Norma Walton, Toxic Business Partners

How do you spot a toxic business partner, ideally before you are in business with him?  Bad business partners can literally ruin your life.  They can employ a scorched earth approach to your business. They can make false allegations against you.  They can ruin your public reputation.  They can even try to send you to jail.

bad company quote

We are judged by the company we keep.  That is true in friendships, in business relationships, in marriages.  The people we trust and surround ourselves with will have a big impact on our lives.  It is important to choose wisely.

Here are a few tips I’ve gathered through personal experience:

First of all, you need to check out the background of your proposed business partner.  If that partner has a history of nasty litigation with prior partners; a criminal past; has been accused of tax evasion in the past; has a lousy relationship with his spouse and/or his children; or has blown up prior business relationships for no good reason, run away.  Don’t walk, run.angry partner

Secondly, if everything initially with that partner seems too good to be true, you are likely missing something that will hurt you in the end.  Business partnerships should be a true give and take.  They should be balanced and each partner should understand and appreciate exactly what the other partner brings to the relationship.  If your partner does not appreciate the value you bring to the relationship, exit the partnership.  That lack of appreciation will never change and will cause big problems down the road.

Thirdly, if your business partner shows no empathy towards others, you have a problem.  People who are narcissistic and self involved feel every perceived slight deeply but have no sympathy or understanding for others who are experiencing real pain.  Watch how he treats his loved ones.  If he is always talking derogatively about his spouse, for example, he will likely also speak the same way about you to third parties.  Also indicative is how he treats people less powerful, less rich or less educated than himself.  If he treats those people with disdain, he is to be avoided.

difficult partners

Fourthly, if your proposed partner seems to never be the one at fault and always blames others, he is trouble.  Those who don’t acknowledge their own mistakes are guaranteed to repeat them.  Unless someone is reflective and realizes that he makes mistakes, that person can never learn from his mistakes.  If you meet someone like this or are in partnership with someone like this, you need to get out.

There is nothing better than being in a positive, enjoyable, productive partnership with people you care about and appreciate.  There is nothing worse than having a toxic business partner.  He will suck the life out of you no matter how well you perform and how well your business may do.kardashian quote  In the end, toxic partners will ruin you and your business.  Get out while you still can.

Structuring your business

“The avoidance of taxes is the only intellectual pursuit that carries any reward.”  – John Maynard Keynes

Written by Steve Nyvik, BBA, MBA ,CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

If you are a Canadian business owner or have a professional practice, consider establishing a Family Trust as the owner.  The Trust might also include an investment holding company as a beneficiary.  Together, this structure provides significant tax benefits and flexibility in operating to achieve your financial goals.

Keeping After-Tax Funds in your Company

For professionals or business people earning more money than they spend, it makes good sense to incorporate and subject that income to the small business company tax rate which can be as much as 30% less than the personal tax rate.  By keeping funds within a company you have up to 30% more to invest to grow and help fund your future needs.  Note that this is just a tax deferral rather than a tax savings since once you withdraw money from the company, the taxes become payable.

But if your personal marginal tax rate drops, like maybe in your retirement years, you may realize an absolute tax savings when funds are withdrawn compared to having earned the business / professional income personally.

The Use of a Holding Company

The tax deferral sounds great as this can make a huge difference to your assets to support your retirement.  But what if there is any potential for business or professional liability?  By leaving funds within your company, are we simply leaving them for future creditors?

Where the liability has not yet occurred (and not foreseeable), it may make sense to have the after-tax funds “distributed” to a “holding company”.  This distribution puts your after-tax income out of reach of future creditors of your operating company and preserves the tax deferral.  Should funds still be required by the operating company, the holding company can loan money back to the operating company.

The Structure

1. The Traditional Structure

It has been common practice for a holding company to be incorporated that owns shares of the operating company.  This may permit payment of dividends on a tax- free basis from the operating company to the holding company.

The problem with this is that this structure can cause problems with regard to full access to the Small Business Capital Gains Exemption (now at $813,600 [as of 2015] per person) as the exemption is only available to individuals on their disposition of Common shares of a qualifying small business corporation.  In other words, the disposition of the shares by the holding company doesn’t qualify.

