MONEY® Magazine - SUMMER 2014 by MONEY®

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MONEY® Media Contact: James Dean, Editor & President Kennon S. Vaughan, Artistic Director Ian R. Whiting, CD, CFP, CLU, CH.F.C., FLMI(FS), ACS, AIAA, AALU, LSSWB Senior Editor/Writer Enquiries: +1 416 360 0000 james@money.ca Mailing Address: Head Office 7181 Woodbine Ave., Suite 226 Markham, ON L3R 1A3

Advertisers Index The MONEY®Newsletter GIC Wealth Management Gordon Pape Enterprises The Mortgage Centre Wall Actuaries Travel Insure Ruth’s Chris Retirement101 Canadian Coin/Stamp Reputation.ca TFSA Book - Gordon Pape

What is a GIC? And why would I want one anyway? Ian R. Whiting - Pg. 8 Buying A Home With Advice Becky Wong, CFP - Pg. 10 Can you really afford NOT to have life insurance? Tahnya Kristina, CFP - Pg. 13 Congratulations. You are Retiring. Now What? Anita Saulite - Pg. 15

Regular Features Best Rate Around Media Release Mutual Fund Review The American Dollar The Advisors Channel

So what is a Bitcoin? Ian R. Whiting - Pg. 4

pg. 7 pg. 29 pg. 36 pg. 43 pg. 47

What Boomers Want - But Aren’t Getting From Many Financial Advisors Richard Atkinson - Pg. 28 What to Expect from Your Financial Advisor - The Top 10 Things You Should expect from yours! Jim Ruta - Pg. 30

How to surf the stock market waves. Steve Nyvik - Pg. 16

When the Banks says NO. What are the Alternative sources of Financing for your Business. Mark Borkowski - Pg. 31

RDSP – Registered Disability Savings Plans Debbie Hartzman - Pg. 17

Which Direction Are You Looking? Robert M. Gignac - Pg. 33

The importance of Risk Profile Assessment Ken Kivenko - Pg. 19

4 Ways Your Overconfidence is Hurting Your Investment Portfolio Tom Drake - Pg. 34

RRSPs and TFSAs - Some Considerations When Deciding Between the Two Accounts Camillo Lento - Pg. 20

pg. 2 pg. 11 pg. 12 pg. 14 pg. 18 pg. 24 pg. 25 pg. 44 pg. 45 pg. 46 pg. 48

Too Soon To Retire? Consider A Sabbatical! Cynthia Kett - Pg. 27

Sharing the burden of online credit card fraud Terry Cutler - Pg. 21 A Travel Insurance Primer James Dean, Publisher - Pg. 23 Lessons learned by property owners in the 2013 Alberta Floods Riaz Mamdani - Pg. 25 To Be or Not to Be – (or which is better, pay-off the mortgage or buy an RRSP?) Ian Whiting - Pg. 26

Social Investor Relations Gerald Trites - Pg. 35 One Size Does NOT Fit All Lise Andreana - Pg. 37 Questions to Ask an Advisor Tammy Johnston - Pg. 39 Total Return: Smoke and Mirrors? Steve Selengut - Pg. 40 Make sure you qualify for a mortgage! Guy Ward - Pg. 41 Do You Need a Digital Estate Plan? Ed Olkovich - Pg. 42

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Money.ca/the_money_store/ MONEY® Magazine - Summer 2014 - pg. 3

So what is a Bitcoin? Written by Ian R. Whiting, Senior Editor and Staff Writer

BITCOIN is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or Euros – they’re produced by lots of people running computers all around the world, using software that solves mathematical problems. It’s the first example of a growing category of money known as cryptocurrency.

The Dawn of Independent Digital Currency is Here. MONEY® Magazine - Summer 2014 - pg. 4

What makes it different from normal currencies? Bitcoin can be used to buy things electronically. In that sense, it’s like conventional dollars, Euros, or yen, which are also traded digitally. However, bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money. Who created it? A software developer called Satoshi Nakamoto proposed bitcoin, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees. Who prints or mints it? No one. This currency isn’t physically printed in the shadows by a central bank, unaccountable to the population, and making its own rules. Those banks can simply produce more money to cover the national debt, thus devaluing their currency. Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network. This network also processes transactions made with the virtual currency, effectively making bitcoin its own payment network. Can you create unlimited bitcoins? Nope! The Bitcoin Protocol – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created by miners. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of bitcoin). So this currency is based on what? Conventional currency has, in the past, been based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But bitcoin isn’t based on gold; it’s based on mathematics. Around the world, people are using software programs that follow a mathematical formula to produce bitcoins. The mathematical formula is freely available, so that anyone can check it. What are its characteristics? Bitcoin has several important features that set it apart from normal currencies. 1. It’s decentralized The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing.

2. It’s easy to set up Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another task, also beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable. 3. It’s anonymous Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However… 4. It’s completely transparent …bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the block chain. The block chain tells all. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours. There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address. 5. Transaction fees are miniscule Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t. 6. It’s fast You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment. 7. It’s non-repudiable When your bitcoins are sent, there’s no getting them back, unless the recipient returns them. They’re gone forever. So, bitcoin has a lot going for it, in theory. But how does it work in practice? Advantages and Disadvantages of Electronic Cash Gone are the days when an individual had to carry around silver and gold coins. We now carry paper money. Now, the amount of paper money that a person needs to carry around has also reduced considerably thanks to electronic cash. But all is not what meets the eye! Let’s find out the advantages and disadvantages of electronic cash. Advertisement Many say that the world economy has benefited from the use of electronic money. Well there are also some who say that it hasn’t. But on careful and detailed research, the well-known phrase “There are always two sides to a coin” came to mind. Electronic money has made monetary transactions a piece of cake. Be it an amount in millions or money transfer to a tiny town in another continent. E-cash transactions are fast, accurate and easy. But before we get to the “two sides” of this “coin”, let’s see how many forms it has.

MONEY® Magazine - Summer 2014 - pg. 5

There are a few basic categories: Anonymous: This kind of e-cash works just like cash. Once a specific amount is withdrawn from an account, it can be used (or misused) without leaving a visible trail. Identified: We know this category popularly as PayPal or WebMoney. The usage and transfer of money in these systems is not entirely untraceable. Online: Obviously, it means that you need to correspond with a bank (via the internet). The bank, then, gets in touch with the third party. Offline: You can directly conduct the transaction without any interference from the bank. Smart Card: Smart cards are like credit cards with a computer chip in them that stores the holder’s money-related information. They are used in digital cash applications.

Frequent synchronizations are not required: The bank doesn’t need to synchronize its servers very often. This is mostly done via batch updates.

Now consider some of the advantages of e-money.

Offline Electronic Currency Prevention may not be Immediate: Double spending may not be prevented effectively and immediately. Implementation Expenditure: The required additional hardware is quite costly to install. E-transactions depend a lot on technology: Hence, power failure, unavailability of an internet connection, undependable software and loss of records could be a hindrance.

Online Electronic Money Anonymity and untraceability can be maintained: User Ids are kept highly confidential. No issues regarding “Double spending”: Real-time checking of all transactions makes the possibility of multiple expenditures negligible. No requirement of additional secure hardware: Existing POS (point of sale) hardware can be updated and used. Offline Electronic Money Portable: This system is fully offline and portable. Anonymity unless double spending: The user is anonymous unless (s)he commits a double expenditure. Detection of Double Spender: The bank can effectively detect a double spender.

Now, the disadvantages of this marvelous mode of transaction. Online Electronic Currency Communication Overheads: Security and anonymity cost become a bottleneck of the system. This can happen at times during real-time verifications. Massive Databases: The bank will have to maintain a detailed and confidential database. Synchronization: The bank needs to synchronize its server every time transaction is made. It would be insanely impractical to maintain.

So, the next time someone speaks about e-cash, you will have enough information in hand. Let’s not have the confused expressions anymore. Just make sure you read all the disclaimers and are aware of your system thoroughly! With courtesy to Wikipedia, the IRS, www.coindesk.com and www.buzzle.com.

MONEY® Magazine - Summer 2014 - pg. 6

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What is a GIC? And why would I want one anyway? Written by Ian R. Whiting

G U A R A N T E E D I N V E S T M E N T C E R T I F I C A T E

GIC

is an acronym for Guaranteed Investment Certificate. These are available to Canadian investors through banks, trust companies, credit unions, caisse populaires and some life insurance companies. When an investor buys a GIC they are loaning the financial institution a sum of money for a pre-determined period of time and in exchange will be paid interest. The “guarantee” behind a GIC is that the principal (the initial amount invested) is protected by the seller and will not lose any value over its term. When it comes to investing, there is no “one size fits all” solution. Investment options – like Guaranteed Investment Certificates (GICs), mutual funds, bonds, and stocks – all have different growth potential and risk. Investments range from totally secure with limited growth to highly volatile with maximum growth.

You can’t predict when markets will rise or fall, so if you won’t have enough time to ride out a potential market slump, a GIC— with its guaranteed rate of return—is a safe investment option. If you absolutely cannot tolerate any drop in value of your investment. With some savings goals, you know how much money you will need and when you’ll need it—for example, you want to buy a car in two years and that car will cost $15,000. With the right initial contribution and rate of return, a fixed-term GIC will ensure you build that savings amount. A guaranteed rate of return is also good if any kind of risk makes you extremely nervous—a GIC may be what you need to sleep at night. If you want to take advantage of tax savings (in an RRSP, for example) but aren’t ready to commit to a more aggressive savings strategy.

GICs are on the safer end of the spectrum, in terms of protecting your principal and a fixed rate of return. Any money you deposit in a GIC is guaranteed by the issuing financial institution to provide a known rate of return, which makes it easy to figure out how much money you’ll have when the term is completed. GICs have a wide range of terms and flexibility. Some are non-redeemable, which means that you can’t move the money out until the end of the term. Generally speaking, the longer the term, the better the interest rate available.

In most cases, GICs aren’t a great vehicle for retirement savings—with long-term goals, the rates of return just aren’t high enough to allow for the real benefits of growth to take effect. But if you can’t handle even a minor fluctuation in the market and want to use GICs as part of your RRSP, you may want to consider a laddered strategy—which involves purchasing GICs of different terms and renewing them when they mature. An investment advisor can explain this strategy in more detail.

GICs are also available in registered investment vehicles such as RRSPs, RESPs, or TFSAs. If you invest in a GIC within one of these registered plans, you may benefit from tax savings and/ or deferring tax payments until you withdraw your money from the plan.

Keep inflation in mind

3 reasons to choose a GIC: If your savings goal is short term (like within the next 1-3 years, or sometimes more).

If you are earning a lower rate of return over a longer, fixed period of time, you should consider the effect that inflation may have on the value of those savings. Recently, Canada’s inflation rate has averaged about 2 per cent. That means that something for sale in 2014 will have a price tag 2 per cent higher in 2015, 4 per cent higher in 2016 and so on. If you’re saving for retirement, you may be saving for purchases that you’ll make 20, 30, or even 60 years down the line. Imagine the

MONEY® Magazine - Summer 2014 - pg. 8

impact inflation will have in that amount of time. To keep up with inflation, your long-term investments need to grow at least 2 per cent every year. Inflation and your portfolio To make sure the money you invest will have greater purchasing power in the future, you have to understand the impact of inflation on your portfolio. For example, its common sense that a 6% annual return is better than a 3% annual return, but the difference between the two is even more significant when you consider recent inflation of about 2%. That means that the first 2% of real purchasing power on your investment dollars will be lost to inflation – and, as such, the lower-paying investment returns just 1% more than the inflation rate itself. Over the long term, if your investment returns barely cover the inflation rate, the compounding effects of 2% annual inflation translate to more groans at the gas station and grocery store. To have greater purchasing power in the future, your investments have to out pace inflation. By building a portfolio with investments that resist the effects of inflation, you can hold on to your purchasing power. Investing in the stock market has its risks, and for “risk-free” investment products (like holding cash), the biggest risk is inflation. As a result, when it comes to reaching your retirement goals, playing it safe isn’t usually the best strategy. In short... Depending on your savings goals and attitude towards risk, a GIC may be a good addition to your investment portfolio. Their guaranteed rates of return provide stability and a reliable source of funds at the end of your term. Most people are familiar with the concept of going to a bank and asking for a loan. That loan will come with a set of conditions such as the amount of interest that will be charged and the date by which it must be repaid. Purchasing a GIC is essentially the same thing but in reverse. Instead of someone borrowing money from a bank, in this case the bank is borrowing money from you. GIC Minimum Purchases and Interest Rates Usually a minimum of $500.00 is required to purchase a GIC, although there may be exceptions depending on the term and the financial institution involved. The interest rate is determined at the time of purchase and may be fixed or be varied over the term. The rate is generally better than a regular savings account but usually offers a lower rate of return than many other kinds of less secure investments. This will be clearly defined at the time of purchase and will likely vary among different financial institutions. Terms of GIC Purchases The term of a GIC can be as little as one day or as long as 10 years, depending on the financial institution involved and the products they offer. In most cases the term is pre-determined at the time of purchase. The final day of the term is known as the maturity date and in most cases, the longer the term the higher the interest rate.

