The Wealth Management Blog

5 Things To Know When Developing Your Estate Plan

2012-02-22T19:33:28Z

My partner, Kelly Willis, wrote a poignant post last week about the loss of her husband and the estate challenges she found in her path, all during a time she struggled with her bereavement. As a private client lawyer with many years of estate planning under my belt, I wanted to share some of the more frequent issues and misconceptions I have witnessed in dealing with families who were unprepared or had inadequate estate plans.

Estate planning is a little like pre-nuptial agreements for couples excited about their pending marriage…why talk with lawyers and plan for the end of marriage when all seems so perfect today? Wills are a bit like that….why think about death, loss and sorrow while I’m relatively young, healthy and the sun is shining? You know it needs to be done….but you rationalize that “I’ll get around to it.”

In the world of estate planning, it’s so very wise to plan for dark days while it’s bright and sunny. The consequences of not doing so are more profound than you might expect. If you think the law is designed to do what you would probably do in the “unlikely” event your family is caught off guard by your unexpected death without a valid will, or incapacity without a power of attorney, you should think again.

Here are 5 things to think about when developing your estate plan:

It doesn’t automatically all go to your spouse. Many people assume this: that if they die unexpectedly and without having gotten their will done on time, the law will ensure everything will go to their surviving spouse. If you leave kids behind, this just isn’t true. In Ontario, your surviving spouse will receive a preferential share ($200k) and then split the balance with your children (the split determined on how many kids you leave behind…if you have 2 or more children they will receive the lion’s share and your surviving spouse a minority interest). And if the children are minors and the government steps in to represent their interests…not a desirable scenario;
Estate planning is not simply “death planning.” It also means planning while you’re alive. So think of it that way because your professional advisors will. Strategically using family trusts and holding companies…developing proper shareholders agreements…marital agreements…preparing for potential incapacity (mental or physical) through powers of attorney….these are all estate planning issues developed while you are alive;
Don’t let the “tax/probate tail wag the dog” as many do. Determine your wishes, what is best for you and your family, all in the context of your unique circumstances, and then envelop those wishes with the most efficient tax and probate plan possible;
Be flexible….and ensure your plan is flexible. When you think it through, the estate you create through your will may go on for decades following your death as trusts are created for children and grandchildren. Your will is then rather biblical in nature for your family because it may govern your estate, and potentially impact lives, on an inter-generational basis. And just as it is impossible to count the number of angels on the head of a pin, so too is it impossible to foresee so far in advance for your family….so develop a flexible plan that allows your executors to adapt.
Your kids are all right...or are they? Most wills dole money (and big money) out to kids at defined ages without any thought as to whether they’re prepared to receive it. Why not develop your estate in a manner that helps prepare your child to receive a large amount (by, say, ensuring that your child participates, upon attaining majority, in the administration of his or her trust fund….requiring your child to deal with professional advisors, taxation, investment decisions and the like in advance of receiving his or her inheritance)?

Without a current will that is considered and strategic, that integrates all of your affairs…from your family trusts, to your company and shareholders agreement, to your cottage and second home outside Canada, to your life insurance and tax planning…you are certain to leave your family with a tangled mess and a challenging labyrinth of complicated issues they are forced to sort through “after the fact.” This mess invariably leads to increased professional costs, delays in distributions, frozen assets, increased tax & administrative fees, reduced estate values, increased likelihood of court intervention…and, regrettably, must be shouldered by those you leave behind…the ones you love the most. So speak to your advisor. Your sunny days are now.

Annual Economic Outlook for Entrepreneurs

2012-02-15T14:12:39Z

Our own Peter Churchill Smith, Managing Director, will be the keynote speaker at the CEO Global Networks’ Annual Economic Outlook for Entrepreneurs on Thursday, February 23rd.

Peter’s plain-speaking talk, designed specifically for the business audience, will look at where we are, where we’re headed, and what you need to know to make smart decisions.

The cost is $129.00 per ticket and can be purchased on-line. Click here to register.

We have arranged for clients of Newport Private Wealth to attend as our guests. To obtain your complimentary ticket, simply contact us by email for on-line registration and the promotional code.

See event details below.

Bereavement is bad enough

2012-02-07T20:08:02Z

My husband passed away a year ago last month. We ought to have been prepared. Two years earlier he had been diagnosed with a rare form of cancer for which there was “little predictive data". We chose to be optimistic. When he died due to complications from surgery I was shocked and devastated.