2. The Modern Day Solution

The modern day solution is to have a discretionary Trust created with possibly your children, you, your spouse and a holding company as beneficiaries.  The Trust owns all shares of your operating company for which the operating company pays all after-tax income to the Trust as dividends.

For funds required for living needs, the amount needed may be distributed by the Trust amongst you, your spouse and adult children.  Any remaining funds may then be distributed to the holding company as a tax-free dividend that preserves the tax deferral for the surplus amount received by the company.

Advantages

To summarize, the modern day solution has maintains both key tax advantages:

1. Income Splitting

With the Trust owning the operating company, income splitting is preserved as the after-tax income is dividended by the operating company to the Trust.  The Trust then distributes cash needed for living needs amongst you and your adult family members and doing so in such amounts to manage  family member income levels and overall taxes payable.

Beneficiaries receive dividend distributions, when and if the Trustee decides.  Those distributions can vary from one year to the next and can be substantial in amount.  Dividend distributions are received by beneficiaries not in relation to any work that they perform.

2. Capital Gains Splitting and Multiplying the Lifetime Capital Gains Exemption

Should the business be sold, it may be possible to multiply the $813,600 Lifetime Capital Gains Exemption for “Qualified Small Business Corporation shares”.

On sale of the operating company Common shares by the Trust, it may be possible to split the capital gain amongst several adult beneficiaries where each individual may claim their lifetime capital gains exemption on the capital gain proceeds received.  For example, a Family Trust with 4 adult beneficiaries can receive up to $3,254,400 tax‐free (= 4 x $813,600) on the sale of shares that qualify for this exemption.

The Next Step

There are a host of issues to be considered before structuring your business or professional practice.  For a professional practice, one has to first consider the provincial statutes for your profession that have restrictions on company ownership.

If you are a U.S. citizen or U.S. resident, we then need to consider United States Income Tax and Estate Tax laws.

Even if you are only a Canadian, there are a number of potential Canadian tax issues to avoid like corporate income attribution and trust income attribution.  And there are requirements to ensure the operating company and holding company are considered connected for tax purposes to avoid of Part IV tax on the payment of the dividend by the operating company.  Finally, there is the “kiddie tax” for which we need to avoid income being received by minor children.

If you own a business or a professional practice, I would be happy to review your current situation, discuss how we might improve it, and quantify the potential tax savings, the costs of establishing a structure, and the annual costs.  Should you decide this is something to pursue, I can refer you to a tax accountant that my clients have satisfactorily dealt with to help you put in place an effective structure.  For clients of mine, financial planning is included as part of the service.

 

Choosing a Trustee

Written by Steve Nyvik, BBA, MBA ,CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

 

You’ve gotten advice on estate planning and have found that, through establishing a Trust,  you may be able to:

  • save income taxes over the lifetime of your loved ones,
  • save on inheritance or estate taxes,
  • creditor protect assets, or
  • protect your family members from themselves by limiting their ability to ‘spend away’ their inheritance.

What then becomes the challenge is choosing the right person or persons to act as Trustee.  Here are some factors you might take into consideration in making your decision:

1. Family First

Your spouse and adult children are your family and most likely may be inheriting most or all of your assets.  Unless there is a good reason, they should be managing their inheritance.  To help them carry out their duties, they can hire whatever professionals needed to advise them.  Such persons might include an estate lawyer, tax accountant, investment advisor, realtor or property manager, etc.

If your surviving spouse cannot manage even with the use of professionals, or having your spouse directly involved would adversely impact your estate planning objectives, then you might consider your spouse acting jointly with an adult child as co-trustees.

Should your spouse predecease you or die thereafter, then it may make sense for one competent adult child (especially if they live near you and the others don’t), who is honest and fair, to act as Trustee on behalf of one or more siblings.  If not, then consider the children (when they become adults) to act jointly as co-Trustees.  For siblings to act jointly, this may remove any perceived concern as to whether one child might attempt to act inappropriately to benefit themselves.  Where siblings don’t get along, by being co-trustees, they will have to come together to make decisions.  The danger of sibling co-trustees are that this could invite gridlock where nothing gets done, decisions made are sub-optimal, or decisions are not made in a timely manner.