Generally speaking, once a GIC is purchased it must be held until maturity and can only be redeemed early under special circumstances. Early redemption may result in the loss of any interest earned to that point and may also be subject to a penalty fee. One exception is a cashable GIC which can be redeemed within the term at the discretion of the holder, but while they offer greater liquidity they also tend to offer a lower interest rate. Advantages and Disadvantages of Investing in GIC’s GIC’s are a low risk and simple investment to own. In most cases they provide stable and predictable income and are not greatly affected by market fluctuations. The principal is also usually guaranteed by the financial institution selling it and even in the event of default, the CDIC (Canada Deposit Insurance Corporation or similar such entity for credit unions, caisse populaires and life insurance companies) offers additional insurance of up to $100,000.00 (however be sure to confirm this before any purchase is made because it is not always the case). On the down side, most GIC’s do not offer a great deal of liquidity and it can be hard to free up those funds in the event of an emergency. As well, although the interest rates offered are usually superior to a regular savings account, this type of investment may still give back a relatively low rate of return, and if held outside of an RSP, the interest is subject to income tax rate. There are many different types of GIC available in an effort to cater to different investor needs and goals and it is important to fully understand the conditions attached before making a purchase. Remember to always consult a professional investment advisor or financial planner before making any kind of investment. The many benefits of GICs Whether you’re looking for a low-risk investment or an effective way to diversify your portfolio, there are many benefits to GICs: Growth - Your investment is guaranteed to grow, regardless of how the markets perform. Dependability - your interest rate is guaranteed not to fluctuate throughout the term. Security - your original investment will be returned with interest at maturity, guaranteed. Flexibility - inside or outside your RRSP, you can choose the term and interest options that are right for you. Simplicity - an investment that’s guaranteed to grow - what could be simpler? With courtesy to: Alberta Treasury Branch Manulife Financial Wikipedia

MONEY® Magazine - Summer 2014 - pg. 9

Buying A Home With Advice Written by Becky Wong, CFP

or most of us, one of life’s largest purchases or investments will be our principal residence. The average price of a Canadian home sold in June 2014 was $413,215 according to the Canadian Real Estate Association. Vancouver and Toronto continue to skew nationwide averages. The average actual, unadjusted selling price for a home in Metro Vancouver was $797,000. How many of these homebuyers actually thought of consulting a financial advisor prior to this life changing purchase? Seeking the advice of a financial advisor can help first time homebuyers prepare for home ownership with greater peace of mind. Once the excitement of house shopping and moving in wears off, the reality of this large financial debt can often be daunting. Buyer’s remorse may even sneak in. The following are six common points to consider before leaping into such a large financial commitment. 1. Affordability. Most will over-estimate how much they can afford rather than under-estimate. Providing your financial advisor with detailed income and current expense information will help determine the maximum mortgage payment amount that is manageable and affordable each month. 2. Mortgage Pre-approval. Getting a pre-approval will help you stay within your price range when you go looking at homes. Most lending institutions will guarantee the mortgage rate for 90 days. If rates go up while you’re shopping, you’re protected. If rates go down, you will automatically get the lowest rate for the term selected. 3. Down Payment. As a strategy, your advisor can help you potentially use the same money “twice.” Make a contribution to your RRSP and take the tax deduction. After a minimum of 90 days, under the federal government’s Home Buyer’s Plan, first-time homebuyers are eligible to use up to $25,000 in RRSP savings per person for a down payment on a home. 4. Mortgage Default Insurance. Commonly referred to as CMHC insurance, (although there are other providers such as Genworth Financial and Canada Guaranty) is mandatory in Canada for down payments less than 20%. The premiums are based on the mortgage amount. For example, on a home purchased for $445,000 and a down payment of $44,500, CMHC premium of $9,612 (2.4% X $400,500) is required. This cost is borne by the borrower to protect the lender. 5. Interest Rate. Your advisor can help you determine your risk tolerance when it comes to your monthly mortgage payment. Will you be more comfortable with a fixed rate or can you tolerate fluctuating interest rates? A fixed rate allows you to budget exactly how much of your payment is applied to principal and interest during the term selected. A variable rate can mean less of your payment goes towards principal when rates go up. Your monthly payment will also change through the term if interest rate changes. 6. Closing Costs. You can be surprised by the variety of unexpected costs that will come from your intended

down payment. Here are a number of items that appear small but will add up quickly: a) Professional Home Inspection. This can cost you anywhere between $275-$600 depending on the size of the home. If any deficiencies are detected, the purchase price may be negotiated again to offset the cost of needed repairs or you may simply cancel the contract. b) Lawyer or Notary Fees. This can vary from $600 - $1,200 for real estate conveyancing depending on the provincial jurisdiction. c) Land Transfer Tax. A ll provinces have a land transfer tax, except Alberta and Saskatchewan, who instead levy a much smaller transfer fee. In most provinces the tax is calculated as a percentage of the purchase price. For example, in British Columbia, the tax is 1% on the first $200,000 and 2% for anything over $200,000, thus a condo at $286,000 would require an additional $3,720. d) Moving. Unless you have a three ton truck and some great friends to haul your goods, a professional mover will need to be hired. There are connection fees for cable, internet, telephone, and other utilities. You may also want to set up mail forwarding through Canada Post. This will be $52 - $82 within the same province. e) Property Tax. There will be an adjustment where the seller prepaid, thus you need to pay the excess amount back to the seller. This adjustment would be applicable to utilities and strata/condo fees as well. f) Home Insurance. Given that this is likely your largest purchase in life, it’s important to protect it from unforeseen events, such as, fire, theft, flooding, earthquake, etc. 7. Home Ownership Costs. The home needs to be heated and taxes paid and utilities include water, electricity, and natural gas. Often these are included when we rent. Ongoing maintenance can include repairs to pipes, paint due to wear and tear, roof, landscaping, deck, etc. You may need to replace the furnace or hot water tank. Again, if you were renting, you would call your landlord to address these issues. If you live in a condo or townhouse then strata/condo fees are required. Expect a special assessment to be levied for larger projects, such as repairs to elevators, roof, building envelope, window replacements, etc. Do take the time to consult a trusted financial advisor before embarking on such a large debt. I have heard from some homeowners that, after a few years of owning their first home, they wished they just continued to rent. Why? They were surprised by a variety of unexpected costs that simply zapped the joy out of home ownership. Advice from your financial advisor will help to alleviate financial anxiety and you will enter into the commitment with eyes wide open. You will be prepared! Becky Wong, B.Comm (Hons), CFP, FMA, Independent Financial Planner, Vancouver, BC, (778) 227-7087, becky.cfp@shaw.ca

MONEY® Magazine - Summer 2014 - pg. 10

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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‘THE INCOME INVESTOR’ 1

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B u i l d i n g

W e a l t h

THE INCOME INVESTOR

Volume 12, Number 14

I N

T H I S

Issue #1414

THE NEW NORMAL

I S S U E

The new normal

REITS are a special breed

Go West

July Top Picks: iShares J.P. Morgan Emerging Markets Bond ETF, Amica Mature Lifestyles, Talisman Energy

July updates: Canexus Corp., Freehold Royalties, Just Energy Group

Housekeeping

All material in The Income Investor is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers and distributors of The Income Investor assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. Contributors to The Income Investor and/or their companies or members of their families may hold and trade positions in securities mentioned in this newsletter. No compensation for recommending particular securities or financial advisors is solicited or accepted.

By Gordon Pape, Editor and Publisher Anyone who still hankers for the good old days when GICs paid 6% or more is going to have to wait a long, long time. It’s too much of a stretch to say those days are gone forever, but it’s not inconceivable that we could go through the rest of this decade without seeing a return to those levels. That’s the message we’re getting from the bond market. Professional bond traders are a pretty smart bunch – some of them pull down multimillion salaries – and their actions are telling us that interest rates are unlikely to make any serious upward move in the near to medium future. I’ve written before about the surprising performance of the bond market this year and it just keeps continuing. Back in January, most forecasts, including mine, predicted a weak year for bonds. That was based on the assumption that the economic recovery would continue to gain momentum, pushing interest rates higher in the process. That’s not happening. The harsh winter derailed U.S. growth to such an extent that first-quarter numbers showed a contraction of 2.9%. That’s a shockingly high number. The rest of the year should be much better but the damage has been done. Last week the International Monetary Fund slashed its forecast for 2014 U.S. growth to 1.7%, down from the April prediction of 2.8%. That would make this the weakest year since the credit collapse of 2008-09.

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July 31, 2014

CAD

One of the results of this economic faltering has been to push forward the day when the U.S. and Canadian central banks are likely to finally start raising interest rates. The consensus is that’s not likely to happen until mid-2015 at the earliest, and some analysts now suggest it may not be until 2016. Even when rates do finally start to turn up, it will probably be at a slow and measured pace. A sudden and dramatic rise in rates would put tremendous stress on overextended North American households, which are carrying more mortgage and other debt than economists are comfortable with.

Prices do not include taxes or shipping costs (IF APPLICABLE)

Next regular issue: August 28 Next Update Edition: August 14

The Income Investor is an electronic newsletter devoted to finding TOP-QUALITY INCOME SECURITIES THAT CARRY MINIMAL RISK. It is designed to help people find investment solutions to the two big problems they’re facing: low interest rates and volatile stock markets. The Income Investor covers all types of income securities including income trusts, preferred shares, high-yielding common stocks, bonds, mutual funds, exchange-traded funds, and GICs. Any security that generates cash flow is fair game for our experts.

Bond traders see all of these crosscurrents at work and their conclusion has been that fixed-income securities are underpriced, even at the current low levels. As a result, they have been buying bonds, driving

‘The Internet Wealth Builder’ Customer Service: 1-888-287-8229

Continued on page 2…

Building Wealth’s The Income Investor is published monthly by Gordon Pape Enterprises Ltd. All Rights Reserved July 31, 2014 showing a year-to-date gain of 5.77%. And the trend line shows no sign of changing; the gain for July alone was almost 1%.

What is even more telling is the performance of long-term bonds (10+ years). If traders expected rates to rise, the price of long-term bonds would decline to reflect that. Instead, they’re rising. The year-to-date gain

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Internet Wealth Builder – August 5, 2014

Volume 19, Number 28

I N

T H I S

Issue #21428

I S S U E

August 5, 2014

CASH OR CANNED GOODS? By Gordon Pape, Editor and Publisher

Cash or canned goods?

Russian turmoil hits Europe

Gavin Graham’s updates: Home Capital Group, Copa Holdings, BMO Asian Growth and Income Fund, Templeton Frontier Markets Corporate Class A Units

Gordon Pape’s updates: AT&T, ArcelorMittal, Google, iShares Japan Fundamental Index ETF, iShares Gold Bullion ETF

Things weren’t any better in New York where the Dow fell almost 70 points on Friday after a plunge of more than 300 points the day before. It’s now in the red year-to-date by 0.5%.

Members’ Corner: Cash in Chou Funds

We won’t know for several days whether this was just a blip brought on by concerns that interest rates could rise sooner than expected because of stronger than predicted U.S. economic growth, or if the long climb of the markets has finally hit a wall.

B U I L D I N G The

W E A L T H

Internet Wealth Builder

All material in the Internet Wealth Builder is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers and distributors of the Internet Wealth Builder assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions.

Maybe the long-predicted stock market correction has finally begun – or maybe not. The TSX ended the week with two double-digit drops in a row, giving back 194 points on Thursday and another 115 on Friday. For the week, the index was off 240 points or 1.55% although it is still up 11.7% for the year.

At least one big financial firm, Goldman Sachs, believes that this could be the real thing. If not, it will hit soon. In a research report, the influential Wall Street company downgraded its short-term (three month) rating on stocks to neutral. The research team was also negative on bonds, which it said could be heading for a sell-off that would impact the stock market. "We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then," the Goldman Sachs team said. In reaction, RBC Capital Markets commented that the analysis means “cash and canned goods are the only compelling investment options”.

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Goldman Sachs still believes that stocks are the best place for money over the next 12 months “by a wide margin”, predicting a gain of 10.5% for the S&P 500. But the near-term outlook is for a return of just 1.8% between now and the end of October.

CAD

So what are we to do with this forecast? If we assume Goldman Sachs is right, the instinctive reaction would be to sell all stocks and bonds and sit in cash (canned goods are much less practical). But that would be both irrational and very expensive. All the sales would attract brokerage commissions, as would the repurchase later. Moreover, selling would trigger capital gains, creating a hefty tax burden for next year.

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My advice is to stick with your plan. Hold off on extensive new purchases for now but don’t sell unless there is a compelling reason to do so. Short-term in-and-out trading is fine for the professionals. For the rest of us, it’s impractical and costly.

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Can you really afford NOT to have life insurance? Written by Tahnya Kristina, CFP

he answer is no. Think about this…You love your family, right? You don’t want to leave them with the burden of debt in case of an unforeseen even, right? But how can you ensure that your family is not dealing with having to pay off debts while they are grieving in their time of loss? By having the proper amount of life insurance, of course. As a financial planner, my job is to make sure that clients have the savings and protection they need to be financially stable now and in the future; this includes saving for short term goals, investing for retirement and insuring credit debts. When I approve a mortgage application I always offer life insurance to clients so that their family and their home are protected in case of an unfortunate or untimely event. Although sadly, more often than not, clients don’t take life insurance on their most valuable asset because they feel that they can’t afford the extra cost. I say sadly because that statement couldn’t be farther from the truth. Your family inherits your debts along with your assets The truth is that people can’t afford not to have a life insurance policy to protect their assets and their family in case of an unfortunate event. Could you imagine losing your spouse or your parent and then also losing your home? For most of us that is an unimaginable nightmare that can be avoided with the right life insurance policy. I want to help clients fully understand the true value of life insurance as a financial product and as a form of protection for the future of their loved ones. The truth is that life insurance can fit into anyone’s budget and anyone with credit card debt, mortgage debt or other types of personal debt should have life insurance to pay off their debts, protect their assets and avoid leaving debt to their family. Shop around for life insurance and get three quotes

Justin Thouin is the President and CEO LowestRates.ca, he confirms that clients should shop around to find the best rates possible for the coverage they need when buying life insurance. Life insurance kind of has a reputation of being a non-flexible contract product and people hate the word contract. But with the right financial advice and good financial planning life insurance can be a truly great financial product. Many of my clients say that they don’t want life insurance because it’s a waste of money, but that is also not true. Life insurance protects us in case of an unfortunate event and we just never know when that is going to happen. Having the right amount of life insurance fits perfectly into your estate planning and it’s definitely worth the cost of the monthly premium, but having too much insurance can be an unnecessary cost. With the help of a licensed life insurance agent you can find the perfect amount of insurance to cover your estate needs. Life insurance is a part of your financial planning Thouin confirms that “All too often people spend more of their hard-earned money than they should because they do not have the time or knowledge to compare offers from multiple vendors before purchasing big ticket items” and this has to stop. If you would shop around and take the time to find the best credit card, why not do the same for your life insurance. Start where you are comfortable, go and see your financial advisor for a life insurance quote. You can also ask around and get a referral from a family, friend or co-worker. It’s a good idea to shop online and compare life insurance quotes in their local area. Be sure to get a quote for the same type of coverage to make sure you are comparing apples to oranges. And never, no matter how much you may feel pressured, don’t buy more life insurance than you need – because then it’s just a waste of money. www.tahnyakristina.com

