CY Bonus Flashcards
2 fastest growing HNW clnt segments
Entrepreneurs (bti) and retirees (baby boom)
White paper 9 competencies of successful wealth advisors
Discretionary vs non-discretionary
Discretionary - can trade for clnt without asking or confirming
Non-Discretionary - broker has to contact clnt before placing trade
At all times, advisors and dealers must comply with federal legislation such as the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
• This requires the advisor and dealer to confirm the client’s identity using valid photo identification.
• In addition, any large cash and/or suspicious transactions must be reported.
IROC Know Your Client (KYC) Rule
The KYC rule is one of the cornerstones of the investment industry. It has three due diligence components and four associated requirements:
To ensure that a trade is suitable, an advisor should consider (as a minimum) the investor’s:
• Financial circumstances: Income, net worth
• Personal circumstances: Age, marital status, number of dependents, occupation
• Investment knowledge and experience
• Investment objectives and needs
• Risk profile
• Investment time horizon.
IROC’s Client Relationship Model (CRM) rules require that the same information noted above be reviewed every time there is a “triggering event”. The following are the five primary triggering events:
- A trade is accepted
- A recommendation is made to a client.
- Securities are transferred or deposited into an account.
- There is a change in registered representative.
- A material change to the KYC information occurs.
Account Application (formerly New Account Application Form (NAAF))
The first step in getting to know your client is the completion of the Account Application form. The application collects the following:
- Personal information (address, date of birth, spouse’s name, etc.).
- Financial information (income, net worth, investment knowledge, etc.)
- Investment objectives (for each account) with percentages allocated to income and to capital gains (short-term, medium-term, and long-term).
- Risk profile (for each account) with percentages allocated to low risk, medium risk, and high risk.
IROC requires firms to gather additional information based on the type of account:
• If the account is joint, personal information must be obtained for everyone named on the account.
• If the account is corporate, personal information must be obtained for any individual who is the beneficial owner (i.e. ultimate owner) of 25% or more of the voting rights of any outstanding company shares.
• If the account is a trust account, personal information must be collected for all known settlors (the donor/contributor to the trust) if more than one and for all known beneficiaries of the trust.
the following six variables need to be considered in retirement planning:
Unique circumstances
“Unique circumstances” are specific to each client. An example of a unique circumstance would be a client who wants to include responsible investments (i.e. environmental, social, or governance investments, commonly known as “ESG” ) in his or her portfolio.
Examples include:
• A client who does not want to invest in certain companies, such as tobacco or alcohol manufacturers, which are often referred to as “sin stocks”. This is sometimes referred to as “ethical investing” or “socially responsible investing”
• A client who does not want to invest in companies that treat their employees inhumanely or employ child labour.
The Structured Conversation
There are three distinct phases to the wealth management approach to client discovery:
-
Setting the stage and building rapport.
This involves helping clients to understand that managing investments is only one aspect of wealth management. Topics include family, work, interests, etc. -
Conducting emotional discovery.
This involves replacing financial terminology with a conversation about life issues.
For example, what do your clients want their future to look like? What would they like to have in place for their children? -
Bridging to financial discovery.
There are four general financial issues that are discovered (“financial discovery”) once the emotional discovery process is completed:
•Accumulating financial wealth.
• Protecting financial wealth.
• Converting financial wealth to income.
• Transferring financial wealth to heirs.
Note: You may want to review the “Questions for Wealth Planning” table in the actual textbook because there may be a question directly from this information on your exam.
Good questions should focus on a client’s “total needs” rather than products and may include the following:
• When did you last update your will?
• What is your view on charitable giving?
• Do you have a power of attorney for incapacity?
• Are you comfortable that your assets will be distributed how you want them to be when you die?
• What plans do you have in place to protect your assets from taxes when your estate is settled?
The layout of the net worth statement can vary, but the following features are typical:
Assets can be divided into short term or long term.
Assets can be further categorized as personal assets (e.g. furniture), liquid assets (e.g. cash and equivalents), and investments (e.g. stocks).
Liabilities are often categorized as short term (less than a year) or long term.
Matching Process
• The funds used for mortgages are generally matched to the term and rate of a GIC.
• The bank typically charges a penalty if a mortgage is repaid early because it is still required to continue paying interest on the matched GIC.
• The matching process is also known as the “cost of funds” for the mortgage on the date the mortgage is booked (committed to) with the lender.
• The date a mortgage is booked is not the same as the disbursement date.
Lenders in the Primary Mortgage Market
(Trust Companies)
• Trust companies are also restricted from lending more than an 80% LTV ratio unless the mortgage is insured.
• Regulated by the Loan and Trust Corporations Act of each province. It is the role of the Office of the Superintendent of Financial Institutions (OSFI) to ensure compliance.
• As with chartered banks, the liabilities of trust companies, such as GICs, require that trust companies maintain a certain level of liquidity.