Shock was the protection I needed to get through those first few weeks, but as reality set in grief took its place. It was in this condition that I was catapulted, like so many others in my position, into the surreal state of dealing with my husband’s estate. If there is any benefit in my experience it is to help others become better prepared.

I have to confess I was ‘fortunate’ under the circumstances. My husband had a valid and current will; our affairs were reasonably straightforward; I had been the ‘chief financial officer’ during our marriage so I was used to managing our finances; and I had the support of the professionals here at my firm whom I trusted as advisors and friends. In theory, I was well equipped to handle my responsibilities as executor.

The reality though was more challenging: There were important choices to make; some with near-term deadlines and long-term consequences. Taxes and probate fees were higher than expected; the settlement process slower (still ongoing). Family members needed to be consulted. The amount of paperwork felt never-ending and overwhelming. All of this, of course, takes place when one is in the emotionally weakened state of grief (i.e. anxiety, sleeplessness, forgetfulness, etc.)

Through the entire estate settlement process, I kept thinking, “I simply cannot imagine what it would have been like for me had my husband died without a current will.” I begged friends to make sure their families’ estate plans were in order. “Bereavement is bad enough,” I said. “You absolutely do not want to go through this without having everything buttoned down.”

And yet, that is precisely the risk many people are taking according to a study by BMO Financial Group last year: 15% of Canadian baby boomers do not have a will. Nearly half of those aged 45 and older have not reviewed their will in over ten years. That is a terrifying thought.

A lot can happen that can impact one’s estate over a decade: Businesses are started or sold. Divorce and re-marriage. Births and deaths. Change in financial circumstances or asset base. The possible consequence is that what you would intend to have happen upon your passing may differ materially from what actually does; leaving your loved ones dealing with a host of thorny issues when they are the very least able to cope.

A recent high profile example: the estate of author, Michael Crichton who died at age 66 leaving behind a wife who was six month pregnant and an outdated will that had language excluding any new children. A legal fight broke out between family members over whether the baby should be allowed to inherit. The judge ultimately ruled the child should receive its share of the inheritance but it was a stressful and costly experience that could have been avoided entirely.

Today is Valentine's Day and Monday February 20^th is Family Day (in three provinces). Do something truly loving for your family this holiday: if you do not have a valid and current estate plan, get one.

Don’t know any estate lawyers? Ask your general counsel for a referral. Or your financial advisor. Or call me! We know a number of good estate planning lawyers we could point you to. Just please, make the call.

Planning your estate may not be fun, but it is truly a loving act.

Looking for investment success? Don't look back!

2012-02-07T19:53:10Z

In pursuit of investment success, it is human nature to look backward for guidance. Unfortunately, it’s also a misguided strategy that can be very costly:

A recent article by Andrew Hallam in Canadian Business magazine suggests we are “hard wired to rely on established patterns” when it comes to investing (read Your Own Worst Investing Enemy). Hallam cited the example that “the average U.S. mutual fund from 1980 to 2005 gained 10% per year. But the average investor in those funds made only 7.3% -- giving up more than one third of their potential earnings each year.” That’s because investors were doing the wrong thing at the wrong time (i.e. selling funds that weren’t performing and buying those that had been doing well and prices were higher).

Now more than ever investors need to be thinking about portfolio changes that will position them for the future not the immediate past.

Consider that it has been five tumultuous years in the world of investments and we are very much in uncharted waters:

Never before have interest rates been close to zero while the economy is growing (albeit slowly). Rates were this low in the early 30’s but the economy was shrinking then;
US stocks (excluding dividends) have made virtually no money for investors in over ten years;
Gold has outperformed the world’s leading stock market for four decades;
In a very short period of time, China has become the world’s second largest economy and consumes 40% to 50% of the world’s commodities;
We have just endured two financial crises (credit crisis in 2008/2009 and Europe 2011) in five years causing a flight to safety by investors and driving bond yields to below 2%;
Last year, the Canadian bond market returned approximately 9% while the S&P/TSX dropped 11%;
Governments have taken emergency measures to stabilize their economies at enormous cost and the price is likely to be sub-par growth for several years yet to come.

So will the winners of the last five years outperform in the next five years? Will bonds continue to outperform stocks? Will gold still gleam? Will Canadian real estate continue to outperform? Will interest rates eventually rise?

These are the questions.

What are the answers? No one has a crystal ball however we would suggest that the picture looks a little less confusing if you look back more than five years for guidance – perhaps even 50 or 100 years. What will you learn?