MONEY® Magazine - Summer 2014 - pg. 13

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Congratulations. You are Retiring. Now What? Written by Anita Saulite

ost of us dream of the day when we will retire and often think about those days when we are having a bad day at work, dealing with deadlines and timelines. The thought of lounging on a beach or playing golf comes to mind, its personal freedom. But the reality is if you are like many Canadians today, the thought of retirement may be a far-fetched dream as you struggle to manage day to day life, family and finances. But for some, particularly baby boomers born in the 1950s and early 1960s – retirement is just around the corner. It may be one of the longest phases of your life and you may have a lot of pent up fear, anxiety and uncertainty about it. You want to transition with ease and spend this time of your life living a worry-free lifestyle. You may have created a retirement plan but have you really taken the time to think about what your life will really be like, and what you will be doing? At What Stage Are You Now? If you are like most people in their late fifties and early sixties, you are probably starting to wonder if you have saved enough to retire or if you will have to continue working. This is a big question and for many of us who have not saved enough money, this will be a reality. Our work life will be extended not because we want to; it is because we have to. For others, the thought of giving up your professional career is a daunting and scary concept. You have defined yourself by your career and now without it, what will you do for intellectual stimulus? For people in their late sixties, lifestyle is top of mind. But you can only play so many games of golf. People in their seventies and eighties tend to think more about creating a personal legacy. Most people I meet who have successfully transitioned to retirement have been planning this transition for a while and have figured out how they will be spending their time, where they will be living and the type of activities to engage in. They have been visualizing their retirement by getting themselves into the right mindset for what is ahead. Consider these 5 tips to help you plan your retirement and transition with ease. 1. Visualize how you want to spend your time. What do you like to do? What makes you happy? Do you have a hobby or activity you used to do in the past and wish to recapture, for example curling, painting or golf? Or will you continue to consult or start the small business you dreamed about in your working years? And how will this fit into your big picture?

2. Consider all the important people in your life. Do their needs and plans fit with your vision of the future? You may have new grandchildren who you want to see as often as you can but living half the year out of province, may make this more difficult. 3. Think about how your health may impact your big picture. Do you have health concerns that could affect what you will be doing in the future? This may impact what you do and where you live. Having access to good medical care will be paramount in your decision making. For example, retiring at the cottage may have been a dream of yours but have you considered the local health care support? It might not offer you what you need. Perhaps you’ll need a back-up plan. 4. Take stock of your current living arrangements. Most people want to grow old in their homes. It offers continuity and familiarity. Will your current home age with you or will you have to make some changes? Perhaps you’d prefer to retire in a different country or climate? What impact will this have on your health care or distance away from your family? 5. What is your time frame and financial situation? The most important consideration is timing or when. Will you be retiring at the same time as your partner and friends? If they will continue to work for several more years, how will that affect you? What are the financial considerations and funding needed for your aspirations and dreams. A retirement financial plan is the solution to help you pull it all together. All major financial institutions in Canada offer retirement planning financial services in addition to fee based financial planners. Although you can’t orchestrate everything in your life, planning to live a long life is smart. Starting the conversation today will lay the seed for future action planning. Given retirement could be one of the longest phases of your life, as you approach your late forties and fifties etc., you must embrace life planning strategies to ensure you transition with ease. By visualizing your future and creating your big picture, transitioning into the next 30 or even 40 years of your life will be easy, enjoyable and worry free. You’ve earned it. You deserve it! Anita Saulite is the author of (The Savvy Money Gal) savvymoneygal.com

MONEY® Magazine - Summer 2014 - pg. 15

How to surf the stock market waves

“Your surfing can get better on every turn, on every wave you catch. Learn to read the ocean better. A big part of my success has been wave knowledge.” – Kelly Slater, 11 time ASP World Tour Surfing Champion By Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.

his chart shows the annual percentage change of the S&P/TSX Composite Index from 1971 to 2013. It is more usual than not for these waves to be greater than 10% and they appear to be unpredictable which makes sense as human behaviour that causes the waves, I’d argue, is also unpredictable

of 50% – one that would get her the growth she needed to meet her retirement goals without subjecting her portfolio to significant portfolio fluctuations. As we had just experienced a tsunami, Janet learned to recognize this type of extraordinary wave and that this was a good time to be buying and be temporarily above her target.

A buy-and-hold strategy can result in your portfolio experiencing these waves as stocks will follow the movement of the market to a significant degree. So where you’re able to surf the stock market, even to a small degree, you can do better than buy-and-hold through time by lowering your portfolio volatility and adding to returns. The trouble is that surfing waves goes against our instincts. When the market is going up, your instincts tell you to buy more stocks and make more money. And when the market goes down, your instincts tell you to sell and protect what you’ve made. To make matters worse, our instincts are reinforced as the market news is generally positive when the market goes up and generally negative when the market drops.

Keeping to an equity target works when markets fluctuate. During bad times, it helps you to “buy low” and in good times helps you to “sell high”. So, if Janet’s equities drop in value, her equities as a percentage of her overall portfolio, typically drops. If equities now represent 40% of her portfolio, to stick to her equity target, Janet is guided to sell some bonds and top up her equities to her 50% target. In effect, when equities drop, Janet is “buying low”. Similarly, if Janet’s equities increase in value so they now represent 60% of her portfolio, she is guided to sell equities down to the 50% level. In effect, when equities rise, Janet is guided to “sell high”.

The rational decision for the stock market as a whole happens to be the exact opposite of what our gut tells us. The way I would think of this is that the stock market has a “fair value” (like a liquidating value) but people push the market price to values well above or well below this fair value. Through time, the market price should move back towards its fair value. When the stock market drops, it is actually becoming less risky. And when the market rises, it is getting riskier. Think of the stock market like buying clothes. When they are on sale, that’s the time to buy. Timing indicators to help us decide when to buy and sell tend not to be that accurate through time. So how can we successfully surf the market? How to Buy Low and Sell High When Janet (not her real name) became a client of ours five years ago, we spent considerable time working with her to determine and set an appropriate long-term equity target

The trouble with this strategy is that there are times when the market continues to go up or down. In the last five years, four years were up years and this strategy was encouraging Janet to sell. Although she could have made more money just buying and holding, she understood that she was reducing risk. Janet learned this valuable lesson through her market experience from 2003 to 2007 period where she was fully invested in stocks and got the clobbering of a lifetime in 2008 where her portfolio shrank to levels below her total portfolio deposits Summary Janet knows investing is not just about returns but also managing risk. She’s become a much better surfer respecting the waves (by considering the fair market value) and using the right equipment (sticking to an appropriate equity target) to navigate successfully over time. Data source: https://ca.finance.yahoo.com

MONEY® Magazine - Summer 2014 - pg. 16

RDSP – Registered Disability Savings Plans Written by Debbie Hartzman

o, just what is an RDSP? The concept of RDSPs was announced in the 2007 Federal Budget and the objective was to enable parents and others to save for the long-term financial security of a disabled individual through the use of tax incentives. Who can apply for an RDSP? The beneficiary of an RDSP must be eligible for the Disability Tax Credit (DTC). The requirements to qualify for this credit are quite strict and involve the beneficiary’s medical care team completing a T2201 – Application for Disability Tax Credit and submitting it to the Canada Revenue Agency for approval. In addition to the DTC the beneficiary must be under 60 years of age at the time the plan is started and have a social insurance number. If the beneficiary is 19 years and older and is considered legally competent, any required “income testing” can be based on their income rather than that of the parents. Contributions to an RDSP? Contributions to a plan can be made by anyone to whom the beneficiary gives permission until the beneficiary turns 59. The current Lifetime Contribution Limit is $200,000. The actual source of the funding is not material – life insurance proceeds can be paid into an RDSP. Contributions by the Federal Government. In a manner that is strikingly similar to the grants and bonds available as part of the Registered Education Savings Plan (RESP) program, the Federal Government will credit the RDSP with a grant, based on a formula, to increase to capital available for investment. For low-income parents, the Federal Government may also credit additional amounts through an RDSP bond. Determination on the amount of Federal grant provided to

a beneficiary is based on family income and the amount of private contributions made to the RDSP. For 2014, with family income of $87,907 or less, the maximum annual grant is $3,500. For those with family income that exceeds $87,907 the maximum annual grant is $1,000. The maximum lifetime federal grant amount is $70,000. Determination of the Federal bond is also based on family income. For 2014, a family with income of $25,584 or less, the maximum amount of the done is $1,000. If a family income is greater than $25,584 in 2014, the amount of the bond is proportionately less than $1,000. No Federal bond is contributed in cases where family income exceeds $43,953. The maximum lifetime federal bond amount is $20,000. So what is all the fuss about? Contributions are not tax deductible by the contributor – which is the same for RESPs – and when the contributions are paid to the beneficiary, they are not taxable. The benefit to an RDSP, the same as for the RESP, is the growing investment is not taxed each year. The growth of the account above the contributions (including the Federal grant and bond, is taxed only as received by the beneficiary. Generally speaking, people who qualify for RDSPs do not tend to have large taxable incomes so the sheltered growth pays of handsomely for them. RDSPs are available from most investment funds and some banks and credit unions. Qualified investments are also similar to RESPs. If you would like to learn more about this or how the account is administered please get in touch and I will be happy to explain things in more detail. Debbie Hartzman,CFP.CLU.CDFA.TEP • www.debbiehartzman.com

MONEY® Magazine - Summer 2014 - pg. 17

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The importance of Risk Profile Assessment Written by Ken Kivenko

isk is a controversial topic: it means different things to different people; it can be highly contextual; and it’s very difficult to quantify. The main factors that influence your risk profile include, but are not limited to; age, income, current savings, savings rate, time horizon, your emergency fund, general investment knowledge, your behavioural profile as well as your debt load. Borrowing to invest magnifies risk and potential returns. Generally, it is regarded as a high risk strategy unsuitable for most retail investors. Investment dealer risk profiling is often characterized by significant deficiencies: emphasis on risk tolerance but ignoring loss capacity, assessing the risk of individual transactions rather than the risk of the portfolio; failure to consider the three risk factors (tolerance, capacity and need) separately; inappropriate weightings being assigned to the risk factors; and inadequate or no reconciliation of disconnects apparent on the NAAF/KYC. Such issues can include high risk tolerance vs. low capacity for loss. A number of investor advocacy groups, led by FAIR Canada (www.faircanda.ca), have been lobbying securities regulators for needed risk profiling reforms. In theory, a high-potential, high-volatility portfolio should generate better returns over time, but it has to match up with your psychological makeup. Sometimes, investment dealers develop scripted programs with all the required exercises but fail to take into account your time, will-power and investment history. That is why volatility of returns along the investing path plays a big role in determining outcomes. For example, it has been observed that investors owning a slightly pricier balanced mutual fund, rather than separate equity and bond funds, obtain better long-term results. When you complete a New Account Application Form (NAAF) you are asked to state your risk tolerance. Currently, there are widely varying practices for assessing risk tolerance. Some simply perform vague and highly subjective evaluations based solely on the advisor’s “impressions” after a short discussion. Others rely on “scores” derived from answers to questionnaires that assign numerical values to the responses and track the resulting tallies to asset allocation tables or model portfolios. If this assessment is incorrect, you may find your advisor makes recommendations that are not suitable for you. The number one cause of complaints is unsuitable investments and in many cases, the cause is a defective risk assessment. Another less obvious cause is the lack of goal(s) for your savings. Without timelined defined goals, assessing the appropriate level of risk is virtually impossible and often meaningless.

If you incur losses and file a complaint, whatever risk tolerance you ticked off on the NAAF/KYC form, will be considered when assessing your concerns. Clearly, risk-tolerance assessment is a critical part of the Know-Your-Client/suitability process, yet there are no industry standards in place for how a risktolerance assessment is to be conducted and documented. The scoring can be inaccurate due to inappropriate weighting of the risk factors. Moreover, there may be no analytical basis for concluding that the questionnaire’s design will extract valid information about your true willingness, capacity and need to take investment risks. It is possible that some questionnaires may have a built in bias towards riskier (and more expensive) investment products. Defining your personal risk profiling will allow you to build a portfolio that is the most suited to helping you reach your goals. Effective risk profiling can also help prevent you from panic selling during inevitable market corrections or chasing returns during a market boom and as such, it should be done carefully. Determining portfolio asset allocation targets is one of the most important determinants of portfolio return. But risk tolerance is just one dimension. A complete risk profile should include more than just an evaluation of how much risk you prefer to take (risk tolerance). It also must assess how much risk you can afford to take (loss or risk capacity) and how much risk is necessary to achieve your investment goals. A rational decision would involve taking only as much risk as is necessary to meet financial goals. Your advisor needs to identify any disconnects between these three measures and help you make trade-off decisions to tailor the appropriate asset allocation and risk level to apply to your portfolio. A disconnect may indicate that your investment objectives are unrealistic. In such cases the goals need to be revised, the savings rate increased, retirement deferred and/ or the risk and potential adverse consequences consciously accepted. While risk profiling is neither easy nor exact, it needs to be done. Just testing out some of the many questionnaires available on the internet can be very helpful in raising your consciousness and knowledge concerning risks. Here’s a good one to try: http://www.riskprofiling.com/WWW_RISKP/media/ RiskProfiling/Downloads/Questionnaire_CANEN.pdf. Also read this paper on investor risk profiling from Vanguard. It will open your eyes and make you a better, more confident investor. https://www.vanguard.co.uk/documents/adv/literature/ investor-risk-profiling.pdf

MONEY® Magazine - Summer 2014 - pg. 19

RRSPs and TFSAs - Some Considerations When Deciding Between the Two Accounts Written by Camillo Lento

ou may be confronted with a difficult decision if you do not have enough funds to maximize contributions to both your RRSP and TFSA. In this situation, you will have to decide where to place your money – RRSP or TFSA. The purpose of this article is to explore important considerations when making this decision.

