Documentation

It used to be that business deals could be consummated with not much more than a handshake. Times have changed.

The documentation now required to open an investment account can be overwhelming but investment dealers and financial advisors have to work within a strict code of conduct outlined by their professional organizations and mandated by both federal and provincial law.

That was a mouthful, but it gives you an idea of the new world of regulation that we live in today.

New investors are often surprised by the requirements and can show up unprepared. A quick view of what you can expect if you decide to open an account can help avoid these unexpected surprises.

Being well prepared can help make the process run more smoothly.

Once your account documentation is complete and your accounts are established, transactions can be processed quickly and easily.

Required Information

You can expect the following information will be required when opening an account. Your advisor will appreciate it if you complete the account information form and bring it to your first meeting. 

  • Personal information

›› Name, address, telephone number, birthdate(s), social insurance number(s)

  • Employment information

›› Name of employer, address, occupation(s), years of service

  • Family information

›› Marital status, dependents

  • Financial information

›› Income, net worth, bank information

  • Investment information

›› Investment experience, investment objectives, tolerance to risk, time horizon

  • Supporting documents

›› Void cheque, valid picture ID (driver’s license or passport, for example)

The account application form will have a section that asks the client for investment objectives and tolerance to risk. It might be the most important section of the form, yet it is poorly understood. Discussing this topic with your advisor can help clarify the picture for both of you.

 A risk tolerance questionnaire is a good way for investors to help determine their profile.

Additional Information

Any additional material and information can be very helpful in interpreting your financial situation. While some of it may not apply to your situation, the more information that you can provide, the better. The list includes: 

  • Current statements of your existing investments including RRSP, RRIF, TFSA and taxable investment accounts.
  • Your latest T4 or tax return.
  • Your latest Notice of Assessment from the Canada Revenue Agency (CRA).
  • A copy of your will and enduring power of attorney if you have one.
  • Any employer pension plan information.
  • Contact information for your lawyer and accountant.
  • Social Insurance Numbers for any beneficiaries that will be named on your accounts.

Some of the information in the application form is required by the investment firm, some by IIROC (the Investment Industry Regulatory Organization of Canada) and some by Federal government regulations with regard to anti-money laundering initiatives.

It is the world we live in today.

Document Deficiences

Any deficiencies in the information can result in an account not being approved and it would likely not be opened until that information is provided.

This is frustrating for both the advisor and the client. The last thing an advisor wants to do is chase down missing information and the last thing a client wants is numerous phone calls and emails requesting additional information.

Doing a thorough, accurate job from the start also helps to get the relationship off to a good start.

All of this documentation comes from the golden rule of investment firms: Know Your Client.

It helps to ensure that your investments are being managed to meet your needs while remaining compliant with industry and government regulations.

Updates Required

Every two or three years the information on your account needs to be verified to ensure it is still accurate and that it reflects your personal circumstances.

It is also part of the ‘Know Your Client’ rule mandated by industry regulators. They want to ensure that the advisor is keenly aware of the client’s circumstances because any recommendations made to the client are based on that information.

It can happen that clients will overlook the task of completing the updates and forms can be forgotten. When that situation occurs the hands of the advisor are tied. Accounts can be frozen with regard to making changes other than selling investments and issuing cheques.

Updates can be aggravating for both the client and the advisor but in the end they are designed to help protect the interests of the client and are a requirement that needs to be fulfilled.

Consolidating Accounts

The advantage of dealing with a full service investment dealer is that you can usually consolidate investments that you hold elsewhere by transferring existing accounts held at multiple institutions into your new account.

For example, you can hold all of your mutual funds, individual stocks, exchange traded funds, bonds and GICs in a single account. Each month you get one envelope and one statement that lists everything. In many cases, you can forego printed statements and apply for online access to your account.

Many investors are unsure about consolidating. First of all, they don’t want to alienate the other advisors they are dealing with. Secondly, they may like to spread their investments around in an effort to diversify or perhaps determine who provides the best returns. And finally, they don’t want to be paying a lot of fees, penalties and taxes to consolidate. If they had to do it all over again, they might do it differently, but since they started down this path, they are hesitant to change.

Each of these concerns should be addressed.

As an investor, you need to put your interests first. If that means staying where you are, that is what you should do, but if your interests are better served by consolidating your investments with one advisor, then that is what you should do. It should be treated as a business decision because that is what it is.

With regard to diversification, you probably have a better chance of getting the proper diversification by choosing one advisor and building a portfolio of quality investments with appropriate asset allocation where the various investments are complementing each other. When you are dealing with multiple advisors, the chances are that the left hand doesn’t know what the right hand is doing. There could be gaps in some parts of the portfolio and improper concentration of investments in other parts of the portfolio.

By choosing only one advisor, you will make your life simpler and your advisor will likely be able to do a better job.

As far as penalties and taxes go, there should be none. The receiving institution will usually pay the transfer in fees. It is a cost of acquiring new business. If they don’t, you may want to question the value they place on your business.

Investors can usually transfer most of their investments ‘in kind’, which means you aren’t selling them and re-buying; you are simply moving them from one account to another. It is usually a good idea to transfer ‘in kind’ whenever possible.

When you transfer your investments in kind, there will be no commissions or redemption charges.