Bear or “sideways” markets are very normal. They typically last 15 years. While that may sound discouraging, we are likely 10 to 11 years through the current bear market;
Interest rates have not been this low since the 1930’s. We were fighting negative growth then. Clearly, rates cannot stay at these levels forever;
Government bond yields are now in the 1.5% to 3% range and bond portfolios need to be carefully managed with rates so low. Even a modest rate increase will wipe out any returns from government bonds, especially long term bonds. In our view, the better strategy is twofold: own corporate bonds instead (higher yields) and ensure that the bonds have a below-average term to maturity;
Looking back more than five years will remind you that there is predictable behavior during times of financial crisis. There is always a “flight to safety”. Investors retreat to “cash” and the US dollar rises (it being the safe haven);
As investor confidence begins to return, safety and yield are the watchwords. Historically that may point to bonds but with bond yields so low and dividend yields looking attractive (some high quality companies paying dividends of 3-4%), we believe investors will move their funds in this direction this time.

Be brave. Be patient. Above all, be diversified. These are very uncertain times. It is possible that there are deeper setbacks still ahead on the way to sustained growth but I would avoid the temptation to be excessively conservative. For that reason, it is prudent to be very diversified.

Resist the temptation to measure success over one or two years. Instead, pretend that you are in a five year race. Do an audit of each investment in your portfolio. Will the income or dividend grow over the next five years? Will it be higher in five years?

Lastly, be smart. Looking back for guidance over 2007-2011 looks like a losing strategy in the race for success over the next five years. We believe that the winners in 2012-2017 are going to be very different.

Tourmaline Oil hit 2012 production target

2012-02-03T19:42:46Z

For those who are regular readers of our blog, the name Tourmaline Oil Corp. should be well known. We participated in Tourmaline’s initial capital raise in 2008 and continued to invest through IPO in November 2010 (see our earlier blog posts). Tourmaline is our single largest holding in the Newport Canadian Equity Fund today.

Tourmaline released their corporate overview presentation last week and it shows a continued path of impressive growth in production levels. Already this year, in the last week of January, Tourmaline achieved its 2012 average daily production target -- well ahead of schedule.

Management’s five year outlook is for continued production level growth -- with an estimated 45% increase for 2012; they have achieved production levels above their provided guidance for three consecutive years.

Despite downward pressure on natural gas prices (due to increased supply from shale gas and unusually warm weather), Tourmaline’s guidance shows a company net positive cash position occurring in 2014.

Longer term, demand for natural gas is expected to rise in both North America and abroad, and the demand/supply fundamentals will have to revert to a sustainable level. In the meantime, the management team has built capacity to realize steadily lower operating costs and improved production efficiencies.

To view the full Tourmaline corporate overview presentation Click here.

Greece default a positive for markets

2012-01-25T19:20:44Z

“There is too much debt in the world and if Greece defaults on its debt, this will be good for the markets in the short term, especially if it defaults big."

That was the message we heard yesterday morning from Barry Allen of Marret Asset Management, considered by many to be the top manager of high yield bonds in Canada and one of the external managers we use for yield mandates.

Barry was in to give us an update and his view was uncharacteristically optimistic: “Now that the European Central Bank has put a floor under European banks with its 3-year loans, smaller governments can now default without bringing down the banking system."

Barry contends that Greece and Portugal should, and will, default and this will be good for the overall global deleveraging that will continue for several years.

He also reminded us that Italy runs a structural budgetary surplus and has a strong industrial base that “makes good things people all over the world want to buy", especially luxury goods desired by the growing affluent classes in emerging markets.

He thinks Italy will be successful in its efforts to crack down on tax evaders, citing the amusing anedote of the recent tax raid on the luxurious winter resort of Cortina D'Ampezzo. Tax inspectors found 42 top-end cars registered to people with declared annual incomes of 22,000 Euros (about $29,000 CAD). The investigation highlights the problem of tax collection in Italy, which Barry thinks will ultimately be resolved given the strong sense of nationalism and patriotism in that country; the upper middle class “will do their part to put the country back on sound fiscal footing."

Barry's overall message was that Europe is in better shape than the world has given it credit for. Not exactly a screaming ‘buy signal’, but still upbeat news for a grey January morning in Toronto.

Do you feel wealthy?

2012-01-17T19:08:31Z

"Am I wealthy?"

It’s a question we are often asked by clients.

Given that many of them live modest lifestyles, a lot of them don't feel wealthy.

A study by Fidelity Investments found that 42% of American millionaires do not feel wealthy. The investable asset level at which they said they would feel wealthy?: $7.5 million.

