Working with Retail Clients PDF

Working with the Retail Client 26 CHAPTER OVERVIEW In this chapter, you will learn to take a structured approach to financial planning with retail clients. You will learn the steps in a financial planning process that is b...

Working with the Retail Client 26 CHAPTER OVERVIEW In this chapter, you will learn to take a structured approach to financial planning with retail clients. You will learn the steps in a financial planning process that is based on the client’s stage in the life cycle. You will also learn about some fundamental aspects of estate planning. Finally, you will learn about the ethical practices and standards of conduct that should form the basis of all your dealings with retail clients. LEARNING OBJECTIVES CONTENT AREAS 1 | Summarize the steps in the financial planning The Financial Planning Approach process. 2 | Describe how the life-cycle hypothesis is used The Life-Cycle Hypothesis to understand a client’s investment needs. 3 | Describe the elements of estate planning, Estate Planning including the components of a will, probate, power of attorney, and living wills. 4 | Summarize the roles of ethical decision- Ethics and the Advisor’s Standards making and the standards of conduct in of Conduct building trust and confidence within the securities industry. © CANADIAN SECURITIES INSTITUTE 26 2 CANADIAN SECURITIES COURSE      VOLUME 2 KEY TERMS Key terms are defined in the Glossary and appear in bold text in the chapter. beneficiary intestate duty of care joint tenancy estate freeze Know Your Client estate planning life-cycle hypothesis estate trustees liquidators ethical decision-making protection mandate ethics suitability executor testator individual executor © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 3 INTRODUCTION Financial planning and wealth management services take a broad approach to investing by focusing on the purpose behind the buying and selling of securities. Working with clients requires a reasoned approach. Your role is to analyze their needs, set realistic objectives, and help them succeed in reaching their goals. Financial planning provides a framework within which to do this. The structured approach to financial planning allows you to understand your clients and formulate investment recommendations that fit each person’s particular situation. Part of this approach encompasses the important role of ethics in the process of making investment and financial planning recommendations. When dealing with the public as an advisor, you are in a position of trust and have a duty to act ethically. Most importantly, you must place the needs and interests of your clients above your own. Ethical behaviour plays a vital role in maintaining and enhancing the integrity of the capital markets. In this chapter, we focus on your role as an advisor in providing financial advice to retail clients. We explain the steps in the financial planning process and the codes of conduct and ethics that underlie that process. We provide an approach to financial planning that ensures your success in helping your clients reach their investment goals. THE FINANCIAL PLANNING APPROACH 1 | Summarize the steps in the financial planning process. The financial planning approach to investment goes beyond merely buying, selling, and trading in securities. It requires an assessment of your clients’ current financial and personal situation, as well as their constraints, goals, and objectives. Your investment recommendations must be made within a financial plan that helps your clients achieve their goals and objectives. You may need to call on the expertise of specialists in investment management, tax, and estate planning for their advice and integrate their recommendations into a coherent plan that meets the client’s particular needs. Many large financial institutions have created internal teams of these specialists to support their advisors. Financial planning involves analysis of your clients’ age, wealth, career, marital status, taxation status, estate considerations, risk tolerance and capacity, investment objectives, legal concerns, and other matters. Accordingly, you must form a comprehensive view of your clients’ present circumstances and clearly define their future goals. The discipline and self-analysis required of clients when preparing a financial plan gives them a better understanding of themselves and what they want to achieve. In fact, the very act of creating a financial plan helps them form more realistic goals and makes it more likely that they will achieve them. The following four objectives must be considered when creating a financial plan: It should be achievable. It should accommodate changes in lifestyle and income level. It should be realistic, rather than daunting. It should provide not only for necessities, but also for rewards. Each person or family will have a unique financial plan with which to reach goals. However, all financial plans are based on common principles and are built following certain basic procedures. © CANADIAN SECURITIES INSTITUTE 26 4 CANADIAN SECURITIES COURSE      VOLUME 2 STEPS IN THE FINANCIAL PLANNING PROCESS Typically, financial planning is a six-step process, as follows: 1. Establish the client-advisor relationship. 2. Collect data and information. 3. Analyze data and information. 4. Recommend strategies to meet goals. 5. Implement recommendations. 6. Conduct a periodic review. Financial planning involves the same set of steps for each client. However, within that framework, a plan must address the unique and specific needs of the particular client to be effective. STEP 1: ESTABLISH THE CLIENT-ADVISOR RELATIONSHIP The first step in the planning process is to interview the client to identify issues, both known and unknown, and determine how a financial plan might help address them. During this process, you and your client will decide whether you are comfortable enough with each other to begin what should become a long-term relationship. The initial interview might include the following areas of discussion: The financial planning process and how it will help your clients meet their objectives Alternative strategies to choose from Specialist expertise required for specific choices Disclosure of possible conflicts of interest If the initial interview is successful, you should formalize the relationship with either a letter of engagement or a professional service contract. The letter or contract should clearly and unambiguously address the following questions: What information will the client provide? What services will the advisor provide? How, and by whom, will the advisor be compensated? How, and by whom, will other professionals be compensated? How long is the professional relationship expected to last? STEP 2: COLLECT DATA AND INFORMATION Once the client-advisor relationship is established and formalized, the next step is to gather the information required to prepare the financial plan. Your clients should understand the necessity of providing as much information as possible. To create a complete and accurate client profile, gather the following information: Current financial and personal circumstances Investment needs and objectives The client’s risk profile and investment knowledge Investment time horizon © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 5 To build an effective financial strategy, you must uncover and understand client motivations that are not always apparent. To discover unique personal information about your clients, you should probe to answer the following types of questions: How do they make important decisions? How do they prefer to communicate with you? What is their psychological makeup? What are the needs, goals, and aspirations of their family members? Your role as an advisor is to do more than simply manage the financial lives of your clients and provide advice. You must also encourage them to assess and re-examine their goals in the context of their evolving business and personal lives. You can use a number of methods to identify your clients’ motives in pursuing a particular financial objective. Most methods involve listening actively and interpreting a client’s statements in the context of their unique background, character, and context. COMMUNICATING WITH AND EDUCATING THE CLIENT The task of gathering information about a client is just the start of an ongoing relationship that should include regular contact and education. Clients rely on their advisors for many reasons, but most share a common characteristic: they want someone to understand their situation and attend to the details of their financial lives. They want an advisor who is watching out for their interests and who makes the effort to call them, even if the news is not favourable. Your first challenge is to help your clients understand the reasons for your recommendations. You should be able to explain in simple terms the technical nature of the plan’s individual elements. For example, if you recommend a global equity fund, make sure the client understands that the fund invests in stocks on markets around the world. A greater challenge is to earn your clients’ full cooperation and trust before the time comes to make decisions. You are more likely to gain that trust if you communicate with them honestly. When you explain how specific investments will help them achieve their goals, make sure you also tell them of the risks those investments carry. OTHER INFORMATION REQUIRED The following information about your clients is also necessary for the preparation of a thorough financial plan: Personal data Personal data includes age, marital status, number of dependents, risk profile, and health and employment