Asset Growth (as a % of starting assets) Net Sales ($)

Net Sales (as a % of starting assets) Performance (Fund Category Averages)

$846.1 billion $11.0 billion - $0.4 billion (-0.05%) $856.7 billion

Top 3 Categories

Bottom 3 Categories

Global Neutral Balanced: $2.893 billion Cdn. Div. & Income Equity: $1.556 billion Canadian Sector Equity: $1.236 billion Sector Equity: 240.7% Misc. – Undisclosed Holdings: 22.3% Geographic Equity: 8.6% Emerging Markets Equity: $2.996 billion Global Neutral Balanced: $2.653 billion Cdn. Fixed Income Balanced: $1.047 billion Emerging Markets Equity: 57.9% Cdn. Long Term Fixed Income: 8.9% Alternative Strategies: 5.4% Energy Equity: 4.8% Emerging Market Equity: 2.7% Canadian Dividend & Income Equity: 2.2%

Natural Resources Equity: -$1.995 billion Canadian Fixed Income: -$426 million Precious Metals Equity: -$179 million Natural Resources Equity: -35.8% Miscellaneous – Other: -10.7% Precious Metals Equity: -7.6% Canadian Money Market: -$165 million Canadian Equity: -$126 million Natural Resources Equity: -$82 million Cdn. Inflation Protected Fixed Income: -3.2% Miscellaneous – Other: -3.2% Geographic Equity: -2.5% Precious Metals Equity: -7.9% Greater China Equity: -2.4% European Equity: -1.4%

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The strength in the stock

market is not due to the U.S. economy. Nor is it due to money printing, corporate earnings, or any of the usual suspects. The stock market is simply going higher and will go much higher over the longer-term because …

WHY THE STOCK MARKET KEEPS GOING UP AS THE AMERICAN ECONOMY KEEPS GOING DOWN By Guy Conger

A. Europe is in worse shape than the United States. And … B. The finances and policies of our government are driving investors away from the sovereign U.S. bond market and into stocks. If you understand those two forces, you will not only be able to protect your wealth in the months and years ahead, you’ll also be able to profit, very well indeed.

And, most importantly, stocks are considered largely nonconfiscatable. On its way down, Washington will seek to nationalize part or all of your retirement assets, confiscate gold, and certainly tax you more and more.

Yet, they will never subpoena Apple for a list of its shareholders. They will never confiscate your shares in a publicly traded company or nationalize any industry. Right now, the strength you are seeing in the stock market is largely due to an influx of the initial money coming out of the sovereign bond markets in the United States and Europe due to its troubles.

Yes, I know, it makes no sense. If America is on the decline, how can stocks go higher?

Not to mention Ukraine, which I am sure is lighting a fire under savvy Eastern European investors to also get the heck out of Europe.

Well, it’s actually simple. Most companies in America are in better financial shape than our own government. Moreover, most blue-chip stocks these days pay you income in the way of dividends or royalties and much better than you can get just about anywhere else.

The fact is that huge amounts of capital now view U.S. stocks as a safe haven, and it is rightly justified in doing so. So sit back and enjoy the decline of western civilization..if you have money in stocks and commodities it will be enjoyable as well as profitable.

THE AMERICAN DOLLAR If your management skills

are above average, your time horizon relatively long (or your asset base relatively large), and your understanding of income purpose securities is passable... the answer is a resounding... yes, you can do this!

INVESTMENT Q & A: HOW DO WE CREATE A TAX FREE RETIREMENT INCOME ACCOUNT? By Steve Selengut

You can create a “much safer than the stock market”, classically well diversified, federally tax free, higher retirement income than you expect all in an easy to manage investment portfolio... without professional assistance. Using the proper on-line tools, you can develop a tax free retirement income from a diversified portfolio of high quality, long-in-existence, easy to understand with rudimentary math skills, Closed End Municipal Bond Funds (CEFs). Talk about compound interest... these things have been spitting out better than 6% tax free income for the past 7 years, and not a whole lot less previously. Just think how much higher this will be when interest rates are no longer manipulated by the Fed. (U.S. Federal Reserve) Income higher, prices lower; market value is not the issue. Plug 6.5% into your compound interest tables.... yes, market prices do fluctuate; yes CEFs do use “leverage”, the same as we all do in buying a car, boat, or condo. But, yes, they

also can be borrowed upon in emergencies, added to when prices fall, (to increase yield and reduce cost basis) per share. And yes, they can be sold easily for (taxable, sorry) profits when prices rise to (for example) produce a “year’s interest in advance” target.