2. Family Friend or Financial Professional

Going outside of the family requires you to rely on the goodwill of a family friend or paying a financial professional (like a business colleague, financial planner, investment advisor, or accountant in addition to your estate lawyer and bank trust officer) to act.  Trouble is that these persons normally don’t do their job for free – and some, like bank Trustees can be incredibly expensive.  Here you need to weigh the cost of the service to the value of having the Trust.  If the benefits don’t outweigh the cost, then don’t have a Trust.

Where you need to use a family friend or financial professional, besides the cost, consider the following:

  • Honesty and Integrity: If you don’t have trust in your Trustee to act honestly and according to your wishes, you have the wrong person.
  • Competency, Wisdom and Sound Judgement: The person you choose as your Trustee should have good financial decision making skills.  This person should spend time with you while you’re alive and of sound mine to understand you, your family situation and your wishes.  Some of the duties your Trustee will handle include: paying your bills, make decisions on keeping, selling, disposing, gifting or distributing property you may own to beneficiaries, complete your final tax return and Trust Tax Returns, make tax elections, make a probate application to court, safeguard your assets, enter into contracts, deal with an estate lawyer, interpreting your wishes and possibly defending them, and make decisions on beneficiary short term versus long-term needs relative to Trust assets.  Your Trustee should be empathetic to appreciate each beneficiary’s situation and be strong enough to make decisions in the face of conflicting beneficiary demands – even if one beneficiary is threatening to go to court.
  • Organized: Your Trustee must be organized and keep proper records. Your Trustee needs to document all transactions using prescribed forms as well as document reasons for any decision that is made.
  • Managing family relationships: With your death, hurtful childhood feelings or sibling rivalry may no longer remain contained.  Your Trustee needs to be able to deal with these unleashed feelings and the conflict and suspicion that comes with it.  Where children are suspicious of each other, it may not make sense to name one child as Trustee; instead name two, or all of your adult children as co-Trustees.  If there is a potential for mistrust or for abuse of Trustee power, it may make better sense to name someone independent as Trustee and avoid adding fuel to the fire at a period when your loved ones are facing extreme emotional stress.
  • Nearby: Ideally, at least one of your Trustees should live close to you, so he or she can perform duties efficiently and economically.
  • Would they be willing to serve: The role of Trustee in some cases can last for several years and involve significant personal legal liability.  Your Trustee can also be on the receiving end of anger and frustration of your beneficiaries that have been ‘held in-check’ all those years.  Once a potential Trustee appreciates the difficulties and risks, he or she may not even want to accept the role.  So you better ask them whether they would be willing to serve before appointing them.  You should discuss with them how much you will pay.  And you better have a plan as to how future successor Trustees will be selected.
  • Age: Will they die before the need for the Trust comes to an end?  Maybe you need to look for someone younger than you who can serve in that role for 20 or more years if the Trust might be needed for that length of time.

Where we fit in

For our clients, we are willing to support your Trustee or, if you have no spouse nor competent adult children, then we would be willing to help if you would like us to act as a Trustee.  For the role of Executor or Trustee, we charge 1% which you’ll find to be very competitive and typically much less than a bank Trustee.

Our interest is to make sure that your goals are carried out in accordance to your wishes as we hope that not only will you be happy with our services, but also your children and future generations.

 

DIY or Hire a Pro

“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.
– Paul “Red” Adair (an American oil well firefighter)

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

 

Do It Yourself (“DIY”) Investing – that’s investing without the services of a financial adviser – is not for everyone. Some people who have an interest in investing may find it appealing to take destiny into their own hands, not to mention saving on the costs of professional financial advice.

Without adequate investing education, skill, and experience, the danger is that a DIY investor could:

  • choose poor investments that simply don’t perform well,
  • expose their life savings to an inordinately high level of risk,
  • make emotional or irrational investing mistakes.