Ironically, of the 58% who said they do feel wealthy, $1.75 million of investable assets was the amount at which they reported feeling wealthy.

So who is ‘wealthy’ in Canada?

This month's issue of Report on Business magazine published a summary of Canada’s highest income earners: The top 1% -- 246,000 Canadians – earn a minimum of $169,300 per year; the average income for this group is just over $400,000.

The top 0.1% make an average of $1.49 million and a rarefied 0.01% of Canadians get by on $3.83 million a year.

Still, these people are what Thomas J. Stanley, author of the Millionaire Next Door would call ‘Income Statement Affluent’; income being an imperfect predictor of net worth.

According to Investor Economics, a research firm specializing in financial services, there are an estimated 562,000 households in Canada having more than $1 million in investable assets and 19,000 households with $10 million or more. According to Report on Business magazine, there are 24 billionaires in Canada.

Perhaps wealth, like age, is just a number; it's more about how you feel.

Do you feel wealthy? How much would you need to feel wealthy? What would happen if you decided to feel wealthy even if your actual net worth doesn’t yet meet your definition of wealthy?

How safe are GICs?

2012-01-10T19:23:29Z

Yesterday marked what could be a watershed moment for investors in Europe as Germany managed to sell €3.9 billion worth of six month bonds at a negative interest rate. Marginally negative, but it demonstrates that investors are so worried about the economy in Europe that they are willing to pay Germany for the privilege of lending it money. When these bonds mature, investors will receive less money than they invested. They would quite literally be better off sticking their money under a mattress.

Investor sentiment worldwide is cautious with a tremendous amount of cash sitting on the sidelines. Recently, I’ve had several conversations with prospective investors who have asked whether their capital would be safe in GICs. The answer to this question is not straightforward as we first have to define what “safe” means.

If the question is whether I believe that investors will get their money back and earn a return on GICs, then the answer is “yes”. The Canadian banking system is strong and well capitalized. There is no reason to believe that investing in the debt of these banks is risky, unlike the view many investors are taking towards European banks.

The majority of high net worth investors worked very hard to build their net worth and are naturally risk averse. They generally state that at the very least, they want to preserve the value of their portfolio. I generally interpret this to mean that they want the portfolio at a minimum, to grow greater than the rate of inflation. By stating they want to preserve the value of their portfolio they are really trying to say, “preserve my standard of living”.

So, if the question is whether I believe that investors will preserve the value of their capital by investing in GICs, the answer is “no”. A dollar today, invested in a GIC will be worth less in the future.

Investing in a locked-in one year GIC with a major bank will result in a return of 1.15% on which tax must be paid at the highest marginal rate (for this purpose assume 46.41%). The Bank of Canada puts the rate of inflation at 2.90% on a year over year basis. Since last March, the inflation rate has hovered around 3.0%, at the higher end of the Bank of Canada's target range. In the graph, I have plotted how a portfolio invested in GICs would grow, after tax, if invested at 1.15%. I have also plotted the effect inflation would have on the cost of goods.

For the purpose of this exercise, I have assumed that these rates hold steady going forward. In five years, the purchasing power of a dollar invested in a GIC would decline by 10.6%. In other words, a dollar invested in GICs today will be worth 89.4 cents five years from now, if inflation stays the same. With so much cash flooding the system, inflation rates may well be higher in future years, and the return more negative.

GICs can be a good solution for the short term when uncertainty remains high, but they will do little to protect the value of your portfolio or your standard of living over time. So what do you do?

We still believe a well diversified portfolio managed with some cash (i.e. T-bills) as a defensive measure and a client’s tolerance for risk in mind will outperform the markets and preserve your standard of living.

Personal finance checklist for 2012

2012-01-06T19:14:07Z

A new year, new resolve, new goals. Each January about 40-45% of us, research shows, make new year's resolutions. Among the more common resolutions: get better organized and take greater control of financial affairs.

If those are on your list for 2012, we've updated our handy month-by-month calendar of tasks, 'to dos' and reminders to help you get and keep on top of your financial affairs. Even if you're already in good shape, you're likely to find something on the list that could help you improve your overall picture -- and peace of mind.

January

Review balance sheet for all family entities (i.e. trusts, corporations, family members) and take action to:

Redeploy cash effectively either to reduce debt or to obtain higher returns.
Review prior year's investment portfolio results against appropriate benchmarks and determine strategy for the coming year.
Review relative capital inside versus outside the business and take appropriate action.
Restructure balance sheet to minimize non tax-deductible debt and consolidate where appropriate.