All of this with no contracts, net of all internal fund expenses, and with much less overall risk than anything you can purchase in the “equity markets”. Remember, retirement income is best created by securities that are designed to produce income from the get go. Stocks are meant for growth, not income. Most bonds pay the same income, regardless of their price, and over the long haul, Closed End Bond Funds actually will pay more in arising rate environment as higher yielding paper is added to portfolios. Regardless of market value at the time of retirement (and beyond), income CEFs will pay about the same income as they did years before. Regardless of market value at the time of retirement, if the portfolio owner spends less than the total income produced, the annual income, and the working capital, will be growing. ...and this is how we develop and grow a tax-free, retirement income account. MONEY® Magazine - Winter 2014 - 35

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SELECTING A FINANCIAL COACH

L O G

by Robert M. Gignac

Among the many opinions we tend to possess is the

belief that people should be competent enough to handle their own personal finances, make their own decisions, and implement them by themselves. Do I really need a financial coach? When it comes to personal finance, why wouldn’t we call a coach? Someone who understands your problems and issues, has seen it before, and can recommend a course of action. All the best athletes on the planet (you did catch some of Winter Olympics –right?) have coaches. Why? Discipline, encouragement, instruction, feedback, teamwork, dedication and they help athletes maintain their focus. A good financial coach does the same for their clients. The key component that a financial coach brings to the table for a client is objectivity – helping a client understand where they are financially. Once that is done, their ability to educate and manage a client’s expectations aids in charting a course of action to build a better, more financially secure future. How does one hire a good financial coach? I don’t believe there is a set answer for this, but here are three questions I would suggest you ask and feel comfortable with the answers you receive before you consider working with anyone. What are your qualifications? Plenty of people offer financial advice, and many call themselves financial coaches. These range from mutual fund salespeople, stockbrokers, insurance agents, tax accountants, or your local bank branch advisors. Financial coaching requires experience and a sound technical understanding of investment options, insurance, taxes, estates, wills, and trusts to name a few. Ask what type of training they have taken and which professional designations they hold. Credentials alone don’t indicate competence, but they demonstrate a commitment to the profession. Common credentials are: CFP - Certified Financial Planner, CLU - Chartered Life Underwriter, CFA - Chartered Financial Analyst, CHFC - Chartered Financial Consultant. For a complete list with descriptions, I will refer you to the Financial Planners Standards Council website at: www.fpsccanada.org. The financial services sector is known for a relatively high attrition rate. As such, experience is an important consideration. Seniority alone should not be the deciding factor, but working with someone who has experienced “bull market euphoria” and “bear market despair” can help give you the proper perspective in dealing with the investor psychology. Helping a client manage their expectations through market cycles is one of the most important roles of a financial coach.

How do you get paid?

