FORUM Magazine - February 2022

FORUM FEBRUARY 2022 • $5.50

The Magazine of Influence for Financial Advisors

DOUSING THE

FIRE Preventing inflation from burning a hole in client portfolios

SETTING UP A CLIENT ADVISORY BOARD

MIXING LOVE AND MONEY EFFECTIVELY PROSPECTING FOR NEW INSURANCE BUSINESS

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FORUM VOLUME 52, 1

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FEBRUARY 2022

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ISSN 1493-826X

FEATURES Dousing the Fire

12

Bryan Borzykowski explains how advisors can prevent inflation from burning a hole in client portfolios

18

Stepping Stone

Four advisors tell FORUM why they decided to get the Professional Financial Advisor (PFA) designation

DEPARTMENTS

COLUMNS

6

28 TAX UPFRONT

EDITOR’S JOURNAL Examining the values and priorities of Millennials

8

OPENERS What travel insurance covers today; taking care of undesirables; love and money conversations

32 ADVOCIS NEWS Association updates, events, and memorial tributes

TFSA guidance for executors

BY DOUG CARROLL

22

Building a Board

Client advisory councils allow clients to consult on your business at a deeper level.

April-Lynn Levitt explains how they work

30 ESTATE DILEMMAS CRA responds to CALU inquiry on gifting insurance policies

BY KEVIN WARK

31 CORPORATE INSURANCE Implementation of an estate freeze is not straightforward for some businesses

BY GLENN STEPHENS

COVER PHOTO: ISTOCKPHOTO

34 THE FINAL WORD Keep Moving Forward

BY GREG POLLOCK

Publication Mail Agreement # 40069004 Return Undeliverable Canadian Addresses to FORUM Magazine Circulation Department, 10 Lower Spadina Avenue, Suite 600, Toronto, Ontario M5V 2Z2

24

New Prospects

Richard Parkinson shares his ideas on discussions with new insurance clients FEBRUARY 2022 FORUM 5

BY DEANNE GAGE

Values and Priorities

I

’m a bit late to the party, but I’m working my way through a fascinating report called Values and Priorities of Millennials in Canada — a must-read for advisors to better understand our most populous generation and their financial attitudes. The report is written by behavioural science expert Dr. Brooke Struck for the FP Canada Research Foundation.

Here’s an interesting nugget in the report: Millennials may bill themselves as investment savvy and proponents of low-cost index funds and robo-advisors, but when given a series of financial literacy tests, their answers fell short of expectations.

While Millennials often have a reputation for eschewing professional financial advice — preferring to take the financial reins themselves, feeling they don’t have enough assets to warrant an advisor, or not wanting to pay advisor fees — some are more receptive. Older Millennials especially may be at a life stage where they need someone to take a comprehensive approach and investigate any gaps in their finances thus far.

But “How much do I need for retirement?” may not be top of mind for these clients as more pressing needs abound.

They might desire advice on whether owning a house will ever be possible, or on figuring out how to survive between self-employment contracts as income is deposited more sporadically than a biweekly steady paycheque. Be prepared to meet this generation where they are, Struck advises.

“Many of the supports traditionally available to long-term, permanent employees are not available to gig workers (and other temporary contractors), and so custom solutions may be required to ensure that workers are protected by a robust safety net,” Struck wrote in the report. “Previously normal expectations are also being challenged, and planners should be ready to build recommendations to support renting (in place of homeownership) as well as progressive retirement (instead of transitioning into full retirement overnight).

Planners will also need to take inheritance 6 FORUM FEBRUARY 2022

into more serious consideration than they do with other clients.”

This inheritance, of course, refers to the trillion-dollar wealth transfer to Millennials from their Boomer parents. A U.S. study from Magnify Money has shown that 30% of Millennials receive financial support from their parents, and that statistic is the same for older Millennials approaching age 40.

And CIBC Economics found that parents give their adult kids an average monetary gift of $52,000 for a down payment on a house.

Different generations often debate which generation had things worse financially. I’ll add a personal note to this debate. It’s the mid 1990s, and my first real job out of university paid me a measly $23,000 a year.

Living at home wasn’t an option as my parents lived out of province. After much searching and networking, I ended up sharing a friend-of-a-friend’s bachelor condo with solarium and paid her $300 a month — quite the deal compared to the musty, roach-infested bachelor basement apartments fetching $650 to $750 a month.

Three hundred still kept me in the ideal 25% range of how much of my income to spend on rent. My peers who had similar wages had as many as six roommates, took on another job, or lived at home.

Last year, I noticed a familiar job vacancy on LinkedIn. It was my same employer and job position from back in the day! What did it pay 25+ years later, in 2021? An amazing … $26,000 a year. Something is very wrong with the system, whether it’s income levels, cost of living, amount of housing supply, or a combination of all those things. It was difficult living on that amount then. Now? Impossible given housing prices today.

Three hundred a month won’t even get you room and board.

Check out the report on Millennials at https://www.fpcanadaresearchfoundation.ca and click on “research and resources.”

Write to us! We welcome your letters and feedback.

Share by emailing dgageforum@gmail.com or contact me on Twitter @deannegage

FORUM PUBLISHER: Peter Wilmshurst advocisforum@gmail.com EDITOR: Deanne Gage dgageforum@gmail.com COPY EDITOR AND PROOFREADER: Alex Mlynek ART DIRECTOR: Giselle Sabatini gisellesabatini@rogers.com ADVERTISING: Peter Wilmshurst advocisforum@gmail.com Tel: 416-766-4273 Fax: 416-760-8797

TFAAC BOARD OF DIRECTORS CHAIR Rob Eby, CFP, RRC VICE CHAIR Catherine Wood, CFP, CLU, CHS PAST CHAIR Abe Toews CFP, CLU, CH.F.C., CHS, ICD.D TREASURER Eric Lidemark, CFP, CLU, CH.F.C., CHS SECRETARY Stephen MacEachern, CFP, CLU, CH.F.C., CHS CHAIR, INSTITUTE John W. Hamilton, CLU, FEA, CPCA CHAIR, CLC Will Britton, CFP DIRECTOR AT LARGE Wendy Playfair, CFP, CLU, CHS DIRECTOR AT LARGE Arun Channan, BASc, MASc, CSP, CFP PUBLIC DIRECTOR Geoffrey Creighton, BA, LLB, C.DIR., CIC.C PUBLIC DIRECTOR Sara Gelgor, LLB, LLM, MBA, ICD.D PRESIDENT & CEO Greg Pollock, CFP FORUM is published four times annually by The Advocis Publishing Group, 10 Lower Spadina Avenue, Suite 600, Toronto, Ontario M5V 2Z2 TEL: 416-444-5251 or 1-800-563-5822 FAX: 416-444-8031 FORUM is mailed to all Association members, the subscription price being included in the annual membership fee. Address changes can be made through info@advocis.ca or by calling member services at 1-877-773-6765.

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FORUM EDITORIAL ADVISORY BOARD MICHAEL BERTON, CFP, RFP, CLU, CHS Assante Financial Management Ltd. LEONY DEGRAAF HASTINGS, CFP, EPC deGraaf Financial Strategies NICHOLAS LANDRY, CEBS, CHS, RCIS BFL Canada - CSI ROBERT MCEACHERN, CFP, CLU, CH.F.C. McEachern Financial IZUMI MIKI-MCGRUER, CFP, CLU, CH.F.C., CHS Freedom 55 Financial

PHOTO: DANIEL EHRENWORTH

EDITOR’S JOURNAL

Tax Efficient Philanthropy

Do your clients own publicly traded securities (personally or corporately) in a non-registered account?

If so, donating securities in-kind can eliminate their taxable capital gain.

Contact Abundance Canada for more information on this and other tax efficient donation options.

Visit abundance.ca/for-professional-advisors or call 1.800.772.3257 to speak with a Gift Planning Consultant.

Generosity changes everything Abundance Canada is a public foundation registered with the Canada Revenue Agency (CRA). Abundance Canada is authorized to receive charitable donations, issue official donation receipts and distribute funds to registered charities in Canada and qualified donees through our donor-advised model. Charity Registration No: 12925-3308-RR0001.

OPENERS Fodder For the Water Cooler

M

ore than ever before, potential travellers, especially those who want to go outside of Canada, need to keep a vigilant eye on health-related issues going on here and in the rest of the world, and what insurers will and will not cover, particularly with COVID-19 variants of concern.

It’s quite a switch from March 2020, when essentially all travel insurers sold the same products, save for the maximum they would pay out to a client. But since the pandemic hit, the world of travel insurance has changed. Now, every insurance company has slightly different rules.

These changes often happen after the federal government alters its recommendations for travel and the insurers have to play catch-up on what they will cover, says Toronto insurance specialist Heather Freed, CFP, CLU, CHS.

Many insurers ask for double vaccination. Some travel insurers have announced they will provide coverage to travellers regardless of travel advisory levels issued

by Ottawa — at least for the time being.