Revise pre-authorized corporate tax remittance.

Pay interest on prescribed (PS) rate loan by January 30th. If you don’t have a PS loan, consider it; rates continue to be at their lowest levels.

Establish priorities for charitable giving rather than rush giving decisions at year end. Revise preauthorization of payments for changes in giving accordingly.

Caregivers should maintain accurate records of expenses to claim the new Family Caregiver Tax Credit.

February

Maximize RRSP, TFSA & RESP contributions for all family members to take advantage of tax sheltered compound growth.

Consider spousal RRSP and RRSPs for kids over the age of 18.

Make contributions to TFSA accounts.

Collect receipts and other information for tax filings in March (trusts) and April (personal).

Arrange for medical in preparation for 'health management' plan for self and family members.

Consider paying out a taxable /capital dividend to preserve your company's qualifying small business corporation status.

RRSP deadline for 2011 is February 29th.

March

Remit Q1 personal tax installment by March 15th.

File trust tax and information returns by March 31st.

April

File personal tax returns for all family members and pay any outstanding liabilities by April 30th (April 15th for U.S. filings).

Revise personal tax installments for the balance of the year.

Review Q1 investment portfolio results.

May

Review 'health management' plan and assess related insurance needs for all family members.

Review amount of emergency funds and arrange for line of credit or put cash into savings to ensure you have a minimum of 3 months of living expenses.

Discuss income/family expectations for university/college kids returning home to set expectations for the summer and September enrollment.

Review your notice of assessment and take appropriate action.

June

Remit Q2 personal tax installment by June 15th.

File personal tax return by June 15th if self-employed.

Pay out any prior year accrued bonus from company by June 30th.

If over 40, consider setting up an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA).

Explore opportunities to sprinkle the capital gains exemption on shares in your business to other family members.

July/August

Review Q2 investment portfolio results.

Consider mid-year reflection on longer-term plans for you and family members through family summit or family council. Reflect on personal, business, family and financial goals, philanthropic/stewardship objectives etc. and develop action plan for implementation in Q3 and Q4.

Determine most effective tuition funding strategy for upcoming school year. Also, review student living accommodation and opportunities to buy vs. rent.

Encourage and support your children in establishing their own savings and investment plans.

September

Remit Q3 personal tax installment by Sept 15th.

Review estate plan (e.g. will, power of attorney, life insurance).

Review shareholder’s agreement.

Consider the merits of incorporating and/or an estate freeze.

Consider transferring property to other family members to minimize current and future tax liability. If you have a child turning 18, there are additional opportunities.

October

Review Q3 investment portfolio results.

Review cash balances and invest surplus cash.

Review medical expenses for the past 12 months (including those of dependent parents) to determine if there are tax deduction benefits.

November

Begin year-end tax planning:

Review status of unrealized capital gains and losses on investment portfolio and take appropriate action to minimize taxes for the current and prior years.
Consider a private or community foundation to shelter large capital gains.
Consider flow through shares or other tax sheltering opportunities.
Ensure at least minimum RRIF and IPP (new) withdrawals are made prior to year end.

December

Make all charitable, political donations (in cash or publicly-traded securities), IPP contributions and unused RESP and TFSA funding by December 31st.

Determine bonus/dividend policy for your company.

Ensure amounts paid or payable from trusts to beneficiaries are properly documented.

Income splitting: ensure family members are paid for work done during year.

Any loans from the company to shareholders should be eliminated prior to year-end.

Final review of tax loss selling opportunities. Remember carryback of losses to shelter 2009 gains expire at year end.

Is the U.S. job market really improving? Don't believe everything you read.

2011-12-21T17:26:18Z

Earlier this week the U.S. Bureau of Labor Statistics (the “Bureau”) announced that the US unemployment rate had dropped to 8.6% and that 278,000 jobs had been created. On the surface, this seems like great news; however, I have a healthy degree of skepticism over an improving U.S. job market.

Let me explain. US employment peaked in March 2007 and bottomed in October 2009 losing 7.94 million jobs in the process. Unemployment rose by 8.9 million people over the same period, so it’s reasonable to assume that nearly 1 million people entered the labor force over that time and were unable to find jobs.

Since the bottom in October, 2009, unemployment has fallen by 2.3 million but this drop includes 595,000 people who are no longer looking for work but would surely take a job in a New York minute if one was offered. If one nets out this “marginally attached” group the number of unemployed has now only fallen by 1.7 million people. So there are still 7.2 million people who either lost their jobs or couldn’t find one during the credit crisis and recession.

