Week in review: December 1 to 5, 2008

By Kate McCaffery | December 5, 2008 | Last updated on December 5, 2008
9 min read

Welcome to the weekly roundup of news affecting you, as covered by Advisor.ca and our sister publication, Conseiller.ca. Read this section every week to catch up on the news you missed, or click here and subscribe to get regular updates sent to your inbox or BlackBerry.

Skip to: Quick links, stories this week. Or click here to get regular updates sent to your in-box or blackberry.

In the name of limiting risk and liability for the dealership, Dundee Wealth Management recently announced it will ban advisors from using external managing general agencies to conduct new insurance business, and the Independent Financial Brokers of Canada (IFB) is "outraged."

The new policy, which was announced in September and goes into effect in January, will require Dundee advisors to process all new insurance business through Dundee’s in-house insurance dealership, Dundee Insurance Agency Ltd. (DIAL). The Mutual Fund Dealers Association (MFDA) already requires registrants to consolidate all of their mutual fund business with their dealer. However, dual-licensed advisors who can sell insurance products may use external insurance MGAs.

For affiliated advisors, Dundee will now be the sole dealer for all new individual life insurance, segregated fund policies, living benefit policies, GICs, Guaranteed Income Annuities and registered investment plans.

Part of Dundee’s concern is the off-book business, a subject discussed by litigators speaking at the Advisor Group’s Fall Compliance Conference. In the unrelated panel discussion, they told conference delegates that off-book products might occasionally generate windfalls for investors or commissions for brokers, but when it comes to dealers, they’re nothing but a liability.

Regulatory news

One of the most notable examples of how off-book transactions can go wrong can be found in the case of now-notorious, Victoria-based advisor, Ian Thow. His firm, Berkshire Investment Group, was eventually fined $500,000 by the MFDA, even though none of the fraud he perpetrated was processed through the firm.

Off-book transactions are also a small part of the growing list of charges and lawsuits unfolding in relation to the Mount Real-Cinar-Norshield affair, which ultimately cost investors nearly $4.5 billion.

The latest allegations in the news are related to William Marston, one of the most prominent salesmen of high-yield unregistered promissory notes offered by Mount Real. Note owners lost $130 million, $16 million sold by Marston, after the Autorité des marchés financiers (AMF) seized the company.

Marston’s disciplinary hearing, being held by the Quebec division of the Investment Industry Regulatory Organization of Canada (IIROC), is part of a broader effort by both IIROC and the AMF – Marston was among the 24 individuals charged with 619 securities regulation breaches in January 2007. To date, five have been found guilty and fined $802,000. One has been found not guilty. Hundreds of other IIROC and AMF charges against Marston and others are joined by a class action suit sanctioned by Quebec courts against Lino Matteo — Mount Real’s chairman and CEO — Mount Real’s controller, accountants, B2B Trust and Penson Canada. The suit describes Mount Real as a Ponzi scheme, and charges that investors were victims of "a vast fraud perpetrated by unscrupulous individuals, made possible by the negligence of financial services professionals and businesses."

Other industry news

Advocis announced the newest lineup of directors elected to the association’s board at the group’s annual general meeting held in Toronto on Monday. Most notably, Kristan K. Birchard, a member of Advocis for more than 30 years, was elected chair of the Advocis board for 2008-2009. Birchard has served on the Ottawa chapter executive and as chair of the CLU Institute’s board of directors. Last year, he was vice-chair of the board of directors of Advocis. He is a charter member of the Conference for Advanced Life Underwriting (CALU) and a Century Initiative member.

For those still interested in commenting on proposals to govern the non-bank sponsored asset-backed commercial paper market, the Canadian Securities Administrators has extended the period for comments to February 16, 2009.

The Financial Planners Standards Council, meanwhile, is updating the CFP curriculum. It announced plans that will see the traditional exam split into two. Future candidates will have four chances to sit the examinations and must pass the tests within 12 years. More information on what each exam phase entails can be found by clicking here.

Although there isn’t much good news to report as far as fund returns are concerned, the 14th annual Canadian Investment Awards (CIAs) were held in Toronto this week. One of the top honours, Morningstar Fund Manager of the Year, was awarded to Gerald Coleman, the head of CI Investments’ Harbour Advisors. This is the second time Coleman has won the award, making him the only repeat winner of the title in the award’s 14-year history.

Dynamic Funds was named Analysts’ Choice Favourite Fund Company of the Year, and advisors named AGF Funds to win the Investment Fund Company of the Year award for its range of range of products, performance, fees, service and community investment.

"Never before have leadership and long-term vision been more important to recognize than in these markets," said Sabine Steinbrecher, founder of the CIAs. "Leaders are making substantial efforts to continue to serve Canadians and we are proud to showcase those at the forefront."

Company-specific news this week includes an announcement that Scotiabank plans to finance the acquisition of its 37% stake in the CI Financial Income Fund, purchasing 105 million units of CI Financial from Sun Life Financial, by paying $1.55 billion in cash, $500 million in common shares at $34.60 per share and $250 million in 6.25% rate-reset preferred shares. Company president and CEO Rick Waugh says the transaction demonstrates Scotia’s "ongoing commitment to growing the company’s wealth management business." Sun Life is expected to continue its distribution arrangement with CI after the transaction is completed sometime next week.

Manulife Financial, meanwhile, is beefing up its capital reserves after the insurance giant announced its first-ever quarterly loss, totalling $1.5 billion in the fourth quarter. Manulife CEO Dominic D’Alessandro says the disappointing performance "is primarily due to the unprecedented decline in worldwide equity markets," but pointed out that company fundamentals remain solid.

