New investment industry rules aimed at equipping individuals to understand their financial choices

A husband and wife should both get to know why their investment portfolio is constructed the way it is and how it will help them achieve their financial goals.

New rules coming into effect will make investment arrangements more transparent.
New rules coming into effect will make investment arrangements more transparent.
Jennifer Snyder
Jennifer Snyder

What is a suitable group of investments for you? Does it change over time? If it doesn’t, should it? Are there guidelines that you can follow?

With the onset of the Investment Industry Regulatory Organization of Canada’s Client Relationship Model (CRM), all facets of the client/advisor relationship with regard to investment portfolios are being examined and scrutinized.

As discussed in Lifestyles 55 last month, CRM is being implemented in stages to allow for the easy transition for clients and advisors from a model that could have been described as opaque to one where clients are made aware of the fees that are being charged, and more importantly, for what service.

In addition, as the baby boomers move through their retirement years, investment advisors are taking particular care to ensure that their clients’ portfolio is suitable for them. Knowing the risks of the individual investments as well as the portfolio’s construction is crucial in this process.

Remember that when former finance minister Jim Flaherty changed the tax regulations for income trusts in 2006, it sent the income trust market for a loop. Many retirees felt the brunt of the announcement’s outcome that income trusts would have to be changed to regular stocks if they didn’t meet certain criteria.

Most income trusts were income trusts only so that their income, along with its tax liability, could be passed along to the individual investor. Prior to 2006, the income trusts had been the market darling and were being taxed much more favourably than their fixed-income counterparts, such as bonds. Because of that, many people that would normally be considered conservative investors had portfolios that included a significant weighting in income trusts.

Sometimes it happens in a market that you feel you have to be in a particular sector, for fear of losing out on potential gains, and of course that doesn’t always pay. If the current CRM rules had been in place a decade ago, clients might have been warned about possible trouble ahead as they galloped to put a large percentage of their money in high payout income trusts.

Because of the CRM changes that have already been implemented, advisors are now having to explain why, for example, an 80-year-old woman might want to have 50 per cent of her non-registered account in stocks that were left her by her late husband. Even if those stocks are considered blue chip by the investment firm, the questions need to be asked and answered adequately.

Those questions would likely be about her past investment knowledge, her risk tolerance and her investment timeline. A rule that may be appropriate for some is that you subtract your age from 100 to determine the maximum percentage you should have in stocks. In this example, that maximum would be 20 per cent.

It’s not that you are not allowed to deviate, but there has to be a conversation about it between the advisor and the clients so that the advisor has a reasonable explanation to give their firm about anything that appears unusual at first blush. The regulators’ concern is that the 80-year-old woman may not know the risks inherent in the portfolio.

Investors and their advisors should be able to determine what the client is comfortable with as a rule, and then the advisor can give advice using that information.

To that point, especially in the early stages of the investment process, it is crucial that all investment meetings are held with both spouses present. There is usually one spouse that has more interest in or more acquired knowledge about finances. The natural thing to do is for one of the spouses to make decisions with regard to the types of investments and the timing of the purchases and sales: it’s a natural division of labour. When talking to your advisor about risks, both spouses’ thoughts and feeling should be noted.

It doesn’t mean that the either spouse needs to become a market wizard but both spouses should be part of the conversation and should understand the language that is being spoken. Both spouses should understand why the couple’s portfolio is constructed the way it is and how it will help them achieve the goals they have set out in their annual review meetings.

Any opinion expressed herein is based solely upon the author’s current analysis and interpretation of such information, is subject to change and does not necessarily represent the opinions of Harbourfront Wealth Management Inc. This article is for information purposes only and does not provide individual financial, legal, tax or investment advice.

Jennifer Snyder is a Portfolio Manager with Harbourfront Wealth Management in Winnipeg. She can be reached at jsnyder@harbourfrontwealth.com or 204.256.1533

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