Most importantly, says Freed, insurers are asking more medical questions nowadays, especially if the person has a pre-existing condition. “So the rules have really changed and the consistency has gone away.

Now, I can only tell clients what the situation is today and I have to qualify it by saying that I don’t know what’s going to happen tomorrow.”

WAM AIMS TO INCREASE WOMEN IN FINANCE

T

he Ivey Business School at Western University is getting set to launch its Women in Asset Management (WAM) program to increase the representation of women in the asset management field in Canada.

Currently, only one in four advisors in Canada is female, with women accounting for only 14% of fund managers in the United States. Just 6% of chief investment officers at the largest U.S. institutional money managers are women.

“We want to help move the dial,” says Steve Foerster, Ivey finance professor and co-director of the program along with colleague Saurin Patel. “The program is meant to attract women to asset management, especially those who might not have been aware of the positive social impact asset management can have on household wealth, such as pensions. Not 8 FORUM FEBRUARY 2022

Insurers, for the most part, are telling clients that if they have not yet started their trip, they reserve the right to make changes. Manulife is cautioning clients to be aware that entry and exit requirements, like quarantining, can change quickly and unexpectedly.

Should Canadians fall ill — for any reason, including COVID-19 — they MUST first call their insurer to ensure the claim will be paid, says Freed.

Some Canadian snowbirds are heading to the United States to get away from the cold and snow, but many are going for a shorter period of time, says Freed. Others have cancelled not because of travel insurance but because it’s their personal preference to stay put.

“You have to assess what your personal comfort level is and ensure that you have appropriate coverage. So buying travel insurance out of a vending machine at the airport like many people used to do is probably not your wisest choice.”

— Susan Yellin

only do we want to see more female participation, but we’d like to see women remain in the industry and fill more senior investment decision-making roles.”

The program is being developed for second- and third-year Western undergraduate women who are interested in learning more about asset management. WAM provides four weeks of in-class training in May, followed by a 10-week internship at an asset management firm from June to August. Courses cover everything from sharpening technical abilities in areas like behavioural finance and stock valuation to enhancing communication skills.

“We see great opportunities for women in engineering, computer science, math, economics, and all sciences and social sciences to have fulfilling careers in asset management, and make a difference,” says Foerster.

Admission and program materials are free to participants.

— S.Y.

PHOTOS: ISTOCKPHOTO

WHAT TRAVEL INSURANCE ACTUALLY COVERS NOW

BRANDING & SOCIAL MEDIA

BY ERIN BURY

TAKING CARE OF UNDESIRABLES

C

anadians avoid thinking about uncomfortable topics like death and taxes, and they delay prioritizing these “undesirable” tasks almost as much as they avoid cleaning their toilets. As a financial advisor, you’re tasked with ensuring clients have these undesirables taken care of — so how can you get clients to stop procrastinating and finally check them off their list?

START WITH WHY For many Canadians, the avoidance of these undesirable tasks is based on mistaken assumptions and a lack of education. For example, we hear people say all the time that they don’t have a will because it’s overwhelming and uncomfortable to think about, but just as often we hear people say that they don’t need one, or that their assets will just go to who they want anyway, so why bother.

It’s clear that education is key when it comes to the “why” behind getting undesirables done — for example, explaining why life insurance helps your family when you pass away, and breaking down the different types of insurance; explaining what happens if you die without a will; outlining what happens if you fall behind on your taxes; or sharing how the power of compound interest means that starting to save for retirement at age 25 is actually a great idea (even if your client just wants to spend that on a trip to Paris). Empowering clients with knowledge can remove the ambiguity around getting these tasks done, and create more realistic expectations of how much it will cost, how long it will take, and the consequences of not getting it done.

PROVIDE A HELPING HAND THROUGH THE PROCESS At Willful we partner with advisors nationwide to help their clients get wills in place, and we always hear the same thing: advisors are constantly reminding clients to get a will, but they just never seem to get it done. Typically, advisors give clients a checklist of things they need to complete, and clients put it off until they absolutely have to get it done (the night before the tax deadline, for example), or they put it off indefinitely while promising you that it’s at the top of their list. So instead of leaving it up to the client, flip the switch and spearhead the completion. This could mean using your quarterly check-in to bring in

specialists to ensure wills are drafted or updated and a life insurance policy is in place, or guiding them through an online tax software service. It might seem like overkill to watch over their shoulder as they complete these tasks, but sometimes people need a deadline to get things done — and there’s nothing better than your advisor saying “by the end of today’s call, you’ll have knocked off the three biggest to-dos on your list in less than an hour.”

INCLUDE UNDESIRABLES IN YOUR SERVICES It’s natural to avoid the “impossible tasks” on our to-do lists — the tasks that seem overwhelming, confusing, or like they’ll take a lot of time — especially when cost is a concern. As an advisor, you can help your clients complete their undesirable tasks by including this benefit as part of your fees or as a way to differentiate yourself and build loyalty. For example, you could pay for online tax software, or the first meeting with an accountant. You could offer a $50 deposit into their RRSP when they set it up.

Humans tend to procrastinate on things that seem undesirable or difficult. We tend to get things done faster when we have a deadline, and we get free stuff and rewards.

If you can appeal to any of those factors, you can start to override human nature to ensure clients have a fulsome financial plan that includes the important but not as fun stuff.

ERIN BURY is the CEO at Willful.co, an estate planning startup that provides an affordable, convenient, and easy way for Canadians to make a will online. Willful works with financial planners across Canada to help their clients get a solid estate plan in place.

FEBRUARY 2022 FORUM 9

OPENERS

UPFRONT WITH… Wallace Howick, FCPA, FCA, author of Love and Money: Conversations to Have Before You Get Married (CPA Canada) FORUM: Why do couples struggle with talking about money?

been paying down non-mortgage debt, which is often a point of friction. People are more aware of where the money is going and not going.

Wallace Howick: People enter marriage without fully understanding their financial position, or their attitudes about money, let alone those of their intended partner.

For couples, this void makes sound financial management difficult, even unlikely.

For each of us, money is laden with meaning. Our attitudes, beliefs, and values have been shaped over many years. These influences are very real but operate below the surface and therefore often go unrecognized.

FORUM: What are the top three issues couples fight about when it comes to money and other financial issues?

FORUM: Do couples like meeting with an advisor together?

WH: My sense is most advisors strongly prefer to meet with the couple. This opportunity gives the advisor a much better read on the relationship dynamics and the financial literacy of the couple as a team and therefore makes the advisor inherently more effective.

However, I know of a number of instances where the couple chooses otherwise and one person works directly with the advisor.

FORUM: In your own experience with clients, do you think a spendthrift and penny pincher can truly work together on financial issues?

WH: Maybe. Slowly. And patiently.

I have yet to meet a committed couple with such extremely divergent attitudes and values around money.

I suspect the extreme difference in attitudes and values about money are present in other areas of life, which makes becoming a committed couple unlikely.

10 FORUM FEBRUARY 2022

FORUM: Real estate is now unaffordable for many young couples without financial assistance from their parents. How does that affect a couple’s financial plan and expectations should the couple split up?

WH: A fulsome constructive conversation about expectations between not just the couple but the couple and the parents is important. Now the attitudes and values of four or even six people will shape the conversation. Once these are understood they need to be documented by a lawyer. Also, family law, which is a provincial jurisdiction, has much to say about the financial aspects of marriage breakdown and therefore “expectations.”

FORUM: During the pandemic, more people saved money in record amounts since there wasn’t much to do. Did this create better understanding among couples about the importance of saving?

WH: I hope so. It’s too soon to know yet. But what is clear is Canadians have

WH: Acknowledging the risks inherent in generalizing from my own professional experience, the first two would be a major purchase one partner “needs” and the other sees as an untimely and expensive indulgence, and discretionary lifestyle expenditures.

The third is about process: how to talk about money. This is why my book includes a section called “Now It’s Your Turn.” It offers tools for surfacing differences in attitudes and values and building constructive ways to talk about money.

FORUM: How do advisors handle the issue of “secret” accounts with some couples?

WH: If a partner has secrets I would want to understand why. One might have a secret account because the other has a gambling problem or one partner may have secret debt arising from past substance abuse. Second, I would ask the partner with secrets to consider if additional professional resources would be helpful/ appropriate and is there a pathway to openness?

Ultimately, the question becomes whether an advisor is able to well serve a couple where one partner requires the advisor to acquiesce in or facilitate their misleading of the other partner.

DID YOU KNOW? GEN Z * ARE MOSTLY KEEN SAVERS

74%

GenZers with a savings account

9%

The average percentage of income saved per paycheque

Top reasons for saving money

WHAT KEEPS INVESTORS FROM INVESTING IN ESG FUNDS?