The Bureau reported that the labour force has actually fallen by 138,000 people over the same period. How can the labour force not grow when the population is growing? According to World Bank estimates and the U.S. Census Bureau, US population has grown by 3.6 million people; 2.0 million of which are between the ages of 20 and 65…working age. In other words, on average, the U.S. has added an additional 90,000 working age people per month since October 2009. Where did these people go if the labour force didn’t grow?

Even if one accepts the Bureau’s 2.2 million jobs having been created since October, 2009, that barely absorbs the growth in the population of working aged citizens let alone makes any dent on those who actually lost their jobs.

It gets worse. If one adds the number of people who are working part time because they can’t get full time work to the number of unemployed the total is a staggering 15.6% of the U.S. labour force! One out of every 6.5 working people in the U.S. are earning significantly less than they were before the recession.

Why does this matter? The consumer represents 70% of GDP in the US. Without a meaningful improvement in jobs, the US economy will continue to languish. When making decisions about where to invest we need to understand whether the economy is improving and whether corporate profits are likely to grow from improving demand. Our analysis goes much deeper than the reported headlines. We consult economists, analysts, our independent investment managers, our clients who own businesses, and we conduct our own research. Digging deeper enables us to gain more insight into whether an apparently improving statistic actually translates into a growing economy. In the case of reported labour statistics, we don't believe it does.

What type of real estate investor are you?

2011-12-13T21:33:16Z

I opened the Globe and Mail today to read with interest the article, How the rich are investing in real estate right now, written by Thane Stenner.

Mr. Stenner had an interesting take on what he defined as four different types of real estate investors. As readers of this blog know, real estate has long been an important plank in our investment platform and I thought the subject merited further discussion of the different types of real estate investment opportunities available to high net worth investors:

Development Real Estate – A longer term investment, this category delivers some of the highest returns available in the real estate asset category. However, it is also the riskiest in that capital can be tied up for years as the property is developed and leased out to tenants.

Opportunities in this category include loans, which offer higher than market yields due to the risk associated with vacant land, and capital investments, where the investor takes ownership of a portion of the property along with the developer. An economic downturn, however, can result in these properties remaining undeveloped, and potentially tying up your investment for longer than anticipated.

Income Producing Real Estate – Both commercial property and multi-residential housing units offer an excellent way to reduce risk and earn a steady cash flow. However, for passive investors, it is important to have experienced and well-qualified property managers who understand the day to day complexities of this type of real estate. After all, who wants a call at 2:00am because of a leaky pipe?

Well-diversified portfolios will include investments in many different properties in many different geographic locations thus reducing the risk associated with any one real estate market. Income- producing residential real estate usually performs very well during economic downturns as those who are unable to afford a home turn to rentals.

Turn-Around Real Estate – An offshoot of income-producing real estate, these diamonds in the rough offer the potential for both capital gains and income. Purchasing a property that is undervalued due to a lack of capital investment and investing more to bring the units up to current standards can result in higher rental income and a capital gain when the property is eventually sold. Unlike “flipping” a house, however, investing in turn-around apartment units requires more capital and a longer term commitment. In the article,

Mr. Stenner points to the United States as another example of this category. Areas where property may be undervalued, such as Arizona for example, can present an opportunity to investors. However, investors should understand that employment, economic growth and competing developments will all have an effect on whether these investments ultimately grow in value. In addition, Canadian residents should be aware of the added costs from non-resident taxes, legal and accounting fees from having to file US tax returns if you earn income, and the potential impact of estate tax.

Mortgages – There is a large secondary market for loans completely unrelated to the big 5 banks. Developers and investors often turn to this market because they need to close faster than a bank is willing to or because the bank is unwilling to lend (for any number of reasons unrelated to the opportunity available). Often, the secondary market proves to be more flexible than the banks are willing to be. These loans are often shorter term and have higher yields and carry the property as collateral in the event that the borrower is unable to make payments.

For our part, we invest in all four of these categories, with the majority being invested in income real estate. We do so to diversify and enhance our returns.

While Mr. Stenner points to a number of publicly traded securities or Real Estate Investment Trusts (REITs) as a method for investing in real estate, in my view, this reduces one of the key advantages to real estate: risk reduction.

While these securities often do not have high correlations with the overall market, they typically still fall in value when public markets undergo periods of volatility. In 2008, the S&P/ TSX Composite Index fell 49.3% from its high. The TSX Capped REIT Index fell 62.66% from its high and that fall began much earlier than the broader market.

