What they DON’T tell you about the investment marketplace - Part II

What they DON'T tell you about the investment marketplace - part 2

 

Welcome to Part II of this article series about understanding how the function investment marketplace functions in Canada. If you missed Part I then be sure to go back and read it before continuing - it will make more sense that way.

But to quickly recap Part I: the regulated investment marketplace is structured in such a way that investors are only able to access investment opportunities from either mutual funds, stocks and bonds, private equity, syndicated mortgage investment products, and segregated fund investment products. Due to government regulations, investors are not able to access any real-estate investment opportunities, largely because it is not in the interest of big banks who make a profit off your investments in the regulated marketplace. 

I used the analogy of a shopping mall, where on the left-hand side sits the regulated marketplace (depicted as 5 stores: store #1 sells mutual funds, store #2 sells stocks and bonds, store #3 sells private equity, store #4 sells syndicated mortgage investment products, and store #5 sells segregated fund investment products). On the right-hand side of the mall sits one large store personifying the unregulated investment marketplace - real estate-related investment opportunities.

Okay, let’s jump straight back into it.

 

How does the OSC and FSCO/FSRA actually ‘trap’ investors?

The OSC and FSCO/FSRA trap investors through the financial advisor licensing system, which the OSC and FSCO/FSRA control. Each of the 5 stores on the left-hand side of the mall require separate and different investment licenses. When a person wishes to work in the investment industry as a financial advisor, they will normally enter the investment industry by getting a ‘license’ and working as a financial planner and/or investment advisor for an investment company (CIBC, Edward Jones, TD, Investors Group, RBC, Money Concepts, etc.). 

If an advisor wants to work in store #1, they need to obtain an MFDA license. To work in store #2 they will require an IIROC license. Store #3 requires a Private Equity license, and store # 4 requires a Mortgage license, while Store #5 requires an Insurance license. Once an advisor gets any of these 5 licenses, they are now stuck in one of the 5 stores on the left-hand side of the indoor mall.

 

How does this affect me, the innocent investor?

When an investor like you works with a ‘licensed’ financial advisor, it means that they have you ‘trapped’ into one of the 5 stores on the left-hand side of the indoor mall. The unsuspecting investor assumes that their licensed advisor is acting in their best interests but this is impossible for the advisor to do. An investor would think that the fiduciary responsibility of the financial advisor is to them, the client, but unfortunately, this is not the case. In fact, the regulatory system actually prevents the licensed advisor from putting the best interests of their client first

Given the way the investment industry is structured, the advisor must put the best interests of the company that licenses them ahead of their client’s best interests. This is a sad fact which I find to be unbelievable, but unfortunately, it is very true. The regulatory system, created by the banks and large investment companies, require the advisor to ‘trap’ their unsuspecting client into one of the 5 stores on the left-hand side of the indoor mall and, as such, the licensed advisor can only sell the investment products found in that store. Thus, the client (you) becomes trapped.

When investors figure this out, thanks to the help of Canadian Investment Services, they get angry and naturally feel duped. We tell them not to blame their advisors given it is not their advisors’ fault. The fault lies with the regulatory and licensing structure within the investment marketplace, which has been created by the big banks and large investment companies to help them control the financial assets invested in the overall investment marketplace. 

The banks and trust companies do not want you to know this, and they certainly do not want you knowing about the Real Estate store on the right-hand side of the mall. Why? Because if investors learn about the Real Estate store they will move their assets there and away from the banks and investment companies. It’s very sad to say but today's licensed advisors are really glorified salespeople for the companies that license them.

 

So what is the solution? How does an investor get out of the trap?

To avoid being trapped, the solution is to work with an investment services company that is not restricted by an investment license, which is exactly how Candian Investment Services operates.

The easy way to find out if you are actually trapped is to ask your financial advisor which license they hold. If they hold an MFDA license, you are trapped in Store #1, if they hold an IIROC license, you are trapped in Store #2, if they hold a Private Equity license, you are trapped in Store #3, if they hold a Mortgage license, you are trapped in Store #4, and if they hold an Insurance license, you are trapped in Store #5. There are no if’s and but’s.

 

How can Canadian Investment Services help you? 

Canadian Investment Services is not tied to any investment license, nor do we want to be. Therefore, we have no fiduciary responsibility to any bank or investment company - or any other company that creates investment products for that matter. We can proudly say that our fiduciary responsibility is to our clients. 