41% I don’t know enough not sure it makes 21% aI’mdifference on non-financial issues

Emergency fund

Financial independence

advisor doesn’t 20% My offer ESG investments I don’t want to

77%

GenZers who put aside a portion of their income as savings SOURCE: CBA.CA

57%

GenZers who put aside a portion of COVID-related government benefits as savings

(*Gen Z are defined as anyone born from 1997 onwards)

investment 19% sacrifice performance I don’t know what 17% they are SOURCE: NATIXIS INVESTMENT MANAGERS

WOMEN ARE FACING MORE PRESSURE AT WORK THAN MEN In the last few months, which of the following have you consistently felt at work?

SOURCE: WOMEN IN THE WORKPLACE 2020, LEANIN.ORG AND McKINSEY, 2020

FEBRUARY 2022 FORUM 11

COVER STORY

Dousing

Fire the

Bryan Borzykowski explains how advisors can prevent inflation from burning a hole in client portfolios

12 FORUM FEBRUARY 2022

that high, which was suspicious,” he says. Two months later, Westhaver’s concerns were validated as inflation numbers started spiking — 4.1% in August and then 4.7% in October, an 18-year high. “I was glad the numbers picked up. It was nerve-racking being told there’s nothing happening when it certainly felt like inflation was rising.”

Westhaver, who got his first job in finance in 2008, has never had to factor these kinds of inflation spikes into his clients’ financial plans. While the cost of goods rose by 4.4% in 2021, between 2000 and 2020 prices climbed by just 1.4% on average, according to the BoC. It also doesn’t appear that these gains will be too short-lived, with many economists

PHOTO: ISTOCKPHOTO

I

t was last June when Kyle Westhaver first realized that a potential postpandemic economic recovery could be in trouble. The Toronto-based wealth advisor wanted to buy a used Volvo, but he was shocked to see that the cost of a previously owned car was the same as a new one. When he went to the Volvo dealership to see if he could buy something new, there were no cars to buy.

“There was the overlap in inflation and supply chain issues,” says Westhaver, who works for Nicola Wealth. Around that same time, he noticed the meat at his local butcher shop had risen by around 15%. “Everywhere you looked, prices were going up in a straight line.

Yet, at the time, Canada’s consumer price index (CPI) had only increased by about 3% year-over-year, which was within the Bank of Canada’s (BoC’s) normal range. “The numbers would come out saying inflation was not really

PHOTO: ISTOCKPHOTO

FEBRUARY 2022 FORUM 13

COVER STORY predicting above-average inflation for 2022. The Bank of Montreal, for instance, forecasts CPI to rise by 3.5% this year, RBC expects inflation to top 4.2% and 3.7% in Q1 and Q2, respectively, while TD says inflation will stay elevated and remain above 2% “for the foreseeable future.”

So far, clients don’t seem to be worried, says Westhaver, who hasn’t received many inflation-related calls. But that doesn’t mean he’s not preparing his portfolios to withstand a higher price environment. He, like many other advisors, is taking steps to ensure financial plans don’t get out of whack, that returns continue to outpace increasing prices, and that interest rate hikes — which many think could come this quarter or next as a response to rising inflation — are taken into account. “We’re already making changes,” he says, “such as diversifying into private assets and into securities that perform better in inflationary environments.”

Kyle Westhaver, CFP, CIM

PROTECTING PORTFOLIOS WITH VALUE STOCKS In Calgary, where decades of oil price ups and downs have made people there more aware of the impact of cost fluctuations, Julie Shipley-Strickland has been fielding calls from her older clientele.

Those who are in retirement are on fixed incomes, while many also lived through the 1970s and early 1980s when Canada’s annual inflation rate was often well above 7%. “That’s the biggest thing for them,” she says. “They’ve seen it all and those days are coming back to their minds.”

She’s spent a lot of time explaining to clients how inflation is calculated and why it’s rising: Because of supply chain backups, increasing demand for goods in reopened economies, government supports that have kept money in people’s pockets, and more. She also thinks it could be temporary, adding that if housing and energy costs were more normalized, inflation wouldn’t be as bad as it is now. “Some of that keeps them calm,” she says. “It also educates them — the more you’re educated on any matter, the more you’re comfortable with it.”

Many of her conversations have also centred around portfolio construction, with a number of clients asking what she’s done to mitigate inflation’s impact. Her answer? “We’ve got a higher position in value stocks than we’ve traditionally had because value does very well in higher inflationary environments,” she says. She’s also moved more client money into commodities, such as gold, oil, real estate, and agriculture — tangible assets that tend to rise in price along with inflation.

Shipley-Strickland began making some of these moves at the start of the pandemic, though not because of inflation: When people stopped driving during the first lockdown and oil prices nosedived, she started adding energy positions to her younger clients’ portfolios. “That world looked really, really positive,” she says. It was in Q3 of 2021, though, when she started adding more value stocks to her older clients’ portfolios to protect against inflation.

Of course, every client has different needs, so Shipley-Strickland has tweaked each portfolio in different ways. Generally, she increased some of her clients’ allocation to value stocks, particularly to consumer staples and banks. Her moves have paid off so far.

Those two sectors are up by 13.5% and 8.3%, respectively, over the 14 FORUM FEBRUARY 2022

last six months, compared to 5.1% for the S&P/TSX Composite Index overall, according to S&P Capital IQ.

PAYING ATTENTION TO RISING RATES There’s another inflation-related issue on people’s minds: Rising interest rates. In 2020, when the BoC and the Federal Reserve slashed their overnight rates to 0.25%, they both said they likely wouldn’t raise them until 2023. Now, many economists expect North America’s central banks to begin increasing rates in either March or April, with National Bank saying that the BoC will raise rates five times in 2022. (Omicron could delay any upcoming hikes, though it’s still too early to tell exactly how the variant might impact the economy.)

While a rapidly rebounding economy is one reason for the earlier-than-telegraphed hikes — central banks don’t need to spur borrowing and spending anymore — inflation is another. If the economy gets too hot, then the BoC, which wants inflation to be at around 2%, could increase rates to cool things down. That could present problems for bond holders versus dividend investors, says Jon Helm, a Victoria-based advisor with Sun Life.

“It’s certainly been a tough year in fixed-income markets because of the prospect of rising interest rates and rising inflation,” notes Helm. “That’s really been the focus for a lot of retirees who are on a fixed income and whose capital values haven’t performed at the same time as they’re watching record highs in the stock markets.”

PHOTO: ISTOCKPHOTO

“There was the overlap in inflation and supply chain issues,” says Westhaver. Around that same time, he noticed the meat at his local butcher shop had risen by around 15%.

“Everywhere you looked, prices were going up in a straight line.”

Balancing the impacts of rising rates and climbing inflation will not be easy for advisors and their clients. For one, they must deal with the prospect of lower returns as stock market gains tend to be more muted in a rising rate environment, while bond prices fall when yields rise. Then there’s the issue of purchasing power — if returns don’t exceed inflation then clients end up losing money, even if their overall portfolios rise.

Helm’s approach is to overweight portfolios with dividend stock–owning mutual funds. It’s tricky, though, because not all clients can stomach the volatility that comes with holding more equity. “It’s very dependent on the client’s risk tolerance and what they have the capacity to go through,” he says. “Can they handle the downside? Do we really want to respond to short-term infla-

tionary news by tilting a client’s portfolio toward equities if they haven’t experienced that in the past? Or is this just a short-term storm that we ride out?”

He’d prefer to make as few moves as possible, and says that if he’s done a good job planning and if his clients are on track to meet their long-term goals, then there’s no reason to be reactive.

However, “if it persists then this conversation will certainly be a big one,” he says.

Sean Harrell, a partner and senior advisor at Winnipeg’s Howe Harrell & Associates, is big on dividend equities, too. He works with a company called BCV Asset Management — the letters stand for Blue Chip Value — that invests in undervalued companies with growing dividends. In a note from September, BCV reported that it holds 25 companies in its Canadian Equity Model Portfolio, of which 20 raised their dividend and five held steady over the preceding 12 months.

Owning companies with a history of growing dividends is a good approach in any environment, but it’s a must in an inflationary one, says Harrell. Other investors agree: Net assets in the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF, which mimics an index that consists of companies that have increased their payouts every year over the previous five years, climbed by $100 million between June 25, 2021 and January of this year. The S&P/TSX Canadian Dividend Aristocrats Index also climbed by 18% over the last 12 months, beating the broader benchmark’s 17% return.

“We have a built-in inflationary hedge on the equity side of our FEBRUARY 2022 FORUM 15

COVER STORY

SHORTER-TERM MOVES

Julie ShipleyStrickland, CFP

“I always think of a portfolio like a pendulum,” says Shipley-Strickland. “If it’s in the middle, do we really want to swing one way to protect against inflation when all of this could already be priced into the market? It’s more about making some small tweaks as opposed to really swinging it to one side.”

Over the next weeks and months, advisors across the country will be looking carefully at how they can mitigate inflation’s impact. Some may work at firms that can buy physical assets, such as Westhaver at Nicola Wealth, whose clients have access to investments in buildings across Canada and the U.S. His company also invests in global infrastructure assets, which, according to Blackrock, outperform all other asset classes in low-growth, highinflation environments.