Table 2 reveals that the RRSP is superior to the TFSA when an individual’s tax rate at the time of withdrawal is lower than at the time of contribution. However, the RRSP is inferior to the TFSA when the tax rate at the time of withdrawal is higher than at the time of contribution. In my opinion, this is the most important factor when deciding between an RRSP and TFSA.

Does the Decision Matter?

An Important Consideration when Forecasting your Future Tax Rate

RRSPs and TFSAs can lead to the same outcome under certain conditions. At the most general level, an RRSP and TFSA are equivalent when an individual’s marginal tax rate is the same at the time of contribution and withdrawal from the RRSP. Consider the following example: Jonas earned $1,000 in taxable employment income, and has a marginal tax rate of 25%. Jonas can either contribute $1,000 into the RRSP or $750 into a TFSA. Table 1 presents the retirement savings after 25 years assuming a 5% return and a marginal tax of 25% at the time of withdrawal. Table 1 – A General RRSP vs TFSA Analysis RRSP TFSA Contribution 1,000 750 Return 2,386 1,790 Funds after 25 years 3,386 2,540 Taxes on Withdrawal -847 0 After-tax retirement funds 2,540 2,540 This simple example reveals that the RRSP and TFSA can lead to the identical outcomes under certain conditions. Does the Decision Really Not Matter? Like many decisions, the devil can be found in the details. So, what are some of the details that must be considered when moving from the simple example in Table 1 to more complex situations? The first factor to consider is your tax rate at the time of withdrawal. It is very difficult, if not impossible, to predict a tax rate 25 years from now. At best, an educated guest can be made. So, what happens when the tax rate at the time of contribution and withdrawal differ? Table 2 presents the results. Table 2 – RRSP vs. TFSA with Differing Tax Rates Contribution Return Funds after 25 years Taxes on Withdrawal After-tax retirement funds

RRSP (35% Tax)

1,000 2,386 3,386 -1,185 2,201

RRSP (15% Tax)

1,000 2,386 3,386 -508 2,878

It is a common belief that your marginal tax rate during retirement is lower than during your employment years. On the surface, this makes sense as an individual will be earning their highest level of employment income during their working years and relying on pension income in their retirement years. Accordingly, it makes sense to assume that an RRSP will outperform a TFSA since marginal tax rates in retirement years should be minimal. Again, the devil is in the details! Withdrawals from an RRSP, unlike a TFSA, are treated as income on your tax return. Therefore, the RRSP withdrawals in retirement will increase your reported income resulting in potential claw-backs of three key retirement benefits: 1) the Guaranteed Income Supplement; 2) the age tax credit; and 3) Old Age Security benefits. If you consider these claw-backs as part of the marginal tax rate from an RRSP withdrawal, it becomes evident that tax rates during retirement years are not as low as many are led to believe. Table 3 presents the marginal tax rates during retirement before and after considering the impact of claw-backs. These show that your average tax rate before and after considering the claw-backs are 29.6% and 44.35%, respectively. Therefore, you need to carefully consider how RRSP withdrawals will impact claw-backs as the true marginal tax rates could be higher than 50% during retirement years. Tax Rate Source: TaxTips.ca Table compiled by author Some other Considerations There are some other considerations that are important to the RRSP versus TFSA decision. Another consideration arises if you are planning to invest in US equities. RRSPs allow for an exemption of US withholding tax, while the TFSA does not. A second consideration is that the TFSA is more flexible in regards to withdrawals and re-contributions during preretirement years. Overall, the decision requires some analysis of your personal situation.

MONEY® Magazine - Summer 2014 - pg. 20

Sharing the burden of online credit card fraud By Terry Cutler

etailers hoping to reduce face-to-face based transactions and increase online sales using credit card numbers are facing two problems. The first is how to duplicate the online trust often envisioned between client and employee at the checkout counter, and the second, equally a difficult task and rapidly emerging as a top priority security concern, is to ensure Fort Knox proof protection of client credit card data. Card not present fraud (CNP) is costly to retailers storing your data, but could have devastating consequences for you. The recent news over major CNP security breaches has left more doubt in an already fickle consumer mind. What’s not to be fickle about? In late 2013, the giant American retailer Target, which operates 1,784 stores in the U.S., and 124 stores and expanding in Canada, reported in November of 2013 that it had suffered a malware-installed attack at its point of sale system. The concealed and vicious malware grabbed credit card data, including PINs, of 70 million of its U.S. customers, according to reports. This number was pushed to 100 million by early January 2014, which included Canadian customers. From Target’s point of view, the news had immediate consequences. Target reported its stock dipped 1.7 per cent in U.S. trading. The retailer predicted that with the widely publicized breach sales would be down from two to six percent in the fourth quarter of 2013 compared to a year earlier and would be at least 2.5 percent lower than previously forecast. This projection, according to the company, was directly related to consumers traditionally slow to forgive the data breach. Not that Target was the only mega-retailer affected. Dallasbased Neiman Marcus, a luxury specialty department store, also suffered a malware-installed attack at its point of sale system reporting that 1.1 million customers may have had their information compromised during the November Black Friday hack.

So, just how large is this problem? The global price tag of consumer cybercrime is now topping US$113 billion annually according to a large-scale 2013 report commissioned by Symantec. The cost per cybercrime victim has shot up to $298, a whopping 50 percent increase over 2012. The number of victims of these crimes is 378 million per year, or an average of 1 million plus per day, or a stunning 12 victims per second. In Canada, incidents of credit card crime continue to climb. In 2011, fraudsters towed in $436.6 million from Canadian credit card accounts, up more than 19 percent from a year earlier. Dispelling a myth The likelihood of someone intercepting card numbers during an online sales transaction is extremely small. Most companies that sell online use a reliable secure communication channels (SSL) when sensitive data is transmitted between the consumer and the web site. The greatest risk, as we discussed, is theft of credit card data and information – your information - from storage points on a company’s website. Why this is happening is simple. These breaches occur when company sites employ weak security measures that in the hands of experienced hackers, is easy to penetrate. Once in, they can be lurking and hiding in the system for years looking for holes until one morning a company CEO wakes up to the dreaded phone call that the network has been breached. What organizations can do? Organizations need to take a holistic approach. This means data and identity protection and in the event of a breach, disaster recovery. One step is to hold true to the Payment Card Industry (PCI) compliance standards. Most card companies demand that retailers pass rigid security audits before they can utilize their cards at point-of-sale. I say, “hold true” because companies who have been hacked often point out they were in compliance. Along with Target and Neiman Marcus, Hannaford Brothers WorldPay and Heartland Payment Systems made

MONEY® Magazine - Summer 2014 - pg. 21

the grade, but were hacked months later. While PCI sets the standard, it isn’t a panacea nor does it guarantee network security. Security begins behind the desk. Employees need to be educated on what to look for when dealing with networks. Social engineering scams, fake emails, downloading pirated software and non-stop clicking through pop-up windows, may all seem harmless, but a network breach could be one click away. Once a fraudster is in the network he will let loose but conceal malware that will weave its way through the network finding holes and then, one day, the phone call comes. Budgets The top priority remains, as it was in the past, adequate allocation of company budgets to data protection. CEOs traditionally are not willing to budget accordingly when it comes to data protection. They either do not believe the threat is real or they think their systems cannot be penetrated. But the numbers tell a different story. The cost of the average data breach per lost record is $136 according to a 2013 Global Data Breach report by Symantec Corp. and the Ponemon Institute. With the average number of records lost per breach reported at $23,647, the average cost of each breach crests over $3.2 million, more than just an annoying dent in small and medium size companies. The problems continue. The damage to brand reputation can sink a company if disaster recovery isn’t immediate, an ad-hoc reaction that could costs millions. What can you do? If the retail industry is pushing data protection, the frontline begins with the individual. We all must be vigilant and take measures to protect our data. One way, of course, is to never shop online, but we know perfectly well that not everyone will do this. Like it or not, a company breach or an individual’s breach amounts to the same measure – your data is out there. Geolocation by IP Address In fact, consumers are already ahead thanks to Geolocation. Your credit card company is on the lookout for any suspicious activity that does not reflect your spending habits. Geolocating is, in fact, fairly straight forward. Using digital information (PINs and so on) to locate a user, whether it is you or a fraudster holding your card information, pin-pointing with accuracy where the stolen number is being used can be quickly traced. Simply, when you use one of their cards – debit or credit – a text alert will be sent to you within minutes, assuming you have a cellular. If you as rightful owner were the one using the card, then you won’t reply. But if you get an alert when you didn’t authorize usage, the text has a toll free number to contact and file a report. For some banks, an investigation is launched, but more importantly for the client there will be no responsibility for the unauthorized debt. And it works. Richard Tardif, a journalist who lives in Montreal, Quebec woke up to a text from his bank at two in the morning. A year ago his card provider sent

a text indicating that a $1,550 purchase had been made at a bookstore in Los Angeles, California. “When I called the toll free number the company blocked my card and didn’t hold me responsible for the charges,” the 54-year-old said. He doesn’t know how this happened given that his bank has a sound security policy, but he says it has made him aware of how and when he uses his cards. Free or anonymous e-mail address Hotmail, one of the best well-known free email services, was born on July 4, 1996 and attracted 1 million users in its first year and today boasts it has over 1 billion inboxes, but like others to follow, these freebies are gold for fraudsters. What does this mean for criminals? Free email services are virtually untraceable. You will find there is a higher incidence of fraud or scams coming from free email services than from paid service providers. A business selling a product will use their domain names and would not use a free email address. Meanwhile, we still must remain on the lookout, because not all domain names are legitimate. This is because fraudsters can register a new domain easily using the stolen credit card information masquerading as an enterprise. And the password is… One password was decoded in seconds. Another was decoded in minutes. A third was decoded ten seconds after. That’s all it took for me to crack some user passwords. It was easy. Birthdates. Family names. Phone numbers. Getting to know your password is an obsession with hackers. It’s the first step to identity theft, and like with retailer networks, once in on your personal network, your identity is in jeopardy. This is the first gateway to identity theft - a trend that security experts across the board are saying is on the rise. The Canadian Anti-Fraud Centre received more than 25,000 calls in 2012 reporting identity theft, phishing and employment scams. In 2013, the Centre reported 6,275 complaints about ID fraud. The losses added up $11.1 million. Here is a quick guideline to strong password creation. Pick a phrase you will remember. Pick all the first or last letters from each word or substitute some letters with numbers and symbols. Apply capitals to some letters and or add punctuation. Here’s an example Ih@d@gr8d@yt0d@y2014! (I had a great day today 2014!) A fish that is more than a Phish Phishing refers to scams that attempt to trick unsuspecting users into revealing personal information using fake Internet sites and email messages that appear legitimate in an attempt to gain PIN numbers and passwords. These fraudsters are looking to hook you in by coaxing you into clicking a link. They also may leverage social networking sites - a farming gold mine of personal information sharing that people, mostly because we are trusting by nature, continue to send aimlessly into the digital world. If it looks like a phish???? Watch the accompanying ‘Credit Card Fraud and Security’ related video at MONEY.CA online.

MONEY® Magazine - Summer 2014 - pg. 22

A Travel Insurance Primer Written by James Dean, Publisher

hat is travel insurance? To begin we first need to consider the definition of travel. From the beginning of time, people have moved and have been moved to travel. In earlier times, local travel was the most prevalent while today we have the fast and the furious jet-set travel that makes far, distant and romantic places seem so close. Travel in itself is many things to many people and it has many influences that cause people to yearn to change, move and explore. People who love to travel or wander are commonly known as having caught the travel bug. For whatever reasons people choose to travel near or far, they will do so continuously, some in style and many more on strict budgets and short periods. What kind of traveler are you? This is a tough question; almost like asking: “what kind of camper are you?” Business traveler or pleasure seeker; there is something for everyone from simple, close and safe to far, exotic and downright dangerous. What you want and expect maybe completely different from reality so being ready for adversity in travel will make you become a happy camper and well traveled. On many occasions I have said “take care and bon voyage”; often really meaning “safe travels”. We have the best intentions and great expectations in traveling and getting ready and prepared to travel is serious business. Starting with your plan, agenda, itinerary, identification and maps to enjoy your vacation, voyage and adventure. Then there are so many trips; just to the corner or half way around the world that end up in terrible disappointment or disaster. The perils of travel are many and the horror stories will not stop the yen to travel. Only a better checklist and a superior contingency plan can help ensure your personal enjoyment and safe passage. Carefully discover and research some important insurance needs online, with your insurance advisor or travel professional. When it comes to travel it is better to be safe than sorry, and when it comes to all types of insurance, you get what you pay for. There is a wide array of travel insurance available and there is more specific travel insurance available beyond that which your life, auto or company employee policy provides. Knowledge is power and knowing what is and is not covered can save money, time or sometimes lives.

It is a reported fact that nearly 75% of Canadians do not feel truly satisfied or refreshed after their vacation. Relax only after you have taken care of both you and your family. Consider if you really need to invest in or investigate any of the following types of travel related insurances. Remember that your Provincial or Territorial Medical Services Plan covers you for many things while travelling within Canada – but not everything. Our national Medicare system does not cover all or even most out-of-province and out of country insurance and medical services. There are many things to consider en voyage. Some items to consider and one or two things about which you need to be warned are noted here. Consider:

• • • • • • • • • • •

Money Exchange rates Language Politics – travel warnings and advisories Civil unrest or war zones Local weather and weather predictions Local customs CIA World Fact references – https://www.cia.gov/ library/publications/the-world-factbook/ Embassy Locations Illness pandemics or epidemics Available medical care and quality of care

Here is a checklist of some types of travel insurance you may require:

• • • • • • • • • •

ADD – Accidental Death and Dismemberment Travel and Trip Cancellation Insurance Flight Insurance Baggage Insurance Medical Insurance Life Insurance Guaranteed Reservation Coverage Car Rental Insurance Emergency or Alternate flight arrangements. Snowbird Insurance

Always consult your trusted insurance professional and or a well-trained travel agent for more information. Safe Travels!