status. Analysis of these factors may reveal special portfolio restrictions or investment objectives. These factors can help you define the acceptable level of risk and appropriate investment goals. Net worth and You can obtain a precise financial profile by showing the client how to prepare a family budget statement of net worth and family budget. Some clients may already have these documents available. It is important that you determine the exact composition of the client’s assets and liabilities, the amount and nature of current income, and the potential for future investable capital or savings. This information is invaluable in helping you determine two things: the amount of income a portfolio must generate and the level of risk the client may assume to achieve their financial goals. © CANADIAN SECURITIES INSTITUTE 26 6 CANADIAN SECURITIES COURSE      VOLUME 2 You should advise clients to maintain complete records of their finances. You can help them prepare a document identifying the existence and location of wills, insurance policies, bank accounts, investment accounts, pension plans, and other important financial documents. They should also have a list of their professional advisors, including the name and contact information of their lawyers, accountants, financial planners, or advisors. It is important for family members to know where records are kept so that they can access this information in case of emergency. DIVE DEEPER To see samples of net worth and family budget information, go to Appendix A at the end of this chapter and view the documents Statement of Net Worth and Family Budget and Earnings Available for Investment. STEP 3: ANALYZE DATA AND INFORMATION To set their investment objectives, clients must assess their personal strengths and weaknesses objectively, and they must review their career and earnings potential realistically. Understandably, many clients are reluctant to perform this difficult task. However, it is not possible to set realistic financial goals without considering how to reach them, which is the purpose of setting objectives. Because investments are selected to suit individual needs, it is essential that you start with an accurate client profile. Only by studying all factors that could affect a financial plan can you make suitable recommendations or design an appropriate investment strategy. EXAMPLE Your client Bill is a commissioned salesperson with a high but unstable income. Bill claims to have a high tolerance for risk and invests mostly in speculative vehicles. Ron, another client, is a geologist who earns a steady income as a unionized employee in the mining industry. Ron claims to be averse to risk and invests mostly in low- risk securities. As an advisor to these clients, you must assess their risk tolerance and capacity based on their personal circumstances, rather than on their own claims. In fact, because Bill’s income is uncertain, he may be better off having his money placed in relatively conservative investments. He should also dedicate a portion of his portfolio to liquid securities. You might suggest that he dedicate a small part of the portfolio to speculative investments to address his need. However, he should consider the broader picture in the context of his unstable situation. On the other hand, Ron, who is risk averse by nature, could be limiting investment choices because of unrealistic fear. You should encourage him to address this fear to ensure that it does not limit his decisions. For example, he might be willing to invest in blue-chip issues if he understands their relatively high quality and moderate risk. Unless you delve into your client’s personal circumstances, such as job security, investment experience, and marital situation, you can overlook important issues. OBJECTIVES AND CONSTRAINTS Investment objectives can generally be described as a desire for income, growth of capital, preservation of capital, tax minimization, or liquidity. You can determine your clients’ particular objectives only thorough analysis of their current financial position and future requirements. Those objectives must be clearly stated because they govern investment decisions. Constraints can be loosely defined as those items that may hinder or prevent you from satisfying a client’s objectives. Constraints are often given less importance when forming a policy than objectives. However, it is essential that you identify the client’s constraints and recognize the discipline they impose on the financial plan. The client’s risk profile, investment knowledge, and investment time horizon are all constraints that should influence the recommendations you put forth in the plan. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 7 STEP 4: RECOMMEND STRATEGIES TO MEET GOALS Once you have collected and analyzed the client’s information, it is time to develop the financial plan. The plan should be simple, easy for the client to implement, and easy to maintain. Clearly defined goals and tasks, along with a schedule for their achievement, can be of enormous benefit. If you need input from other professionals, you should prepare a list of instructions for them. After you have prepared the plan, you should review it with your client, making sure they understand each chosen product and are aware of the risks as well as the potential rewards. The client must agree with your recommended goals and the stated objectives and risk profile constraints before any potential solutions are implemented. STEP 5: IMPLEMENT RECOMMENDATIONS At this stage, the client begins to put in motion the carefully considered ideas and strategies. Some recommendations may be discharged immediately, such as applying for insurance or paying down debt; others will be executed over a longer term. Long-term plans include making periodic investments or contributing funds to a registered retirement savings plan (RRSP). Your clients may need your help to implement some recommendations. If necessary, you may refer them to a business partner, such as a lawyer, tax advisor, investment advisor, real estate broker, retirement specialist, or insurance representative. STEP 6: CONDUCT A PERIODIC REVIEW AND FOLLOW-UP A financial plan should never remain static; it must be reviewed regularly and updated to reflect changes in the client’s situation. Just as investments rise and fall in market value, a person’s financial situation can also change. As well, economic changes, tax increases, and health issues can all threaten even the most comprehensive plans. There is no set time frame for reviews; however, an annual review is the minimum required. Mini-reviews may be necessary depending on circumstances such as changes to tax laws, economic conditions, or employment status. In extreme circumstances, such as a job loss, it may be necessary to devise a completely new financial plan. Revisions can also arise from changes to a will or beneficiaries. They may include updates to ensure that the client is continuing to take advantage of all tax savings techniques. Recommendations can be minor and broad or lengthy and detailed. In some cases, no changes are necessary, but when changes are recommended, you must follow up with the client to make sure that they are carried out. GATHERING INFORMATION How do you gather information and assess client needs to prepare a financial plan? Complete the online learning activity to assess your knowledge. THE LIFE-CYCLE HYPOTHESIS 2 | Describe how the life-cycle hypothesis is used to understand a client’s investment needs. To add perspective to the process of setting objectives, it can be helpful to think in terms of the life cycle. The life-cycle hypothesis states that, as people age, their objectives change along with their financial and personal circumstances, their investment knowledge, and their risk profile. In dealing with most clients, you can make the following general assumptions: Older clients tend to be more risk averse than younger clients. Younger clients tend to focus on shorter-term financial goals, such as saving for a major purchase. Older clients tend to focus more on retirement and estate building. © CANADIAN SECURITIES INSTITUTE 26 8 CANADIAN SECURITIES COURSE      VOLUME 2 The life-cycle hypothesis, developed in the 1950s by several North American and European economists, has great potential benefit to financial advisors. The theory suggests that, if you know the age of your client, you can infer investor characteristics such as goals, circumstances, and risk tolerance. The life-cycle hypothesis works for many, but not all, clients. In getting to know a particular client, a good strategy is to assume that the theory holds. Recognize, however, that you may have to change your mind as you obtain more information about a particular client. Special circumstances require an individualized approach. THE STAGES IN THE LIFE CYCLE The life cycle has five approximate stages: 1. Early earning years Age 18 to 35 2. Family commitment years Age 25 to 50 3. Mature earning years Age 45 to 60 4. Nearing retirement Age 55 to 70 5. Retired Age 60 and onwards In general, each stage corresponds to an age grouping, but there is considerable overlap between the groups. The ambiguity is accounted for by the fact that every client is unique. For example, a 30-year-old client could be in either of the first two stages. Additional information about this client will help you identify the appropriate stage. STAGE 1: THE EARLY EARNING YEARS The early earning years generally start when a person begins to work and ends when family commitments or other commitments start to impose financial demands. Stage 1 investors, in general, are free of family and financial commitments. They