These mistakes not only can result in poor performance where you might not be able to achieve your financial goals, but could result in devastating losses of a significant amount of your life savings.
Investing is not about entertainment, it is about getting you financially independent by the time you no longer can manage to work. You should seek to increase those odds of becoming financially independent and consider whether a professional financial advisor will more likely get you there.

A professional financial advisor, of course, doesn’t work for free. The payback comes through:

  • higher returns and/or lower risk by selecting the right asset mix, selecting good investments, sheltering income from taxation, controlling risk, and setting aside funds for anticipated needs (so you are not forced to have to sell investments when they are down). An experienced investment professional may also help you avoid making costly emotional or irrational investment decisions.
  • eliminating, reducing, and deferring income taxes so you’ll have more money growing faster to meet your goals;
  • protecting your family against devastating financial losses – like the death, disability or illness of the family breadwinner, property loss, theft or damage, and liability claims. Without such protection, your lifetime of savings could get wiped out; and
  • putting in place your estate plan so your estate is protected and will be distributed according to your wishes.  This not only gives you peace of mind, but hopefully will ensure your life savings is there to take care of your loved ones throughout their lifetime.

Hiring a professional financial advisor doesn’t mean you have no involvement – it is your life savings, not theirs. I prefer clients that like to understand their investments, who ask questions, and who appreciate that we are in effect statisticians that employ investment strategies that we believe are likely to deliver good risk-adjusted returns.

I believe that an educated client can be a more stable client that doesn’t panic in the tough times when the market declines. Rather such a client sees it as opportunity for buying stocks on the cheap that will lead to higher returns. An educated client tends to make more rational investment decisions and less likely to make emotional ones.

If you are intent on being a DIY investor, I urge you to take the Canadian Securities Course and those courses leading to the Certified Financial Planner where you’ll learn about income taxes, retirement plans, investments and asset allocation, retirement planning, family security (risks to you and the family associated with death, disability, critical illness, sickness, and liability), estate planning, and cash and debt management.

If you don’t have the time or interest to become a DIY investor, then you need to take time to identify the right professional financial advisor.  Here’s an article to help you do this: http://money.ca/you_and_your_money/2015/06/24/find-the-right-advisor/

Find the right advisor!

“As a business owner or manager, you know that hiring the wrong person
is the most costly mistake you can make.”
– Brian Tracy (a leadership and sales coach and trainer)

 

Written by Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.
Financial Planner and Portfolio Manager,
Lycos Asset Management Inc.

 

For many people, hiring a financial advisor is the right thing to do.

Your financial future should not be placed in the hands of some nice guy, a family friend or former sports star, or an accountant who’s too busy and knows less than you about investments.  And you shouldn’t put your life’s savings in the hands of an investment or insurance advisor whose only qualifications are a license to sell you investments or insurance products.

A truly professional financial advisor takes a lifetime to build up their educational and professional credentials.  They’ve gone through a period of articling or training with seasoned financial advisors, they’ve seen hundreds of situations similar to yours, carry liability insurance, and adhere to a code of ethics and practice standards.

A professional financial advisor, of course, doesn’t work for free.  The payback comes through:

  • higher returns and/or lower risk by selecting the right asset mix, selecting good investments, sheltering income from taxation, controlling risk, and setting aside funds for anticipated needs (so you are not forced to have to sell investments when they are down). An experienced investment professional may also help you avoid making costly emotional or irrational investment decisions.
  • eliminating, reducing, and deferring income taxes so you’ll have more money growing faster to meet your goals;
  • protecting your family against devastating financial losses – like the death, disability or illness of the family breadwinner, property loss, theft or damage, and liability claims. Without such protection, your lifetime of savings could get wiped out; and
  • design an effective estate plan so your estate will be distributed according to your wishes, minimize tax and transfer costs, and protect your legacy from a variety of creditors.  This not only gives you peace of mind, but hopefully will ensure your life savings is there to take care of your loved ones throughout their lifetime.