While it is true that REITs distribute significant cash flow, making this category attractive, they are still subject to market volatility. Private real estate investments may offer some advantages in that their value does not bounce around with the stock market everyday and potentially offer more re-development or capital gain potential than public investments. The challenge however is they are typically more difficult to access for individual investors.

Real estate should be an investment held in every investor’s portfolio. However, it is a complicated asset category and unless you have the expertise, you may want to find professional managers who understand and specialize in this area.

What you can learn from financial history

2011-11-29T13:52:48Z

Coming off of a couple of weeks of topsy turvey markets, it’s understandable if investors are feeling a little rattled these days.

Some comfort may be taken in the perspective of someone who has managed through more than a few bear markets: Dennis Starritt, one of Canada’s investment luminaries and a key manager of the Newport Canadian Equity Fund.

Dennis joined us for a chat at one of our recent Inside the Tent events (where we bring together thought leaders from our network to discuss topics of interest). Judging from the engagement of the audience – there were more questions than we could accommodate in an hour and a half – he certainly captivated everyone’s attention with his views. We offer a short recap that may be useful for these times.

As background, Dennis is a “stock picker” and unabashedly admits to paying more attention to stock valuations than to the “macro” picture. Generally, he is more focused on individual companies, their business fundamentals, and prospects for growth.

Yet, Dennis acknowledged that in the current climate, the “macro” picture cannot be ignored, so great is the correlation between the markets and individual companies at this time. The market is not trading on fundamentals, but is instead trading on day-to-day updates from Europe.

Dennis is also something of a financial historian. In Dennis’ view, we are about two-thirds of the way through a bear market. He points out that this is nothing new. There have been three such prior periods during the past century. He referred back to the 1982 to 1999 bull market as a possible guide to our current confusing picture.

Most people measure the bull market that ended more than 10 years ago as having been initiated in 1982. Actually, the beginning was near the midpoint of the secular bear market that lasted from 1966 to 1982. A vicious 50% decline during 1972 reached its bottom in late 1974. This marked the best buying opportunity for the next 25 years. Dennis would suggest March, 2009 is comparable to December, 1974.

During the subsequent two years to 1976, the market rose over 70% to the level reached 10 years earlier in 1966 before succumbing to another nasty correction of more than 25%. This may be seen as a parallel to our current situation in 2011 and into 2012. The end of that correction in 1977 provided the second best buying opportunity of the 25 year bull market to 1999. It should be noted, however, that patience was required since market performance remained choppy for another five years until 1982 when new all-time highs were finally sustained.

Patience did pay off however; since the market went on to achieve gains over 1000% (more than 10 xs). Beginning in 1982, enthusiasm for equity ownership accelerated during the next 18 years into a buying frenzy in the late 1990s, which set the stage for the long term correction. The first quarter of 2000 marked the end of this bull market and the beginning of the current secular bear phase.

Using history as a guide (but NOT as a blueprint), Dennis offered that March, 2009 and again now in 2011 or 2012 may prove to be the best entry points that we are going to see before the next bull market. However, he was also quick to point out – and we concur – that the bull market is likely still years away.

Dennis is currently holding an unusually high amount of cash in the portfolio he manages within our Newport Canadian Equity Fund. He offered that he prefers to be invested and is uncomfortable holding cash. He reminded us that cash will not save you from bad markets, although it will limit the damage. According to Dennis – “if you are wrong with the 75% of your stock picks that are invested during a bad market, the remaining cash will only provide modest protection.” At the same time, he does not want to be caught without any resources if the market corrects further and some of his favorite companies are available at fire sale prices.

Dennis also took the opportunity to once again remind us that “growth” stocks are as cheap as he can remember. These stocks have been out of favour since March, 2000. In his view, industrial America is on the rebound despite the many political problems that exist. With balance sheets as strong as they ever have been, he feels that investors are neglecting this unloved sector at their peril.

For our part, we came into this past summer with high cash balances and have been picking away at the buying opportunities created by the turmoil that began in August. At the same time, while history may prove this to be an extraordinary buying opportunity, we remain cautious knowing these things are never perfectly timed.

Surviving spouse, it's okay to spend the money

2011-11-22T15:02:07Z

I recently had the experience of counselling a long-time client who, despite a very secure financial position, was overcome with anxiety about money. What became clear to both of us after a lengthy and at times emotional discussion was that her anxiety was not about money at all. Rather it was about her obligations to her children, as the sole beneficiary of her late husband’s estate.