O TI

Coaches may earn compensation from fees billed to you, commissions from products sold to you – or a mix of both. Some feel there is an advantage to “fee only” because there is no pressure to sell you anything. Fees can range from an hourly rate for work done, a flat fee to create a financial plan, or a fee based on the percentage of assets managed. Fee-only coaches may not have any direct motivation to help you implement the plan. Having a plan and not implementing it is equivalent to having no plan at all. Good coaches are upfront about their fees and all costs associated with any investment you make. If you don’t understand the fees, ask. Request full disclosure and ensure they provide it. I f you still have questions, ask again. If they aren’t prepared to fully disclose and explain their costs, that should bother you. How do they handle their non-expert areas? I don’t feel that a coach can be 100% versed in every aspect of the financial arena, so the coach’s business relationships are key. What access does the coach have to tax specialists, lawyers, business accountants, insurance specialists, etc? What is the cost to use these experts? Sometimes if you are dealing with a coach in a large integrated firm, this expertise is all housed in one place and it is part of a blended fee. Hiring a financial coach can be a scary thought for many people. You have to be comfortable and willing to share personal information with them. They have to understand your dreams and goals. Discussing that much personal information with a ‘stranger’ can scare people. Don’t be intimidated. Financial coaches aren’t there to pass judgment. They exist to help you attain the goals you want for yourself and your family. You are responsible for your part in the planning process; nobody will care more about your money than you will. Peace of mind with the people who are helping you in the process is a great place to start. Robert Gignac is the owner of “Rich is a State of Mind” providing keynote presentations, client seminars and workshops on personal financial development and motivation. He is the author of the Canadian best seller “Rich is a State of Mind” (14th printing) and the author of the US edition of the same title. Sample chapter and video clips at: www.richisastateofmind.com. To book Robert to speak at your next corporate or organization event, contact him at: robert@richisastateofmind.com. Copyright 2014 – Rich is a State of Mind

MONEY® Magazine - Winter 2014 - 37

N IN MO A Z M

CREATING A NON-CORPORATE” CORPORATE ENVIRONMENT by Frank Lonardelli

As an entrepreneur and as someone who has set up a

number of companies in my professional career, I’ve come to learn that a company’s culture or environment plays a large role in determining whether that company will succeed or not. And as those of us who occupy executive or management titles very well know, how we organize our team goes a long way in determining the company’s culture and its overall success. With that said, I’d like to bring up a news story that I encountered several months ago. In December 2013, Zappos.com, an online shoe and clothing store that has become known recently for some of their out-of-box thinking, made business news when they announced that their company had completely done away with staff titles and any sort of staff hierarchy. Zappos had gone “holacratic” and going forward would be an organisation operating under a type of internal “self-governing” system. Personally, I’d find it very interesting to know how Zappos’ staff has adjusted to this radical shift in organizational structure and how the company as a whole has adjusted as well. Either way, what Zappos did was in my opinion incredibly important – they publicly demonstrated that in today’s modern business world, companies do not necessarily have to fit themselves into the traditional box of a top-down hierarchical corporate structure. There are alternatives to this structure, alternatives that could very well work better. When I founded my commercial real estate development firm, Arlington Street Investments and began building my team at the company, I was very deliberate in the kind of corporate culture I wanted to create. Though I never considered taking it as far as creating a holacratic system at Arlington Street Investments, through my past experience as an entrepreneur and through founding other companies, I knew that the traditional organizational structure carries with it definite drawbacks. Thus, I knew that promoting a traditional corporate environment was not the way to go, and I really wanted to have my name, Frank Lonardelli, as well as my company’s name associated with forward-thinking. I’ve repeatedly found that too heavy of a concentration on staff titles and in creating a starkly defined, top-down system 38 - MONEY® Magazine - Winter 2014

can lead to rigidity within the company as a whole. And in today’s fast business climate, I really think this kind of rigidity is a compromising weakness, especially when we are speaking about commercial real estate development. A rigid, starkly defined hierarchal structure can limit the level of engagement team members have with company projects and goals. Similarly, an over-emphasis on a strict, hierarchical organizational structure can foster a culture that places competitiveness above collaboration and group goal setting. All these things, in the end, can dramatically take away from a firm’s adaptability as an organization. What I chose to promote instead was more of a middle ground between a rigid, traditional hierarchical structure and the Zappos example. Indeed, I understand the need for titles within an organization. And yes, I also understand and accept the need for some sort of hierarchy within a company. But, with that said, I’ve always stressed to my team that duties and responsibilities can be fluid and team-driven. And instead of tasks and responsibilities being compartmentalized and rigidly segmented off to members of staff, a more open and transparent structure will favour the organization better, which is why at Arlington Street, we practice open book management. This means, in essence, that everyone within my company knows exactly how we make money and how we lose money. I’ve always been surprised by how many entrepreneurs that I know, when asked that same question, “Does everyone from your controller to your receptionist know how your organization makes and loses money?” that answer is no. Even in large well publicized Canadian Corporations, the general knowledge around that question is surprisingly low. In the end, there are lots of ways to organize a company. But, when we are considering an industry that involves large projects, significant capital, dramatically tight timelines and requires an enormous amount of teamwork and collaboration, such as the industry of commercial real estate development, companies may want to reevaluate whether their current organizational structure is truly working towards the best interests of the corporation’s announced goals in the most effective way.

