IPP vs. RRSP...Business Owners...take note!!

An Individual Pension Plan (IPP) is a registered defined benefit plan that typically has only one or two members.

An IPP is a pool of assets set up to fund a retirement income to a single beneficiary (employee). In most cases the plan is set up for the principal in an owner-operated business or partnership but plans may also be used for key employees.

1. Every 3 years an actuarial evaluation is completed to determine the funding requirements for the following 3 years.

2. Each year a contribution is made by the company on behalf of the employee, in an amount established by the actuarial evaluation. The contribution is tax deductible to the company.

3. If the employee/beneficiary retires before reaching age 65 they may also benefit from terminal funding. Terminal funding allows for additional lump sum contributions to be made to add indexing, bridge benefits or various other options to the pension plan. This could result in over $100,000 in additional tax deductible expenses in the year of retirement.

4. Upon retirement, the beneficiary employee has three options:

- The beneficiary employee may withdraw the prescribed annual pension amount from the plan. The plan sponsor remains responsible for ensuring that the IPP can meet its obligations

- Alternatively, the beneficiary employee may “commute” their pension. Commuting the pension is a process where a lump sum related to the cost of providing the future pension is withdrawn from the pension plan and paid to the employee. The employee then becomes responsible for managing their own retirement income.

- The final option is the purchase of a life annuity with the value of the funds.

5. Unlike most conventional defined benefit plans, payments do not necessarily end with the death of the pensioner’s spouse. If assets remain in the pension plan at the time of the employee’s death, the remaining value will be used to pay a survivor pension to the spouse. Upon the spouse’s death the remaining assets transfer to the employee’s estate. In short, all of the assets accumulated in the plan are paid out for the benefit of the employee.


The Benefits of an IPP :

Avoiding the damage of a bear market

IPP members have an edge over RRSP investors in the event of weak investment performance. Under pension legislation, if a pension plan has fewer assets than will be required to meet its income obligation the company can increase tax deductible contributions to the plan to increase the asset base. RRSP investors can only envy this ability.

Creditor protection
As a registered pension plan, the IPP is creditor protected, providing an additional benefit to small business owners and incorporated professionals.

Individual Pensions are a complicated product and you should always seek professional advice prior to initiating a plan. But if you meet the following criteria, the benefits certainly make it an option worth investigating!

Age 40 or above
Employee/owner of corporation engage in active business
Corporation has surplus income and cashflow
Have a T-4 Income of $100,000

We can help. Call us. Visit our website : www.jstomenson.ca

This Too Shall Pass

I listened to Steve Cowley speak this week and what a contrast in perspective between what he has to say and what the overly sensational media continues to report.

Steve is a certified financial analyst and portfolio manager at LA based One Capital Management, LLC, a portfolio management and strategy firm that I have worked closely with over the last few years.

Steve is busy looking for value in and amongst the myriad of companies who's stock prices have been battered in the wake of the meltdown in global equity markets resulting from the financial and liquidity crisis that peaked in the final quarter of 2008.

Steve's voice is one of reason in a world that has been shaken to the core and is still reeling from the erosion of personal wealth.

To Steve the future is exciting from a global growth perspective (once we get beyond 2009) and current valuations therefore represent "the best we've seen in years"! In 5 years returns have significant upside as the economy reverts back to a normal, non-recessionary environment.There are tremendous opportunities that exist for investors right now, especially in Financial Services (currently one of the most depressed sectors in the economy).

As Steve wrapped up his discussion he summed it up by saying that "this too shall pass" and that, despite what we are reading and hearing in the media, this downturn is not as severe as either the 70's or 80's recessions. Nowhere near the Great Depression. We are in the midst of some fairly difficult times, but that the future is exciting.

The future.....the future has tremendous upside potential.
Time to stop worrying about what is now and get busy positioning ourselves appropriately to take advantage of what the future is going to bring.

Listening to Steve was like a fresh breeze blowing in bringing a new weather system.

I will be hosting Steve at my next Webinar event on April 8th at 4pm. Tune in if you would like a "fresh" perspective.


Title: This Too Shall Pass
Date: Wednesday, April 8, 2009
Time: 4:00 PM - 4:30 PM EDT
After registering you will receive a confirmation email containing information about joining the Webinar.