Many are also buying inflation-protected fixed income products, such as Treasury Inflation-Protected Securities (TIPS) ETFs. According to Bloomberg data, 18 inflation-related ETFs brought in US$35.5 billion in new cash between January and November of last year, equalling 37% of their assets. “Every single ETF with the word inflation in either its name or description has posted inflows so far this year,” Bloomberg reported.

But whether advisors add more dividend-paying stocks, laddered bond strategies, or whatever else they believe could protect against inflation, they have to think carefully about how far they might want to go. If supply chain backups resolve themselves sooner than later or if companies start meeting demand for their goods, then inflation could quickly disappear. The BoC has said it expects inflation to “ease back towards 2%” in the second half of the year, which doesn’t give people a lot of time to adjust their portfolios.

“I always think of a portfolio like a pendulum,” says ShipleyStrickland. “If it’s in the middle, do we really want to swing one way to protect against inflation when all of this could already be priced into the market? It’s more about making some small tweaks as opposed to really swinging it to one side.”

It’s also worth thinking about whether your clients will even 16 FORUM FEBRUARY 2022

feel the impacts of inflation over the next few months, says Westhaver. With COVID-19 keeping more people at home, many of his clients are spending less and saving more. At the same time, stock markets have done so well — the S&P/TSX Composite Index is up 87% since March 23, 2020 — that a lot of people are better off financially than they were before the pandemic. “I keep hearing people say their credit card bill was the lowest it’s ever been,” he says. “Technically, inflation has been higher, but there’s a huge buildup of cash, and all asset prices have gone way up. So your nominal investment return less inflation has been really positive.”

Still, when it comes to inflation Westhaver is being proactive, though he’s less concerned about what number it will be at in the next month. “We’ve gone through every one of our clients’ portfolios and updated their plans, but we’re looking out 10 to 20 years,” he says. “That’s when you’re really going to see inflation, right? If you’ll be 95 with $5 million, but the inflation rate is 2% then your purchasing power will be only half of that. This isn’t going to kill you overnight — it’s in the long-term projections where you really need to focus on it.”

BRYAN BORZYKOWSKI is a business journalist who has written for the New York Times, CNBC, BBC, Fortune, the Globe and Mail, and many other publications. He’s also the founder and editorial director of ALLCAPS Content, an award-winning content creation agency, is the author of three personal finance books, and appears regularly on CTV News Channel and SiriusXM radio.

PHOTO: KALEY HAYWARD PHOTOGRAPHY

portfolios,” he says. “The income on the portfolio is naturally being bumped up by increases in good blue-chip companies.”

What about bonds? Most advisors agree that you still need to own some fixed income, but how much is up for debate. Helm says that more clients in the accumulation phase are contemplating putting all of their money into equities, but both he and Harrell agree that bonds do still balance out a portfolio during a downturn. Still, Harrell is trying to trim back bond weightings as much as he can to try and get a higher return in the months ahead. How much he’s pairing back depends on the client’s comfort level and time horizon.

“The conversation with the client is about how many years we have,” he says. “If we have five to 10 years then we’ll probably get a better return in stocks [so we can take on more risk]. But two or three years? God only knows. That’s where clients will say, ‘we need some stability,’ which is right, but we’re pushing people a little more to the aggressive side right now to curb their need for return over the next five to 10 years.”

WIDE AWAKE FOR THE NEW YEAR. Like a fresh cup of coffee, a brand-new series of webinars is always a sharp idea. Stay tuned throughout the year as COFFEE TALKS returns monthly throughout 2022 with engaging topics, presenters, and complimentary CE credit opportunities for Advocis members.

advocis.ca/coffee-talks

CONTINUING EDUCATION

Stepping

Stone Four advisors tell FORUM why they decided to get the Professional Financial Advisor (PFA) designation

18 FORUM FEBRUARY 2022

Laurent Munier PFA, financial advisor, Safe Pacific Financial Inc., Vancouver

T

he PFA gave me a good, broad base knowledge of the things that I need to do to be successful and have longevity in this industry. I liked the way the PFA courses broke down the material into sections and the curriculum wasn’t strictly about the technical part of providing financial advice. There was a component about how to run a business, how to make a business plan. So that’s not related to writing a financial plan for

somebody but is related to me having success and being able to actually stay in the business so that I can continue to write financial plans for clients.

I would recommend it for any advisor starting in the business to make sure that they set themselves up correctly and with good habits. The course also covers compliance in great detail and is structured on real world case studies, which helps to put things in perspective.

The PFA is also accessible in that you can start with it when you join the industry or before you join. Whereas you need a university degree before you can even do some designations unless you’ve been working 15 years.

Theresa Pellizzari PFA, financial security advisor, Sovereign Wealth Management, Burlington, Ont.

T

he financial industry was a second career for me and it had been years since I studied and wrote exams. Studying for my insurance and mutual fund licence was a huge learning curve. After a few years in the industry, I decided the PFA was a great opportunity for me to refresh and reinforce a lot of the foundational information. Taking the courses, coupled with my field experience, made it a lot easier for me to understand what I was being taught and apply the information to my business.

I highly recommend the PFA for those new to the business after they get their licences. It’s the perfect curriculum to make sure you just don’t learn the information but you actually apply the information to your business.

FEBRUARY 2022 FORUM 19

CONTINUING EDUCATION Joe Lee-Owe PFA, financial advisor, Lee-Owe MacLeod Wealth Management Inc., Calgary

I

worked in the product side of the investment industry for a long time and made a move to the retail side because I preferred working with families on reaching their financial goals. I thought the PFA would be a good way to reignite the education process.

A large part of being an independent advisor is being a business owner, and it’s nice to see a designation that covers some of the basics of operating a practice, as well as being a practitioner.

The curriculum covers some interesting parts about business building, best operating practices, and tips for connecting with clients.

When advisors run a practice, they can get used to the same structure with onboarding new clients, managing existing relationships, and providing advice. The PFA really gave me an opportunity to step back and reassess how we do things. It was a great refresher to make sure everything was in the right place, that our procedures and systems are all up to date, and to learn some new marketing ideas.

Alicia Leblanc PFA, sales coach, The Co-operators Moncton, N.B.

I

’m a coach who helps new advisors build a business.

In our organization it’s mandatory to have at least one designation. I had already completed four CFP courses, but some time had elapsed from those courses and I needed a refresher so I decided to give the PFA a try. Besides providing good content, the PFA showed me how to apply

20 FORUM FEBRUARY 2022

what I learned to my business. I learned how to apply strategies to a meeting and how to implement a process into a sales cycle, for example. It gave me activities and exercises to prepare me to deal with various scenarios I may have in my current role. There was information about compliance and all the documentation.

The PFA also gave me the knowledge to develop a new process for my business, which was especially timely during this pandemic. Doing things virtually has meant that advisors had to show up differently when dealing with clients and processes.

YOUR NAME HERE

READY TO GO PRO? SELF STUDY NOW AVAILABLE advocis.ca/PFA

Become designated as a Professional Financial Advisor and develop a technical foundation alongside real-world professional skills, including: • • • •

Business Planning Prospecting & Marketing Effective Client Communication Compliance & Ethics

Learn more at advocis.ca/pfa

Advocis®, The Institute for Advanced Financial Education (The Institute™), CLU®, CHS™, CH.F.C.®, PFA™ and APA® are trademarks of The Financial Advisors Association of Canada (TFAAC). The PFA designation is conferred by The Institute for Advanced Financial Education.

CLIENT COMMUNICATIONS

Building a Board

Client advisory councils allow clients to consult on your business at a deeper level. April-Lynn Levitt explains how they work

22 FORUM FEBRUARY 2022

PHOTO: ISTOCKPHOTO

I

n the May 2021 issue of FORUM, my colleague Patricia Giesbrecht shared her strategies on how to ask for client feedback and then devise a plan to apply that feedback. Not surprisingly, asking for feedback can have a profound impact on your advisory practice if you know how to apply it. It can help strengthen client relationships, increase referrals, identify ideal clients, and better understand what your clients value most. It may feel like an intimidating task. Some advisors feel exposed and vulnerable and it does require time to co-ordinate. It is, however, worth it if you formulate the right plan to implement it.

Have you ever considered taking client feedback a step further and developing a client advisory board (CAB), also called a client advisory council? Let’s start by understanding how a CAB works. In the advisory world and other industries, a CAB is a group of clients, ideally your best clients, coming together to provide feedback and advice on the business’s effectiveness and future direction.

We have seen some of our clients create a CAB to enhance their client experience as well as their marketing initiatives, which ultimately impacts their business’s growth and future success.

Your best clients are the best fit for your CAB because you want more of them. They matter to you and so does their opinion. Many are likely business owners themselves and appreciate the same type of feedback from their clients. They may have their own CAB in place or you may inspire them to create one.

Because they are your best clients, they also likely have a deeper relationship with you and your business and have a good understanding of your value and ways to improve upon communicating that value.