CHANGE? WHAT CHANGE?

L O G

by Don Shaughnessy

I have, for about 15 years, tried to understand why

investment returns tend to be the way they are. I have noticed that over long periods the stock market moves in a very narrow growth trough. In my view there must be an attractor that makes the rate the one we see. This is background. It is insufficient to act upon as an investor. I am reasonably convinced there is an attractor and for the Toronto Stock Exchange it is about 9 and 7/8%. This graphic shows how the total return index (Actual) has behaved from 1950 to now. TSE attractor

O TI

Average wealth matters too because the stock market counts economic wealth alone. Real GDP per person has about tripled in the last 65 years. About 1.7% annually. Total to here. 8.9% The other could be things like: Access to markets. The Internet turns a local business into a global business for some products. Cost reductions. Computers have replaced a lot of clerks. How many operators does Bell employ? Not many. What has happened to draftsmen? Some of these changes are picked up in productivity changes. Competition because capital is not as crucial as it once was. It is possible to start a world class business and get it to the proof of concept level with much less capital than was needed to start old businesses like the car companies and the steel mills. The rise of service industries is important too. Their margins per dollar sales is much higher than retail or manufacturing Better service and banking structures and better infrastructure Longer lives.

The outside bands are the growth from 1920 at 9 7/8% plus or minus 3/8%. The graph is logarithmic. There seems to be limits so that if the high band is exceeded, then the future actual return tends to be sharply lower and if outside or near the low band, it tends to bounce back. Something draws it back from excesses on either side. It returns to some standard and that standard must make sense or it would not be so persistent. What makes it up? I do not know with certainty but I have some candidate ideas Since the stock index is in dollars, inflation will contribute some of the growth. Using the Bank of Canada records, that is 3.69% over the 1950 to 2013 period. Be careful with this one though, there are many ways to assess inflation and there is not a consistent set of principals used throughout the period. Productivity adds value. It is harder to know what that might be but it is likely about 2%. The size of the market matters. Population growth tends to create customers and thus business value. In 1950 there were 13.7 million of us and now there are 34.9 million. Average growth rate about 1.5%

Regardless of what makes it up, it seems to be a persistent number. As an investor, it is not usually in your best interest to bet against the market long term without a very good reason. By that belief, it would be not so clever to expect yields over long times to be more than 10% less fees and costs to earn it. Call that 7% to 8%. By the same token if you have a 40 year or longer time frame, then betting much lower may sound smarter, but you will shortchange the present. You cannot take the kids to Disney World when they are 32. There is always the systemic risk that some government or other will do something to make the attractor rate be much less. I suppose they could make it be much more but I will need to see evidence for that one. I already have evidence for the former. Be wise. The world behaves in semi-predictable ways. Try to notice what drives it. Notice the number, but pay attention to how that affects your meaning. Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