Reserve your Webinar seat now at:

https://www1.gotomeeting.com/register/832044908

If you missed the webinar: visit this site for a replay:

http://www.onecapital.com/ourcomments.html

and click on the webcast for "This Too Shall Pass".




System RequirementsPC-based attendeesRequired: Windows® 2000, XP Home, XP Pro, 2003 Server, Vista
Macintosh®-based attendeesRequired: Mac OS® X 10.4 (Tiger®) or newer

Private Equity : Diversify Your Wealth

As an independent business owner who has put years of hard work into your successful enterprise, it is pretty important to take stock and have a good look at your Diversification Risk.

How much is your business worth and how much of your wealth is tied up in it?

In many cases owners are so focused on their business that they do not get an opportunity to step back and look at their over-all financial picture.

In some cases owners are not even sure what their business is worth.

From a planning perspective, this becomes difficult, because at some point you are going to need an idea of your net worth and exactly how you will strategically create an income stream for yourself (and your family) in your next stage of life: post ownership (we used to call it retirement!!)

"Succession planning is all about taking the helm and setting the course for your eventual exit from the business...Failure to plan, communicate, and manage succession is the greatest threat to the survival of a business" (Succession Planning Toolkit for Business Owners, Weigl et al).

Even if the next stage (of life) is years away, there may be a significant amount of risk in having most of your wealth tied up in one asset: your business.

In her book Money Magnet: How To Attract Investors To Your Business, Jacoline Loewen discusses some very interesting ideas for not only taking some of your hard-earned wealth out of your business, but also getting a capital injection at the same time so that you can continue to maximize its growth potential.

Diversification (to make your wealth manager happy) and the ability to continue to grow your business, sounds like getting your cake and eating it too!

How? Private Equity , or as Jacoline so eloquently puts it : "O.P.M. (other peoples money)".

"Money Magnet is a guide for entrepreneurs interested in accessing capital from the private equity market. It is addressed to entrepreneurs, in accessible language, by an author who has spent a career helping businesses grow.
Undoubtedly, owners and founders of businesses need capital, but too often a trip to the dentist seems more appealing than dealing with financing."

http://www.moneymagnetbook.ca/

Succession planning and Private Equity can work hand in hand to help business owners diversify and strategically plan their (and their families) future.

It only makes sense to click on the above link and delve a little further into this great option. Can I help? Contact me to explore the possibilities!

The Educated Investor and the Psychology of Investing

Professor Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University, Santa Clara, Calif.,

Taken from :
The Monitor, The Voice of the Investment Management Consultants Association,
May / June 2005: What is Behavioral Finance, The Monitor, 2005.Cognitive Biases Series: a collection of articles from IMCA's publication, The Monitor.

"I describe financial advisers as financial physicians. Good physicians promote both health and well-being, and good financial advisers promote both wealth and well-being. Good physicians ask, listen, and empathize with their patients; they diagnose what’s wrong; they educate; and, finally, they treat. Good physicians must possess all the relevant knowledge and tools of medicine, and they must also have the handholding and educational abilities of good psychologists. Good physicians must play psychologist because body and mind are not separate.

The same is true for financial advisers. Some financial advisers prefer to keep away from the wellbeing issues of their clients; they only want to find good money managers and calculate accurate alphas. I say to them what I would say to a physician who prefers not to deal with patients: be a pathologist.Confine yourself to a back room where you can choose money managers and evaluate their performance. Let someone else help live human investors."

So for all you "live, human investors"...many of you clients, some thinking about being clients and others perhaps looking for someone who really does care about you.......

In light of the current Investment environment, I have tried to find a good synopsis on Behavioral Finance theory, which can explain the thought process and research behind broadly diversified, less actively- managed portfolios. It is a bit long and a little technical, but I think it underscores what is important. The highlights (bold) are mine. I plan to build on this theme with a "webinar" ( a conference call seminar with live internet feed to your computer) shortly.

Psychology is the basis for human desires, goals, and motivations. Psychology is also the basis for a wide variety of human errors that stem from perceptual illusions, overconfidence, over-reliance on rules of thumb, and emotions.

Errors and bias cut across the entire financial landscape, affecting individual investors, institutional investors, analysts, strategists, brokers, portfolio managers, options traders, currency traders, futures traders, plan sponsors, financial executives, and financial commentators in the media.

Successful investing requires taking the psychological propensities of others into account.