Hiring a professional financial advisor doesn’t mean you have no involvement – it is your life savings, not theirs.  Your advisor is there to help you increase the odds of achieving your financial goals.

You could spend the time you need to educate yourself and dedicate the time you need to properly managing your investments, but maybe your time might be better spent bringing in the money, and then relaxing with family and friends.

Of course you want someone whose personality gels with yours who you can be comfortable with.  But you also want someone who:

  • has spent a lifetime building up their educational and professional credentials;
  • has gone through a period of articling or training with a seasoned financial advisor;
  • carries liability insurance; and
  • adheres to a code of ethics and practice standards.

You want a mature financial advisor with good judgment who:

  • you trust implicitly in their honesty;
  • provides advice that is always in your best interest and is sound where you know they are well-versed in the topics that he or she advises you in;
  • has many years of experience who has seen hundreds of situations similar to yours who has helped people solve their financial problems and put them on a path to achieving their goals;
  • has the strength to get you to stick to your plan in the tough times when they inevitably come.

Finally, you should consider the investment orientation, strategies and philosophy of the advisor:

  • What kinds of investments does the advisor invest in? – i.e. individual stocks, mutual funds, exchange traded funds?
  • How does the advisor manage risk?
  • How does the advisor decide on your asset allocation and when and how is your portfolio rebalanced?
  • Does the advisor believe the market is efficient and therefore invests exclusively in market index type investments?
  • What kind of strategies does the advisor utilize and what are the risks and returns of those strategies?
  • Does the advisor believe in employing (higher cost) fund managers in attempt to outperform the market (how does the advisor identify those managers that are skilled (versus just lucky) who have a good chance of continuing to outperform into the future)?
  • If you are investing more than $100,000, how does the advisor help you to reduce investment management fees so you keep more of your money working for you?
  • What can you expect with regard to reviews, service and financial advice?

I hope that this article helps you find the right advisor to help you achieve your financial goals.

Sincerely,

Steve Nyvik, BBA, MBA, CIM, CFP, R.F.P.

Wall Street’s Dirtiest Little Secret

As of Close of Business May 8th, no less than 53 multi-year experienced, Tax Free Income, Closed End Funds (CEFs) were paying 6% or more in federally tax free income to their shareholders.

18 issues (34%) paid 6.4% or above, and the average for the group was 6.35%. All portfolios are professionally managed by this dozen, well respected, long experienced investment companies.

Blackrock, Nuveen, Pimco. Putnam, Invesco, Alliance-Bernstein, MFS, Dreyfus, Eaton Vance, Deutsche, Pioneer, & Delaware Investors.

How difficult could it be to put together a well diversified, retirement income portfolio?

Most of these funds have paid steady, dependable, income for more than fifteen years, even through the financial crisis… several have been around since the ’90s

Yet your financial advisor has never mentioned them to you; you have never heard them advertised or reviewed in the financial press… Wall Street, it seems, would prefer that you didn’t know they exist.

But there’s even more to this story. These readily-available and much-higher-than-you’ve-been-led-to-believe-even-exist tax free yields can be purchased at bold discounts to their Net Asset Value, or NAV in Mutual Fund Terms.

A May 15th data search at cefconnect.com reveals that 85% of all Municipal Bond Closed End Funds (CEFs) were selling below their net asset values (NAVs), and of those, 20% were available to all investors at discounts above 10%.

Mutual Funds (I believe) are never available at discounts from NAV, and how many discounted munis has your advisor suggested to you since 2012 or earlier?

Municipal CEFs regularly sell at discounts, and this morning, nearly 60% were available to MCIM taxable account investors at discounts of 5% or more.

WHY THE WALL STREET COVER-UP?

Why aren’t you asking for more information?

Dodging the DOL Chainsaw: Small Business Owner Protection

The DOL is Coming!   The DOL is Coming!

As if you weren’t already up to your elbows in rules, regulations, and expenses, the Department of Labor has empowered itself to fine at least half of the Employer/Plan Sponsors it audits… for multiple investment related reasons.