MONEY速 Magazine - Winter 2014 - 39

N IN MO A Z M

CANADIAN ESTATE INCOME TAX RETURNS

If you are an estate executor, it’s tax season. Coping with a deceased’s income tax returns is a burden. Here is some general information about estate income taxes. I have added a final note about executor compensation. You need to exercise due diligence hiring a tax professional. You are responsible for their mistakes, so choose wisely. The deceased may have trusted Tony because Tony made house calls. But that does not mean you should use Tony. He happens to have no insurance or experience with estate returns. Correcting mistakes made in the estate tax returns can be doubly painful. You, as executor, may end up paying penalties and interest. Filing revised tax returns can also delay the final distribution of the estate. Beneficiaries can start calling you if they believe their inheritance is overdue. How about some good news about instalments? You don’t have to pay any more tax installments for the deceased. However, you must pay any unpaid installments due before the date of death. You must arrange to prepare and file income tax returns. The three main types of tax returns typically required are: One for the year before the death, if the deceased did not file a return. One from January to the date of death (called a final or terminal return). One for income received after the date of death during the tax year of the estate administration (T3 Trust Income Tax and Information Return). Consult a qualified accountant or tax lawyer to discuss the tax liabilities of the deceased. Be clear about your responsibilities as executor. Confirm who will file returns. The accountant may be able to prepare additional, optional returns that can save taxes. As executor, you are personally liable to ensure 40 - MONEY® Magazine - Winter 2014

by Ed Olkovich

all taxes are paid before distributing the estate. Normally this requires you to request a final tax clearance to protect yourself. When Are Returns Due? You are allowed at least six months before the final return is due. You should confirm this date with your tax advisor. Do not forget to diarize the date. Follow up to find out what documents the accountant will require. It may take you some time to collect them. Do not use a software or tax service to prepare any tax returns. You are liable for any mistakes made. What if you file the final return late and money is owing? You could be responsible for interest and a filing penalty. The final return and any taxes owing are due as follows: Period when death occurred •

January 1 to October 31: Due date is April 30 of the following year

•

November 1 to December 31: Due date is six months after the date of death

Compensation for Executors and Estate Trustees Will you request fees for acting as executor? If so, you should expect to report the compensation as income. You can do this with a T4 slip or include it in your business income. You can contact Canada Revenue Agency (CRA) for more information by calling 1-800-959-8281 or online: What to do when someone has died – http://www.cra-arc.gc.ca/tx/ ndvdls/lf-vnts/dth/menu-eng.html. Edward Olkovich (BA, LLB, TEP, and C.S.) is an Ontario lawyer, nationally recognized author and estate expert. He is a Toronto based Certified Specialist in Estates and Trusts. Ed’s law firm website is MrWills.com © 2014

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42 - MONEY® Magazine - Winter 2013 www.TheMoneySchool.ca www.TheMoneySchool.ca

I’M MAD AS HELL! – CONFESSIONS OF A WIDOW By Richard (Rick) Atkinson, MBA

After a recent presentation, a member of my audience

named Edith spoke privately with me. She informed me her husband Fred past away six months previously. Then Edith added “I’m mad as hell!” When asked the reason for her fury, she said when Fred was alive he regularly met with a financial advisor and the two of them made money decisions impacting both he and Edith. Edith was informed after the fact, by her husband, regarding what was decided but with little or no explanation. According to Edith, Fred ended each conversation with the words, “Don’t worry sweetheart, I’ll take care of you.”

Where to Start For women (also men) who want to feel empowered when it comes to financial matters, here is a partial listing of actions you may wish to consider:

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(a) Investigate enrolling in a course on investing offered at your local community college and boards of education night school programs. (b) Read the business section of your local or regional newspaper for useful economic and financial information. Three of my favourite financial writers are: Ellen Roseman and Gordon Pape of the Toronto Star and Rob Carrick of the Globe and Mail. (c) Use the Internet to search for investment information, commonly asked questions, trends, economic thinking and the like. (d) Read published reports and investment newsletters offered by financial institutions and private organizations.

After Fred’s passing, Edith said she was left with the task of picking up the financial pieces. Not only did she have a hard time finding Fred’s financial paperwork, she didn’t understand his notes or the rationale for decisions.

(e) Attend business shows. One show in which I have participated is the annual MoneyShow held in major centres across Canada.

After gathered up what papers she could find, Edith said she met with the financial advisor Fred with whom he regularly dealt. At the meeting, Edith said the advisor quickly summarized the years of discussions without regard to Edith’s lack of financial understanding. She said he used unfamiliar terminology and spoke in a rather abrupt manner. Several times, the advisor said, “You do understand, don’t you?” Edith said this made her feel inadequate and humiliated.