When it comes to taxes, even in the case of transferring accounts like RRSPs, you aren’t withdrawing money from your account; you are only moving from one RRSP account to another. It is a ‘tax sheltered’ transfer.

As you can see, there are very few barriers to consolidating investments with a single advisor. The reasons people don’t consolidate can be because they have existing relationships, they are unaware they can consolidate, they worry about the costs of making the move or they just don’t get around to it.

The biggest misconception is that their money is safer if it is spread among a variety of institutions.

In many cases that approach can result in poorer performance and higher volatility because of improper diversification.

The question of Canada Deposit Insurance Corporation (CDIC) coverage also comes up. The fact is that you can hold investments that qualify for CDIC coverage from a variety of issuers within your account at a full service investment dealer.

Each of these would qualify for the maximum coverage available which is currently $100,000 per issuer. In other words, you could hold several hundred thousand dollars of GICs with your investment dealer and they could all be covered by CDIC. You would reap the benefits of safety and convenience in one package.

Each investor has to do what they feel is right for their own situation. For some, it is consolidating, for others it is dealing with multiple advisors. There is no right way and no wrong way. Investors have to weigh the pros and cons then decide what the most important factors are.

Pension Plan Transfers

From time to time individuals will change careers and the circumstance can arise where they had a pension plan with their former employer. In many cases, the employee can take control of those pension assets by having them transferred into a Locked-In Retirement Account (LIRA) or a Locked-in RRSP (LRRSP) at an investment dealer.

LIRAs and locked-in RRSPs are similar to RRSPs in many ways. Your financial advisor can explain the differences in more detail but it is important to know the options that are available.

One advantage of holding a LIRA with your financial advisor, rather than leaving your assets in the pension plan, is convenience. With all of your investments in one place, it becomes easier to monitor your overall financial holdings.

Another advantage is that you can more easily ensure that the combined asset mix of your LIRA and the remainder of your personal investments are appropriate for your circumstances. When two portfolios (your pension and your personal investments) are managed in isolation of one another, there can be gaps or overlaps in the portfolios that make the overall investment mix inefficient.

Before you decide whether consolidation is appropriate, it is important to differentiate between the two types of pension plans. These differences were covered before, but they are worth repeating when it comes to the issue of consolidating your investment assets.

The first is a defined benefit pension plan which provides you with a guaranteed income for as long as you live. Keeping any defined benefit pension plans in place is often the preferable choice unless there are exceptional circumstances.

The second is a defined contribution plan which is a pool of money that provides no guaranteed income upon retirement. These pensions can often be left where they are if you change employers but since these are not guaranteed pensions there are fewer reasons to leave them in place. In order to manage your finances more efficiently it can make sense to consolidate these plans with your investment dealer.

Transferring those pension assets when the opportunity presents itself is an option that should be carefully considered.

Reading your statements

When you begin an investment program with the firm of your choice, you will begin to receive statements usually at least once a quarter and often on a monthly basis. They are more complex than bank statements and include a great deal of information in addition to the value of your investments.

Some of this information may include the adjusted cost base of each investment, the asset mix, contributions made to the account, withdrawals taken from the account, dividends and interest collected, account activity with respect to purchases and sales of investments, changes in the value of the account over the reporting periods and so on.

If you have never had an investment account, it is a good idea to schedule an appointment with your financial advisor once you have received your first statement. The two of you can go through the details line by line. It can help you identify some of the key information and understand how that information is reported.

Maintain realistic expectations; investment accounts are not bank accounts. Don’t expect your portfolio to gain value immediately. It will rise and fall in value, sometimes for periods longer than expected and the growth will not be steady month after month.

Keep in mind that while your money is usually accessible, it is not usually instantly accessible.

Investments have to be sold, the transfer of ownership processed by the transfer agent and the funds released. These funds then have to be delivered by cheque or by direct deposit to your bank account. 

When requesting a withdrawal from your account you should count on at least five business days before receiving the proceeds.

The role of the administrative assistant

While the exact role of the administrative assistant may vary from one advisor to the next, they serve a very important role in the management of your portfolio. Some of their duties may include:

  • Ensuring your account documentation is completed properly.
  • Processing requests for cheques or withdrawals from your account.
  • Setting up your RRIF withdrawal schedule.
  • Inquiring about the status of any transfers.
  • Checking on dividend re-investments.
  • Providing updates on tax receipts, RRSP contribution receipts and capital gains that must be claimed on tax returns.

The time consuming burden of these tasks falls on their shoulders and frees up time for the financial advisor to review your accounts, research investments, prepare retirement plans and make investment recommendations.

Learning how your advisor and their assistant divide up the responsibilities associated with managing your account can help make everything run more smoothly and efficiently. Ask your advisor if they have a checklist of who is responsible for the various functions of the investment team. It can save time and reduce misunderstandings.

Notes: 

  • Government and financial industry regulation requires that significant information is gathered before an investment account can be opened.
  • Governments require information to assist in their efforts to prevent illegal activity such as money laundering and fraud.
  • Industry regulators need to understand your personal situation in order to monitor the efforts of financial advisors to ensure they are acting in your best interest.
  • It is a requirement that your account information is updated every two to three years.
  • Accounts from several different firms can often be consolidated with one financial advisor by completing a simple account transfer form.
  • Upon changing employers or upon retirement, your pension plan can often be transferred into an account managed by your financial advisor.

NEXT: Fees and Commissions

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