Note: A GIC is considered a liability to a bank or trust company because the lending institution is required to pay the principal back to the investor at maturity.
Lenders in the Primary Mortgage Market
(Life Insurance Companies)
• Life insurance companies are regulated under the federal Insurance Companies Act, and compliance is monitored by OSFI.
• As with banks and trust companies, insurance companies are limited to lending 80% of a property’s appraised value unless the loan is insured.
Lenders in the Primary Mortgage Market
(Pension Funds)
• Although pension funds have a small percentage of the residential mortgage market share, they are a major player in the commercial mortgage real estate market.
• Pension funds are also restricted from lending more than an 80% LTV unless the mortgage is insured.
• Pension funds have large pools of capital for investment, but they need to ensure the safety of that capital along with a strong investment return.
This makes bonds and mortgages (secured by a charge against real property) ideal investments.
• Due to their huge pools of capital, pension funds are major players in the commercial mortgage real estate market and own large real estate and development companies. For example, the Ontario Teachers’ Pension Plan owns Cadillac Fairview, one of the largest owners of commercial real estate in North America.
What are MICs and why invest in them?
(Mortgage investment corporations)
MICs are investment companies that provide mortgages to borrowers, offering investors a chance to earn income from mortgage lending, typically with higher returns than GICs, and they can be CDIC insured if federally incorporated.
key difference between GDS and TDS ratios
is the inclusion of consumer credit (i.e. loan) payments in the TDSR (total debt service ratio).
• Generally, the GDR maximum is 32%, and the TDSR maximum is 40%.
• The ratios can be calculated using monthly or annual amounts (you just need to be consistent with the other figures in the formula).
• If a client’s ratios are below the required thresholds and his or her credit history is good, then the client would likely be able to obtain further credit.
Semi-Annual Compounding
Mortgage payments are generally blended (a portion of each payment goes towards the interest, and the remainder goes towards the principal).
This has the result of reducing the principal amount remaining after each payment. The law requires that when mortgage payments are blended, they cannot compound more than twice per year.
Exam tip: Semi-annual compounding increases the total interest cost for the borrower as compared to annual compounding.
For example, if the nominal annual interest rate is 10%, the effective rate would be 10.25% with the effect of semi-annual compounding.
Not in Advance
Interest must be calculated on the declining principal. Principal is deducted when a payment is made, and then the interest is calculated afterwards. In other words, interest is not calculated in advance of the next payment being applied to the principal amount.
The “not in advance” provision reduces total interest costs to the borrower. This is why it is beneficial to pre-pay a mortgage because the principal outstanding is reduced each time a mortgage payment is made.
Exam tip: Not in advance reduces the total interest cost for the borrower.
Land Transfer Tax
When a property is purchased, the province generally applies a tax known as the “land transfer tax”. This tax is applied even when land isn’t technically being purchased, as in the case of condominiums.
The tax percentage is based on the purchase price.
It is a tiered system in which the more expensive the property, the greater the tax percentage.
First-time home buyers may receive a land transfer tax credit.
In some cases, the city (such as the City of Toronto) may charge an additional (municipal) land transfer tax, thus increasing this cost.
“estoppel certificate”
An “estoppel certificate” is a document issued by a condominium corporation that gives potential purchasers information about the specific condo unit and the condominium corporation.
Exam tip: Transaction-related fees usually amount to 2%-5% of the purchase price.
Closing costs must come from the client’s own resources, especially for high-ratio mortgages. In other words, the closing costs cannot be borrowed.
Accelerated Payments
This results in an additional amount being repaid each year equal to one full monthly payment and is known as an “accelerated bi-weekly payment”.
The result is that the borrower pays 13 months’ worth of mortgage payments each year and “accelerates” paying down the mortgage.
Exam tip: Know the difference between a “weekly payment” and an “accelerated weekly payment”. Notice it is the accelerated version that results in an extra amount equal to the monthly payment being repaid each year. For example, assume the monthly mortgage payment would be $1,000 (which is $12,000 per year).
Under an accelerated payment plan, $13,000 would be repaid each year.
“accelerated payments” vs “acceleration clause”
Take note that there is a difference between “accelerated payments” and an “acceleration clause”. Because they sound very similar, they might provide for a trick question on the exam. While an acceleration clause does not belong in this section, it is discussed in this tip to show you the difference. An “acceleration clause” is a clause, common in a mortgage contract, that states that the full principal amount plus accrued interest immediately becomes due the moment the mortgage is in arrears (default).
A pre-payment penalty is usually the greater of:
- Three months’ interest.
- An interest rate differential (IRD).
Example: Gina owes $250,000 on her mortgage. She has two years remaining on the mortgage term and is paying an interest rate of 4.5%. Current interest rates for a similar term are 3.0%. She would like to pay the mortgage off in full. Gina’s penalty would be the greater of the following:
Therefore, Gina’s penalty would be $7,500, and she would need to compare this penalty to the anticipated savings achieved by refinancing.