MONEY® Magazine - Summer 2014 - pg. 23

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Lessons learned by property owners in the 2013 Alberta Floods Written by Riaz Mamdani

n June of 2013, Alberta experienced some of the worst flooding in the province’s history. Affected areas were extensive and included regions along the Bow, Elbow, Highwood, Red Deer, Sheep, Little Bow, and South Saskatchewan rivers. In Calgary, the flooding caused the evacuation of over 75,000 residents. This ranks as the largest evacuation order in the city’s history. The Insurance Bureau of Canada called Alberta’s 2013 flooding “the costliest natural disaster in Canadian history,” with property damage in Calgary exceeding $1.7 billion, with another $500 million in lost economic output. These statistics are ominous however, in a disaster of this scale, we need to examine the personal and economic lessons that can be gleaned from an event of this magnitude. The personal lesson for many Albertans was the demonstration of mankind’s altruistic traits. There have been many incredible and inspiring stories of thousands of people actively aiding friends, family, neighbours and even strangers. The impact has reinforced our community values and has further emphasized what it means to be a caring Albertan.

The economic lessons from this once in 100 year event also need to be noted. As the CEO of a large Calgary-based commercial real estate company, I was acutely aware of the dangers the flooding posed to property in the affected areas. While I was relieved that property damage was not even greater, I recognize that the damage could have been much worse. This more significant economic impact needs to be considered and hopefully prevented in the case of a future disaster. Every business must develop a business continuity plan that provides redundant infrastructure for all critical functions. Disaster planning manuals must be created for every significant business addressing matters like employee safety and communication, IT infrastructure, accounting records, banking contacts, asset lists and fan-out strategies. Owners of commercial real estate must implement flood-proofing measures and ensure that building operations systems are moved from lower parkade levels to a higher and dryer building elevation. This will take investment and commitment by landlords. I am confident that the benefits of this investment, while hopefully never utilized, will provide security in the case that Mother Nature thinks differently.

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W W W .MONEY® R UMagazine T H- Summer S C2014 H- pg.R25I S . C A

To Be or Not to Be – (or which is better, pay-off the mortgage or buy an RRSP?) Written by Ian Whiting

ee and Daphne are asking this very question – which is better for them? They are aware of the huge interest cost on their mortgage but also would like to be able to retire in their late 50s or early 60s. Can they do both at the same time or must they choose? Through diligent saving before they purchased their condo, their mortgage is only $150,000. They are able to afford higherthan-normal payments so decided on a 20 year term at a fixed rate of 5.0%. Over 20 years, they will pay about $87,000 in interest, assuming rates don’t change of course. If they decide to make a principal payment of $6,000 on each mortgage anniversary, they would pay it off in 11 years and reduce their interest cost to about $46,000. In theory, they would then begin contributing that same $6,000 to their RRSPs after the mortgage was paid. But is this the best option? They are both 30 and by waiting until age 41 to start their RRSP contributions, and assuming they are able to obtain a consistent 7.0% rate of return each and every year up to age 60, they would accumulate about $230,000. Really a very modest amount. At current rates that could pay them a lifetime income of about $1,300 per month. Even including OAS and CPP at current maximum rates, and applying the effects of inflation for 30 years up to retirement and beyond, this is not going to be much of a lifestyle. So let’s examine this more closely. To pay down their mortgage by $6,000 annually, this young couple has to earn just over $9,100 before taxes (BC rates are used for 2013). If they made $9,100 annual deposits to RRSPs after the mortgage is paid, and using the same 7.0% interest assumption, they could have nearly $350,000 at age 60 – which could mean a monthly income of about $2,000, again based on current rates. Better – but not by very much. So, by doing some reverse math, if they agree to pay off the mortgage in 15 years and starting with $9,100 of pre-tax earnings, they could deposit $6,800 into their RRSPs every year starting now. The estimated tax savings (in BC at 2013 rates) would be about $2,300. This $2,300 is then used as the

annual prepayment on their mortgage. The mortgage would then be paid in full after 15 years with interest paid now being about $64,000. By putting $6,800 per year into RRSPs now and increasing it to $9,100 when the mortgage is done, they would accumulate nearly $710,000 at age 60! At current rates, this would provide a lifetime income of nearly $4,100 per month! To summarize, their choices come down to 3: a) Eliminate the mortgage in 11 years by making $6,000 annual principal payments then put the $6,000 into RRSPs each year until age 60. This reduces total mortgage interest to $46,000 and has an estimated total RRSP savings of $230,000 and an income of about $1,300 per month at age 60. b) Pay off the mortgage in 11 years and then start RRSP deposits of $9,100 each year until age 60. The mortgage interest still totals $46,000 but their RRSP totals $350,000 and a potential lifetime income of $2,000 per month. Better than the first choice, but they can still do better. c) Finally, they could decide to clear the mortgage in 15 years by contributing $6,800 to RRSPs each year and applying the tax savings of $2,300 to the mortgage principal. When the mortgage is gone, they then increase their RRSP deposits to $9,100 per year. Mortgage interest will total about $64,000, but their RRSPs can grow to $710,000 and generate about $4,100 per month. Time to think things through – Lee and Daphne decided that choice c) gives them the best of both worlds. While option c) does result in higher interest paid on the mortgage and extends the payment period from 11 to 15 years, there is a very significant difference in both their RRSP savings and potential lifetime income. This does require they pay about $18,000 more in interest but their RRSP total more than TRIPLES – increasing by $480,000 and their retirement income goes from $1,300 per month to $4,000 per month. Doesn’t it make sense to do this same series of calculations on your mortgage? Happy crunching!

MONEY® Magazine - Summer 2014 - pg. 26

Too Soon To Retire? Consider A Sabbatical! Written by Cynthia Kett

’ve just returned from a wonderful rock climbing trip to Maple Canyon, Utah; I wish I could’ve stayed longer. Perhaps you’re having similar thoughts after your summer vacation. Is it too soon for you to contemplate retirement? Maybe a sabbatical is in order. What are some considerations? Are sabbaticals accepted and common in your field of work or would this be an exception? If the former, employees can financially prepare for a sabbatical 5 years from now (with the employer’s permission) by having their salary reduced to 80% of their regular pay (“banking” 20% of their salary for 4 years), so that their salary might continue at that same level during the year of their sabbatical. This type of “salary deferral arrangement” is permitted under Reg. 6801 of the Income Tax Act. Many public sector employers offer sabbaticals to their employees, especially in the education fields. If sabbaticals aren’t common in your field, consider an extended vacation instead. Maybe a month is manageable. Alternatively, would it be easy to find another job if your employer couldn’t hold your position until your return? Ask whether they’d be willing to provide you with a strong letter of reference for future use. Could you be eligible for a comparable position with your employer if one were available upon your return? If you have a good relationship with your employer, speak with them as far in advance as possible. Outline your proposal for how it might work for both of you and see if your employer would be willing to cooperate. They may suggest some other possibilities.

What should you do with your current home if you decide to travel extensively? Many individuals consider “residence swaps” and have had success doing so. Renting out your place (or subletting, if permitted) may be an option. Home insurance policies usually require that your residence not be left vacant for any length of time (check policy terms). Therefore, if you don’t rent or sublet your place, make sure that someone checks it on a regular basis. If you’re going to rent to someone you don’t know, you’ll have to take prudent precautions: request a damage deposit, check references, etc. Some world travelers simply sell their homes or terminate their lease/rental agreements. It’s best to consider all options before making a decision. What details must you take care of before you leave? Develop a checklist. It should include: travel visas, vaccinations, travel insurance, names and addresses of Canadian consulates, currency exchange, credit card notification, redirection of mail, vacation stops for subscriptions, etc. Take photocopies of all important travel documents. Keep one copy secured with you while your travel. Leave one copy with your emergency contact at home. Make a list of all the things that you’ll need to pack. Divide the list into “must haves” and “nice to haves”. Most people pack more than they need. Remember that airlines limit the amount of checked baggage, plus you may have to carry your own luggage from place to place. Less can be more. Remember, planning for a trip, especially an extended one, can be almost as fun as the trip itself. A sabbatical may be the pre-retirement break that you need!

MONEY® Magazine - Summer 2014 - pg. 27

What Boomers Want - But Aren’t Getting From Many Financial Advisors

Written by Richard (Rick) Atkinson, MBA

ension plans, RRSP’s, estate plans and IPP’s are one side of retirement. These topics are common, but what about a retiree’s need of purpose and building a new social network? Today’s boomer is facing imminent retirement and looking for direction, advice and guidance on how to properly prepare for life after work and all its opportunities and challenges. Unfortunately, many financial advisors (and Human Resources practitioners) are not stepping up to assist their boomer clients (and employees). Margaret is a senior manager. She always told her friends she didn’t plan to retire but at the age of 64, Margaret lost her job due to a company downsizing. After 6 months of job-hunting Margaret concluded she was retired. What does she do as a retired person? What will make her happy? Without a job to go to, will her health suffer? She has enough money to retire but mentally is not ready for it. Where does she start now that her colleagues are no longer part of her social circle? When she raised several of her concerns with her financial advisor, she received a blank stare and the retort, “Let’s talk about your RRSP.” Research shows over 80 per cent of today’s boomers do not have any sort of retirement coach or mentor and many are looking to their financial advisor to provide leadership in that area. The financial advisor who will succeed will be the one who serves his or her clients on more than asset accumulation, allocation and wealth transfer. Besides money issues, they will assist clients with answers and information on importance topics including: how to build a balanced health and leisure strategy; the importance of a positive attitude; the best time of year to retire; and how to create a happy and productive retirement, to name a few. Though most clients are not expecting their advisor to be a retirement guru, they often want an awareness of all the issues surrounding retirement. Having a team that meets the needs of today’s clients is an expected competency. As clients shift to being more holistic in their retirement thinking, advisors need to shift and be prepared to meet the demands. Take James, a successful financial advisor, as an example. Every few months he invites his clients and prospective clients to attend a retirement planning workshop facilitated by me.

During the event, the attendees are encouraged to explore their holistic retirement concerns. Through lecturettes, workbook exercises, case studies and small group discussion, the topics of purpose, legacy, attitude, health and wellbeing, relationships and others are examined and action plans created. Not only does James provide the workshop experience, he holds ‘client appreciation’ events where clients can ask in-depth questions of me and other specialists (i.e. estate planner, lawyer, family services provider, etc.) The clients share experiences and, most importantly, get insights into retirement and additional strategies for success. James provides books and articles to his clients and encourages them to share their views and opinions on the material provided. At each and every individual client meeting, James asks about the steps the client is taking to build his/her rewarding retirement and offers his observations and experience. When he doesn’t have an answer to a concern, he researches the subject including contacting experts in the field. James plays the role of coach and mentor giving assurance he cares and is prepared to help ensure his clients are successful. What does James get out of this? His clients greatly appreciate his caring and willingness to meet their needs. Prospective clients view James as a ‘different kind of advisor’ who goes well-beyond product selling. The result, clients are reluctant to find another advisor and prospective clients become clients. The added value of providing holistic retirement planning guidance to clients can be monumental and it doesn’t cost a lot of money. Those financial advisors who assist clients in building a successful and stimulating retirement reap great dividends. Happy clients are likely to live longer and enjoy greater social circles. Word of mouth is a powerful thing. Recently, a client said to me about her advisor; “I’ve been asked several times to move my accounts to a different advisor and firm but I won’t. My financial advisor understands what I’m going through as I prepare for my life after work. She’s shared with me insightful books and articles she’s read and mentors me on my holistic retirement planning. It’s because of our relationship that I’m staying put. You can’t get me out of here with dynamite!” Now that’s what we all want to hear!

MONEY® Magazine - Summer 2014 - pg. 28

MONEY® MAGAZINE

MEDIA RELEASE 7th Annual Canadian Hedge Fund Awards and Conference. Register Today! Where: Grand Banking Hall, One King West Hotel, Toronto, ON When: Tuesday, October 21, 2014 2:00 PM The 7th Annual Canadian Hedge Fund Awards will be held on October 21, 2014. We invite you to join us to celebrate with the winners of this year’s awards. New for 2014: the Awards presentation will follow a half-day, high level, hedge fund conference. This year’s theme is Dispelling the Myths: • 2:00 - Registration • 2:30 - Keynote Address: TBA • 2:50 - Panel One: Investors’ Views on Alternatives Moderator: TBD Panel Participants: • Davee Gunn, Principal, Prime Quadrant • Audrey Robinson, Chief Investment Officer, Waterstreet Family Offices • Mark Purdy, Managing Director & CIO, Arrow Capital Management Inc. • Gary Ostoich, President, Spartan Fund Management inc. (and President, AIMA Canada) • Jeff Banfield, JMO Research • 4:00 - Networking Break • 4:20 - Panel Two: Correcting Risk/Reward Misconceptions Moderator: TBD Panel Participants: • Colin Stewart, CEO & Portfolio Manager, J C Clark Ltd. • Richard Pilosof, Managing Partner, CEO & Head of Risk, RPIA • Blair Levinsky, Co-Founder & Portfolio Manager, Waratah Advisors • David Picton, President and Portfolio Manager, Picton Mahoney Asset Management • 5:30 - Cocktail Reception • 6:30 - 8:00 - Awards Ceremony: 7th Annual Canadian Hedge Fund Awards

And the winner is... The categories have been revised for 2014, and are as follows: • Equity Focused • Market Neutral • Credit Focused Multi-Strategy/Managed Futures/Global-Macro. Based on performance to June 30th, the 2014 Canadian Hedge Fund Awards measurements for each category will be: • 1 year best return for each category • 5 year best average, annual compound return • 5 year best Sharpe Ratio NEW for 2014: “Canada’s BEST Hedge Fund” Best 10 year return AND Best 10 year SharpeRatio To be considered for an award, funds must be domiciled in Canada. Based on nominations from participating Canadian Hedge Fund managers, the following industry awards will also be presented: • Best Canadian Hedge Fund Administrator • Best Offshore Hedge Fund Administrator • Best Canadian Prime Broker • Best Canadian Law Firm • Best Canadian Accounting Firm A portion of the proceeds from this event is going to:

Buy Tickets http://alternativeiq.com/event/7thannual-canadian-hedge-fund-awards/

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What to Expect from Your Financial Advisor The Top 10 Things You Should expect from yours! Jim Ruta BA RHU EPC, Financial Industry Consultant

oday, everyone’s a professional. There are no mechanics anymore. They’re all “automotive technicians”. Car salesmen are “Sales and Leasing Consultants”. And not to be out done, most life insurance agents have become “financial planners or financial advisors”. It can be confusing even to people in the business. What chance do you have? You’ll have a better chance of knowing if you’re working with

a professional financial advisor if you know what you should expect from them. Because I’ve been an industry insider for more than 35 years and coach to many of the best, I’ll let you in on what the very best do. Then, compare and see for yourself where your advisor stands. Here’s how to recognize the best professional financial advisors. The best advisors check all the boxes. These advisors are:

1. 2. 3. 4.