These include, among other things, the cost of the products in your investment menu and the market value performance of those products. As a plan fiduciary (right, you are a plan fiduciary), it’s your job to keep costs below average and performance above average…. and, yes, you are deemed responsible for your employees private investment decisions… no matter how foolish.

Hardly seems fair, does it. You give them money to invest, and you’re too blame when they mess up.

But, true to form within the 401k “space”, no one (other than the plan participants) seems to care about the retirement income benefit that 401k plans should provide to employers and employees alike… not even the DOL, ERISA champions of the interests of employees.

Since roughly half the plans will always be below average, it’s fair to expect that large numbers of plans will be fined….

In fact, 70% of plans audited in 2013 were penalized or forced to make reimbursements. Neither ETF providers nor Mutual Fund promoters share this responsibility with you, and all of this stress is on top of the “top heavy” problems you deal with year, after year, after year…

You may be able to protect yourself from the fines and the “top heavy” audits in one fell swoop by switching your plan to a professionally-managed-by-a-fiduciary, self-directed 401k they call a “Safe Harbor” Plan. In this type of plan, there is no menu of one size fits all products, none of which focus on income purpose investments that support the ultimate benefit of the program.

You see, the goal of the providers is to keep your money in their funds forever, hoping for upward only markets and their ability to convince you that you just can’t do better than 2% income anywhere. That’s the 401k space “end game”, but you can do much better, and considerably safer in a… “Safe Harbor”, managed growth and income program…

In the self directed, private portfolio “space”, you can require the safest equity selections, and growing retirement income, in a flexible asset allocation geared to the age and risk profile of each participating employee. Employees don’t have to participate, but you have to provide an immediately vested matching contribution if they do…. BUT, the top heavy problems disappear, and your contribution levels have no backdated limitations.

Not so long ago, I brought a QDI (Quality, Diversification, and Income) portfolio series to the 401k space. None of the product pushers were even slightly interested in any facet of the program… not even the superior retirement income generation capabilities… the “good ‘ole boys club” just couldn’t be bothered.

With the stock market at the peak of a six year sustained rally, what protections do you have from a correction? In the managed programs I’m describing, equity profits have already been taken, and the income keeps growing… monthly, in most cases. The Target Date Funds 401k providers are in love with are low quality equity, seriously low income time bombs, ready to go… KABOOM!

The Vanguard 2015 Fund, for example, was 50% invested in no less than 5,000 stocks at the end of January 2015; the total portfolio income was just barely 2%. What do you think the 2020 or 2025 portfolio looks like?

Here’s a look at the workings of a professionally managed retirement income program: a high quality, individual security, 30% Equity portfolio, generating three times the Vanguard 2015 TDF income, with a whole lot less risk:

https://www.dropbox.com/s/28ty6z5dkgn5ulu/Retirement%20Income%20Webinar.wmv?dl=0

Hmmmm, Small Business Owners, seems to me that would resolve your fiduciary issues.

Exchange-traded funds are not perfect

You’ve likely heard the pitch: Exchange-traded funds are cheaper and deliver better returns than most actively-managed mutual funds, so stop buying mutual funds and just invest in a portfolio of index ETFs.

While ETFs have much to commend, they are by no means perfect. In my view, the less positive aspects of ETFs have not received the attention they deserve. In the spirit of improving your ETF decision-making, the following list highlights some of these.

1. ETFs are market-driven financial products.

Like mutual fund companies, ETFs manufacturers market their products and follow the laws of supply and demand. They regularly issue new products which pander to the latest investing trends and close down duds. To wit, more than 140 exchange-traded products hit the US market in 2013 and 65 funds were terminated.

Sifting out the marketing buzz is part of the investing process, be it ETFs or any other type of investment.

2. Choosing the right ETFs to create a portfolio to meet your goals requires time and effort.

As originally conceived in the early 1990s, an ETF was a passively managed fund that traded on a stock exchange and sought to replicate the returns of a well-known benchmark index such as the S&P 500 Index. As such, ETF investing gained the reputation of being quick and easy.