We help our clients navigate the overall investment marketplace, and if we want any investment products from stores #1, #2, and #3, or mortgages and/or insurance from stores #4 and #5, then we just simply use the services of a licensed representative to access that product. Also, by not being tied to an investment license, we have access to the investment products that are found in the Real Estate store on the right-hand side of the mall, many of which we create internally ourselves (such as Real Estate Fix ‘n Flip projects).

Think of it this way: try to avoid going into The Investment Marketplace mall by yourself, you’ll just end up trapped in one of the 5 stores on the left-hand side. Alternatively, let Canadian Investment Services navigate you through the mall, and that way you’ll be able to access all of the investment products available on both sides of the aisle. In addition, we will provide you with the unbiased investment advice and financial planning information that you deserve. With our help, you’ll end up being invested in investment products that you actually want to be invested in, either from stores 1 through to 5 and/or from the Real Estate store.

 

How much does it cost to use Canadian Investment Services?  

The short answer: nothing! That’s right, our service is free. Here’s why: 

We deal with all your needs before you enter the Investment Marketplace mall by providing you with all the required education and information required for you to make an informed decision as to the direction you want your financial investment to take. We do this because when we enter the investment mall together you are much better equipped to determine which store to go into. 

We help you determine which investment products and financial services you require and then we go into the store and purchase those products from a licensed advisor (the licensed advisor will then pay Canadian Investment Services a portion of the commission they have earned, and that’s how we get paid). That’s why our service to our clients is completely free. Given you deal directly with a licensed advisor, you would have had to pay the same amount of commission anyway. So what’s the difference? There is no added cost to you.

Canadian Investment Services provides you with solid, unbiased financial information, whereas licensed advisors are just trying to sell you what they are licensed to sell.   

 

Ready to go shopping at the investment mall with us? 

Visit www.canadianinvestmentservices.com to learn how we can help broaden your access to diverse investment opportunities.  

This concludes Part II of this article topic. I hope you have found this information useful. I look forward to helping you structure and plan your financial future.

 

Until then, take care.

Gerry J. Hogenhout

Founding Principle, Canadian Investment Services

Edit: On The Run Agency


What they DON’T tell you about the investment marketplace - Part I

What they DON'T tell you about the investment marketplace - part 1

 

Throughout my extensive career in investment, I have noticed that an overwhelming majority of investors have been left to wonder whether their financial advisors really have their best interests at heart, or if investment products are simply ‘sold’ to them for a commission. As you will see, these concerns are not entirely unfounded. 

Don’t shoot the messenger here, but most investors are being duped by their financial advisors. However, it is not entirely the fault of the financial advisor. The problem, in fact, lies with the investment industry itself and how it functions. In this article, I want to shed some light on this unfortunate problem so that you can better understand what has been happening to you and your investments up to this point.

At Canadian Investment Services (CIS), we strongly believe that educating our clients on how the investment marketplace functions leads to tangible investment results from informed decisions based on detailed knowledge. By informing and educating our clients with ultimate transparency, our investors avoid being duped while they actually become better equipped to determine what investment products and/or financial services they need. More importantly, they become better able to determine what they actually want to invest in within their own personal and/or corporate financial plan. 

 

Understanding the investment marketplace

The simplest way to explain the investment marketplace is like this: think of the overall investment marketplace as various retail stores selling a variety of different investment products (mutual funds, stocks, bonds, private equity, and real estate-related investments) and/or providing financial services (mortgages and/or insurance). 

Now, picture these retail stores inside an indoor mall, which we’ll call The Investment Marketplace Mall, which has a hallway with 5 retail stores on the left-hand side, and 1 large retail store on the right-hand side. The 5 retail stores on the left-hand side all sell their own investment products, with each store selling a completely different investment

The 5 stores on the left-hand side of the mall sell the following:  product than what is found in the other stores.

  • Store #1 sells only mutual funds
  • Store #2 sells only stocks and bonds
  • Store # 3 sells only private equity
  • Store #4 sells only syndicated mortgage investment products (while their primary focus is to provide mortgage services)
  • Store #5 sells only segregated fund investment products (while their primary focus is to provide you with insurance services)

So what happens on the right-hand side of the mall? Well, that’s a big store that sells only real estate-related investment products that are unfortunately unavailable to the stores on the left-hand side of the mall. And, to let you in on a secret, the investment industry does not want you to know about the real estate store, given it only sells real estate-related investment opportunities.