(g) Join an investment club or discussion group. Check your local library for information on the availability of such clubs and groups in your area.

At the conclusion of our chat, Edith added, “You know Rick, though I’m mad as hell at Fred, I’m also mad at myself.” On asking why, she said, “I should have insisted at being present at each meeting with the advisor, asking my questions and getting answers which satisfy me. Unfortunately I didn’t and this makes me very angry.” I mention the conversation with Edith because I believe she represents many spouses/partners who defer financial decision making to their mate. Financial Education is Key! For years Edith relied on her husband to determine the financial wellbeing of them both. Unfortunately for Edith, her behaviour of shirking financial responsibility played havoc and is forcing Edith to ‘get up to speed’ with her financial situation and plot a course of action aimed at solidifying (and possibly improving) her future as a single retired woman. Turning the clock back, Edith could have prevented her frustration by insisting on being present at every meeting with the financial advisor. Further, she would have benefited by educating herself on financial terminology, investment products available and their advantages and disadvantages, asking questions and insisting on receiving explanations and answers which satisfied both she and Fred.

(f) Read books and magazines for investment information and tips. Two magazines I find appealing are: Canadian Business and Money Magazine.

Consequences of Financial Literacy • By increasing one’s financial literacy, the payoffs are many including: • Avoiding making financial mistakes through exercising informed decision making. • Increased ability to make projections about future variables (i.e. income growth, inflation). • Increased self-confidence when dealing with financial institutions and personnel. • Better understanding of financial products including costs and benefits. • Increased personal and household budgeting. • Better debt management. Women I’ve met who consider themselves financial literate report they feel an increased sense of control; something they did not experience prior to understanding the complex world of money. To this day, I wonder what steps Edith has taken to dispel her feeling of anguish. Is she feeling confident when meeting with her financial advisor, is she more understanding of her financial situation and better equipped to face life? I do hope so. What are you doing to improve your financial literacy?

MONEY® Magazine - Winter 2014 - 43

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GOING BEYOND SR&ED: IT IS TIME FOR A CANADIAN PATENT BOX” Written by Trevor R. Parry M.A. LL.B LL.M (Tax) TEP

Too often policy seems to be created in a vacuum.

Well intentioned tax policy, in this case the massive expenditure in the form of tax credits for companies to undertake research, known as Scientific Research and Experimental Development (SR&ED) sees businesses compensated for “research” that they undertake. In recent years the Canada Revenue Agency (CRA) has instituted measures to both streamline the process and to prevent abuse of the program. They should be applauded for these measures. However the results yielded by this longstanding program are anything but clear. While the intention to promote research is noble there is a fundamental disconnect which may be remedied through further innovations in tax policy that are already successfully being used by our largest trading partners. The problem is simple. Research should in many cases result in a commercial benefit to those who undertake it, and therefore through taxation of that ensuing commercial activity we as a society should consequently benefit. The fact is that successful research in many cases does not yield any benefit to Canada. That is because current tax rules promote the removal of any valuable Intellectual Property (IP) which would include patents, copyright, and industrial design, to a jurisdiction with more favourable tax treatment of the royalties and revenues that the IP generates. The most famous instance of treaty shopping and jurisdictional maneuver is the “Double Irish-Dutch Sandwich”, in which companies such as Google, Starbucks and Microsoft reportedly were able to drastically reduce taxation on their non-U.S income by using licensing agreements and transfer pricing rules to move income through a series of low tax jurisdictions and avoid repatriation of such income to the U.S. Last year the Chairman of Apple was pilloried before a Congressional Committee for similar tax structuring, despite the fact that everything Apple had undertaken was nothing new and consistent with U.S. tax law.