1. Focused and specialized: Top advisors don’t try to be too much. They are not usually Jacks-of-all-trades. They are masters of something specific about which they are passionate. This specialization means you get the best possible advice. Specialized advice is important to the degree that expertise is required. The more complicated your financial situation, the more important expertise is for you. Check credentials and experience. 2. Plain language communicators: Regardless of the complexity of their service, the best advisors know their field so well that they communicate advice in plain, coffee shop language. If you need a dictionary or (even worse) a thesaurus to understand them, you may have someone trying to impress themselves more than they are trying to help you. If you don’t understand your advisors, let them know. 3. Curious about you: Once you start work, the best advisors ask questions to ensure they put the right amount and kind of products and services to work for you. Prescription without diagnosis is malpractice. It’s true for your health care provider and your financial advisor too. Welcome and expect questions. 4. Easy to deal with: Professional advisors take into account your circumstances when deciding where to meet and how to work. Sometimes their office is easy and best for a meeting. Sometimes your home turf is better. The best advisors ensure you fully understand what they do, how they do it and what you have to do to make it work. They explain things. They write them down. They help you get best value. If you work too hard for your advice, your advisor isn’t working hard enough for you.

5. 6. 7. 8. 9. 10.

5. Likeable: It sounds simple, but this is critical. It doesn’t matter how talented your advisor is if you don’t get along. This is true of advisors of any kind. If you don’t like each other, the relationship will be strained and advice and information won’t flow back and forth properly. That means a mediocre professional relationship at best and poor results. If you don’t like your advisor, find another. 6. Familiar with people like you: When your advisor specializes in people with similar life, business and family backgrounds to yours, they bring a wealth of useful experience to your relationship. That experience means they can share a lot of advice about what’s worked elsewhere. That experience pays dividends. Look for it. 7. Part of a team: The Mayo brothers of the Mayo Clinic, invented the team approach to medicine over 100 years ago. The best advisors do the same today. They work with other specialized advisors like lawyers, accountants, bankers and other financial specialists to bring you the best advice. When they do, you win. Look for a team. 8. Organized: Professional advisors have a written process for most of what they do like – setting up your relationship in writing at the beginning (engagement), questionnaires to keep them on point when asking questions, interview guides, meeting agendas, annual portfolio and policy review questionnaires. They have good web sites and social media presence. If your advisor is “winging it”, you may be at risk. Be careful. 9. Regularly in contact with you: Top advisors stay in touch. You get newsletters, holiday cards, birthday cards, phone calls, annual reviews and regular visits. Relationships that are not fed, die. Good advisors want you to know they are always there for you and your questions. If you haven’t heard from yours often enough, look for another. 10. Recommended: Professional advisors prove they do good work by the recommendations and testimonials they use to attract business. And, if you can’t refer and recommend your advisor to friends and family or if you didn’t start that way either, you may need another advisor. Use and give recommendations.

Ultimately, the best, most professional advisors are those who build a strong personal relationship with you. They help you do for yourself what you likely wouldn’t have done on your own but needed to do. They bring you the advice you need to make the decisions you have to make to get the financial results you want.

So, check your progress and peace of mind. If you’re short on either, you may need another advisor. But, if your advisor has checked all ten boxes…congratulations! You are working with a Pro.

MONEY® Magazine - Summer 2014 - pg. 30

When the Banks says NO. What are the Alternative sources of Financing for your Business. Written by Mark Borkowski

N THE BUSINESS OF INVESTMENT BANKING, WE ARE exposed to all kinds of difficult situations that business owners can face. Sometimes our client’s need for financing is driven by an unexpected business or sector slowdown, other times it is for acquisition or growth purposes. But more often than you might think a need for capital will arise as a result of a breakdown of existing credit facilities through no real fault of the borrower. I spoke to one of my colleagues in the Financing arena and sought his advice. Barry O’Neill, the Managing Partner at Zed Financial Partners. He had this advice, “Some of the most disheartening circumstances we’ve seen have involved management becoming” blindsided by their traditional financial partners. A business owner can have a long-standing relationship (along with shining credit rating and excellent margins) with a traditional lender and still find their loan called, or “no-brainer” requests for further capital declined. Changing market conditions, concerns around exposure to industry sectors and risk management strategies can change a traditional lender’s interest in a client and the effects can be devastating.” But there are steps that business owners can take to go on the “offensive” and secure the liquidity they need to grow outside of traditional financing sources. Business owners and managers must learn to become as creative and versed in options for financing their businesses as they are in other facets of operations. Sometimes it is a matter of looking for another financial institution that better understands the business. Other times, it requires re-examining the assets of a company

from a different perspective. Alternative or non-traditional financing options can help to facilitate and allow for the execution of business plans. Often access to the appropriate financing may solve liquidity problems or even present hidden and creative opportunities for freeing up cash flow. Several unique structures may be employed in order to ensure a successful transaction and to maximize the availability of funds. Knowing where to find the different types of financing is crucial. Barry O’Neill suggested a few options. THE U.S. OPTION: An increasingly viable option for Canadian businesses is U.S. private equity and private debt lenders. In Canada there are a limited number of such sources of capital available, but in the United States, there are hundreds of different institutions that are actively seeking opportunities in Canada. Because of the vast amounts of money available south of the border and a limited number of transactions, many of these financial institutions are looking for opportunities outside the United States. Because of the size and specialization of the U.S. financing market there are numerous funds that specialize in specific industries. Understanding industries allows them to better assess the risks and rewards associated with the financing, resulting in a better financial partner. As a result, there is growing demand for more creative financial structuring to solve liquidity issues. Companies seeking U.S. funding should work with financiers who understand the industry sector and business, so they can work with the company as it changes and grows.

MONEY® Magazine - Summer 2014 - pg. 31

GETTING CREATIVE: Regardless of whether the source of capital is domestic or foreign, the key to securing capital is presenting value where others don’t and then translating that value into a workable solution for a lender. There are many ways to put financing together. It’s a matter of being creative and knowing where the money is. Some examples of different vehicles for creative financing that we’ve secured through nontraditional sources include: EQUITY OR QUASI EQUITY PARTNERS: A well-suited, strategic financial partner, who understands the business and industry, can provide the appropriate financial structure to take the company forward. These partners typically bring cash injections to relieve immediate problems and supply sufficient liquidity to take the company forward and often are critical to the future viability of a company. Private equity partners can be important tools in situations where owners want to retire or semi-retire and transition the company to family or a management group but wish to extract some wealth from the business. REFINANCING OF SUBORDINATED DEBT: Subordinated debt may need to be restructured or refinanced in order to alleviate liquidity concerns. Strategies for accomplishing this objective include: purchasing the debt at a discount; converting debt to equity; exchanging the debt for future royalty payments tied to revenue or cash flow; moving the debt off-balance sheet. CASH FLOW MANAGEMENT: In many cases, there is significant capital being tied up in working capital. Various operational specialists can help to assess cash flow restrictions and assist companies to unlock liquidity by putting in proper controls and systems. SECURING OF FUTURE CASH FLOW STREAMS: Cash flow streams that are associated with long-term contracts and a high degree of certainty may be sold to a third party. SALE LEASEBACK: Land and/or buildings can be sold to certain lenders at market value or greater using long-term sale- leaseback agreements. In this case, the financier relies on the company’s business plan and future cash flows to support future payments. REFINANCING “DEPRECIATED” ASSETS: Specific machinery and equipment within a company may have little or no collateral value to traditional lenders. Other lenders, such as appraisal or auction companies, may attach value to these assets that allow other financiers to loan against them regardless of whether they have been fully depreciated. INTANGIBLE ASSETS: Many companies find that intangible assets (i.e. patents, trademarks) carry little or no collateral value to traditional lenders. However, some non-traditional lenders will lend against such assets. In fact, there are firms that will attach a value to intangible assets and guarantee that value to lenders. TAX STRUCTURES: Off-balance sheet structures may generate additional liquidity. For example, intellectual property may be sold into a separate company, which reverts back to the “parent” company after a period of time.

So what was Barry O’Neill’s bottom line? “Accessing capital can be expensive, time consuming and incredibly frustrating.” But it doesn’t have to be and there are a number of other options outside traditional financing sources. One of the most important advantages in maximizing a company’s access to capital is finding the most beneficial source of capital from the most ideal financial partner. In many cases for Canadian businesses, banks and traditional sources of funding are the ideal financial partners. The convenience and the efficiency of the commercial branch suit most situations effectively and commercial bankers work hard to service their clients. However, for businesses in periods of transition, whether caused by distress, explosive growth or the potential for a change in ownership, the traditional lenders can be impediments and obstacles. There are numerous other options available to Canadian businesses and with a little research, business owners and managers can unlock a realm of new possibilities that suit their situation and best serve their needs. There are countless ways to improve business liquidity and it makes sense to review options regularly, before additional liquidity is necessary. With the wide avail of creative alternative options for financing one’s business, sometimes a “no” from your traditional lender might actually do you a great favour resulting in a better financial partner. As a result, there is growing demand for more creative financial structuring to solve liquidity issues. Companies seeking U.S. funding should work with financiers who understand the industry sector and business, so they can work with the company as it changes and grows. Factoring is another form of immediate financing. A factorer is a financial intermediary that purchases receivables from a company. A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party. For example, assume a factor has agreed to purchase an invoice of $1 million from Clothing Manufacturers Inc., representing outstanding receivables from Company A. The factor may discount the invoice by say 4%, and will advance $720,000 to his client. The balance of $240,000 will be forwarded by the factor upon receipt of the $1 million from Behemoth Co. The factor’s fees and commissions from this factoring deal amount to $40,000. Note that the factor is more concerned with the creditworthiness of the invoiced party - Behemoth Co. in the example above - rather than the company from which it has purchased the receivables (Clothing Manufacturers Inc. in this case). Although factoring is a relatively expensive form of financing, factors provide a valuable service to (a) companies that operate in industries where it takes a long time to convert receivables to cash, and (b) companies that are growing rapidly and need cash to take advantage of new business opportunities. Mark Borkowski is president of Toronto based Mercantile Mergers & Acquisitions Corp. He can be contacted at www. mercantilemergersacquisitions.com. Mercantile operate a mergers & acquisitions brokerage for the past 31 years.

MONEY® Magazine - Summer 2014 - pg. 32

Which Direction Are You Looking? Written by Robert M. Gignac

was behind the wheel of a Subaru Forester, idling at a red light in Vevey, Switzerland when suddenly a horn blasted from behind me. I didn’t figure out why until the second blast. My light was green and I was supposed to go. Sounds simple enough, until I tell you that the light that I was looking at was red. A key learning for Swiss driving is that each lane has its own traffic light at many intersections and they don’t necessarily operate in unison. Once I got over the shock of the second horn blast I realized that and moved on. I didn’t need to hear a third. As I often do in these situations, I tried to figure out what that incident was supposed to teach me. My first thought was “focus”. Sitting at the stoplight, I was faced with four sets of lights, two across the intersection and two on my own side. Due to the angles of the streets (few intersections in Vevey met at 90o), I could actually see another two sets of lights (6 sets in total). In short, I was presented with too much data to process effectively. As investors, streams of data arrive at a relentless pace, from every imaginable direction - daily. Radio, TV, newspapers, social media and the Internet bombard us with seemingly “important” facts and figures 24/7. As we dig our way through it, we try to process the data, sorting the useful from the useless in an attempt to make some sense of it. However, a critical question often overlooked is this: “Where does all this data come from?” Knowing the source is only half the battle but when it comes to timing, all the “data” we deal with comes from the past. The past hour, day, week, month, year - but it all comes from the past. Is that a problem? I think to some degree it is. It means we spend a lot of time looking at things that happened yesterday instead of looking at what is going to happen tomorrow, next week, next month, next year. Unfortunately, we have no data about tomorrow. We have projections, forecasts and the occasional “swag” (systematic wild-ass guess), but we have no “data” about tomorrow. It only becomes data once it has actually happened. Think of your mutual fund and ETF investments, the companies can tell you what the funds did last week, last month, last quarter, last year, since inception – but not a single one of them will tell you what the fund will do next year. Not because they don’t want to - but because

they can’t. What they tell us is this: “Past performance is not necessarily indicative of future results”. Again you ask – is that a problem? Those of you who are parents will understand this; you’re driving down the highway and a fight breaks out in the back seat of the car between your two favorite children. You decide to play referee by turning and looking at them to end the dispute. Your car continues to move in a forward direction while you are looking backward. There is a fair degree of predictability about what will happen next. Hopefully it is just a car horn and a raised middle finger. We cannot move forward with any degree of confidence unless we are looking at the direction we are going. It’s like riding backwards on the train, you see everyplace you have been, but too late to realize you were going the wrong direction. Unfortunately too many of us are so consumed with the data from the past, that we don’t see we are going in the wrong direction. I’m not telling you to ignore the data, it’s important. Process it, analyze it, but once we’ve done that, and learned what we need to from it, let it go. All that data was from yesterday and the most important things are still in front of us. There are two kinds of people, the first group, looking at the past and wondering what has happened and why. The second group looks forward at the future and wonders how to make things happen. It all depends on which direction you are looking. The next time you are at a traffic light and a car horn blast comes from behind you – make sure you are looking in the right direction. It makes driving your car a lot easier; it will make dealing you’re your finances/investing easier as well. 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 - Summer 2014 - pg. 33