But there are so many real-estate investment opportunities many investors are gagging for which the traditional investment marketplace (left-hand stores) do not have access to due to regulatory and licensing constraints. The real estate store on the right-hand side offers many real estate investment products such as real estate fix ‘n flips, real estate joint ventures, real estate limited partnerships, private mortgage lending in your RRSPs, and facilitates the Child Home Ownership program as well as offering many other types of real estate-related investment products. 

Apologies for the rather clumsy analogy, but hopefully you get my point: one of the big problems in the investment industry is that the overall investment marketplace is structured to prevent investors from knowing about real estate-related investment opportunities.

 

How is the overall investment marketplace governed and regulated?

In Canada, the investment marketplace is governed separately by each province. For example, Ontario is governed by provincial regulations established by the Ontario Securities Commission (OSC), as well as the Financial Services Commission of Ontario (FSCO, soon to be renamed FSRA - Financial Services Regulatory Authority of Ontario). 

Back to The Investment Marketplace mall analogy: the OSC and FSCO/FSRA only govern the left-hand side of the indoor mall (stores 1, 2, 3, 4, and 5), and do not govern nor deal with the right-hand side of the mall - the Real Estate store. It may be hard to believe, but the Real Estate store functions without the need for an investment license from either the OSC or FSCO/FSRA. In fact, a person does not need any type of investment license to function within the Real Estate store, but those advisors who do hold an investment license are prevented from functioning within The Real Estate Store. 

So, to clarify: the OSC governs and regulates the investment products found in stores #1 (mutual funds), #2 (stocks and bonds), and #3 (private equity), while the FSCO/FSRA governs the financial services found in store #4 (mortgages) and store #5 (insurance). The Real Estate Store is not governed by either the OSC and/or the FSCO/FSRA.

 

So what’s the problem?

The problem is that the overall investment marketplace is designed to ‘trap’ investors into one of the “stores” on the left-hand side of the indoor mall, and designed to not let them visit the other stores. And trust me on this, the investment industry does not want you, the investor, to know about the Real Estate store on the right-hand side of the mall (which is where all the real estate-related investment opportunities are found). 

So why doesn’t the investment industry want investors to know about the Real Estate store? Because the big banks and large investment companies make too much money keeping you trapped inside store #1 (mutual funds) and store #2 (stocks and bonds).

The investment industry is strategically structured to keep investors trapped into store #1 and store #2 because this is where the big banks and the large investment companies make a fortune from their investment products, such as mutual funds and stocks. Given the banks and the investment companies control the OSC (just check out who sits on the OSC board of directors), this allows them to make a fortune for themselves off the backs of so many unsuspecting investors who simply do not know any better. This is why we at Canadian Investment Services think it is crucially important for investors to better understand the overall investment marketplace. 

I hope that this newfound information will help you make better, more informed investment decisions based on what is available to you in the real estate investment marketplace.

Visit www.canadianinvestmentservices.com to learn how we can help broaden your access to diverse investment opportunities.  

That’s all for Part I of this article topic. Be sure to look out for Part II where I continue to explain more about the OSC and FSCO/FSRA and what it means for you.

Until then, take care.

Gerry J. Hogenhout

Founding Principle, Canadian Investment Services

Edit: On The Run Agency


What they don’t tell you about RRSPs

What they don't tell you about Registered Retirement Saving Plans (RRSPs)

 

RRSPs are one of the most commonly used types of investment strategies, but are really not that well explained or understood. Most people are aware that one of the main benefits of putting money into your RRSP is that you can use these contributions as a deduction to reduce your taxable income. For example, if I make $100k in a year and I contribute $20k to RRSPs, my taxable income for that year is reduced to $80k ($100k - $20k), which will greatly reduce my tax owing for the year. 

While this is a great short-term benefit and can lead to a nice refund when you file your taxes, it is important to realize that an RRSP is a tax-deferred account. In other words, although you would not be taxed on the $20k you contributed, you will have to pay tax on this money when you withdraw it from your RRSPs. This part of the equation isn’t as widely advertised and explained by the companies trying to sell you on putting all your money into RRSPs, which results in many people ending up with a ton of money tied up in RRSPs that they can’t withdraw without losing half of it to tax. 