A new study from TowerGroup suggests pressure on insurance companies’ balance sheets in general, and declining sales in key growth areas, are going to have a nasty impact on U.S. insurers in 2009 as well, and could result in a rollback of benefits they currently offer to customers.

Most notably, they say insurance carriers will likely pump resources into risk management and regulation, both large areas of focus, to optimize risk management and meet new regulatory mandates, all of which will need to happen in the face of higher employee retirement rates and rapidly decreasing sales.

Demographics is getting to be a tired subject, but advisors should do their best to avoid glazing over in the face of it, since it affects employee retirement, yes, but also client management. Older clients are some of the best clients out there – they have all the wealth – but they also present unique challenges that come with old age, challenges that increase the litigation risk advisors face.

Experts speaking at the Advisor Group’s Fall Compliance Conference say dealing with these aging clients can often mean getting sucked into the affairs of litigious relatives and disputes with families who have an eye on the estate.

Products, investing

Jov Talisman Fund investors approved a plan this week to change the fund into an actively managed ETF. Following regulatory approval, the fund will be listed on the TSX in January as the Horizons AlphaPro S&P/TSX 60 ETF.

For the industry as a whole, November was another rough month of net redemptions. Fortunately, the numbers weren’t nearly as bad as those reported in October. According to the Investment Funds Institute of Canada, the industry suffered net redemptions between $801 million and $1.3 billion, compared to net redemptions of $8.4 billion and $4.5 billion reported in October and September.

Morningstar Canada, meanwhile, says equity mutual funds continued to take a beating during the month, as economic fears became more entrenched. That said, the pace of decline seems to have slowed substantially – although November was the third consecutive month in which almost all equity fund categories fell. Only the Morningstar Real Estate index (down 12.9%), held the dubious distinction of falling more than 10%, compared to October, when more than 20 indexes were down more than 10% on the month. Overall, 21 of the 24 equity-based fund indexes were negative in November.

Going forward, the latest year-end prognostication from TD Waterhouse suggests that investors can expect North American stock indices to rise in 2009, but they’ll have to put up with more volatility before the markets find a firm footing. Bob Gorman, chief portfolio strategist at TD Waterhouse, recommends that large-cap stocks form the basis of a U.S. portfolio, due to the greater stability they typically exhibit. (It is possible that Russell Canada numbers back this up as well – the investment firm says U.S. large-cap stocks outperformed small-caps by four percentage points in November, fueled in large part by companies in the utilities and integrated oils sectors.) In Canada, Gorman says the TSX’s 49%-decline from its peak is likely a sign that the bottom has been reached, adding that equities should recover in 2009.


If a stimulus package is in the cards when the Conservative government tables the federal budget next month, a new survey conducted by TD Bank Financial for the Children’s Miracle Network suggests that 45% of Canadians would donate more to charity if the government were to offer more generous tax credits. TD points out that donations are more important than ever, particularly at times when Canadians are likely paring back their expenses.

Those who are still making donations this holiday season, though, should make sure these are entirely above board, after the Canada Revenue Agency issued a warning about tax shelter gifting arrangements. Despite numerous warnings and audit actions, the CRA says taxpayers are still participating in tax shelter gifting schemes. The agency has already denied $2.5 billion in claimed donations. The agency is vowing to audit all tax shelter gifting arrangements going forward.

In other news, the federal government posted a budget deficit of $400 million for the month of September, compared to an $11-million surplus recorded in September 2007.

Finally, realty market reports show that activity in the Canadian real estate market fell by almost half in the second part of 2008. Although the pace of sales slowed, average transaction prices seem to be holding steady. The outlook suggests the market will remain slow in the first half of 2009, rebounding in the latter half of the year if the economy picks up.

Quick links: Advisor.ca news, December 1-5, 2008.

New columns and features this week:

Chris Paterson: Volatile markets and low-interest-rate markets: either would spur interest in insured annuities. But both create what some would call a perfect storm. Now let’s re-examine insured annuities’ applicability in both a non-charitable and a charitable sense. Full story.

Shawn O’Brien: Let’s face it – no investor has escaped the troubles caused by recent market turmoil. Quality blue-chip equity buyers, "core and explore" proponents and balanced portfolio fans alike are grappling with deep client disappointment. The question is whether there is a governing philosophy that you adhere to through thick and thin when managing client assets. Full story.

Cindy Jenner Cowan: Clients are better educated about the principles of investing and the qualities they expect from their advisors. To meet these evolving demands, advisors will need to learn about new tools and processes and get adequate training. When picking a technology solution, though, one size truly does not fit all. Allowing the technology itself to drive client-facing processes can also cause problems. Full story.


Last chance – read this article, earn free CE credits IIROC has indicated it will ask questions about why clients are placed into fee-for-service arrangements, which it generally defines as any account in which advisor compensation is derived from fees based on a percentage of client assets as opposed to commissions. Full story.

Regulators require justification for fee-based accounts IIROC has indicated it will ask questions about why clients are placed into fee-for-service arrangements, which it generally defines as any account in which advisor compensation is derived from fees based on a percentage of client assets as opposed to commissions. Full story.

Mark your calendar It’s never too early to start planning what industry events to attend next year. Advisor.ca has compiled a list of some conferences happening across the country. Full story.

Prime hedge fund worries The collapse of Lehman Brothers didn’t just take down the whole investment banking model of Wall Street; it also put the squeeze on a significant number of other investments, including principal-protected notes and hedge funds. Full story.


Kate McCaffery