Statistics and probability are essential concepts when it comes to risk. Yet, most people have poor intuition about statistics and probabilities. Instead of behaving like professional statisticians, they rely on flawed intuition, based on rules of thumb called heuristics. By using heuristics people render themselves vulnerable to errors and biases. That is why the first theme of behavioral finance is called heuristic-driven bias.

A frame is a description. Frame dependence means that people make decisions that are influenced by the manner in which the information is presented. Frame dependence manifests itself in the way that people form attitudes towards gains and losses. Many people make one decision if a problem is framed in terms of losses, but behave differently if the same problem is framed in terms of gains. An important reason for this behavior is loss aversion. Hedonic editing is the practice of choosing frames that are attractive relative to other frames. People with self-control problems often use hedonic editing to help them deal with those problems.

Markets are efficient when prices coincide with intrinsic value. Heuristic-driven bias and frame dependence combine to render markets inefficient. Representativeness leads to the winner–loser effect, whereby investor overreaction causes prior long-term winners to become future long-term losers, and prior long-term losers to become future short-term winners. Conservatism leads security analysts to underreact to earnings surprises, thereby generating short-term momentum in stock prices. Frame dependence leads investors to frame stock returns in terms of short horizons instead of long horizons. As a result, investors require a larger equity premium than they would if they framed returns using longer horizons. Prices can deviate from fundamental value for long periods, with excess volatility the result.

Wall Street strategists are susceptible to gambler's fallacy. In general, four important behavioral elements affect the market predictions of investors: overconfidence, betting on trends, anchoring and adjustment, and salience. Although gambler's fallacy generally afflicts Wall Street strategists, it typically does not afflict individual investors and technical analysts—they succumb to other errors. This point leads to a discussion about some of the key illusions that most people have about randomness, and why these illusions bias their predictions. Inflation adds an additional element of confusion.

Many investors believe they can make money by betting against the market predictions contained in advisory newsletters. Yet, they are wrong. Investors are wrong about advisory newsletters, and they hold fast to mistaken beliefs. And the issue goes beyond the predictions of newsletter writers. The general question is why people hold views that fly in the face of empirical evidence. The general explanation centers on overconfidence, overconfidence that stems from the tendency to overlook disconfirming evidence. Consequently, overconfident investors come to hold invalid beliefs. They succumb to what psychologists Robin Hogarth and the late Hillel Einhorn call the illusion of validity.


The third theme of behavioral finance is inefficient markets. In recent years scholars have produced considerable evidence that heuristic-driven bias and frame dependence cause markets to be inefficient. Scholars use the term “anomalies” to describe specific market inefficiencies. For this reason, Eugene Fama characterizes behavioral finance as “anomalies dredging.” Market efficiency is a direct challenge to active money managers, because it implies that trying to beat the market is a waste of time. Why? Because no security is mispriced in an efficient market, at least relative to information that is publicly available. Inside information may be another story.

Placing funds with an active money manager is typically a bad bet. Yet, institutions continue to hire active money managers. Why? The short answer is that the individuals who serve on institutional investment committees exhibit frame dependence and heuristic-driven bias. When it comes to framing, committee members tend to think of portfolios as a series of mental accounts, with associated reference points known as benchmarks. Therefore, they tend to mistake variety in manager “styles” for true diversification. In addition, reference point thinking tends to make people give opportunity costs less weight than out-of-pocket costs of the same magnitude. In addition to frame dependence, members of institutional investment committees bear responsibility for the performance of the portfolio. Consequently, they are vulnerable to regret. Choosing active managers enables committee members to shift some of the responsibility for performance onto the managers, thereby reducing their own exposure to regret. Heuristic-driven bias stems mostly from reliance on representativeness. Specifically, representativeness underlies the mistaken belief in a “hot hand,” an effect that leads sponsors to believe, mistakenly, that they have the ability to pick managers who can beat the market.

Abstracts from:
Beyond Greed and Fear
Understanding Behavioral Finance and the Psychology of Investing

Shefrin, Hersh Holds the Mario L. Belotti Chair in Finance, Leavey School of Business, Santa Clara University
Print publication date: 2002 (this edition)Published to Oxford Scholarship Online: November 2003Print ISBN-13: 978-0-19-516121-2doi:10.1093/0195161211.003.0006

If you made it through and want to discuss this further, feel free to contact me.