are interested in saving, but their goals are usually short-term. Car purchases and vacations are two typical goals. These clients tend not to have life insurance and probably do not need it because no one else depends on the continuity of their earnings. By age 30, clients who have not yet started a family of their own may have made some of the same major financial commitments as their married counterparts, such as buying a house. However, some people can still be considered stage 1 investors after age 30. Because stage 1 investors have longer investment time horizons, they are often psychologically prepared to tolerate a substantial amount of investment risk. When they invest for the long term, they are more likely to allocate most of their funds to riskier investments. A typical asset allocation for long-term goals might be 80% in equity funds and 20% in fixed-income funds. EXAMPLE Henry, age 28, graduated from college a few years ago with a degree in broadcasting. He rents an apartment in the city and is saving for a down payment on a house. He recently bought a used car that required a small bank loan. He has only a small amount invested, which is mostly held in two equity mutual funds and two conservative funds. His asset allocation—80% in equities and 20% in fixed-income securities—reflects his risk profile, long investment horizon, and desire to earn a good return. STAGE 2: THE FAMILY COMMITMENT YEARS The difference between stage 1 and stage 2 investors is the number of commitments and the level of responsibility the second group must assume. A typical stage 2 client is fairly young and married with children. Marriage itself does not necessarily result in a change of stage, especially if the couple does not plan to have children or buy a home. In most cases, however, marriage leads to a shift in financial goals. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 9 The arrival of a child has a major impact on clients’ goals and their ability to attain them. It might become more difficult to save because of the added expenses, and saving for post-secondary education is likely to become an important goal. Many dual-income couples see their disposable incomes decline with the arrival of children because of the associated costs. In some cases, it results in the complete or partial elimination of one salary. Life insurance becomes a requirement, rather than a discretionary expenditure. One of the distinguishing characteristics of stage 2 clients is their lack of liquidity due to obligations such as mortgage and car payments. Lack of liquidity has a significant impact on the savings pattern of these clients, particularly those who are younger. Although they might identify long-term goals such as retirement saving, it is typically difficult for stage 2 clients to save for the long term. As salaries increase with job experience, more savings can be deployed into medium-term goals, such as education savings and eventually retirement. EXAMPLE Isabelle recently married Marcus, her partner of four years. Both Isabelle and Marcus are in their early thirties. They have good careers, so their mortgage and car payments each month are manageable. They have also shown good discipline in setting up automatic savings plans each month. They consider themselves long-term investors. So far, they have invested primarily in domestic and foreign equity funds. Isabelle and Marcus would like to start a family in the next couple of years. Their challenge is to carefully consider the effect of this decision on their investment choices. The asset allocation at stage 2 should reflect shorter investment horizons and reduced willingness to bear risk. The weighting might shift, for example, from 80% equity and 20% fixed income to 60% equity and 40% fixed income. The move from the riskier to the more conservative mix would likely be made gradually during this stage. STAGE 3: THE MATURE EARNING YEARS The point where clients move from stage 2 to stage 3 varies greatly. For some clients, the transition occurs early; for others, much later. The critical factor determining the transition is almost always the family’s level of disposable income. A dual-income family in a high-tax bracket will have a short stage 2, whereas a single-income family in a lower tax bracket might never leave that stage. Stage 3 clients may be able to save for all of the goals they have identified. In many cases, they have already made provision for both short- and medium-term goals and are now able to focus their attention primarily on retirement savings. Clients at this stage are probably not much more averse to risk than they were in stage 2. Their asset allocation is likely to shift back toward a higher weighting in equity funds. One reason for the shift is the need to minimize taxes, given that these clients are often in the highest marginal bracket. Investments in bond and money market funds generate interest income that is fully taxed. Equity funds, on the other hand, generate returns in the form of dividends and capital gains, both of which are taxed at lower rates than interest income. Ultimately, the asset allocation for stage 3 clients depends on the range and nature of their investment goals. One client’s allocation at this stage can be very different from that of another. EXAMPLE Amar and Jasmit are in their late 40s and have two children in their early teens. Jasmit was recently promoted to a senior position at her company and Amar’s consulting business is thriving. These changes allow them to save more of their earnings. Their focus is to save for their children’s education and put more money toward their retirement. They plan to allocate their investments as follows: 40% in growth-oriented equities, 30% in dividend-generating equities, 20% in bonds, and 10% in money market securities. © CANADIAN SECURITIES INSTITUTE 26 10 CANADIAN SECURITIES COURSE      VOLUME 2 STAGE 4: NEARING RETIREMENT Stage 4 clients are generally in their peak earning years. They may be financially as well off as stage 3 clients or better; however, there are two key differences. First, stage 4 clients have fewer family commitments. Their children are typically grown and have left home (although financial commitments such as tuition costs for post-secondary education may still be necessary). Second, they are closer to retirement, and they know that in the coming years they will have to rely on their savings to maintain their standard of living. Depending on their circumstances and market conditions, clients in this stage may shift toward a more risk-averse strategy of wealth preservation. EXAMPLE Nigel and Grace are in their early 50s. Nigel is a lighting technician in the film industry, and Grace works in health care administration. Their only son has moved out and has a career of his own. Although they saved regularly for years, saving for retirement was not a priority. They were more focused on paying off their mortgage and putting their son through school. Their challenge now is to save aggressively so they can maintain a comfortable lifestyle during retirement. Stage 4 clients may be eager to minimize taxes by shifting their portfolios away from equities. They may still maintain a substantial equity component, but as retirement grows closer and their aversion to risk increases, the equity component of their portfolio may shrink. STAGE 5: RETIRED At stage 5, clients are faced with a conflict: they rely on their retirement savings to maintain a certain standard of living, but, at the same time, they need to keep sufficient funds invested to generate enough return on which to live. Higher returns are generally earned with riskier investments, but these investors should not put their retirement savings at risk because they are less likely to recover from dips in the market and less able to bear risk psychologically. Stage 5 clients with more-than-adequate retirement savings have another concern not shared with those in stage 4: they often want to leave an inheritance for children and grandchildren. Therefore, many clients at this stage focus on estate building and wealth transfer. The asset allocation for retirees usually shifts toward less-risky investments, and the equity component declines in favour of less-volatile fixed income and safer investments. EXAMPLE Imelda and Vince retired several years ago after working for over 40 years. Although comfortable with their level of retirement income, they watch their money very closely. After retiring, they shifted most of their investments to fixed-income securities, including a mix of Treasury bills, guaranteed investment certificates (GICs), and money market funds. They kept 10% of their investments in equities. Maintaining their lifestyle is a key priority. Another challenge is to help fund the education costs for their four grandchildren. SUMMARIZING THE LIFE-CYCLE HYPOTHESIS Table 26.1 summarizes the features of the life-cycle hypothesis by showing how investment goals, personal circumstances, and financial circumstances change as people age. It does not include columns for investment knowledge or risk profile because changes in both of these aspects can apply across the entire life cycle. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 11 Table 26.1 | Summary of the Life-Cycle Hypothesis Investment Goals Personal Circumstances Financial Circumstances Stage 1 Goals are generally short- Commitments are Investment portfolios are term but could have a generally light. small but growing. Car Early earning years: longer-term component. payments are a typical Age 18 to 35 financial commitment. Stage 2 Goals are shorter term Commitments are at their Financial burdens such as with a medium-term heaviest. mortgage payments and Family commitment component. childcare expenses increase. years: Age 25 to 50 Clients tend to have little liquidity. Stage 3 Goals are medium term Commitments have Circumstances have greatly with a substantial long- become more moderate, improved. Wealth increases Mature earning term component. to a certain extent. at the highest rate. More years: Age 45 to 60 attention must be devoted to attaining an asset allocation consistent with the client’s level of risk tolerance and risk capacity. Stage 4 Goals tend to shift to the Family commitments Clients have substantial medium term. become lighter. investment portfolios, with Nearing retirement: little in the way of day-to- Age 55 to 70 day liquidity requirements. Stage 5 Goals are medium-term Family commitments Retired clients’ financial in scope; the existing might increase to help commitments are light. Their Retired: investment portfolio must grandchildren. portfolios must be able to Age 60 and onwards continue to earn income maintain living standards. over the medium term. Asset allocations vary with each changing stage and are usually, but not always, affected by the constraints typical of the stage. The single most important determinant of clients’ asset allocations at any stage is their psychological willingness to bear risk, which usually tends to decline with age. However, some retirees have a very high tolerance for risk, and therefore have investment portfolios containing a substantial equity fund component. Some 25-year- olds, on the other hand, may refuse to invest in anything other than money market funds or GICs. Although the life-cycle model provides a convenient approach to financial planning, you should consider it a mere guideline for developing a particular plan. Many clients will conform to the model, but individual circumstances vary, and not everyone can be easily categorized. Special circumstances require an individualized approach. Life-cycle analysis can be helpful, but it is far more important to consider the client’s personal situation, financial position and responsibilities, tolerance for risk, and investment knowledge. Only by assessing these factors in depth and relating them to the expressed needs of the client can you help an individual client develop specific investment objectives. LIFE CYCLE HYPOTHESIS What are the characteristics of the various life stages according to the life-cycle hypothesis? Complete the online learning activity to assess your knowledge. © CANADIAN SECURITIES INSTITUTE 26 12 CANADIAN SECURITIES COURSE      VOLUME 2 ESTATE PLANNING 3 | Describe the elements of estate planning, including the components of a will, probate, power of attorney, and living wills. Estate planning has become an important facet of managing a client’s wealth. In one sense, estate planning is the orderly transfer of a client’s assets from one generation to the next. But to the client, estate planning is making the most of what they have achieved over their lifetime so that their beneficiaries receive the most allowed by law, without delay or unnecessary fees and taxes. Although it is not their job to draft the will or pay the taxes, advisors should understand the necessity of estate planning as an essential part of a client’s overall financial plan. They should be familiar with the steps and concepts involved and advise clients to seek expert counsel where appropriate. Many clients view estate planning as a distant prospect, but preparing a will and considering other estate planning matters is a basic part of financial planning. Estate-planning issues should be dealt with early and revisited whenever there is a major change in circumstances, such as marriage, divorce, childbirth, or the death of a parent. The advisor is involved in estate planning from the day the client opens an account. The process starts with deciding how an investment account is registered and who a client designates as his or her beneficiary on those investments, either through a will or directly on the investment account. For the advisor, investment planning is also part of the estate planning process. A growth mandate might be the primary objective for estate planning purposes, whereas retirement planning may focus more on future income and preservation of capital. Estate planning considerations include tax planning and other tax implications, along with the use of insurance policies to help pay the capital gains tax, among other strategies. PASSING ON THE ESTATE Each year, thousands of Canadians die without a will, leaving the law to settle their estates without direction from the deceased regarding their intentions. Without a will, the value of the deceased’s estate may be unnecessarily decreased due to legal and court costs and other expenses. Costs might arise from the application of intestacy rules or a lack of tax planning. The estate may not only be heavily taxed but may also suffer long delays in distribution. In other words, the deceased’s family suffers the consequences of poor planning or no planning at all. With a small investment of time and money, clients can prevent such problems and ensure that their estate goes to those they wish to leave it to. They can also structure their estate appropriately to expedite distribution and minimize probate fees and income tax payable by the estate. All clients who want their estates to pass to their loved ones, friends, relatives, or charities in accordance with their wishes should draw up a will. The responsibility for passing on an estate at death is solely that of the person who has assets to pass on. The will is the legal document that implements this process. The person making the will is the testator, and the person (or persons) receiving the deceased testator’s assets is the beneficiary (or beneficiaries). The person who settles the estate and distributes the assets according to the terms of a will is generally known as the executor. In Ontario, executors are also called estate trustees, and in Quebec they are known as liquidators. DYING INTESTATE Every year, many people die intestate – that is, without having made a will, or having made a will that was revoked (e.g., by marriage) or otherwise determined to be invalid. Some people avoid making a will because they don’t want to think about their own death. Others simply procrastinate until it is too late. In the common law provinces, when a person dies without a valid will, a court application is necessary before any of the deceased’s assets can be distributed. Assets are then distributed in accordance with provincial intestacy laws. As a consequence, assets may go to beneficiaries against the deceased person’s wishes. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 13 PURPOSE AND COMPONENTS OF A WILL A will has two main purposes: Identify the persons whom the testator wants as beneficiaries. Appoint an executor. Clients should review their wills whenever a material change or life-changing event takes place in their lives. Even without a major change, wills should undergo periodic reviews (usually every three to five years). Small changes in a person’s life circumstances can add up to consequences much larger than the testator realizes. Examples of such changes include the birth of a child, a change in matrimonial status, or an altered financial situation. In some cases, an outdated will, which does not reflect the new circumstances in the testator’s life, may have worse consequences than no will at all. Clients should keep in mind that a will does not always allow for full control in allocating funds to the beneficiaries they deem fit. Certain life changes, such as marriage or divorce, may result in deemed alterations under provincial law or even revocation of the will. A typical will has the following components: Identity of the testator A statement revoking all former wills or codicils Appointment of the executor or executors and substitute executors Instructions to pay all just debts and taxes, as well as funeral and estate-related expenses Identity of the beneficiaries (heirs or legatees) to receive specific assets and the residue of the estate, and the terms on which they are to receive them A will may include, at the testator’s discretion, his or her wishes for burial or cremation. However, it is better to instruct close relatives or the executor of one’s wishes in this regard in person. A will is usually opened after the deceased’s funeral has already taken place. DID YOU KNOW? A codicil is an amendment to a will and is technically considered to be a will on its own. FACTORS TO CONSIDER WHEN MAKING A WILL Two important factors to consider when making a will include the choice of executor and the circumstances under which the will may be revoked. CHOOSING AN EXECUTOR The executor of an estate (or liquidator in Quebec) is an individual or a corporation such as a trust company appointed by the testator to manage the testator’s affairs after death according to the terms of the testator’s will. The executor’s duties are to recover the assets, pay the debts, identify the legatees of specific assets and residuary beneficiaries, and divide the property of the deceased among them. The executor or liquidator should be selected with care and consideration for financial stability, good judgment, honesty, and integrity. After all, this person will represent the testator and the testator’s family in financial affairs during a crucial period. The choice of executor often depends on the size and complexity of the estate and the range of possible executors. If the estate is not large, its assets are not complex, and any resulting trust is not expected to endure for many years, such as with an