reach a new zenith under as a result of its “redistributive” rhetoric. Increased taxation drives away business; a simple fact that Canada’s sputtering engine, Ontario now realizes. While we need not engage in a race to the bottom by eliminating corporate taxation (although there are many merits to doing just that) we might follow a policy initiative that is finding success in Europe. Following the lead of the Netherlands, Belgium and Luxembourg, the U.K. instituted the “Patent Box” in 2013. The idea is straight forward; royalties generated by I.P. developed or domiciled in the U.K. will be taxed at preferential lower rates. The result is that revenue that would have left the U.K. via Ireland or another low tax jurisdiction now remains in the U.K. and generates tax revenue. Canada can improve on the U.K. model by going beyond simple patents. The inclusion of copyright and industrial design would be a tremendous boom to our already well respected research facilities and perhaps be the proverbial shot in the arm that our atrophied industrial base needs

While Canada is not the headquarters for many multinational companies those that are here may still make use of international tax planning to reduce taxation. If the Canadian taxpayer is funding, in part, innovation and the development of new drugs, software or even advanced processing for our natural resources shouldn’t Canada also benefit from such progress? The answer of course is yes; but how is this achieved?

Something similar to the “Patent Box” was suggested in the submissions made to the Advisory Panel on Canada’s System of International Taxation but was not included in the 2008 Report and Recommendations. If we as a country believe that research and innovation are a cornerstone of a thriving knowledge based economy, and a buoyant industrial sector it is time to revisit these recommendations. Simply seeking to punitively tax all revenue to satisfy the ravenous demands of the mob is no way to build economic stability.

Those on the left see punitive measures, such as increased corporate and personal taxation as the only remedy to this situation. This echoes the hollow policy threats of the Obama administration which has seen international tax planning

We should continue to encourage research, but at the same time actively encourage through these tax incentives that the fruits of such research remain in Canada to benefit our society as a whole.

44 - MONEY® Magazine - Winter 2014

IS AN ADVISORY BOARD GOOD FOR YOU AND YOUR COMPANY?

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by Michael Kavanagh

In a recent CBC MarketPlace show, the main topic was focus

on financial advisors and their favorable biases towards their employers products. A person was hooked up with a camera and microphone and visited several financial firms to speak to investment advisors on how to invest a sum of money. What they discovered is that products of the respective companies were promoted. With a compensation plan geared toward highly recommending their own products, the interests of the customer are put second. What was ultimately learned was that these people are not really advisors but salespeople. What this highlights is the lack of independence which permeates almost all the financial and professional providers/ advisors. The same could be said for obtaining independent advice for other areas. It is difficult to find a truly independent advisor. As a business owner, it is doubly difficult, as they have dealings with some professionals but limited interaction otherwise. They typically talk to their banker, their outside accountant , business partner and maybe their lawyer concerning an issue but that is usually the extent of getting advise. This lack of independent advice means other information, which could be very helpful, is not heard. Also, a frank discussion on all possibilities does not happen. With respect to their banker, some owners are reluctant to discuss plans on possible expansion or negative developments fearing that the credit facilities could be negatively adjusted. As for their accountant, their typical focus is taxes and financial statement preparation. With their lawyer, cost is always an issue and most will only call when there is no other alternative. In my experience, successful entrepreneurs, who have assembled a group of trusted advisors to provide independent advise, on a whole range of issues, generally perform better. Whether it is a formal structure of quarterly meetings with agendas or an informal structure where the advisors are put on a retainer and are available to discuss issues as they develop, the entrepreneur is able to obtain independent advise with no hidden agenda. Who are these advisors? Typically they are, say, retired commercial bankers, business people, other professionals who have a long track record of managing or assisting business. Since most have a pension or are independently financially secure, they are free to provide independent