Ways Your Overconfidence is Hurting Your Investment Portfolio Written by Tom Drake

o a certain extent, you need to have some confidence in your investing decisions if you plan to grow your wealth. After all, if you are too risk averse, you will be lucky to keep pace with inflation – hardly a recipe for growing your nest egg. However, even though you want to be reasonably confident and invest, you also don’t want to be overconfident. Overconfidence can lead to reckless decisions that result in big losses. The trick to a good portfolio is being confident enough to invest in the first place, but not so overconfident that you end up going overboard with your investment decisions. Here are 4 ways your overconfidence might show through behavioral bias. If you recognize any of these symptoms in your investing style, take a step back and consider changing course: 1. Illusory Superiority Numerous studies indicate that most of us believe that we are “above average.” Whether it comes to intelligence or looks, the majority of people think that they perform better than the “average” person. This idea can easily translate into the investing world. Part of this behavioral bias is a tendency to attribute success to your innate abilities and losses to external forces. So, if you are doing well, you think that you are a stock-picking genius – even if the entire market is higher and everything is going up. When you see losses, you blame them on the fact that the market is lower, or on some other outside force (like a geopolitical upheaval). This becomes problematic when you are sure that you are a better than average investor and that your picks are superior to others’. You start to believe that you won’t go wrong, and take bigger and bigger risks. These are risks that are likely to backfire and result in losses. 2. Recency Bias This is the idea that what has happened recently is likely to keep happening in the future. Recency bias is one of the reasons investment bubbles are so devastating and take so many people by surprise. Because a security or asset classes has performed well recently, you are confident that it will always perform well. As the investment keeps climbing, you are sure that you have a winner. This confidence means that you might get into an asset at the top of the market, confident that you are doing the right thing, only to have it crash. It can also be problematic if

you hold onto something that shows signs of being in a bubble, but you don’t sell before a crash. 3. Confirmation Bias With confirmation bias, you make a decision and then look for information to support your conclusion. So, if you choose a particular stock, you might think that you are analyzing it. However, you want to confirm that you have made the right decision, so you look for information that supports your choice and discard critiques. Confirmation bias only makes you more confident in your decision. If you are wrong, ignoring the evidence that indicates your investing strategy is flawed could result in losing big time – even as you confidently point to the information that seems to support your claims. 4. Narrative Preference Emotions tend to get in the way of investing. This is where a preference for narrative comes into the picture. As humans, we don’t want to look at data when we can connect to a narrative. We’d rather hear stories of success, than look at data that brings us back to reality. A preference for narrative can instill feelings in us that lead to poor investment decisions, since we are now basing decisions on stories related to success, rather than stepping back and getting real with the data. When this preference is combined with confirmation bias, the overconfidence that results can be downright devastating, since you might make a portfolio decision based on feelings and cherry-picked information. You think it’s a “sure thing,” but really it’s a portfolio buster. There is a good chance that you are overconfident in some ways when it comes to your portfolio. In order to overcome these biases toward overconfidence, it can make sense to build a long-term investment portfolio based on low-cost index funds and ETFs, using asset allocation rather than individual stock picking. This provides you with a way to get returns closer to the average – and that are more likely to realistically help you reach your long-term investing and retirement goals. Tom Drake is a financial analyst and personal finance blogger living in Edmonton, Alberta. He writes at CanadianFinanceBlog.com.

MONEY® Magazine - Summer 2014 - pg. 34

Social Investor Relations Written by Gerald Trites

ocial media has been having a tremendous impact on business, as new ways of using it have emerged. One of the first major business applications was the socialization of Customer Relationship Management systems. Social CRM enables a business to maintain current information about customers and use it to develop products that best meet their needs.

of social media) which in turn contains a feed of the Twitter tweets issued by Goldcorp. Also, that same page contains links to the other social media used by Goldcorp, which include the full blog “Above Ground”, YouTube, Slideshare and Flickr. The “Above Ground” blog contains important IR information, including at the date of writing, a message from the CEO on the company sustainability program.

Social media is also being used to generate big data, which is then analyzed through systems such as Business Intelligence to generate broad based useful information for serving customers and finding new opportunities for profit and cost savings.

Finding relevant information on social media can be a problem. Twitter has hashtags and they are often useful in finding investor related information. All the media have search engines. But some of the companies help out by providing indexes and customized search facilities. Seimens is a good example of this in their use of Youtube. That company provides playlists that classify the video content by topic. For example,

Some businesses have gone so far as to incorporate social media into all or most of their functional areas, leading to the concept of social Business. So it was only a matter of time until Investor Relations got into the act. Late last year, the Securities and Exchange Commission in the US recognized social media as a primary means of distributing IR information. Canadian regulators are not that far advanced, but there is nothing to prevent companies from using social media as a secondary channel. So far, Twitter has been the most used form of social media. Companies have found it useful for sending out earnings notices, dividend announcements and generally links to important corporate events. Although Twitter is limited to 140 characters, the ability to include links makes it a very powerful distribution tool. Starbucks is a leader in this field. In fact, they won the social media award last year in the NIRI corporate reporting contest for effective use of social media. Their Starbucks News account in Twitter is a model of “how to do it”. Many companies have social media accounts but often they are not devoted to IR. Sometimes those accounts contain IR related information though. Goldcorp is an example of a company that makes good use of Facebook (www.facebook. com/Goldcorp) and provides substantive information on that site. Anyone holding Goldcorp shares would find the site interesting and informative. The Goldcorp Facebook site links to a blog (another form

the playlist for industrial productivity should be of interest to investors. LinkedIn is a favourite social media for business professionals and one that can be used effectively for investor relations. Strangely, it has not yet achieved the level of use for IR that Twitter and Facebook have. However, some companies maintain corporate sites on LinkedIn and they do often have notices such as earnings releases and conference calls. An example of this is Agrium Inc. Social media is fast becoming a significant component of IR communications. Twitter is the most critical at this point, with Youtube and Facebook important runners-up . As Social IR develops over the next year or two, we will see a lot of innovation in this field.

MONEY® Magazine - Summer 2014 - pg. 35

MONEY® MAGAZINE

MUTUAL FUND REVIEW June 2014

Starting assets (May 31, 2014) + Net sales +/- Estimated market effect = Ending assets (June 30, 2014)

Asset Growth ($)

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

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

$874.9 billion $11.0 billion $8.5 billion (1.0%) $890.1 billion

Top 3 Categories

Bottom 3 Categories

Global Neutral Balanced: $2.853 billion Cdn. Div. & Income Equity: $2.361 billion Canadian Equity: $1.815 billion Geographic Equity: 23.9% Precious Metals Equity: 18.5% Energy Equity: 10.0% Global Neutral Balanced: $2.089 billion Canadian Fixed Income: $1.598 billion Cdn. Fixed Income Balanced: $977 million Geographic Equity: 21.7% Asia Pacific Equity: 7.2% Energy Equity: 4.4% Precious Metals Equity: 18.2% Natural Resources Equity: 6.5% Energy Equity: 6.3%

U.S. Equity: -$853 million International Equity: -$403 million Cdn. Long Term Fixed Income: -$178 million Misc.- Undisclosed Holdings: -13.8% Cdn. Long Term Fixed Income: -9.2% International Equity: -3.2% U.S. Equity: -$1.056 billion Canadian Money Market: -$353 million International Equity: -$240 million Cdn. Long Term Fixed Income: -9.3% U.S. Equity: -2.9% Commodity: -2.3% European Equity: -1.4% International Equity: -0.7% Global Fixed Income: -0.6%

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The Mutual Funds Newsletter was created specifically for the investor-advisor relationship and mostly as an important communication tool that really helps to explain important trends in the mutual fund industry. Financial consumers and Mutual Fund Investors as shareholders today are more savvy and demand more attention and better service towards their long-term investment goals. It is clear mutual funds stakeholders expect open disclosure, ethical investing and then superior returns in exchange of quality customer service. Helping make, save and preserve more of your money more of time is indeed the essence behind this important, timely and newsworthy communique. Consult your advisor or a recommended professional on a regular basis and engage them in this important information, data and focal point for decision making and portfolio design and maintenance.

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One Size Does NOT Fit All Written by Lise Andreana

eing summer, I was recently enjoying a late afternoon glass of wine at a local outdoor patio, enjoying the universally popular patio pastime of people watching. Have you ever noticed while some look Fabulous in their summer attire others appear to be in extreme discomfort from ill -fitting clothing? As a former fashionistta, I must confess to an obsession with analyzing what people wear and imagining them in more flattering attire. This passion for fit has transformed itself into a passion for financial planning. When it comes to financial planning, as in fashion – one size does not fit all!

Often heard are versions of the following statistics: •

The median net worth of Canadian households, headed by someone age 65 and older is $460,700.*

•

The average Canadian household saves 5.4% of their income **

•

Canadians who intend to add to their RRSPs by this year’s deadline 33%***

•

Canadian’s unused RRSP room will exceed $1 trillion by 2018 ***

MONEY® Magazine - Summer 2014 - pg. 37

While these statistics can make for interesting, and on occasion alarming reading, what do they have to do with you? The truth is not very much. Do the statistics above tell you anything about how ready YOU are to retire? Do they tell YOU how comfortable your own retirement will be? Or if YOU will run out of financial resources before your time on earth is done? No they do not! Worrying about average or median statistics will not prepare you to reach your financial goals. Neither will comparing yourself to other retirees. While some families will enjoy a comfortable retirement with relatively little in savings, others with millions of dollars may not be able to achieve their retirement lifestyle goals. A key difference may be the existence, or lack of, a Defined Benefit Pension Plan. For example a retiring couple both with a teacher’s pension, may not require much in the way of savings. On the other hand a retiring business owner will need much more in savings, as they must rely on the savings they accumulate. Financial planning is the art and science of building a strategic financial plan to fit individual needs. Like a tailor-made suit, the best fit comes from working with a qualified financial planner. If your current advisor has not provided you with a clear, step-by-step guide of what you need to do to reach your financial goals for a major purchase, children’s education and/ or retirement, the odds are the person you call your “Financial Planner” may be just an investment advisor. Traditionally, investment advisors limit their advice to investment decisions; when and what to buy or sell, asset allocation models and providing tactical and strategic advice regarding your investment portfolio. Don’t get me wrong, this is important stuff and for the majority of us who do not want to make our own investment decisions an investment advisor is key member of our financial well-being team. It is important to know that some investment advisors are also qualified financial planners who can and do provide a written financial roadmap guiding you to your individual goals. What can you expect from working with a qualified financial planner? Financial planning is a comprehensive process that touches on all aspects of your financial well-being. Your planner will take into consideration where you are today, your limitations, risks you may be exposed to and your life time financial security goals. You can expect your financial planner to ask about and request information on your budget, current saving, debt and insurance plans including those offered by your employer. Withholding this information from your financial planner is like holding back talking to your Doctor about that worrisome lump. Ignoring it won’t make it go away! Financial planners typically follow a formal process to help you achieve financial peace of mind. The following 6 step process comes from the Financial Planners Standards Council (FPSC), representing Certified Financial Planners (CFPs) in Canada.

Step 1. Establish the client /planner engagement: This meeting establishes the roles for both you and your planner. This discussion should include how the advisor will be paid and the formula for payment. Now is the time to ask about your planners credentials. A key credential is the CFP designation. Others include the Chartered Life Underwriter (CLU) and Trust and Estate Practitioner (TEP).

Step 2. Determine your goals and expectations: Your financial

planner will guide you (and your partner) through a dialogue of your goals and the hoped-for timelines. Think of it as setting your financial GPS. If you do not know where you are going, how will you know when (if) you arrive?

Step 3. Clarify & evaluate your current situation: In this step,

your planner will collect all relevant financial documents. This will allow her or him to understand your present financial status; identify problem areas and opportunities you may be missing

Step 4. Develop and present a tailor-made financial plan:

This is normally prioritized by area of greatest need first. This step may include one or all of the following: advice on the appropriate level of life and disability insurance, required savings to achieve education, retirement goals, debt modification, budgeting and tax planning ideas. In addition, this is the stage at which your Financial Planner will make portfolio recommendations designed to bring your investment portfolio into line with your optimal asset allocation.

Step 5. Implement the agreed upon financial plan: Once you

and your planner have agreed on the steps required to meet your goals, your planner will assist you with implementing your plan. If you are working with a Fee-for-service planner, they will direct you to the appropriate investment and insurance resources. If your financial planner is preparing the financial plan at no direct charge to you, they will most likely expect you to make product purchases through them. Either way is fine, as long as both of you are clear (step 1) about the terms of engagement.