education trust for minor children, it may be appropriate for the testator to select an individual to © CANADIAN SECURITIES INSTITUTE 26 14 CANADIAN SECURITIES COURSE      VOLUME 2 act as executor. Many testators appoint someone such as a spouse, brother, or lawyer to act as executor without giving serious consideration to the implications of the role. The selection of an individual executor is a decision your family may have to live with for years to come. The testator can change his or her mind prior to death, but there is no such opportunity after the fact. In such cases, the prospective individual should exhibit some or all of the following characteristics: They should be of an age and state of health that they would be likely to outlive the duration of the estate. They should have general expertise in finance, taxation, and investments. They should be reliable and available. They should have personal knowledge of the wishes of the testator and the personalities and needs of the beneficiaries. If the estate is large or complex, a financially astute close relative can be involved directly, perhaps as the main executor, with the assistance of experts if necessary. If there is a need for constant assistance, a reputable entity such as a trust company may be appointed. ESTATE FREEZE From an investment and tax-planning perspective, individuals can minimize their tax liability by using an estate freeze. An estate freeze may be structured so that the owner of growth assets transfers them directly to his or her children or spouse. The main reason to freeze an estate is to limit the individual’s tax liability for potential asset growth. To do so, the individual must freeze the value of specified growth assets, so that future growth of those assets occurs normally in the hands of their children or spouse. Growth assets generally consist of capital property likely to increase in value, such as stocks, bonds, real estate, business interests, and shares of a private corporation. In an estate freeze, the accrued value in the assets before they are frozen belongs to the owner of the shares, that is, the shareholder or transferor. Subsequent growth in value usually accrues to the owner’s children or spouse. When the transferor dies, any increase in value up to the freeze date is taxed in the hands of the estate (or in the owner’s hands if the owner disposes of the assets before death). Any subsequent growth in value will be ultimately taxed in the hands of the children or spouse. REVOKING A WILL A will takes effect only upon the death of the testator. It can be revoked at any time up until death unless the person becomes mentally incapable. The most common way of revoking a will is by making a subsequent will. The new will normally starts with a revocation clause, such as “I hereby revoke all my former wills and codicils”. Even without the revocation clause, the signing of a new, more recent will automatically revokes in some provinces the prior, existing will. As well, in all provinces except Quebec, Alberta, and British Columbia, marriage revokes a will. Clients should understand that certain life events, including marriage and divorce, may automatically alter the terms of a will or even revoke an existing will. It is important, therefore, that clients review their wills whenever there is a change in marital status. WHAT IS PROBATE? Probate is the legal process by which the courts confirm a person’s will to be his or her valid last will and testament. Probating a will also validates the authority of the executor. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 15 In common law provinces, a will is valid without a court order under the following conditions: The will has been prepared by a mentally competent person and properly signed and witnessed. It has not been revoked by a later will, by marriage, or by destruction of the original document. In Quebec: Probate is necessary only for holograph wills and for those made in the presence of witnesses. Therefore, if the deceased has made this type of will, the liquidator may have to get the will probated and take all the necessary steps for its execution. However, the probate procedure does not conclusively validate the will or prevent others from contesting it in the future. The liquidator must make sure that the will in question is the latest version. In Quebec, a notarial will is a will that is drafted and attested by a notary. It is signed by the notary, the testator, and a witness (who is not required to know the contents of the will). Such documents are considered notarial deeds and are not subject to probate upon the testator’s death. DID YOU KNOW? A holograph will is a will written and signed entirely in the handwriting of the testator, without the use of a computer or any other mechanical device. No writing of any sort can appear on a holograph will other than the handwriting of the testator. Witnesses are not required because such wills are understood to be executed by the testator alone, in circumstances that prevent the execution of a conventional will. A letter, in the testator’s handwriting only, declaring the testator’s intent and containing related matters may constitute a holograph will. Holograph wills are not valid in Prince Edward Island. Even where they are valid, they are not recommended, because the handwriting may be illegible or the language may be ambiguous or vague. Any of the above issues may render a holograph will open to interpretation and a potential challenge by a disgruntled beneficiary or heir at law. One strategy used by Canadians to bypass probate is to hold assets as joint tenants with rights of survivorship. Joint tenancy refers to two or more people owning assets together where each owner has equal rights and obligations regarding the asset. Upon the death of the first owner, ownership of the jointly held assets transfer to the surviving owner or owners, thereby bypassing the probate process. A savings account, a house, and a cottage are examples of assets that, held jointly, would bypass the probate process upon the death of one of the owners and pass directly to the surviving owner or owners. It is important to note that probate and income taxes are not the same thing. The deceased’s estate may have to pay tax on income or on gains from assets that are excluded for probate purposes. POWERS OF ATTORNEY AND LIVING WILLS As clients approach retirement, their chances of experiencing serious disability, incapacity, or health problems increase. As an advisor, you should be able to help your clients prepare by appointing someone to make financial and health care decisions on their behalf when they are not able to do so. You should be aware of the available options so that you can advise your clients on what action to take. The form and requirements for powers of attorney vary from province to province. Your clients may have to consult a professional in the appropriate jurisdiction to prepare these documents. POWERS OF ATTORNEY A will gives an executor authority to administer and distribute the assets in the estate of a deceased after death. In contrast, a power of attorney authorizes someone to make decisions on another person’s behalf while the person is still alive. The authorized person (i.e., the attorney) is a substitute decision maker. These decisions may be financial or personal. © CANADIAN SECURITIES INSTITUTE 26 16 CANADIAN SECURITIES COURSE      VOLUME 2 A power of attorney is a document that gives written authority to one or more persons or a corporation to act on behalf of the person granting authority. The person granting authority is the donor, and the person or corporation given authority is the donee, more commonly referred to as the attorney. With a power of attorney, the donee has the legal authority to make decisions and to perform certain actions, on behalf of the donor. In Quebec, a power of attorney is also called a mandate, the donor is called the mandator, and the donee is the mandatary. FORMALITIES Granting power of attorney involves the following formalities: Naming the donor and appointing the donee Specifying the authority being granted Signing of the document by the donor in the presence of two witnesses Many people appoint their spouse, adult child, or another trusted person close to them as the donee. In Quebec, two powers of attorney may be required: A mandate that is effective while the mandator is capable A second mandate, called a protection mandate, that becomes effective if the mandator becomes incapacitated PERSONAL CARE POWER OF ATTORNEY A personal care power of attorney (generally included in a protection mandate in Quebec) allows the donor to appoint someone to make personal care decisions if the donor becomes mentally incapable. Such decisions could include choosing the donor’s place of residence, food, or medical treatment. As with a financial power of attorney, limits can be placed on the authority of the donee, and special instructions can be given. The donee should be someone the donor knows well and can trust with important personal decisions. LEGAL CONSEQUENCES OF NOT HAVING A POWER OF ATTORNEY If an individual becomes incapable of making decisions about one’s property, the Public Guardian and Trustee takes over decision-making duties as the statutory guardian of that person’s property. In such cases, family members or associates can apply to the court to replace the Public Guardian and Trustee and become the incapacitated family member’s court-appointed guardian of property. The procedure is time-consuming and costly, and the legal process can create a great deal of anxiety for a family already in a traumatic situation. Furthermore, the court-appointed guardian