So the question is why wouldn’t these companies be more up-front about the downside to this investment option? Well, the answer is simple: because they are making a very high management fee (usually about 2.5%) on all of the money you have sitting in RRSPs. This is another one of the downsides that investors should be wary of. As such, most advice is very biased and, too many times, not in your best interests. 

Now I don’t mean to put an entirely negative spin on RRSPs, there are certainly situations where RRSPs can be very useful. Mainly, RRSPs are effective when you are in a high tax bracket (i.e. you have high taxable income) and you anticipate being in a lower tax bracket in later years. Going back to our example, if I make $100k in a year then putting $20k in RRSPs would make sense if I anticipate making less than $50k in the years I want to withdraw my RRSP funds. That way, I get a 30-40% tax saving going into the RRSP, and I’ll only pay 20% coming out of the RRSP (I’m up at least 10% on tax savings alone).  

However, if I know my income is going to stay the same or increase, then I am just going to have to pay the tax I am saving that year when I withdraw that $20k, which can often be very inconvenient. This makes no sense, and that is why I am sceptical about RRSPs, very sceptical. In addition, if someone is already in the lowest tax bracket (taxable income below $50k) then any contributions they make to RRSPs will result in paying the same (or in many cases more) tax when this money needs to be withdrawn. Again, this makes no sense at all. 

Overall, RRSPs can be a solid investment option in certain situations, but they are certainly not the one-size-fits-all investment answer that they are often promoted as. 

An alternative to an RRSP is a Tax-Free Savings Account (TFSA), with the difference being you do not receive a tax deduction on contributions to a TFSA but you also don’t pay tax on withdrawals. Also, remember that any investment you choose to hold inside of an RRSP can instead be held outside of the RRSP, either in a TFSA or not inside of a TFSA.  (just delete your highlighted area)

In closing, do not think of an RRSP as an investment, it is simply a vehicle to hold an investment, as is a TFSA. (just delete this too)

I hope you found this article helpful. If you have any questions regarding RRSPs and TFSAs then get in touch with us and we will be happy to offer any advice you may need.

- Gerry

Edit: On The Run Agency


Real Estate Investing 101

Real Estate Investing 101

 

Needless to say, there are many discussions that could be included in a ‘Real Estate Investing 101’ article, but this one is a bit different given I want you to look at real estate from a different perspective. 

To begin with, I want you to look at any real estate asset that you can see - be it your own house, the house across the street, a duplex on your street, a triplex or an apartment building in your neighbourhood, etc. Think of that asset as the thing that protects your investment. Any time we invest money we need to deal with two very important aspects; 1) the security of your investment (i.e. what protects your investment) and; 2) the expected or potential rate of return. 

Think of a bank, they lend out a mortgage and they register the first mortgage against your property. So what protects their money? Your house. What is the expected rate of return? Whatever you have agreed to pay the bank as an interest rate on the mortgage. Not much risk here is there? The bank has your house as collateral and they have a contracted agreement that requires you to pay a predetermined rate of interest. You need to look at a real estate investment in the same way, but from a different angle. 

When you look at any house on your street, you too can use that house to protect your investment by either owning it or lending against it. If you look at owning it, you can do it in one of two ways; 1) own it yourself (i.e. own your own rental property), or 2) own it as a group with a number of people (i.e. a real estate income trust - REIT)

Alternatively, if you look at lending against it, you again can also do it in two ways; 1) lend against it yourself (i.e. private mortgage lending), or 2) lend against it as a group with a number of people (i.e. a syndicated mortgage). 

This is a very conceptual look at real estate investing but it is a good way to overview different options of real estate investing, both from an asset protection perspective, as well as an expected rate of return. Needless to say, each different method of investing has many different pros and cons which need to be much further explored to truly compare these different options. But in concept, it’s very similar in that we are all about balancing the protection of your investment with your expected rate of return. We just need to figure out what real estate vehicle to use.    

I hope you found this article helpful. If you have any questions regarding real estate investing then get in touch with us and we will be happy to offer any advice you may need.

- Gerry

Edit: On The Run Agency


Ethical Investing

Ethical Investing - Matching Conscience with Returns

Growing concerns over the environment and ethics are gaining the forefront over gains. How to ensure your legacy stays pure for future generations. 