Today, the definition is much broader. An ETF is an investment fund that trades on a stock exchange. The ETF choice is huge with more than 1,500 ETFs listed on Canadian and U.S. stock exchanges and new funds popping up regularly. Similar funds are available from more than one sponsor. Management expense ratios vary significantly among ETFs with similar objectives. There are ETFs that inhabit every sort of investing niche, even exotic strategies such as alternative, leveraged and inverse returns investing. Some funds are actively managed and do not track an index. ETF funds of funds are available.

There is much for an investor to consider when shopping for an ETF.

3. An ETF will not deliver the same returns as its benchmark index.

For a variety of reasons including fund expenses, taxes, exchange rates and methodology for replicating a benchmark index, an ETF’s performance will be less than its reference index. Small deviations are to be expected, but relatively large tracking errors, especially compared with similar ETFs, are a warning sign that something is amiss with management of the fund.
4. ETFs are only as liquid as the underlying assets.

Liquidity is touted as one of the benefits of using ETFs. However, an ETF is only as liquid as its underlying assets. If one or more constituents of an ETF’s benchmark index rarely trade, the ETF could have liquidity issues. An illiquid ETF has a higher bid-ask spread and may trade significantly above or below its net asset value (NAV). These situations can result in lower profits – for example, if the ETF purchase price is above its NAV, a buyer is overpaying for the assets she is buying.

5. An ETF is a slave to the index it tracks.

The assets inside an index ETF are rigidly defined by whatever index it tracks. Depending on the index, this design can be a recipe for undesirable results. For example, when BlackBerry stock fell 26 per cent on June 28, 2013, the S&P/TSX Capped Information Technology Index Fund, which at the time consisted of almost 20 per cent BlackBerry shares, dropped 8 per cent.

Understanding how an ETF is constructed must be part of ETF research before purchasing.

6. You will own some investments that you don’t like.

An index ETF owns shares of all the assets in the index it tracks, even ones you may not want to own. A nuclear energy opponent will own a piece of uranium miner and nuclear industry supplier Cameco if you buy an ETF that tracks the S&P/TSX 60 Index. That same index includes shares of SNC-Lavalin Group Inc., a company that some might consider a poor investment because of allegations of corruption.

There is no easy way to get around this issue. While all the holdings of an ETF may be acceptable when you buy, this could change in the future because of the fund’s design.

7. Commissions will eat into your profits.

Everyone gets paid for their work. Buying or selling an ETF usually involves a commission. These costs lower your returns and are a major profit drag on smaller-sized purchases.

Lower-cost discount brokers and dividend reinvesting can reduce the commission hit. Some online brokers offer a lineup of commission-free ETFs. However, the selection is limited and minimum purchase and holding requirements may apply. Don’t let the fact that an ETF is commission-free drive your purchase decision. You might save a few bucks, but are unlikely to make the best choices. Remember, there is no such thing as a free lunch.

8. There is an art to buying and selling ETFs.

Pricing anomalies can occur in the ETF trading world. For example:

– At the beginning and end of the trading day, ETF prices may vary from underlying NAVs.
– In times of market turmoil, an ETF’s prices may be more volatile than its underlying index.
– Thinly traded ETFs can have large bid-ask spreads.

You must learn how to buy and sell ETFs, to avoid overpaying in such situations. Here are some of the basic rules of ETF trading.

1. Always use limit orders.
2. Do not trade in the first and last minutes of the trading day.
3. Trade an ETF when the market for its underlying assets is open.

Book Review – THE WILLS LAWYERS – their stories of money, inheritance, greed, families and betrayal

Barry Fish and Lex Kotzer have done all Canadians a great service with this book – and there is a touch of humour amongst the angst and situations revealed.  The vignettes are easy to read and understand – they speak the truth about families in time of loss.

All of the situations are actual cases with names changed to protect the “guilty” – and that makes them all the more memorable.  #10 – “Goin’ out in style” – brought to mind some of my own experiences with people who “put on the Ritz” at someone else’s expense and the truth is never known outside a tight family circle.  Keeping up an image gets more expensive all the time!