It’s a scenario we see frequently: a surviving spouse, usually the wife (life expectancies between men and women being what they are) of a sole or principal income provider, with more than sufficient capital to sustain her lifestyle is anxious and unsettled. Through discussion, we come to understand that the uneasiness is related to guilt over spending money that is perceived to be earmarked for heirs.

Isn’t it ironic that so much estate planning is directed towards preserving capital for the next generation through spousal trusts, etc., when often lost in the process is reassuring a spouse that it’s okay to spend money to maintain her lifestyle once the principal breadwinner dies.

Yes, there is a balance between spending today and ensuring enough capital is maintained to meet future needs, but let’s not confuse providing for heirs in that equation. Retirement and estate planning are not mutually exclusive, but they are different objectives.

In helping our clients plan for their retirement needs, we at Newport Private Wealth prepare detailed financial projections based upon reasonable assumptions for income, expenses, investment returns, inflation, etc. to determine levels of spending which are affordable (see our earlier post onretirement spending as a percentage of assets). These projections are then modified to identify potential shortfalls in both liquidity and cash flow should the sole income earner die prematurely; in which case buying life insurance payable on the death of the sole breadwinner is often the best solution. But these are relatively straightforward arithmetical equations.

Where we often add greater value and experience is in helping couples talk openly about the expectations and obligations should one pre-decease the other. Most couples say, “we want to enjoy our retirement and whatever is left over should be gifted to our heirs.” This is not an entitlement, but rather a gift to residual beneficiaries after other needs and bequests are satisfied. Both spouses and children need to understand this important difference and recognize and respect the pecking order. Unfortunately, too many families don’t effectively communicate their objectives, often leaving a surviving spouse with guilt and strained relationships with children.

This can be avoided if discussions are held well in advance – both informally and during the estate planning process. Ask yourself first, “does my spouse know clearly and plainly what I want for him or her should I die prematurely?” “Have I told my spouse it’s okay to continue the lifestyle we both enjoyed?” “Have I talked to my children about my values and what we have agreed to as a couple?”

Don’t wait until it’s too late to convey important family values and wishes to those who are most important.

A small change with big meaning.

2011-11-11T16:57:10Z

Today we announced that we have rebranded as Newport Private Wealth.

It’s a modest change – but meaningful in a couple of ways:

One, it clearly defines what we do and who we are in business to serve. We work for individuals and families who have accumulated wealth. Full stop.

Second, and most significantly, it is just one more step in our evolution to be the very best that we can be and create the very best experience possible for our clients. Clarifying and strengthening our brand is just one more milestone toward that goal.

As is so often the case, the entire effort is better summed up by one of our clients, in something he wrote to us upon receiving the news last week. Recalling on his own experience with the rebrand of a major corporation, he said, “the rebranding exercise provides all kinds of benefits...not the least of which is the creation of a natural opportunity to engage in conversation with clients and potential clients around what's really behind the change in name and brand...and talking with clients is always a good thing!”

We couldn’t agree more. Further, this blog is just another way we want to engage in conversation with like-minded people who want to be responsible stewards of their wealth.

We hope you’ll be part of that conversation. Let’s chat anytime.

Individual Pension Plans revived

2011-11-04T16:30:14Z

With Hallowe'en just passed, it brings to mind another spectre that appears to have been revived: Individual Pension Plans (IPPs). And it's good news for business owners.

As we have written previously in this blog (See previous articles), IPPs have long been one of the most favourable tax strategies for business owners to save for retirement.

However, this year's federal budget, which proposed new funding rules for IPPs, significantly reduced their attractiveness. Recently however, the rules were modified to restore most of the tax benefits that make these retirement vehicles so attractive.

It's a bit technical, but here is a brief summary of what's happened:

Historically, business owners could fund a significant portion of the accrued liability associated with their IPP from pre-tax earnings of their operating company. This provided a very tax effective method of funding retirement.

This year's federal budget introduced measures requiring that the past service be funded first with the IPP member's RRSP (including unused contribution room and money purchase plan) assets (defined as the “qualifying transfer”) which eliminated the ability to use pre-tax corporate earnings to top up the IPP.

The rules were recently softened by limiting the amount of the qualifying transfer to a portion the RRSP assets; thereby, restoring the balance of past service funding with tax deductible contributions from the company (albeit a lesser amount than was previously available).

The bottom line is that IPPs still offer significant benefits to business owners (visit IPP Experts to learn more) and their families. In our view, IPPs should always be considered in retirement planning for business owners over 50 years of age who have at least 10 years of service with their company to assess how they can be incorporated into the retirement plan for maximum advantage.