Step 6. Monitor the financial plan: Over time your

circumstances, goals and needs will change. It is important to measure your progress against stated goals and adjust your financial plan as required. Clothing sizes vary because the human body comes in many shapes and sizes. Your financial situation is as unique as your body. Get the best fit by working with a qualified financial planner. Until next time, when we will tackle the 5 keys steps to hiring the best financial planner to meet your needs. (*Financial Post St July 19 2014 –Golden Generation by Garry Marr page FP9 ** Newsroom.bmo.com BMO Household savings report; Canadian saved average of $8,764 in 2013 ***G&M Fri Jan 14 2014 Fewer Canadians plan to contribute to RRSP citing lack of funds)

Lise Andreana CFP, CPCA P.S. “Financial Care for Your Aging Parent” by Lise Andreana is now available at books stores & Shoppers Drug Marts across Canada. Published by Self Counsel Press. She has over 20 years’ experience as a financial planner helping her clients achieve their financial goals. She is the author of “Financial Care for Your Aging Parent” and “No More Mac-N-Cheese The Real World Guide to Managing Your Money for 20-Somethings” published by Self Counsel Press. Lise is the founder of the financial planning firm, Continuum II and can be reached at the company web site www.C2inc.com or by email Lise@c2inc.com

MONEY® Magazine - Summer 2014 - pg. 38

QuestionsByto Ask an Advisor Tammy Johnston

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hoosing a Financial Advisor is a difficult and daunting task. You need to find someone that understands your needs, can communicate to you clearly, and help you accomplish your goals. There are thousands of licensed financial professionals in Canada and they offer different products and services. So how can you go about best interviewing an advisor to find the best fit for you? Below is a list of questions that you should ask any financial advisor before you start working with them. The questions have no right or wrong answers, but the advisor should be able to answer them. If they are not willing to answer a few questions before you entrust them with intimate details and your future, then I would advise that you keep looking. 1. What are you licensed to sell? - Mutual Funds Securities (stocks and bonds)Life Insurance Accident & Sickness Insurance (disability, long term care, critical illness, health benefits). An advisor that specializes in one area may be able to give help in more challenging or complicated situations. An advisor that has a more rounded approach can help in most general situations. 2. How many companies are you contracted to do business with? Are there any that you prefer? Why? Some advisors are independent brokers, some are what are known as captive agents. A captive agent receives training from one company, and can only get paid if they sell their company’s product, whether it is the best for the client or the worst. If an advisor says they are independent they have to be representing/contracted with at least two companies. Most companies pay pretty much the same for similar products, so having more companies to choose from allows an advisor to do what is right for the client and still get paid. Agents may have companies that they prefer due to product offerings, customer service, underwriting requirements, investment returns. This is not a problem as long as they are honest and up front about it, and tell you why. 3. How do you get paid? Fee or commission - An advisor that gets paid by a fee charges clients directly for their time, usually on an hourly basis. An agent that gets paid by commission only gets paid if they sell something to the client. Both methods have advantages and disadvantages. Nobody works for free, but a good advisor will provide more service and value than is paid for by the client either as an up front fee or a back end commission. Have the advisor explain exactly how they get paid so you can understand. 4. Who do you have in your network? - Accountants (CAs, CMAs, CGAs) • Lawyers (Tax, Estate, Real Estate, etc) • Mortgage Brokers and other Lenders General Insurance (Home, Auto, Liability). An advisor cannot be all things to all people. The financial world is a complicated one, and if

we want to do the best job for the client we need to have competent people that we can refer a client to in order to help them with a need that we personally may not be the best at handling. A full and complete financial plan requires many professionals to properly complete. Have the advisor give specific names and areas of expertise of their network.

5. What are the three most important aspects in an advisor / client relationship? - This can be answered in a lot of different ways, but they should have an answer and you should be comfortable with it. 6. Do you have any sample plans that you have done for clients? - An advisor probably won’t have this at their fingertips, but they should be willing to offer this. Just be sure that the sample plans do not have details that identify the client (name, address, phone numbers, account numbers, etc.) If they do, do not deal with the advisor. Confidential client information needs to be protected by law. 7. How often do you contact your clients? - Annually, SemiAnnually, Quarterly, Monthly. Clients should be contacted at least annually. For some clients and some plans, contact needs to be more frequent. 8. How do you contact your clients? In person, phone, mail, email, newsletters. Contact depends largely on the client, but the advisor should have an answer. 9. How many clients do you have? The number of clients an advisor has may reflect among other things, how long they’ve been in the business, and how aggressively they have marketed their services or if they have taken over another advisors clients. If they have over 500, chances are they don’t have much time to service them. It may be worth asking why they are looking for even more. 10. How do you keep current with changes in your industry? Do they take courses in order to expand their knowledge, what do they read, are they members of any associations, do they have their CFP or are they working towards earning it? What seminars and education sessions do they attend? Who puts them on? What books do they read? Do they teach any courses? Do they publish articles or books themselves? The more an advisor values education the better it is for clients. The more sources of education the better the advice. 11. What services do you provide for your clients? - This will give you an idea of the range and type of service they will provide. 12. What sets you apart from other advisors? - Hear what is said and be comfortable with the answer.

MONEY® Magazine - Summer 2014 - pg. 39

Total Return: Smoke and Mirrors? Written by Steve Selengut

ust what is this “total return” hoop through which investment managers are required to jump? Why is it mostly just smoke and mirrors? Here’s the formula:

• Total Income + (or -) Change in Market Value – Expenses = Total Return — the ultimate test for any investment portfolio.

If this formula is applied to income purpose portfolios, it is really close to nonsense, and confusing to most investors. Remember John Q. Retiree? He was the guy with his chest all puffed up one year, bragging about the 12% “Total Return” on his bond portfolio. Secretly, he wondered about having only 3% in actual spending money. A year or so later, he’s scratching his head wondering how he’s going to make ends meet with a total return that’s approaching zero. Do you think he realizes that his spending money may be higher?

fund, but how does he invest his own money? According to a New York Times Money and Business article by Jonathan Fuerbringer (January 11, 2004), he’s “out” of his own Total Return fund and “in” Closed End Muni Funds paying 7.0% tax free. (Must have read “The Brainwashing of the American Investor”.) Fuerbringer doesn’t mention the taxable variety of CEF, then yielding roughly 9%, but they certainly demand a presence in the income security bucket of tax-qualified portfolios like 401Ks. Sorry, can’t do that now. The omniscient DOL says the net/net income isn’t nearly as important as the Expense Ratio….

What’s wrong with this thinking? How will the media compare mutual fund managers without it?

Similarly, Mr. Gross advises against the use of the noninvestment grade securities (junk bonds, etc.) that many fund managers sneak into their portfolios. But true to form, Mr. Gross is as “Total Return” Brainwashed as the rest of the Wall Street institutional community, as he gives lip service validity to speculations in commodity futures, foreign currencies, derivatives, and TIPS.

Wall Street doesn’t much care. They set the rules and define the performance rulers, and they say that income and equity investment performance can be measured with the same tools. They can’t, because their investment purposes are different.

Inflation impacts buying-power and the only way to beat it is with higher safe income. If TIPS rise to 5%, REITS will yield 12%, and preferred stocks 9%, etc. No interest ratesensitive security is an Island!

If you want to use a ruler that applies equally well to both classes of security, just change one piece of the formula and give the new math a name that focuses on the actual purpose of income investing — the spending money.

As long as financial intellectuals remain mesmerized with total return numbers, investors will be the losers.

We found this old way of looking at things within “The Working Capital Model”. The new and improved formulae are: • For Fixed Income Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money! • For Equity Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money! Yes, they are the same, and divided by the amount invested, they produce a Total Realized Return number. The difference is what the investor elects to do with the spending money. So, if John Q had taken profits in year one, he could have spent more or added to his income production. You just can’t spend (or reinvest) “Total Return”. We’ve taken those troublesome paper profits and losses out of the equation entirely. Unrealized” is “un-relevant” in a properly diversified portfolio comprised only of investment grade, income producing securities. Most of you know of Bill Gross, the Fixed Income equivalent of Warren Buffett. He manages a humongous bond mutual

• Total Return goes down when yields on individual securities go up, and vice versa. This is a good thing. • Total Return analysis is used to engineer market timing decisions between fixed income and equity investments, based on statements such as: “The total return on equities is likely to be greater than that on income securities during this period of rising interest rates.” Investors have to commit to the premise that the primary purpose of income securities is income production… this requires a focus on spending money. If these three sentences don’t make complete sense to you, you need to learn more about income purpose investing: • Higher interest rates are the income investor’s best friend. They produce higher levels of spending money. • Lower interest rates are the income investor’s best friend. They provide the opportunity to add realized capital gains to total spending money and to total working capital. • Changes in the market value of investment grade income securities are totally and completely irrelevant, 99% of the time.

MONEY® Magazine - Summer 2014 - pg. 40

Make sure you qualify for a mortgage!

Written by Guy Ward

o, you can afford your desired mortgage payment, but do you qualify? There are many factors a lender considers when deciding to give you a mortgage. There is a difference between knowing you can afford a mortgage and actually qualifying for one.

• Character: Okay, this is a grey area: It is an impression of your trustworthiness. It’s the big picture. Lenders look at how long you have been employed and how secure you are in your employment. They will also look at your ability to save and manage your credit.

Recently, there was another round of changes to the rules that banks use to qualify you for a mortgage. But what does that mean? It doesn’t mean you’re shut out of the real estate market completely. If you have the income and a steady job, it just means you have to be more careful with your debt load. Lenders will look at two factors and five variables to determine whether you qualify for a mortgage. In the industry, the common terms for these variables are the Five Cs of Credit. If you pass the credit test, the industry also looks at a couple of ratios that must fit to qualify for the mortgage. It’s these ratios that have been most affected by the changes.

• Collateral: Yes, your cash flow is important but so is the property you are buying. The house is pledged as security for the loan. Collateral can also come from a third party who will guarantee the loan.

The first two factors are your ability to make your mortgage payments and your willingness to make those payments. These two factors are then categorized into the five variables. They are: • Capacity: Can you repay the loan? This is the most important of the five. A lender will look at your credit report and review your debts to see if you’ve paid them on time. Lenders don’t like to see missed payments consistently, which sends a message that you may be over your head with your debt load. Lenders also don’t like to see too much debt and/or maxed out credit cards or lines of credit. • Capital: This is the amount of money you have to invest in the property yourself. Lenders don’t like to take all of the risk. So, make sure you have at least the minimum down payment. That down payment can come as a gift from a family member or can come from a bank loan or a line of credit as long as you can manage the extra debt.

• Credit: This is your credit history – how long have you been using credit. The more years you’ve been an active credit user the better. Now, on to the ratios. There are two critical ones that lenders use that determine your ability to service your debt – your gross debt service ratio or GDS and your total debt service ratio or TDS. To qualify for an insured or high-ratio mortgage, your GDS cannot be higher than 35% of your gross income. GDS is the amount spent on housing — principal mortgage payments, interest, taxes and heat. The TDS includes all your debt and cannot be higher than 42 per cent of your gross income. If you opt for a fixed rate, which today can be had for less than 3%, you’re relatively safe throughout the term of the mortgage, and as long as you opt for a five-year term, you are qualified on that rate. But if you decide you want a variable rate, which is sitting as low as 2.4%, you will have to qualify at the lender’s benchmark posted rate, which now 4.79%. The good news is that the housing market is balanced; meaning people are still buying and selling. So let’s put a plan together to help you get into your new home. Guy Ward is a Mortgage Broker in Calgary, Alberta with TMG (The Mortgage Group Alberta). WWW.GUYTHEMORTGAGEGUY.COM

MONEY® Magazine - Summer 2014 - pg. 41

Do You Need a Digital Estate Plan? Written by Ed Olkovich

ill your estate executor have access to your digital estate? Do you know what is involved in a digital estate plan? It’s more than signing your paper will. Is it enough to leave your email password on a notepad beside your computer? Sorry, no. You need to learn more digital dos and don’ts. Digital assets are various online or electronic files with your personal information. They include financial resources and social networks. Digital assets can include personal data with high emotional value. You could also have digital business property with monetary value. Digital assets can be stored electronically, online, in the cloud or on physical devices. Passwords Can Control Access Access to your online information or electronic storage is vital. Who should have access to your passwords? When you make a will, you can appoint a digital executor. You can authorize your executor to hire experts to handle digital assets. You must, however, share passwords and login information to manage such assets. Executors face a dilemma; in some cases, you may not have ownership of some digital property. Instead, only a non-transferrable access license may exist. Social media user agreements may only permit network access with a personal password. There is nothing to own or sell. But executors have a duty to collect estate assets. Will they have to hunt for your passwords and usernames? What about your material in the cloud, on social media or video sites? You can create a digital estate plan and specify your preferences. How is your executor to handle your digital accounts? Should files be closed, maintained or memorialized? Secure Devices Estate trustees must be aware of their duties to secure devices with digital information. This includes cell phones, tablets, laptops and computers. Documents, photos, videos, text messages can be personal or business materials. Executors may not be able to distinguish between these. Digital assets may have emotional and personal connections for your survivors. This may not translate to monetary value to calculate probate or income tax. However, the loss or expiry of a business domain name or blog can affect online sales

and value. Customer subscription lists and shopping carts can be stored online for businesses. Trademarks, copyrights and creative work can be considered assets and intellectual property. What about the value of an unpublished manuscript or musical composition? Your online financial accounts may automatically pay utilities, credit card bills, income taxes or loan payments. Your digital estate property can include: • • • • • •

Blogs; domain names; online photos and music; memorial websites; shopping networks; or loyalty and reward programs.

Credit card agreements may impose deadlines for the transfer of rewards or membership points. Do Not Store Passwords in Wills You need to store your digital information somewhere other than your will. Once probated, your will and any password information become public. This could lead to fraud, cybercrime and identity theft. Many online services store passwords and access codes. These may promise confidentiality. Their guarantees may be short-lived when such businesses fail. Also, digital laws will likely change and courts can order disclosure of such records. Executors must be aware that online fees can continue to be charged and go undetected. Credit card payments or debt service accounts may have been set up for automatic payments. Without paper statements, executors may be unable to track them. Digital worlds often have no paper trail. User agreements may prohibit the transfer of passwords and access to anyone other than the registered user. Can your executor answer your secret questions? When asked, “What is your favourite bar beverage?” my answer is, “who’s buying?” About Ed 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 Law. Ed’s law firm website is MrWills.com © 2014

MONEY® Magazine - Summer 2014 - pg. 42

MONEY® MAGAZINE

THE AMERICAN DOLLAR

US Money Markets and The FED

Written by Guy Conger

he stock market is at all-time highs and the bond market is still functioning….everything is great right? Wrong. Since the current state of the markets is entirely predicated on the actions of our Federal Reserve I thought it would be a good idea to show investors what is going on behind the curtains, so to speak.

The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences. Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgagebacked securities, etc. – the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008. The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give – not lend – to banks? The Fed’s policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime. The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed’s Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury’s traditional debt management. This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.

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