of property has limited decision-making authority, unlike an attorney appointed by a donor. For example, court-appointed guardians are limited in the types of investments they may make on behalf of the incapable individual. In contrast, attorneys for property are not restricted in the same way, as long as they are acting in the best interests of the incapacitated donor. LIVING WILLS AND HEALTH DIRECTIVES A living will, which is very similar to an advance health care directive, provides instructions on the treatment a person wishes or does not wish to receive in the event of a terminal illness or incurable injury. It may be part of the power of attorney or a separate document. A protection mandate serves the same purpose in Quebec. Both living wills and advance health care directives specify the medical treatment that a donor would like to receive in case of a terminal medical condition, incurable injury, or severe mental or physical incapacity. However, an advance health care directive often contains more detailed directions than a living will about the types of medical treatment that may or not be desired, depending on the specific medical condition involved. A living will © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 17 is usually more general in nature. For example, many people write a living will stating that they do not want to be kept alive on artificial life support if they have no hope of recovery. ESTATE PLANNING How familiar are you with the key terms and concepts related to estate planning? Complete the online learning activity to assess your knowledge. ETHICS AND THE ADVISOR’S STANDARDS OF CONDUCT 4 | Summarize the roles of ethical decision-making and the standards of conduct in building trust and confidence within the securities industry. Ethical behaviour is a critical element in building a solid, trusting relationship with clients. Ethics can be defined as a set of moral values that guide actions. Moral values are enduring beliefs that reflect standards of what is right and what is wrong. ETHICAL DECISION-MAKING Ethical decision-making is based on the principles of trust, integrity, justice, fairness, honesty, responsibility, and reliability. The securities industry cannot exist without the trust and confidence of the public. Registrants in the securities industry play an important role and must regularly generate trust and confidence in their clients by adhering to high standards of ethical conduct in all of their dealings. Ethics is defined generally as a set of values and standards that guide individual behaviour. A person’s values can change over time, but the change is always driven by standards of right and wrong, rather than by personal need. Commonly agreed-on ethical values include accountability, fairness, honesty, loyalty, reliability, and trustworthiness. As a concept, ethics can be defined more specifically in the following three ways: The rules or standards governing the behaviour of a particular group or profession A set of moral principles or values The study of the general nature of morals and the moral choices made by individuals There is a key difference between ethical behaviour and mere compliance with rules. Following rules does not involve judgment, and compliance results only in conformity with externally established standards. Some rules simply codify consensus practices, such as the rule stating that stock trades settle one business day after the trade date. Other rules approximate ethics by incorporating ethical behaviour, such as the law against stealing. Rules are designed to deal with the most significant or most common situations. They cannot encompass every possible situation that may occur in day-to-day business. People follow rules because they must, not necessarily because they believe it is morally correct. Ethical behaviour, in contrast, requires judgment based on internally established moral values. Ethical decision-making is a system that can be applied to any situation, even one where no rule exists to govern behaviour. Such a system might involve the following steps: 1. Recognize that a moral dilemma exists. 2. Assess your options in terms of moral criteria. 3. Make a commitment to a morally appropriate strategy. 4. Have the courage to carry out the strategy. © CANADIAN SECURITIES INSTITUTE 26 18 CANADIAN SECURITIES COURSE      VOLUME 2 The following short case illustrates an example of an action that is compliant with rules but that violates ethical standards. EXAMPLE CASE 1: Handling an Ethical Issue Beatia, an investment advisor, is considering recommending that her client Henri invest in a small but promising software company called NetTrack Enterprises. Coincidentally, Beatia’s brother-in-law is NetTrack’s main shareholder and chief executive officer (CEO). The recommendation to invest in this company may not be a clear violation of industry rules or regulations, but Beatia is nevertheless facing an ethical issue. To act in an ethically sound manner, she must do as follows: Recognize that making the recommendation places her in a potential or actual conflict of interest Consider whether her professional objectivity in making the recommendation might be compromised, or appear to be compromised, by her relationship with NetTrack’s CEO Determine that the ethical thing to do is to disclose the relationship Carry out her decision by letting Henri know that the CEO of NetTrack is her brother-in-law STANDARDS OF CONDUCT AND ETHICAL GUIDELINES As the national self-regulatory organization that oversees the securities industry, the Canadian Investment Regulatory Organization (CIRO) regulates the actions and behaviour of registered individuals. Along with strict compliance with its rules and regulations, CIRO requires that registered individuals observe high standards of ethics and conduct when transacting their business. This integration of ethics into industry rules essentially applies to all of a registered individual’s actions and everyday behaviour with clients. DID YOU KNOW? CIRO's Investment Dealer and Partially Consolidated Rules govern the activities of investment dealer firms. Rule 1402 Standards of Conduct states: 1. A Regulated Person: i. in the transaction of business must observe high standards of ethics and conduct and must act openly and fairly and in accordance with just and equitable principles of trade, and ii. must not engage in any business conduct that is unbecoming or detrimental to the public interest. 2. Without limiting the generality of the foregoing, any business conduct that: i. is negligent, ii. fails to comply with a legal, regulatory, contractual, or other obligation, including the rules, requirements, and policies of a Regulated Person, iii. displays an unreasonable departure from standards that are expected to be observed by a Regulated Person, or iv. is likely to diminish investor confidence in the integrity of securities, futures, or derivatives markets, may be conduct that contravenes one or more of the standards set forth in subsection 1402(1). © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 19 The securities industry has no formal code of ethics. However, industry rules and regulations imply a set of ethical standards. For the purposes of this course, we have distilled these rules and standards into the following five primary values that registered individuals must observe: Duty of care Duty of care is the responsibility to conduct due diligence before providing advice or recommending products. In performing this duty, you must gather as much information as you can about your clients, so you understand their needs, goals, and risk profile. You must also learn about the products you sell to ensure that your recommendations suit each client’s situation. Integrity You must act in an honest, fair, and trustworthy manner in all dealings with clients, employers, colleagues, and the public. You must avoid entering into situations where your interests conflict with those of your clients. Professionalism You must conduct business in a professional manner that reflects well on yourself, your employer, and your profession. You should encourage others to do the same. You should also strive to maintain and improve your professional knowledge. Compliance You must conduct yourself in accordance with applicable legislation and industry rules. Confidentiality You must hold client information in the strictest confidence. DUTY OF CARE Duty of care encompasses many obligations toward clients. Among them, two obligations are of paramount importance: Know Your Client and due diligence. In fulfilling these two obligations, you ensure the priority of your clients’ interests and the suitability of your recommendations. Know Your Client Among the duty-of-care obligations, the Know Your Client rule is of paramount importance in the industry. You must learn the essential financial and personal circumstances and the investment goals and objectives of each client. You must also identify the client’s risk profile, investment knowledge, and investment time horizon. Client account documentation should reflect all material information about the client’s current circumstances and should be updated to reflect any material changes to those circumstances. Adherence to this obligation ensures that the client’s interests take top priority and that all investment recommendations are suitable for that particular client. Due diligence Registrants must make all recommendations based on a careful analysis of information about the client and the particular product and transaction. In keeping with the Know Your Product rule, registrants must understand a product’s features, risks, and costs and how it is constructed. They