 

Modern investment theory suggests that you must diversify your investments and stock in order to protect against losses. This often means you inevitably buy into a variety of stocks and bonds across multiple investment sectors, including large corporations which carry with them unsavoury reputations due to the business they are in. These include big businesses in the petroleum, tobacco, sugar and fast food industries. Understandably, a growing number of ‘ethical investors’ do not wish to invest their money and support into these businesses which place more value on profits than the general public’s health and well-being. 

 

Luckily, there a some ethically prudent investment options and ETFs out there for the more conscious investor. However, placing all your capital into these funds isn’t diversifying your investment as there aren’t many to pick and choose from, especially if you are still wanting to yield high returns. As a result, it is becoming increasingly important for ethical investors to conduct their own research into businesses which have a positive social impact with low carbon footprint in which to invest their money.   

 

There are a few ethical concerns investors need to consider when investing in real estate both locally and abroad. Finding the right investment options which suit your ethical compass is made easier when you understand what to look out for. We have compiled a brief list of things to look out for when investing in local and global real estate.

 

Environmental impact

Large buildings like high-rise apartment blocks, warehouses, shopping malls and hotels have large carbon footprints. Buildings across the globe are responsible for almost a third of global greenhouse gas emissions. With the growing number of ethical investors and a global mindset toward more sustainable methods, more building contractors and real estate businesses are focusing their attention to reducing their building emissions and finding new ways to keep their carbon footprint low. This involves reusing and recycling building waste and adopting the latest renewable energy technologies in new buildings. So it is a good idea to research which building contractors and real estate businesses are making great strides with their carbon emissions if you are looking to invest your funds into real estate with an environmental conscience. 

 

Social impact

If you are looking for more ethical investment other than environmentally friendly real estate with low carbon emissions, then perhaps consider investing in real estate which serves a social purpose. Of course, real estate low on carbon emissions also serving a social purpose is the first prize, but they are increasingly difficult to come by). Buildings such as hospitals, clinics, GP rooms, schools, policie buildings and other civic facilities make a positive impact on their immediate community and influence social harmony. Although this type of real estate investment sector commonly does not yield higher returns than that of commercial property, the positive social impact these properties provide are seen as a way of uplifting communities, driving social consciousness and change and ultimately changing the face of an area for good. This drives people to the area and increases the overall value of the surrounding properties. 

 

Commercial land exploitation

When investing in real estate through a broker or firm your money will often be placed into large real estate business with overseas presence looking to build property on foreign land. This can come in the form of residential housing, hotels and shopping malls. However they sometime can include property for large corporations and factories and warehouses. These are associated with land grabs and the exploitation of foreign land where often locals are forced out of their land when big business purchases the land. Apart from the environmental impact these properties incur, there are also social and cultural repossessions. Because of this, it is vital for investors to investigate what kind of overseas commercial property their money is invested in and what social and environmental impact they are having on the land and community. 

 

Remuneration

When investors place their money into commercial property and businesses offshore there are a few things to consider. The widely publicised low wages and poor working conditions found in the offshore sweatshops of large brands like Nike and Wal-Mart raised awareness of some poor business practices of large businesses which have a lot of local and international investors. So for anyone wanting to invest their money in ethical businesses which have offshore stations, they should ascertain whether they look after their employees and pay above the minimum wage and empower the community they find operate in rather than oppress them. 

 

As you can see, the model for ethical investment requires a hands-on approach to investigate where the money you invest is going and why agenda it is advertently and inadvertently supporting. When dealing with investment brokers whose primary purpose is to generate high returns on your investment on your behalf, it is inevitable that large parts of your investment will go into businesses and industries which some people deem as unsavory. It is therefore critical for all ethical investors to investigate where their money is going and to whom, and what social and environmental impacts their investments will be supporting. To recap, if you are more concerned with high returns than ethical practice then don’t bother knowing where your money goes. Of, however, you hold strong social, environmental and ethical convictions then it is worth finding out which businesses you wish to support. 


David & Gerry's Real Estate Cafe - COVID 19 edition, Live & Interactive. All About Real Estate & Investments.

https://youtu.be/-xSaL3NyeAc

In this session, we discussed Real Estate Development & Financing Real Estate Development during COVID 19, Why Residential REIT's (Real Estate Investment Trusts) are hot and much more.


David & Gerry's Real Estate Cafe - How to Add Investment Services to your Tax Practice

https://www.youtube.com/watch?v=nmnfv3x8CHw&feature=youtu.be

Description: In this session, we discuss how to add value to your current business model using investments.