“I fought back” brings the truth about the effects of financial abuse of the elderly – usually parents.  Physical and emotional abuse are usually noticed by others but financial abuse can hide for decades.  Readers need to be aware of the horrendous cost (other than financial) to the victims of financial abuse. And several stories here make the point very well.

The “Un-will-ing” narrative caused me to laugh out loud at the thought of Clement using his will to make some excellent points with in-laws and so-called friends – it was perfect!  “Wills as a weapon” has a similar tone and story – wills can become messages from the hereafter to the living and sometimes the lessons are bitter.

Living Wills or Substitute Decision Agreements or Representation Agreements – a rose by any other name – a critical part of the estate planning process don’t escape this review.  “I heard my mother’s words” is a poignant story that regrettably is repeated daily in thousands of hospitals across Canada – if this doesn’t cause you to think and then quickly act, it is hard to image what will.

“The first wife” brought the laughter back – maybe a lot of truth in this one!  “The Hospital visit” evoked another round of chuckles – and you can see it happening which makes it even better!  And “The last wish” has the perfect timing you can sense was coming! “The code” was a tough one to read – the impact on children is beyond words and I have had the same reaction working with clients in this type of situation.

In short – every lawyer and notary that handles Wills and Estates needs to read this book – objectively.  The same applies to financial advisors – everyone needs to be aware of the issues that can and do arise and take appropriate steps to help their clients avoid such situations. Bankers are also advised to set aside some built-in prejudices and learn more about helping their clients too!

401k Plan Fiduciary and Performance Responsibility

Anyone who influences the investment product mix should likely be a fiduciary… but only if the selected investment managers are fiduciaries as well.

Yes, that eliminates all Mutual Funds and ETFs, since neither admit fiduciary responsibility. But Mutual Funds, ETFs, and Collective Trusts could be recommended by plan fiduciaries who are not paid for product placement.

Plan sponsors could be required to use: fee only plan advisors, non-product investment education providers, and 3(38) fiduciaries, TPAs and record keepers that help keep all the fiduciary bases covered.

Collective Investment Fund Trustees and Investment Managers are fiduciaries.

If Plan Sponsors do all the above, their responsibility is covered, and plan participants can be responsible for their own investment mistakes… subject to the product alignment rules outlined below.

What happens in the case of an individual brokerage account option within the plan? Are Plan Sponsors responsible for the performance of these portfolios? Perhaps, but just from a qualification standpoint… Rules that impose fiduciary liability on employers will eventually kill defined contribution plans dead!

So how should we deal with investment performance?

What constitutes poor performance, and how can performance be judged when all plan participants will have somewhat different investment objectives and risk tolerances?

If I want an income building, convertible-at-retirement CIF, that’s my choice… investments with income or “working capital” preservation objectives can’t be judged with a market value ruler.

If I get a 50% match from my employer, that’s an annual 50% gain on contributions… my good fortune, my business, my selections. Similarly with cost. If my program develops a convertible, 6% income, portfolio, why should it matter if the expense ratio is higher than with standard 401k income products?

Again, participant’s choice… leave the employer alone.

My solution would be an investment menu “warning system” based on product risk assessment and a system of controls on individual portfolio content.

The menu composition rules and participant selection controls would be based on risk recognition and income production instead of market value history… higher quality plus reasonable income should equal a more secure retirement.

All participants currently have access to  “performance”, “income production”, and “expense” information;  few convert the data into realistic performance expectations, or risk assessments.

A simple warning label could flag high risk products.  Plans must have less than 20% “high risk”  and at least 30% “low risk” opportunities in selection menus containing between 20 and 40 selections.

Participants must select at least 10 products… no more than two “high risk”, no less than three “low risk”. No high risk and all low risk is the “default” within three years of retirement.

No single portfolio position could exceed 25% of the portfolio… any excess would automatically be reallocated among four default positions. None of the “most risky’ products could be “default” choices, and at least one of the least risky must be.

Done. No DOL aggravation required.

For more information, contact a qualified 3(38) fiduciary at either QBOX Fiduciary Solutions or Expand Financial.