Domestic contracts
are most often made at the beginning of a relationship or when contemplating marriage. Without a domestic contract in place, spouses who are separating must negotiate an agreement through what can be a very emotional time.
Spouses must provide full financial disclosure to each other, and it is in each spouse’s own best interest to get independent legal advice (ILA).
5 emotional cycle stages of divorce
guilt,
denial,
anger,
sadness, and,
finally, acceptance.
The British North America Act, 1867, gave the _________ government(s) legislative responsibility for marriage and divorce, and this is still the case today.
Federal
• However, each province is responsible for the “solemnization” of marriage. This basically means the province can establish its own rules for the marriage ceremony, such as the minimum age requirement.
All provinces and territories have enacted their own marriage rules, and they vary.
The federal Civil Marriage Act has three requirements for those who wish to marry:
- Minimum age: Both individuals must be at least 16 years of age.
- Consent: Both individuals must have “free and enlightened consent”, meaning that they both understand what they are doing and the responsibilities that come along with it.
- Previous marriage: Before getting married, any previous marriages must have been legally dissolved, which can occur through a legal divorce, the death of a spouse, or a declaration that the previous marriage is no longer valid (nullity).
Generally, family law legislation consists of various parts. Under one part of the Family Law Act, a “spouse” can include:
• Married couples.
• Unmarried couples who have lived together for at least three years continuously.
• Unmarried couples who have lived together, had a child together, and are “in a relationship of some permanence”. In this case, the three-year requirement does not apply.
For this reason, one part of family law provides that an unmarried spouse has a right to spousal support just like a married spouse. However, different parts of the Family Law Act will provide for different rights according to legislation.
In Ontario, unmarried spouses ________ entitled to receive an equalization of the net family property
Are NOT
because another section of family law defines “spouse” to include only those who were married.
As a result, although unmarried spouses can receive spousal support upon separation, they cannot receive an equalization of the net family property. The family law in other provinces may differ in this aspect.
Under the Divorce Act, a lawyer must:
• Discuss the potential of reconciling with one’s spouse, if appropriate, and
• Provide information about marriage counseling services.
Corollary Issues
Family law may involve several corollary issues.
• A “corollary issue” is any secondary issue that needs to be resolved as part of or prior to resolving the main issue. For example, prior to a divorce (main issue) being granted, a court must be satisfied that the parties have made reasonable arrangements for the support of children (corollary issue).
If a couple has been separated for 12 months, and if corollary issues such as support, custody, access, and division of property have not been agreed to, it is possible to separate the actual divorce from these unresolved issues. These issues can then be determined by negotiation between the parties or in court at a later date.
For unmarried parents, the relevant provincial legislation will govern. In Ontario, this is the _________
Children’s Law Reform Act.
Note: Family law generally permits that custody and access is a child’s right and not the exclusive right of the parents). As a result, grandparents or other parties may be permitted custody or access under legislation.
Domestic Contracts
“Domestic contracts” (aka “pre-nuptial agreements”) allow the parties to predetermine their rights and obligations and to regulate their own financial arrangements.
The agreement allows each party to:
• Define each party’s rights and obligations during the relationship and in the event of relationship breakdown.
• Opt out of most parts of the traditional marriage legislation.
Note: For a domestic contract to be enforceable, it must be fair!
Net Family Property
net family property is not the same as net worth.
Each province will have its own legislation as to what is or is not included in net family property, and legislation varies among provinces.
The Ontario Family Law Act (ON-FLA) generally defines “net family property” as “the value of all property a spouse owns on the valuation date less certain deductions and exclusions”.
In most cases, the valuation date will be the mutually agreed-upon date of separation. As of the valuation date, the value of all the property of each spouse (i.e. assets and liabilities) is determined.
The main information slips are as follows:
How Taxes are Calculated
Tax Deductions and Tax Credits
• A tax “deduction” reduces your taxable income and, in turn, your tax liability.
Allowable tax deductions include RRSP contributions, childcare expenses, and business losses.
• A tax “credit” directly reduces the taxes owed
Refundable vs. Non-Refundable Tax Credits
Below is a summary of the four types of investment income and how they are treated for tax purposes.
To calculate tax on a Canadian dividend, you must go through a four-step process
Whether a dividend is paid out in cash or as a stock dividend (whereby the
client receives additional shares in lieu of cash), the tax implications are the same. Since the actual dividend is grossed up, this will have the effect of increasing a client’s net income, which can lead to the following:
Private Health Insurance Premiums
Private health insurance includes things that you usually consider part of your benefits package at work, such as dental coverage and eye care.
Group Life Insurance Premiums
Car Allowance for an Employee-Provided Car
Business Meal and Entertainment Expenses
Type of transfer (rules and attribution)