Beyond this, below are other qualities you should consider when picking a client for your CAB: • Clients who you enjoy working with. You care about them, they likely are in the same stage of life as you, and there is mutual respect between one another.

• Clients who understand your business philosophy, your beliefs, your process, your brand, and overall business direction so they can help you see innovative ways of continuing down that path.

• Clients in your “sweet spot” who have the funds for you to make a difference in their lives and who understand the importance of comprehensive planning.

• Clients who are likely to refer you to others, who would have the best opportunities to do so, and understand your services and product offering.

• Clients who are somewhat extroverted so they are comfortable speaking in front of others.

• Other professional advisors, such as your accountant or legal professional, to get a different perspective.

You may choose to meet with your CAB virtually or in person, perhaps a few times a year or quarterly. Ideally, you can take them to dinner or do an activity you all love to do.

You can also hold a virtual event and have a bottle of wine or dinner delivered to their home before the meeting.

Whatever you decide, collecting insightful information is the most important goal of these meetings. This is most likely to happen with a prepared agenda. Some advisors will get a third party, such as their business coach, to facilitate on their behalf. This would help you relieve some pressure so you can focus on listening versus facilitating.

A CAB is a step above one-on-one client feedback, simply because the conversations will go deeper. One idea will often spark several ideas from others and they will build on each other.

Your CAB should have the opportunity to communicate why they chose you over other advisors; what they believe is most valuable to them, their business and their family; and what they like most about working with you and your team.

They should also have the opportunity to discuss what they would like to see in the future or ideas they have for you to grow and improve your business further.

If you are focused on adding new ideal clients to your practice, here’s a great question to ask your advisory board: “If you were me, what would you do to attract more clients like you?” We have seen some great suggestions and increased referrals from just asking this question. This powerful question gives you insightful answers and you are showing your CAB how much you truly value their business. So much so that you want more of them!

Also, open up a discussion around thoughts and ideas about your services. What would your CAB like to see prioritized? Are there any issues they have with your solutions? What problem did they have before working with your team that you have since resolved for them?

With the increased emphasis on technology in these virtual times, it is an opportune time to get client input on how easy it is to do business with you in the electronic environment.

Make sure you also save time to discuss your own vision for the company and the priorities you see on the horizon. Give the CAB the opportunity to ask questions about your vision and offer feedback.

Likely from this engaging discussion, themes will emerge and you will notice that comments end up being similar across the board, especially since these are your ideal clients and they likely all appreciate your business for similar reasons.

Not only will this help you with building your business in the future, but your CAB members are more likely to do more business with you and introduce you to someone else because of the strengthened relationship you have developed.

The CAB will also know that they are your priority.

They will understand that their feedback and opinions matter. When they see feedback get implemented, they will more inclined to provide more suggestions. And they may ask you to do the same with their business and join their CAB. APRIL-LYNN LEVITT is a business coach with the Personal Coach, providing customized coaching to financial advisors and their teams.

FEBRUARY 2022 FORUM 23

INSURANCE

New Prospects

Richard Parkinson shares his ideas on discussions to have with new insurance clients

24 FORUM FEBRUARY 2022

PHOTO: ISTOCKPHOTO

A

new prospect can appear from many sources. Perhaps it’s a referral from an existing client, an orphan your managing general agency asks you to take over, a stranger you meet in public, or someone who comes to your home to service an appliance or furnace.

Some prospects come to you with formed opinions on insurance, usually about the price and the myth that insurers don’t pay out their claims when in fact $8.4 billion was paid out in death claims alone in 2020, according to the CLHIA Fact Book.

In any case, building rapport is an important first step when meeting new prospects. Start by learning as much as you can about them, about their history, family members, occupation, and personal interests. Also be prepared to share some of your personal information as well. People are more likely to deal with people they like and can relate to, and are turned off by advisors who are too pushy, or give the appearance of lip service to their concerns.

Once rapport is established, learn about their financial concerns, and if they already have individual or group plan coverages. One of the questions I ask when someone tells me they have a group plan is whether they plan to stay with their current employer or if they are likely to make a job change within five years. The latter suggests the group coverage should be considered a bonus versus an integral part of a final financial plan.

One quick comment: when a client identifies that they have a Universal Life policy, make sure to get an inforce illustration for it, and check the cost of insurance. Most of the time when I do this the original agent chose yearly renewable term (YRT) for the cost of insurance, so the inforce illustration will show you if the policy will run out of cash to supplement the premium before life expectancy, which they often do. Better to find out at the beginning of your relationship.

There are lots of needs analysis websites out there, but the problem I have with them is they ask for input numbers, then give you an answer, but they don’t show their work. I recommend you create your own needs analysis. I created a needs analysis sheet in Excel for life, disability, and critical illness because I can show the client how my recommendation for coverage was calculated. For example, for the income replacement component of, say, $2,000 per month for life insurance, is the capital required before tax or after tax, and how many years before the capital can be depleted to zero?

Once you have completed the needs analysis, and both you and the client understand the risks and how insurance can address those risks, you can start to work on a plan that addresses their needs and their budget.

Often a client or clients require life, disability, and critical illness, but the combined costs are beyond their desire to pay. What to do? Let’s address each type of insurance separately.

LIFE INSURANCE • Term insurance is three to four times lower cost than permanent, and given term can be converted to permanent up to age 75, company dependent, without medical evidence, starting with term is certainly going to save monthly or annual premiums. Note that paying annually saves 18% interest over paying monthly with most carriers.

• Most companies allow a term 10 to be switched to a longer-term plan within the first five years of the policy in force, so even though a term 20 to 30 may be the ideal coverage determined from your needs analysis, e.g., perhaps a spouse is on maternity leave so family income for the next year or two is reduced, to minimize initial costs, start with term 10, then plan to switch to term 20 or longer in two to three years. The switch does not require medical evidence, but the rate at the switch date is at attained age, so this scenario works well for younger clients age 35 or younger, but is still workable for older clients as well, you just need to do the math.

• I know of four companies that offer decreasing term coverage, which is ideal for a decreasing risk such as protecting a mortgage. And with people over 50, the savings can be substantial. Also, Canada Protection Plan, for simplified issue clients, offers a decreasing term 25, which is much more generous in the rate of decreasing coverage, so definitely check it out for age 60 or younger. On occasion I have found $350,000 of decreasing term 25, as in the example on the next page for an age 50 male, to be less than $250,000 of level term 25 and takes to year 17 before the coverage drops below $250,000. For those clients where this fits, it would likely be rated 200% with a medically underwritten plan, and if the decreasing concept works for them, it can be a cost-effective solution.

LONG-TERM DISABILITY (LTD) INSURANCE Given someone in their early 30s is about six times more likely to experience a disability before age 65 compared to dying before age 65, disability is certainly high on the list of mandatory coverage, especially if they are not covered by a group plan and work in a risky industry, e.g., truck driving, construction, roofing contractor to name a few. Some considerations to reduce the cost of disability are: • Some plans are available offering injury only, and offer a substantial savings over injury and illness. So while not the ideal coverage, I find truck drivers like the injury only as it is inexpensive and is, in their minds, the most likely cause of a disability (from a crash).

• Depending on your occupation, long-term disability (LTD) can be expensive, especially in older ages. LTD comes with myriad options that can also affect the price, the elimination period, and the benefit period. I am not a fan of a benefit period other than to age 65, FEBRUARY 2022 FORUM 25

INSURANCE but some clients may want a shorter period if the cost savings are substantial, which they can be. My 41-year-old son became disabled at age 34 with multiple sclerosis, and fortunately had a group plan that will pay him to age 65, so a five-year plan would have been a disaster for him.

• The additional insurance rider (AIR) is one option that may be useful to reduce costs initially. Here, a small monthly premium allows you to start with a lower initial premium then annually increase your coverage as your income increases in future years.

As the table below shows, the client could start with $3,000 of coverage initially at $75.65 monthly, or start at $1,000 monthly with the AIR at $31.78 monthly, then build up the coverage over time as income allows. Note there can be a lot of nuances around this.

• When clients have a group plan, they may feel they do not need an individual LTD plan, however, make sure you obtain a copy of their booklet, and make sure they understand the definition of disability, which is usually regular occupation for two years, then any occupation thereafter. So typically, after two years the insurance companies try hard to cut them off claim. Also check the no evidence maximum (NEM), as I have found some clients

Table showing how the coverage reduces each year for Canada Protection Plan’s decreasing term 25 - Male age nearest 50 - non-smoker / level coverage premiums also shown Canada Protection Plan offers decreasing term plans for term 25 only. The rate of decrease is guaranteed, i.e., the amount in a given year is what your beneficiary will receive regardless of how much is owing on your mortgage, as this coverage is not tied to your mortgage in any way. The table below shows how.