thought. They also have the time to take on these assignments since they no longer have full time jobs. Here are some of the benefits of setting up an advisory board with independent advisors: 1. Independent advise: Since they have no affiliation to any one company, they can offer an unbiased opinion. You can bounce ideas off or discuss plans without the fear of negative repercussions. You may not like the news, but at least you are hearing it! 2. Cost effective: Whether it is a formalized structure or an informal structure, costs will be defined and much lower than if professional services are obtained. In addition, because these advisors are independent contractors, headcount does not increase. 3. Enhances succession plans. With an advisory board, there are a group of people who know your business and can assist if there are issues. A client of mine set up an advisory panel which met on a quarterly basis. A tragic event happened where the owner was killed in an accident. The advisory panel then was reconstituted as a Board of Directors and took over operations and managed until the company was ultimately sold. 4. Ability to have multiple levels of expertise: The advisors, if properly picked, have different levels of expertise and experience. The owner can benefit from different points of view. 5. An advisory board forces discipline: when there are quarterly meetings or meetings set up for discussion, it forces the entrepreneur to have information ready and to provide action plans. A former client of mine advised that after the equity investment was retired and meetings subsequently stopped, he missed the interaction and the questioning . He said it forced him to be proactive and made him a better manager. While entrepreneurs are always watching costs, some express concern paying for advise when they don’t have to pay for it at all. As we have seen, “Free” normally has baggage and again the “independence“ issue rears its head. You get what you pay for!! The benefits of truly independent advice appear to far outweigh the costs and gives the owner solid unbiased advise. Proactive owners should seriously consider engaging qualified people to be either on an advisory board or an informal advisory engagement. MONEY® Magazine - Winter 2014 - 45

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MOBILE PAYMENTS ON THE MOVE by Gerald Trites, FCA, CPA

The use of mobile units like smartphones and

tablets has skyrocketed in recent years. So has interest in their use for making payments at the cash register. They already can be used for making payments over the Internet, and they are. But the idea of making payments with them directly at a store by interacting with the cash register has had a lot of discussion and a lot of intuitive appeal. Canada is already a leader in the use of contactless technology for credit cards, which involves having a chip in the card which can be activated with a quick touch or even an “airkiss”. But Canada does not lead in the use

of smartphones for payments. So far, the leaders are in Kenya and Japan, with various other countries on the rise. The most discussed technology for mobile unit payments involves the use of NFC (Near Field Communications), which is a means of transmitting short range messages between devices. There are other means, notably Bluetooth, but Bluetooth raises a host of security problems. And of course, security is critical. There are various players in the development of mobile payment systems, including the banks, phone service providers and the phone manufacturers. It’s important to note that no payment system has ever succeeded in Canada without the support of the banks. What about Paypal, you say? Well Paypal has primarily been a means of using credit cards for payments on the internet, particularly where the seller can’t afford to put in a customized payment system. They have, however, introduced Paypal Mobile, which allows transfers between Paypal accounts just by touching 46 - MONEY® Magazine - Winter 2014

two phones. This may be a popular application and shouldn’t be discounted. But in addition to the banks, the active cooperation of the Service Providers is needed. Rogers has tried to bridge this need by becoming a bank itself, but the jury is out on whether that will work. Some banks have been trying to form alliances with the service providers, like Rogers, Telus and Bell. The problem is that Canadians are used to a very stable and secure banking system and don’t trust their money moving outside the banking system. So the banks will remain an important ingredient. This leads to the second major problem – the lack of standards. Whenever a technology is adopted, there is a need for standards so that the transmissions are understandable across platforms and systems. Without standards, payments cannot be easily sent between the parties to the payments. With all other payment systems, there are standards in place. In May, 2012, the Canadian Financial Industry released a set of preliminary mobile standards in the form of the Mobile Payments Reference Model. This model, supported by all the Canadian banks and the Canadian Bankers Association, sets out guidelines for the development of mobile payment systems using NFC technology. The guidelines are voluntary, but were accepted by all the banks and are therefore a great start for a formal set of standards. The Model also includes several guidelines on security as well. Mobile payments has other obstacles to overcome, a major one in Canada being the success of the alternative, more traditional, means of payment. Canada is one of the largest users in the world of debit cards. They are convenient, secure (backed by the banks), very familiar, easy to use and understand and can be used around the world. These are all important attributes. Besides security and bank backing, the simple idea of convenience is critical. A payment system using mobile phones needs to be at least as convenient as debit cards. That’s a serious challenge to meet. There seems little doubt that mobile payment systems using smartphones will succeed in Canada. But efforts have been disjointed so far and all the players need to get their acts together first.

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