should also have a general idea of how the product is likely to perform in various market conditions. Unsolicited orders An unsolicited order is an order entered by a client that was not recommended by you or anyone at your firm. In giving advice to clients, you must provide appropriate cautionary advice with respect to unsolicited orders that appear unsuitable based on the client’s profile. You must be aware of the objectives and strategies behind each order accepted on behalf of your clients, whether it is solicited or not. You should take appropriate safeguarding measures when clients insist on proceeding with unsolicited, unsuitable orders. © CANADIAN SECURITIES INSTITUTE 26 20 CANADIAN SECURITIES COURSE      VOLUME 2 INTEGRITY As an advisor, you must be trustworthy, honest, and fair in all your business dealings. This primary value requires that you observe the following obligations: Priority of the client’s The client’s interest must be your foremost consideration in all business dealings. interest In situations where you have an interest that competes with that of the client, the client’s interest must be given priority. Respect for client’s The client’s assets are solely the property of the client and are to be used only for the assets client’s purposes. You shall not use the client’s funds or securities in any way to suit your own or another person’s interests. Complete and accurate You must take reasonable steps to ensure that all information you give to clients information relayed to about their portfolios is complete and accurate. Your firm must provide each client the client with written confirmation of all purchases and sales, as well as monthly account statements. Your role is to accurately represent the details of each client’s investments to the client. You must be familiar with the clients’ investment holdings, and you must not misrepresent facts to create a more favourable view of the portfolio. Full disclosure To ensure fair, objective dealings with your clients, you must disclose all real and potential conflicts of interest, and the conflicts identified must be addressed in the best interest of the client. To the extent that such conflicts cannot be addressed in the best interests of the client, the conflicts must be avoided. When clients trust your integrity, they trust that your recommendations are meant to serve their interests rather than your own. However, to be confident that your recommendations are sound, they must trust your competence as well as your integrity. Competence without integrity leaves them at the mercy of a self-serving professional. Integrity without competence puts them in the hands of a well-meaning but inept professional. To ensure your competence, you must meet initial proficiency requirements for your registration category and take part in mandatory continuing education. EXAMPLE CASE 2: Gaining a Client’s Trust When advisor Jo-Ann assumed the account of 75-year-old Ena Beyer (Mrs. Beyer), she knew she had a challenge on her hands. Mrs. Beyer, a widow, held more than $350,000 in a non-registered account. The entire amount was invested in a combination of GICs and a mortgage mutual fund. After the first meeting with her client, it was evident that Mrs. Beyer’s investment knowledge was very limited and that she relied almost entirely on her son for financial advice. Her son, a systems-services professional employed by a high-tech firm, had been generating great returns for his own portfolio by investing in various Canadian and U.S. technology stocks. When Mrs. Beyer passed over a list of her son’s recommendations, Jo-Ann shook her head. The proposed list of holdings included an excessive amount in equities, especially aggressive, high-growth securities. It showed very few dividend-paying, blue-chip names and fixed-income securities. Convinced that the son’s proposed strategy was overly aggressive for someone with Mrs. Beyer’s profile, Jo-Ann recommended to her a much more conservative approach. Mrs. Beyer balked at the suggestions for change, siding with her son over someone she was meeting only for the first time. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 21 EXAMPLE (cont’d) By questioning the son’s judgment, Jo-Ann risked losing an attractive account, one that would generate a good chunk of commission income right away. But, in good conscience, she could not go along with Mrs. Beyer’s requests without making further inquiries. Jo-Ann asked Mrs. Beyer if they could meet with her son and discuss her situation to determine what was in her best interests. A few weeks later, the agreed-on meeting started poorly. Mrs. Beyer’s son, Roy, seemed skeptical of Jo-Ann’s abilities and was suspicious about her intentions. Undeterred, she patiently explained her responsibility as an advisor, her concerns about his mother’s account, and the reasons for her recommendations. After the first meeting, Roy said he was not yet convinced, but would think about it. His mother concurred. It took some time, but after several more meetings, Roy became convinced of Jo-Ann’s expertise and recommendations. “In the end,” Jo-Ann stated, “we had totally revamped the asset mix to ensure prudent allocation of Mrs. Beyer’s investments.” Mrs. Beyer was more comfortable knowing that her son was involved, and Jo-Ann felt more assured that she would be able to get better results for her client. “We now meet regularly, and the trust that has developed between the three of us is very strong,” says Jo-Ann. More recently, this trust went even further. When Roy found himself increasingly too busy to oversee his mother’s investments, they both agreed that she should switch to a managed account, with Jo-Ann as manager. PROFESSIONALISM Professionals with specialized knowledge are expected to protect their clients, who usually do not have the same degree of knowledge. As an advisor, you must always put client interests ahead of your own and make a continuous effort to maintain a high standard of professional knowledge. This primary value encompasses the following obligations: Client business All methods of soliciting and conducting business must be such as to merit public respect and confidence. Client orders Enter every client order only at the client’s direction, unless the account has been properly constituted as a discretionary or managed account under the applicable regulatory requirements. Trades by registered All trades and all acts related to trades, whether with existing or potential clients, and approved must be made only by people who are registered and approved under applicable individuals legislation and the rules of CIRO. Approved securities Only securities approved for distribution by the appropriate regulatory authority and partner, director, or officer of the firm should be distributed. All such transactions must be recorded on the books and records of the firm. Personal business Conduct all your personal business affairs in a professional and responsible manner, so as to maintain not only your own reputation but also that of the securities firm and the profession. © CANADIAN SECURITIES INSTITUTE 26 22 CANADIAN SECURITIES COURSE      VOLUME 2 Personal financial Avoid personal financial or business dealings with clients, including lending or dealings with clients borrowing money, paying their losses out of personal funds, or sharing a financial interest in an account. You must also disclose the situation to the firm so that it can monitor the account. Personal trading activity Keep any personal trading activity to reasonable levels. If you are trading in your own account very actively on a daily basis, it is doubtful that you will have enough time to properly serve your clients. Excessive trading losses on your part will also present a negative image as a responsible financial professional. Other personal Make sure that any other publicly visible activity in which you participate (such endeavours as politics, social organizations, or public speaking) is conducted responsibly and moderately, so as not to present an unfavourable public image. Continuing education To be fully competent in your role, you must understand the factors that influence the investment industry. You must also continually upgrade your technical and general knowledge to ensure that your recommendations and advice are sound. EXAMPLE CASE 3: Dealing with Vulnerable Clients Over the years, Raj has guided many people through the vulnerable period when a spouse dies, and they must decide what to do with inherited assets. “The time immediately following the death of a loved one is a time for grieving, not decision-making,” says Raj. That is when they most need to know that their advisor is a professional whom they can trust to put their interests ahead of the advisor’s own. Among Raj’s clients is Martina, whose retirement life was shattered by the sudden death of her husband of 35 years. Ivan was only 67 years old. Preoccupied as she was with funeral arrangements, Martina found time to call Raj to ask about Ivan’s RRSP and other investment accounts. She said that Ivan had looked after the family’s finances, and she was unsure what she was supposed to do. Raj assured her that no immediate action on her part was needed. “Most people in your situation worry that they have to take care of everything immediately. In fact, as long as you have enough cash on hand to pay the bills, there is no great rush. When you’re ready to sit down and talk, give me a call.” Though the timing of Ivan’s passing was unexpected, it had been provided for in the couple’s financial plan. Ivan’s death triggered payment of a life insurance policy that had been designed to cover any of his tax liabilities at death. The two largest tax payouts had to do with the deemed disposition of rental property owned by Ivan, and the deemed disposition of his portfolio of stocks. His portfolio had built up considerable capital gains over the past 10 years. Additionally, the life insurance policy had been over-funded to ensure a cash reserve for Martina, the beneficiary. Martina was thus able to cover all of the one-time expenses associated with a death. She was also able to pay the cost of flying her son and his young family across the country for the funeral. While mourners gathered to comfort the grieving widow, Raj was quietly taking care of business. Raj’s assistant produced an estate-evaluation report listing the market value of Ivan’s equity investments on the date of his death and the maturity dates of his bond and GIC holdings. The report provided the information that Martina’s executor, lawyer, and accountant would need to do their jobs. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 23 EXAMPLE (cont’d) Raj also reviewed Martina’s investment account, which he had been looking after for many years. He saw that a five-year GIC was just about to expire and that some stocks and mutual funds had recently paid quarterly dividends into her account. In the weeks and months to come, the probate process would play out, and Martina would seek Raj’s advice on how to invest her existing and inherited assets. But now was hardly the time for reinvestment decisions. Raj knew from his conversation with Martina that she would need the money for short-term expenses such as funeral home charges and catering costs. After consulting with Martina, he transferred the available cash from her investment account to her daily chequing account at her bank. Less may be more when it comes to helping clients who are bereaved and otherwise feeling vulnerable. “A death in the family immediately changes a client’s profile,” says Raj. “For example, they suddenly have a need for a lot more liquidity. My job is to make everything easier for them. But I don’t know if I could do that job if we hadn’t built up a relationship of trust over the years.” COMPLIANCE Your conduct must always be in accordance with the securities acts of the province or provinces in which you are registered. You must also observe the rules and regulations of CIRO, of which your firm is a member. You must not knowingly participate or assist in any act that violates the laws of any government or government agency. If two rules apply in the same circumstances, you must adhere to the more stringent rule. Employees of a firm’s trading, corporate finance, or research departments must be aware of the need to safeguard non-public, confidential, material information received in the normal course of business. If you acquire non-public, material information, you must neither communicate it (outside of the relationship) nor act upon it. CONFIDENTIALITY You must treat all information concerning your client’s transactions and accounts as confidential. You must not disclose that information except with the client’s permission, for supervisory purposes, or by order of the proper authority. Furthermore, you must keep the identity of your clients confidential and refrain from discussing their personal and financial circumstances with anyone outside your firm. Never leave the firm’s client lists or other confidential records out in the open, where they can be taken or observed by visitors to the office. Information regarding your client’s personal and financial circumstances and trading activity must be kept confidential and may not be used in any way to effect trades in personal or proprietary accounts or in the accounts of other clients. You must refrain from trading in your own accounts based on your knowledge of your client’s pending orders. You must also refrain from using that knowledge as a basis for recommendations to other clients and from passing this information along to any other parties. Because the investment industry is built on trust and confidence, you must abide by high standards of ethics and conduct to establish trust, integrity, justice, fairness, honesty, responsibility, and reliability. © CANADIAN SECURITIES INSTITUTE 26 24 CANADIAN SECURITIES COURSE      VOLUME 2 EXAMPLE CASE 4: Client Confidentiality Marco has a client who is a technical analyst with an impressively successful track record. Marco is very impressed by his client’s success. In fact, he is pleased to tell other clients about the technical analyst’s favourable results. He even manages to persuade some of his clients to adopt the same trading strategies as the analyst, to which his clients gladly agree. However, Marco has violated his client’s confidentiality by passing along his trading strategies to other clients. He has also violated his confidentiality obligation simply by telling the other clients that he has been maintaining an account for the analyst. For these infractions, Marco may be subject to regulatory penalties and possibly a civil lawsuit brought by the analyst. FIVE PRIMARY VALUES What are the five primary values that are central to your role as an advisor? Complete the online learning activity to assess your knowledge. CASE SCENARIO Listen in again on a conversation between Shelly and Yasana as they discuss the financial planning process. Can you select the answers to their questions? Complete the online learning activity to assess your knowledge. KEY TERMS & DEFINITIONS Can you read some definitions and identify the key terms from this chapter that match? Complete the online learning activity to assess your knowledge. © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 25 SUMMARY In this chapter, we discussed the following key aspects of working with retail clients: There are six steps in the financial planning process, as follows: 1. Establish the client-advisor relationship 2. Collect data and information 3. Analyze data and information 4. Recommend strategies to meet goals 5. Implement recommendations 6. Conduct a periodic review The life-cycle hypothesis states that the risk-return relationship of a portfolio changes because clients have different needs at different points in their lives. It assumes that the younger clients can take on more risk in the pursuit of higher returns and that the risk-return relationship reverses as clients age. Probate is the legal process by which the courts confirm a person’s will to be his or her valid last will and testament. Probating a will also validates the authority of the executor. A power of attorney is a document that gives written authority to one or more persons or a corporation to act on behalf of the person granting authority. A power of attorney may be executed for financial or personal reasons. It may provide full power or only limited power during the donor’s absence. It may also grant power that comes into effect only when the donor becomes physically or mentally incapacitated. A living will provides instructions on the treatment a person wishes or does not wish to receive in the event of a terminal illness or incurable injury. It may be part of the power of attorney or a separate document. A protection mandate serves the same purpose in Quebec. Industry rules and regulations can be distilled into the following five primary values: Duty of care Integrity Professionalism Compliance Confidentiality REVIEW QUESTIONS Now that you have completed this chapter, you should be ready to answer the Chapter 26 Review Questions. FREQUENTLY ASKED QUESTIONS If you have any questions about this chapter, you may find answers in the online Chapter 26 FAQs. © CANADIAN SECURITIES INSTITUTE 26 26 CANADIAN SECURITIES COURSE      VOLUME 2 APPENDIX A Table 26A.1 | Statement of Net Worth ASSETS Readily Marketable Assets Cash (savings accounts, chequing accounts, etc.) $ Guaranteed investment certificates and term deposits Bonds – at market value Stocks – at market value Mutual funds – at redemption value Cash surrender value of life insurance Other Non-Liquid Financial Assets Pensions – at vested value RRSPs Tax shelters – at cost or estimated value Annuities Other Other Assets Home – at market value Recreational properties – at market value Business interests – at market value Antiques, art, jewellery, collectibles, gold, and silver Cars, boats, etc. Other real estate interests Other Total Assets $ LIABILITIES Personal Debt Mortgage on home $ Mortgage on recreational property Credit card balances Investment loans Consumer loans Other loans Other Business Debt Investment loans Loans for other business-related debt Contingent Liabilities Loan guarantees for others Total Liabilities $ ASSETS Minus LIABILITIES NET WORTH $ © CANADIAN SECURITIES INSTITUTE  CHAPTER 26      WORKING WITH THE RETAIL CLIENT 26 27 Table 26A.2 | Family Budget and Earnings Available for Investment Monthly Total Monthly Total Annual NET EARNINGS Self $ Spouse $ Net Investment Income $ $ $ EXPENSES & SAVINGS Maintaining Your Home Rent or mortgage payments $ Property taxes $ Insurance $ Light, water and heat $ Telephone, cable $ Maintenance and repairs $ Other $ Total Monthly $ Total Annual $ Maintaining Your Family Food $ Clothing Laundry Auto expenses Education Childcare Medical, dental, drugs Accident and sickness insurance Other Total Monthly $ Total Annual $ Maintaining Your Lifestyle Religious, charitable donations $ Membership fees Sports and entertainment Gifts and contributions Vacations Personal expenses Total Monthly $ Total Annual $ Maintaining Your Future Life insurance premiums $ RRSP and pension plan contributions $ $ Total Monthly Expenses and Savings $ Total Annual Expenses and Savings $ Available for Investment $ $ © CANADIAN SECURITIES INSTITUTE