Monthly and annual premiums for decreasing term 25 - Max. $500,000 with Simplified Elite Term Coverage amount:

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Monthly premium:

$51.21

$74.12

$97.02

$119.93

$142.83

$165.74

$188.84

$211.55

$234.45

Annual premium:

$569.00

$823.56

$1,078.00

$1,332.56

$1,587.00

$1,841.56

$2,098.22

$2,350.56

$2,605.00

Coverage amount:

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Monthly premium:

$72.63

$106.25

$136.86

$173.48

$207.09

$240.71

$274.32

$307.94

$341.55

Annual premium:

$807.00

$1,180.56

$1,520.67

$1,927.56

$2,301.00

$2,674.56

$3,048.00

$3,421.56

$3,795.00

Monthly and annual premiums for level term 25, i.e., coverage doesn't change - Max. $500,000 with Simplified Elite Term

Starting coverage amount ---->

$100,000

Incrementor amount ---->

$50,000

I have highlighted $350k decreasing and $250k level to show the premiums are comparable, but the decreasing plan gives you more coverage for the first 16 years, so is the better deal in my opinion.

Decreasing term coverage amounts from Canada Protection Plan - all ages, either sex

Coverage amount:

$100,000

Year

Term 25

1

$100,000

$150,000 Term 25

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

Term 25

Term 25

Term 25

Term 25

Term 25

Term 25

Term 25

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$500,000

2

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

3

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000 $500,000

4

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

5

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

6

$97,500

$146,250

$195,000

$243,750

$292,500

$341,250

$390,000

$438,750

$487,500

7

$95,000

$142,500

$190,000

$237,500

$285,000

$332,500

$380,000

$427,500

$475,000

8

$92,500

$138,750

$185,000

$231,250

$277,500

$323,750

$370,000

$416,250

$462,500

9

$90,000

$135,000

$180,000

$225,000

$270,000

$315,000

$360,000

$405,000

$450,000

10

$87,500

$131,250

$175,000

$218,750

$262,500

$306,250

$350,000

$393,750

$437,500

11

$85,000

$127,500

$170,000

$212,500

$255,000

$297,500

$340,000

$382,500

$425,000

12

$82,500

$123,750

$165,000

$206,250

$247,500

$288,750

$330,000

$371,250

$412,500

13

$80,000

$120,000

$160,000

$200,000

$240,000

$280,000

$320,000

$360,000

$400,000

14

$77,500

$116,250

$155,000

$193,750

$232,500

$271,250

$310,000

$348,750

$387,500

15

$75,000

$112,500

$150,000

$187,500

$225,000

$262,500

$300,000

$337,500

$375,000

16

$72,500

$108,750

$145,000

$181,250

$217,500

$253,750

$290,000

$326,250

$362,500

17

$70,000

$105,000

$140,000

$175,000

$210,000

$245,000

$280,000

$315,000

$350,000

18

$67,500

$101,250

$135,000

$168,750

$202,500

$236,250

$270,000

$303,750

$337,500

19

$65,000

$97,500

$130,000

$162,500

$195,000

$227,500

$260,000

$292,500

$325,000

20

$62,500

$93,750

$125,000

$156,250

$187,500

$218,750

$250,000

$281,250

$312,500

21

$60,000

$90,000

$120,000

$150,000

$180,000

$210,000

$240,000

$270,000

$300,000

22

$57,500

$86,250

$115,000

$143,750

$172,500

$201,250

$230,000

$258,750

$287,500

23

$55,000

$82,500

$110,000

$137,500

$165,000

$192,500

$220,000

$247,500

$275,000

24

$52,500

$78,750

$105,000

$131,250

$157,500

$183,750

$210,000

$236,250

$262,500

25

$50,000

$75,000

$100,000

$125,000

$150,000

$175,000

$200,000

$225,000

$250,000

26 FORUM FEBRUARY 2022

Client:

Male age 35

Elimination period:

90 days

Rate class :

3A

Benefit period:

to age 65

Plan:

Manulife Venture

Regular occupation:

to age 65

Annual income:

$50,000

Coverage

Basic - no options

Additional insurance $3K

Monthly total

$1,000.00

$28.22

$3.56

$31.78

$1,500.00

$40.07

$3.56

$43.63

$2,000.00

$51.93

$3.56

$55.49

$2,500.00

$63.79

$3.56

$67.35

$3,000.00

$75.65

$3.56

$79.21

With $3,000 of additional insurance, this plan allows the client to increase their coverage by $600 per year, income qualifying, etc., to age 45, $300 annually age 46 –55.

Client:

Female age 35 NS Basic–3–4 illnesses–SSQ

Coverage

Enhanced–25 illnesses–Canada Life

Term 20

Term to 75

Term to 100

Term 20

Term to 75

Term to 100

$25,000.00

$19.53

$16.31

$19.33

$13.34

$22.23

$28.62

$50,000.00

$21.06

$32.63

$38.66

$26.69

$44.46

$57.24

$75,000.00

$31.59

$48.94

$57.98

$40.03

$66.69

$85.86

$100,000.00

$33.21

$58.81

$67.95

$43.29

$76.32

$99.00

are surprised to learn they will not receive 66% of the income, but rather a nominal amount (such as $2,000) as an NEM. If you are not a group person, contact a group wholesaler from one of the insurance companies and ask for some training on group plans.

Also address integration of benefits. For more information on this, refer to my article in the May 2020 issue of FORUM called “Benefits Integration” on page 28.

CRITICAL ILLNESS (CI) INSURANCE CI is often the last coverage clients consider, as often their budget is already topped with life and LTD. However, it is my opinion that something is better than nothing, so even $25,000 of coverage will help out. I can attest to this personally. When I started in this business in 2003, I bought a $50,000 CI policy for myself, but did not think about getting one for my wife. Back in 2013 she had a claimable incident that impeded her ability to drive, so I became chauffeur to the many labs and doctors’ appointments, plus domestic duties like grocery shopping, meal planning and cooking, and house cleaning — all tasks she used to do. It was a major impact to my productivity and income. So, the message here is a critical illness affects everyone, especially the spouse, so having some extra cash to make ends meet comes in handy. And I actually had a claim on my own CI policy last year, and received $50,000 while I recovered from my surgery.

So how can we minimize CI premiums?

• Close to 85% to 90% of claims are for the major CI claim causes such as heart attack, cancer, and stroke, so this will save you a few dollars. For a 35-year-old non-smoking female, a basic plan providing $50,000 of coverage to age 75 and three illnesses is around $32 a month, but the enhanced plan covering 25 illnesses is around $44 a month. You will need to help the client decide whether the reduced plan is worth saving $12 per month. The table above shows a rate comparison for these two plans: • While term 20 is a lower-cost option, I am not a fan of less than term to 75, and ideally term to 100 for the small difference in cost.

• Forget about return of premium, as it is not good value, in my opinion, as explained in my critical illness article in the FORUM May/June 2018 issue.

• My rule of thumb, when there is nothing else influencing the coverage amount, is that one year’s after-tax income is a good starting point. Again, I reiterate with the client that something is better than nothing.

Turning a new prospect into a client is a process that can’t be rushed. Demystifying all their insurance options based on their budget and financial circumstances puts you well on your way.

RICHARD PARKINSON, CPCA, is an independent insurance broker based in Vancouver.

FEBRUARY 2022 FORUM 27

TAX UPFRONT

BY DOUG CARROLL

Unexpected Taxes TFSA guidance for executors

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rom its humble beginning in 2009 and that first $5,000 of contribution room, the Tax-Free Savings Account (TFSA) has grown to become an increasingly important component of our savings. Cumulative room in 2022 is $81,500 for those who were at least 18 in 2009, which means investment accumulation could be well into six figures.

And the investment accumulation could be double that for couples who can use the survivor rollover rules on death without affecting the TFSA room of the spouse/common-law partner (CLP). The qualifying rollover amount is the lesser of the TFSA’s fair market value (FMV) at death and the amount paid to the survivor.

It’s a generous feature, but the “lesser of ” constraint can be problematic, in addition to tax leakage when income is earned while awaiting transfer to the survivor.

Though these concerns may be minimal if the transfer happens quickly, they can become costly if the proceeds go through an estate, particularly when there are delays in administration. Fortunately, there are some things an executor can do to limit the harm.

TAXABLE EVENTS It may seem odd to think of a TFSA as taxable, given its name. But it can happen, either through overcontributions during the holder’s life, or following the holder’s death. For couples, the easiest solution in the case of death is to designate the spouse/CLP (the survivor) as successor holder, either on the plan or through the holder’s will. The TFSA continues to exist in its current form, with the survivor carrying on as its new holder.

The use of a beneficiary designation does not have the same continuity effect, even if the survivor is the beneficiary. Such designation assures that the plan proceeds go to whoever is named, including avoiding probate tax in provinces where that is 28 FORUM FEBRUARY 2022

an issue. But income tax will still apply on earnings after death.

A TFSA may be in the form of a deposit, annuity, or trust. For deposits and annuities, the holder’s death causes a disposition of the TFSA at FMV, with any subsequent earnings taxable to a beneficiary(ies) or estate.

