Category: Blogosphere

Money for nothing? – Of commissions, fees and advice

I was humming that classic Dire Straits tune “Money for Nothing” as I traveled the moving sidewalk at the airport last month.  My flight was headed south of the border that day, and not having allowed enough time to make it to my own financial institution that morning, I instead employed the money changer’s booth on the departures level. 

On a day when the loonie sat a full penny above parity, it cost me $238.52 Canadian to receive $200.00 of the US variety.  Do your own arithmetic, but in ballpark terms that’s roughly a 20% premium.  I said as much as I scraped my jaw off the counter, and took little solace when the clerk suggested that it’s not all commission, but rather is attributable as well to fees. 

As the colleague hosting at my destination suggested (between chuckles), maybe I should just view it as a service that facilitated my ability to travel with confidence.  While there is certainly an intellectual appeal to that perspective, on an emotional level I had just paid money to obtain money, and no euphemism was going to convince me otherwise.

Money for money?

I was reminded of this during a meeting last week with a group of advisors who were exploring alternatives to their existing client model.  In the context of the continued sideways market, they were concerned whether their current approach still aligned with investor needs.  In particular, with the growth of exchange-traded funds in the market, the media has been abuzz with discussions about the cost of obtaining investment advice. 

Thus our purpose was to look at the tax implications of a spectrum of arrangements from MERs on mutual funds, to fee-based accounts using F-class mutual funds and/or ETFs, and on through to purely transactional based commission structures.  

Suffice it to say for current purposes, tax efficiencies may certainly be gained by both advisor and client by choosing an appropriate model, and the interests of each need not necessarily conflict in arriving at an optimal choice.  As with the issue of the overall cost of advice, one size does not fit all.

Money for advice

In fact, the consensus within the group was that while the tax aspect is relevant, it must not distract from or overshadow the core purpose of delivering valuable investment advice.  In that regard, though absolute cost is obviously important, the measurement of its value is in how well it is catered to the client’s situation and how well the client understands that connection.

In many fields, advice relates to physical products like cars or building materials, or tangible services like dental work or travel planning.  By comparison, financial advice is much more open to being perceived in that fungible money-for-money sense if communications are not carefully managed.  That can be a tall order for an advisor to deliver on, regardless how the cost of that advice is calculated.

As for my business trip, in the end most of it was managed on plastic, leaving me with cash for family gifts.  That was my colleague’s suggestion – Good advice indeed.

For some inheritances, timing really is everything

The adage timing is everything is a convenient phrase that is often used for emphasis in situations where it is not entirely true.  In the case of determining entitlement to an inheritance though, it could very well be right on the money. 

Back in 1991, Nora Mulligan provided in her Will both for her three (adult) children of her first marriage, and for her second husband Arthur.  The children were bequeathed such “money” that she may own at her death, and her husband was to continue as surviving joint owner of the house and beneficiary of the residual estate assets.

In May 2005, Nora’s sister died without having made a Will.  According to the rules of intestacy of the province where the sister resided, Nora and her one other sibling were the statutory beneficiaries under the intestacy.  The Public Guardian’s office in that other province initiated proceedings to administer the estate, which consisted of “money” type assets, out of which Nora was to receive about $75,000.

In November 2005, the Public Guardian’s application was granted, and the sister’s estate was ready to be administered.  Unfortunately, Nora had died some weeks earlier in October 2005 so she would not be able to enjoy that inheritance personally.

As the sole named executor under Nora’s Will, Arthur distributed all of her $115,000 “money” to her children; the $60,000 house passed to him by right of survivorship.  Perhaps not surprisingly though, a dispute arose as to whether the $75,000 forthcoming from the sister’s estate was in turn to be characterized as “money” when received in Nora’s estate.

The matter progressed to court, and after a review of relevant case authorities the judge held that Nora had “no interest in the specific assets in her sister’s estate… [and] …those assets, accordingly, cannot be the subject of a specific bequest.”

For Nora’s children to have succeeded, Nora would have had to survive not only up to the grant of administration to the Public Guardian, but further to the point where her estate entitlement was properly distributed to her while living.  Things may have been different if Nora’s sister had executed a Will that might have allowed for a quicker administration, or if Nora’s own Will had been drafted to cover such contingencies.

As it turned out for Arthur, timing really was everything, and he took that right to the bank. 

CASE REFERENCE
Mulligan v Hughes 2007 SKQB 123 (CanLII)

Family business succession

The succession of a business is often the last thing on an owner’s mind, or at least the last thing that the owner wants to deal with.

Unfortunately, as with death and taxes, the transfer of a business is an inevitability that cannot be escaped – and it’s those same two former issues that make the transfer so critical to plan effectively.

Of even more immediate and personal impact, unless an owner intends to travel to the great beyond directly from the shop floor, a well considered succession plan is essential to enable the owner to ease into a stress-free and financially secure retirement.

Ultimately the goal is to provide certainty – either at retirement or death – about who will succeed to the business, and how and when that process will be carried out.  The key is to be prepared.

Preparing the successors

Selecting a successor involves a combination of commercial and emotional considerations.  

Particularly for a family business, the succession plan is intimately tied to the owner’s estate plan. The owner must not only decide on the appropriate successor(s) but also be prepared to deal with those who are not chosen, and the possibility that the business will have to be transferred to management or sold outright to strangers.  

Some issues to consider:

  • How should family and management be involved in the succession decision? 
  • How and when should the decision be communicated?
  • How will the estate be equalized for the non-successor(s)?

Once the decision has been made and communicated, the job of preparing the successors begins.  Depending on the nature of the industry and on the style of the existing owner, the transition can take weeks, months … and often years.  

Clearly, leaving the succession to chance exposes the business to a level of risk that could result in unintended results, and possibly a total loss of the enterprise.

Preparing the business

The most effective succession plans flow naturally from the existing business.  A seamless ownership transition can be facilitated by conscientious record-keeping, people-independent management systems & policies, and general good organization.

An acid test for the owner is to consider what would happen if that owner were to take an extended vacation for 3 to 6 months, 

  • If the business’ operations are significantly impaired or would grind to a halt (or if the owner gets no sleep while away), it is likely that the only thing to be transferred is a job obligation
  • If the business remains pretty much intact, there is a true business opportunity to be passed along 

To the extent then that the business preparation fundamentals are in place, the time required to transition the business to successors will be minimized, and the chances for success will be maximized.

Preparing the transaction

Essentially the agreement of purchase and sale is a formal legal record of the business decisions that will have already been made during the foregoing preparation stages.

For many owners, there is a certain amount of comfort gained by knowing the general content of such a document.  It covers things such as:

  • Identifying parties, relationships among them and relationship to the business
  • Statement of the transaction subject matter, price determination and payment method 
  • Parties’ representations about themselves and commitments to one another
  • The closing agenda, including conditions, time, place and documents to be delivered
  • General legal provisions to give effect to the agreement

Finally, as with many matters in life and in business, the best laid plans can go for naught without the financial wherewithal to see them through to conclusion.  Whether it is by sinking fund, insurance or a combination of the two, the job of preparing a business for succession is not complete until succession funding is arranged. 

The bottom line

Planning a succession can be the most challenging business task an owner can face, but it need not be a daunting one.  Knowing these fundamental steps can allow an owner to maintain business as usual for now, for retirement, for life and beyond.