Next blog I'll devote to Private Equity financing and specifically, Jacoline Loewen's new book Money Magnet - Attract Investors to Your Business http://canadianprivateequity.blogspot.com/.....so stay tuned!!

The WOW Service Checklist

Here are the guidelines we use to ensure that our clients have the optimal client experience:



Investment Satisfaction:



1) Makes an exceptional effort to understand each client's unique needs.

2) Works with each client to define those needs in considerable detail.

3) Provides well thought-out and viable alternatives suited to solve those needs.

4) Investment advice is appropriate based on each client's objectives.

5) Investment performance is dependable.

6) Investment performance is good relative to the indices.

7) Portfolio performance, at a minimum, meets client expectations.



Services Satisfaction:



1) Clients are extensively involved in the decision-making process.

2) Clients needs are understood and have high priority.

3) Client privacy and confidentiality are strictly maintained.

4) Client queries are responded to on a timely basis.

5) Clients are updated on a regular basis and immediately following a major event.

6) Administrative errors should not occur (but if they do, they are quickly and efficiently dealt with).

7) All deadlines are strictly adhered to.



Relationship Satisfaction:



1) There are no "stupid" questions.

2) Client feedback is invited and used to further enhance service.

3) Stewardship is the on-going monitoring and regular contact to ensure that established goals are being met or otherwise strategy is adjusted accordingly.

4) Is this a comfortable relationship for the client?

5) Is there a feeling of Trust for the client?



Success = Results - Expectations



Is your client experience optimal?

Current Thoughts On The State Of Capital Markets

This is my current thinking (for what its worth) and what I am saying to clients who have called in the last couple of days:

1) Economic issues are front and centre in the media: increased unemployment, severe slowing of economic growth across most sectors, tight credit markets (and on and on, blah, blah....).

2) All of that is built-in to the current valuations of holdings (and in some cases, in smaller and less liquid investments, there is significant undervaluation).

3) Historically, equity markets tend to lead the economy, i.e. they usually respond / react to negative stimulus well before the economy turns down. The reverse is true on the upside (6 to 10 months ahead).

4) While most investors wait for signals in the economy to give them more confidence, more shrewd, value oriented investors are bargain hunting.

5) There has been so much liquidity provided by the governments and central banks globally that, as some confidence is restored, all that money will have to be put to work and the trillions of $$ that are currently sitting on the sideline earning close to 0% returns will re-enter the equity market with some urgency.

6) Unfortunately it is tough to predict the timing on this, however my best call will be March or April of 09 (unless an unexpected shock of political or economic significance interferes in the interim).

7) It is tough to stand by helplessly watching and waiting when we are impatient to see improvement.

8) If you have $$ to invest and do not require the $$ for lifestyle needs for at least 2 years, then this is likely to be the best time to put it to work, i.e. be as fully invested in a globally diversified portfolio of good companies as possible.

9) Given the nature of the "melt-down", no asset class (other than cash) has gone unscathed.

10) For now we must wait for the "true" value to return to current portfolios (which will happen eventually) and let the managers make the necessary adjustments.

11) I will be vigilant to make sure that they (the managers) are acting in your best interests.

Hope this is helpful.

Plan, Plan, Plan...and Plan some more!!

A few years ago our team walked a client through a strategy that was, at that time, rather new to her:


She was a wealthy widow (husband had owned and sold his privately owned and operated business a few years earlier and she had inherited the proceeds) with a number of grand-children that she wanted to provide education funding for if they needed it and she was no longer around to make sure that they got it.



She also did not want them to incure any estate or probate costs and was not prepared to risk this money to the volatility inherint in capital markets.



Our team of experts: legal, risk and tax put their heads together and came up with some interesting solutions.



We call this facet of Wealth Management: Advanced Planning.



Wealth Management = Investment Counsel + Advanced Planning

Advanced Planning = Wealth Enhancement (Tax Strategy)
+
Wealth Protection (Risk Mitigation)
+
Wealth Transfer (Estate Planning)
+
Charitable Giving

Our client called me up the other day to thank me for the comfort and peace of mind that she was feeling, now with capital markets melting all around us, knowing that the strategy we had implemented had protected her plans from the current volatility.

Planning to achieve goals by thinking ahead of the curve.

Can we help you find solutions to your financial challenges?