TFSA TRUSTS A TFSA trust continues as a non-taxable trust after the holder’s death, until distributed to beneficiaries. Though this sounds like a positive result, any income earned after death is indeed taxable, but generally to the beneficiaries. However, it will be taxed to the trust if the distribution has not occurred by December 31 of the year after the year of death, known as the “rollover period.”

As the owner of a TFSA can name a successor holder or beneficiary, one might ask why a TFSA would end up in an estate.

Apart from Quebec (where one cannot legally make such designations), the simplest answer is that the holder may not have been aware of this option, or that the named person is pre-deceased.

Alternatively, it may be a conscious intention to allow for the TFSA to fall into the estate to be managed according the terms of the will. This may be a strategic move to provide more flexibility in caring for heirs, possibly driven by mixed family considerations, a late-life marriage, disability issues, spendthrift concerns, charitable planning, or just general liquidity.

Whatever the reason, the executor now has control, so what then can be done — and why?

RISKS AND RESPONSES With the understanding that the executor’s first obligation to the estate is legal in nature, these tax issues offer extra impetus to obtain the official appointment without delay. Within those boundaries, here are

some tactics that may then be considered.

For a TFSA that comes into the estate, the continuing growth in the non-taxable trust will eventually be taxed as regular income when distributed to beneficiaries.

Accordingly, the executor could close the TFSA and deposit the proceeds to a nonregistered estate account that can take advantage of the preferred treatment of Canadian dividends and capital gains.

The executor could face a dilemma if the TFSA has fallen in value since death, as crystallizing that loss will reduce the eventual exempt contribution available to the survivor, due to that “lesser of ” calculation. On the other hand, assuming the TFSA has at least held its value, the exempt contribution will be unaffected, and the move out of the TFSA will protect against a future loss that could reignite this concern.

The additional benefit is if the new account is opened within the first 36 months of a graduated rate estate, low tax bracket rates will be available to use against this income. Still, a sufficient estate distribution would have to be made to allow the spouse/CLP to make an exempt contribution within the rollover period, again being up to December 31 of the year after the year of death.

As noted above, the executor’s first duty is to the estate, and in turn its beneficiaries.

Of course, the executor and spouse/CLP are often one and the same. Whatever the makeup of the estate, any tax-driven actions should first be discussed with legal counsel.

DOUG CARROLL, JD, LLM (Tax), CFP, TEP, is a tax & estate specialist with Aviso Wealth.

He can be reached at doug@douglascarroll.ca.

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ESTATE DILEMMAS

BY KEVIN WARK

Gifting Insurance Policies CRA Responds to CALU inquiry

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popular method of making a charitable donation is to gift an existing life insurance policy to a registered charity. However, tax issues can arise where the client converts a term policy and subsequently gifts the converted policy to a charity. Before reviewing this potential tax issue, let’s examine the more general tax rules governing the gift of an existing life insurance policy.

The donation of a life insurance policy is treated as a disposition of the policy for tax purposes. The Income Tax Act (the Act) provides that the policyholder is deemed to receive proceeds of disposition equal to the greatest of: • the value of the life insurance policy (defined to be the policy’s cash surrender value (CSV)); • the adjusted cost basis (ACB) of the policy; and • the fair market value (FMV) of the consideration received by the donor.

As a result, where an existing policy is gifted to a charity, the deemed proceeds will be the greater of the policy’s ACB and CSV immediately before the gift. This will result in a taxable policy gain to the policyholder where the policy’s CSV exceeds its ACB. The policyholder will be entitled to receive a charitable tax credit equal to the FMV of the policy, less the amount of any advantage received in making the gift. The FMV of the insurance policy would normally be determined through an actuarial valuation. Of note, the Canada Revenue Agency (CRA) has indicated that the donation tax credit is not an advantage for these purposes.

It is therefore advantageous to gift an existing policy where the FMV of the

policy exceeds its CSV, as the value of the charitable tax receipt will likely offset any gain that might arise from the disposition of the policy.

But there is a question of whether the same tax benefits will arise where the donated policy originated from a term conversion. For example, assume Ms. A acquired a 10-year term insurance policy that she does not plan to renew. Her advisor indicates that the policy may have value due to recent changes in her health status, which is subsequently confirmed by an actuarial valuation. So instead of terminating the policy, Ms. A plans to convert the term policy and then donate that policy to a charity in return for a donation receipt.

Ms. A’s advisors need to consider the rules in subsection 248(35) before finalizing the term conversion. These rules provide that the FMV of the gifted life insurance policy (unless the gift arises on death) will be the lesser of the ACB and the FMV of the policy immediately before the gift in the following two circumstances: • The donor acquired the policy less than three years before the day the gift is made; or • The donor acquired the policy less than 10 years before the day that the gift is made, and at the time the donor acquired the policy, one of the main reasons for acquiring the policy was to gift it to a registered charity.

Thus, if the conversion of a term policy results in the acquisition of a new insurance policy, this will restart the applicable three- or 10-year period from the date of the conversion. In Ms. A’s case, the donation credit would be reduced to be equal to the ACB of the policy, which would likely be nominal.

CALU asked the CRA to specifically comment on whether a term conversion would result in the acquisition of a new policy for purposes of these rules. The CRA responded as follows: … whether the conversion of a term life insurance policy to a permanent life insurance policy results in a new policy acquired by the policyholder at the time of the conversion … is a mixed question of fact and law and can only be determined on a case-by-case basis. All the provisions of an insurance policy should be reviewed to determine whether the changes are so fundamental as to go to the root of the policy.1 Given the uncertainty on this issue, the following planning should be considered when contemplating the gift of a term policy: • If a policyholder has already converted the term policy, and at that time was not planning to gift the policy, they should wait for the expiry of the three-year period before donating the policy. However, if a charitable gift was intended at the time of conversion, the policyholder will unfortunately need to wait for 10 years to pass from the conversion date before gifting the policy to ensure the charitable receipt will be equal to the FMV of the policy.

• If the policyholder has not yet converted the policy, the best approach may be to gift the term policy to the charity and have the charity convert the policy. 2 In summary, donors and advisors need to consider the application of subsection 248(35) to any gift of life insurance, and in particular, investigate whether the policy in question resulted from a term conversion.

KEVIN WARK, LLB, CLU, TEP, is the managing partner of Integrated Estate Solutions and tax advisor to the Conference for Advanced Life Underwriting (CALU). He is the author of the bestselling consumer book, The Essential Canadian Guide to Estate Planning (2nd Edition). A version of this article was previously published in CALU InfoExchange and is being published with the permission of CALU. For CALU membership information please go to www.calu.com.

1 CRA Technical Interpretation 2021-088239. 2 This also assumes that the term policy is not caught by the applicable three-year or 10-year time period as specified in subsection 248(35). If the term policy is subject to subsection 248(35), the donor will need to wait for the expiry of that time period before donating the term policy, and in some cases the policy owner may have to renew the policy at the expiry of a term.

30 FORUM FEBRUARY 2022

CORPORATE INSURANCE

BY GLENN STEPHENS

Estate Freezes Implementation is not straightforward for some businesses

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state freezes have been a planning staple for small business owners in the decades since the introduction of capital gains tax in Canada. As the term suggests, a freeze allows individual shareholders (typically, older parents) to cap the value of their shares at current levels.

At the same time, future growth is passed to one or more succeeding generations.

Capital gains tax on that growth is thereby deferred until the younger family members die or dispose of the shares.

For a couple of reasons, estate freezes may be of even greater interest at the present time: • The pandemic may have caused some businesses to temporarily decline in value.

This creates even greater opportunity for future growth to be transferred to younger shareholders. In some cases, this might entail a “refreeze” of shares that were frozen at a higher level in a previous year.

• Speculation persists that the capital gains inclusion rate will increase to 75% from its current level of 50%. If so, the value of tax deferral will increase accordingly.

There are many ways of implementing a freeze and they will not be addressed in detail here. The simplest method is for the older shareholders of an operating company (Opco), who may be the founders of a family business, to exchange their common shares for preferred shares. The latter shares would have a fixed redemption amount equal to the fair market value of the common shares, would be entitled to dividends, and in most cases would have voting control of Opco.

Properly structured, the share exchange described above would be tax-deferred, with the preference shares having the same cost base as the common shares. A fully documented valuation combined with a price adjustment clause is an integral part of this arrangement and is key to ensuring compliance with applicable income tax rules.

The parent’s preferred shares could be held until death, with the accrued gains being taxed at that time. Alternatively, they could be gradually redeemed using a technique known as a “wasting freeze.” The redemption proceeds would be taxed at dividend rates, which are currently higher than capital gains rates. For this reason, a wasting freeze will usually take place only where the parents require funds for living expenses.

Opco common shares could be issued to the shareholders’ children, perhaps only those who are active in the family business.

It is, however, becoming increasingly common for the shares to be issued to a family trust controlled by the parents as trustees.

The potential advantages of a trust are many: The trustees can be given the discretion to ultimately distribute the Opco common shares to one or more of the beneficiaries in such proportions as the trustees determine. This can be done on a tax-deferred basis. Thus, children who became active in the business might eventually acquire shares in their own name to the exclusion of non-active children.

The parents themselves can be beneficiaries and can receive shares if they ultimately decide not to make a distribution to the children. This would defeat the purpose of the freeze but does provide protection in the event they do not want the shares to go to any children.

The trust would own Opco shares directly. If the shares are sold to a third party at a future date, and if they are qualifying shares for the purposes of the lifetime capital gains exemption, each individual beneficiary of the trust may be eligible to take advantage of the exemption. Potential tax savings are in the range of $235,000 per person, depending on the province.

An increasingly common technique involves the use of a family holding company (“Holdco”) as a discretionary beneficiary

of the trust. The shareholders of Holdco could be various family members, including parents and adult children. With proper planning, dividends could be paid by Opco to the trust, then allocated to Holdco as a tax-free intercorporate dividend. Holdco could use these funds for investment purposes, and, as addressed in the next paragraph, for the acquisition of insurance on the lives of given family members.

Insurance advisors who are active in the family business market will understand the many potential advantages of using life insurance for estate and business succession planning purposes. For example, joint last-to-die insurance on the parents’ lives can be used for a variety of purposes, such as the payment of income taxes, balancing estate distribution amongst their children, and funding charitable bequests. In these circumstances, Holdco can be the owner and beneficiary of the insurance coverage, and can pay premiums from dividends received. Ultimately, the insurance proceeds (net of any policy’s adjusted cost basis) can be distributed as tax-free capital dividends to fulfill these planning needs.

Planners should also bear in mind the potential impact of the 21-year rule, which, if no action is taken before the trust’s 21st anniversary, will cause the realization of capital gains inherent in the trust’s shares of Opco. Unless there is a sale of the shares to a third party as described above, the practical effect of this rule may be to impose a 21-year limit on the duration of the trust.

While I’ve provided a simple overview of the benefits of an estate freeze, in many cases implementation is not a straightforward process. Legal and tax advice is a must to ensure that the desired results are obtained.

GLENN STEPHENS, LLB, TEP, FEA, is the vice-president, planning services at PPI Advisory and can be reached at gstephens@ppi.ca FEBRUARY 2022 FORUM 31

AdvocisNews ASSOCIATION UPDATES AND EVENTS

CHAPTER NEWS Advocis Members Give Back for the Holidays

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embers from Advocis Edmonton enjoyed spending part of their December volunteering at Edmonton’s Food Bank.

Advocis groups were tasked with quality control and building the baskets for the clients, and the chapter would like to thank all of the generous volunteers for donating their time to those in need.

Edmonton’s Food Bank serves more than 28,000 people a month, 40% of which are children.

Advocis Edmonton members volunteering at Edmonton’s Food Bank.

Chapter AGMs and Member December

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hapters recently held their annual general meetings for members, providing an opportunity for members to hear updates about advocacy and regulatory activities by National, chapter updates on 2021 initiatives, and their plans for 2022; and to be introduced to their local volunteer chapter board for the year ahead. As part of their Member December activities, chapters also included celebrations of long-standing members and newly designated graduates.

32 FORUM FEBRUARY 2022

Advocis St. Lawrence presents 2021 membership milestones at their holiday chapter gathering.

IN MEMORIAM Roy Alastair (Al) Rickard 1943–2021 dvocis sends its condolences to the family and friends of Al Rickard, who passed away on December 28. Al earned three university degrees in history before entering the life insurance industry in the early 1970s.

For several years he was the head of the Estate and Financial Planning Service at Mutual Life of Canada, later rebranded as Clarica. After the company was taken over by Sun Life, he became assistant vice-president of government and industry relations. He also served as chairman of the Canadian Life and Health Insurance Association’s Standing Committee on Distribution and Intermediaries for 16 years.

In 2007 he received FP Canada’s Donald J. Johnston Award in recognition of his contribution to the financial planning profession.

Separate from his regular employment, Al founded the Canadian Journal of Life Insurance.

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THE PETER W. NEWTON AWARD

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dvocis Thompson Okanagan would like to congratulate Caroline Radics as the recipient of the 2021 Peter W. Newton Award.

Created in memory of longtime member Peter W. Newton, the award is presented to a member of the chapter with at least 10 years in financial services, active membership in the chapter, and a demonstrated commitment to community service.

Frank Jollimore 1939–2021 dvocis was saddened to learn of the passing of Frank Jollimore on November 1.

Frank joined Advocis in May 1990, and

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served on the board of the Northwestern Ontario chapter from 1999–2007 as its treasurer, and also as IFATC chair and membership chair. In addition to a successful career in life insurance and financial planning, Frank was an avid volunteer for many charitable organizations, including United Way Thunder Bay, Heart and Stroke, Arthritis Society, Salvation Army, Cancer Society, and the Knights of Columbus. We send our condolences to his family and friends.

Brent Holmes 1966–2021 dvocis was saddened to learn of the passing of Brent Holmes on October 12, 2021. Brent joined Advocis in 2009, and served as sponsorship chair for the Durham chapter for close to a decade, as well as vice-president from 2014–2017. After his early career at TD, Brent worked for a mortgage brokerage firm before moving to insurance to start his own agency in Port Perry, Ont. We send our condolences to his family and friends.

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Advocis®, The Institute for Advanced Financial Education (The Institute™), CLU®, CHS™, CH.F.C.®, PFA™ and APA® are trademarks of The Financial Advisors Association of Canada (TFAAC).

FEBRUARY 2022 FORUM 33

FINAL WORD

Keep Moving Forward

BY GREG POLLOCK

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t press time, the world continues to hover in uncertainty — the Omicron variant of COVID-19 is having a considerable impact across our provinces, and the plans of many major institutions in our industry to gradually begin returning to offices have changed once again.

However, vaccine booster uptake seems promising — a reminder that great adversity can be faced with preparation, determination, and collective responsibility.

At Advocis, our members and staff have also accomplished extraordinary things in 2021, the spirit of which I am confident will continue into 2022.

To begin with, our legal and regulatory staff remain focused on the ongoing issue of title protection — one that will remain vital throughout the year ahead. Regulatory frameworks continue to come together in Ontario and Saskatchewan, with consultations now underway in New Brunswick. Advocis has been at the forefront of this conversation for many years, and we have always believed that once momentum began to move in its favour, it would quickly begin to pick up even greater steam. In 2022, we look forward to seeing this trend continue. The outstanding work of our chapters continues. Despite the limitations on gathering in person, they remained committed not only to their members but also to their charitable initiatives as well.

Thanks to the many chapters who held events and collected contributions toward a wide variety of food banks and other worthy organizations. At National, our Chapter Relations team was thrilled to recognize many of you in our “Member December” campaign, and offer congratulations to the Advocis members celebrating many years of both membership and service to Canadians through your work as a financial advisor. One of the finest privileges we have as an organization with a long history is the ability to celebrate individuals who have given as much as half a century to our industry.

Of course, we will continue working to advance the public interest directly through thought leadership in the area

34 FORUM FEBRUARY 2022

of financial literacy. We had an enthusiastic reception of our innovative work for Financial Literacy Month 2021 — especially our “Fin Lit Kit” for youth and accompanying Roblox game. Starting with our youth and up, an informed public can empower advisors to do smarter and better work on their behalf, and we look forward to seeing what the impact of a generation that has grown up with financial literacy as a fundamental element of their education will be.

This year, members can also expect a further unfolding of our diversity, inclusion, belonging, and equity (DIBE) strategy. Like any initiative that seeks to address longstanding and systemic issues, DIBE was never intended to be anything less than a multi-year campaign that connects with every facet of our organization. In 2021, we began the process of rolling out virtual learning opportunities to our staff and chapters, with additional training provided to leadership from both groups. We’ve paid particular attention to inclusivity in these sessions, with a two-part workshop on inclusive leadership to complement general sessions on managing implicit bias. We are committed to creating real change in this space.

Finally, I would be remiss if I did not briefly mention our continuation of Coffee Talks, the evolution of DigiCat, the development and expansion of our continuing education programs, and much more. Throughout this pandemic, Advocis has become resilient, creative, and forward-looking in ways I would have once said could not be predicted. As we enter our third year of the pandemic, we are now more than aware of how outstanding we can be under challenging circumstances when we work together, find ways to turn weaknesses into strengths, and choose the right directions to move in based upon where we know the industry is headed and where Canadians need us to be.

We know how to make it happen — all we need to do is keep moving forward.

GREG POLLOCK, CFP, is the president and CEO of Advocis.

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Advocis®, The Institute for Advanced Financial Education (The Institute), CLU®, CHS, CH.F.C.®, PFA™ and APA® are trademarks of The Financial Advisors Association of Canada (TFAAC). The PFA designation is conferred by The Institute for Advanced Financial Education.

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