Would you ever buy a house that didn t have a bathroom? (yes/no) And what would you like in that bathroom? (tub, shower, sink, toilet).

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1 Thanks for meeting with me today. You ve learned how to assess what your true needs are (review the 5 Finger Rule), and you know how the boxes on your asset sheet work together to create your overall financial picture. In our first meeting, we discussed banks and bank products. Last time we met, we learned to be good, wary consumers of insurance products provided by insurance companies. Now we know how banks and insurance companies work from a consumer standpoint, and today we ll talk about brokerages. We reviewed banks and insurance companies in our previous meetings. We learned that banks and insurance companies are jealous of each other, and are now trying to sell each others products. But they are both jealous of one other entity, and that s the brokerages! That s because the brokerages have figured out that they can get paid on every transaction and they can get paid even when there is no transaction. So now banks and insurance companies are buying brokerages. It is important to remember that most people deal with banks and insurance companies because they think they have no alternatives. These institutions are ingrained in Canadian culture as being safe places to keep and grow your money. From the very first explorers to Canada, both the banks and insurance companies were there the banks and royal treasuries financed exploration through the fur and spice trades while the insurance companies underwrote the voyages. As Canadians, this is why banks and insurance companies are nearly impossible to avoid in our daily financial life and why it s important for us to fully understand how they work and how we can make them work for us. Do you remember when we went over the rules of the boxes from the Asset and Debt Sheet? We also need to remember is not just the rules for each of those boxes and how the boxes relate to each other, but what we ultimately put in those boxes which allow us to be successful in both our pre retirement and our retirement years. 1

2 Would you ever buy a house that didn t have a bathroom? (yes/no) And what would you like in that bathroom? (tub, shower, sink, toilet). We ll discuss each of these investments, or bathroom components, in greater detail. 2

3 Mutual Funds can be likened to a bathtub styled investment. All they are, really, is a big tub or pool of money that is being invested on your behalf by a portfolio manager. The portfolio manager is the one who has a specific outline of how he/she may invest the pooled funds. However, one of the problems of the manager has is that he/she has to abide by the investing rules that are outlined in the mutual fund prospectus. It limits and restricts him/her as to what the money pool may invest in, to what the proportions are for each investment, and how the cash flow in and out of the pool is managed. Let s look at mutual funds like a bathtub. Imagine there are 3 kids in that tub on Saturday night: Mom fills the tub 1/3rd the way to the top. When the first kid gets in, the water is clear and warm and full of bubbles. The water comes up to the kid s tummy and it feels warm and smells good, and he gets cleaned by up Mom. Then the second kid gets in and the water comes up to his armpits. As Mom cleans the second kid, the water is getting noticeably dirtier, a little cooler, and the bubbles are starting dissolve it s getting a little murky. Finally the third kid gets in and some of the water spills out as an overflow; Mom wipes up the floor with the corner of the lone towel and orders the kids to stop splashing around. The third kid can t enjoy himself as much as the other two; the water is getting murkier and colder by the moment, and the bubbles are bursting left, right and centre. The first kid decides he s had enough and it s time to get out. Mom wraps the lone warm dry towel around him and the kid gets dried off quite comfortably. The second kid sees the water level drop below the level of when he entered the tub since some water spilled out of the tub. He is not quite clean, but decides it is time to get out since the water is barely lukewarm and slightly lower level thanwhen he first got in the tub. Mom towels him off. 3

4 In summary, the first kid had a great experience and loves the common pool approach; the second kid did not get to enjoy all the bubbles it was okay but could take it or leave it. The third kid hates bath time since he got to enjoy fewer bubbles before they burst and he was dried off with a cold wet towel. We might want to blame the advisor or the manager for the problem, but the problem is that the fund manager is bound by the prospectus. When the investment spills, or the kids are getting in/out, he still has to manage what is left in the tub and try to mop up the spillage. That, in essence, is the life cycle of a mutual lfund. There are thousands of funds to choose from in Canada. At National Best, we try to target funds that have good track records from experienced managers and that have more specific purposes in the prospectus. The client s expectations from the funds are better understood and clients can accumulate money in and out of different positions. ii Here are some samples of our favourites today: Target Click (Guarantee Lock In s for High Water Marks in the marketplace) Pro Financial Fundamental Index Funds (Managing the Cash Flow through Volatility Controls) BMG Bullion Management Group (actually 1/3 Gold, 1/3 Silver, 1/3 Platinum held as the metal), some cash for in/out bound clients. 4

5 But Mutual Funds are not the only pooled investment products on the market. What about exempt market products like Land Development Partnerships or Private Mutual Fund Trusts? Other examples are Real Estate Investment Trusts, Flow Through Shares, or Principal Protected Notes. How might we describe these products continuing our bathroom analogy? What about the shower? This is the exempt market; some people don t like washing in someone else s water. They would rather jump right into a hot shower. Exempt products are very much like this. In the beginning, there is a lot of buzz about the opportunity. There might be advertising and seminars, and they might be providing a chance to get into a hot market. At first, it feels really good when you get into the hot shower. You get all lathered up and you re having a good time. Eventually the hot water tank runs out of hot water and soon the shower becomes cold. You have to turn off the tap and wait for it to heat up again. As you wait, you realize the water is quickly draining out of the shower and there is no way to get it back. Now you are getting quite cold, so you reach for the towel. But there is no towel those kids! So you have to climb out shivering and very uncomfortable. While the market is hot there are great returns and liquidity, but when it goes cold? Well, the investor is left standing naked with his or her assets exposed, cash flow pouring down the drain and no warm towel waiting to be wrapped in. At National Best we only recommend exempt products that we, as potential clients, have fully investigated and vetted. There are no guarantees for the risks you take. The risk is always present, but we are trying to limit our clients to products where they understand what are their true risks, and where possible clients can put a bit of a stopper on the drain to pool the cash flow from these investments as a reserve. Some examples are: Prime Funds Unit A (provides monthly distribution, clients may pool the cash flow 5

6 Life Insurance investment vehicles can be compared to having a sponge bath in the bathroom sink. Mom wants to have a bath, but now the water is gone from the tub and shower. She puts some water in the bathroom sink and has a sponge bath. The water is not overly hot but it is satisfying for a sponge bath. She has put a stopper in the drain so she cannot lose all the water at once. It is not a very satisfying experience and the sponge always absorbs some of the warm water so you never get it all back (this represents the slightly higher fees of the insurance products). However, it is a safe product and it is wrapped in a guaranteed contract. Comparatively, you might be faced with a drained bathtub style investment, or you might slip in the shower styled investment and crack your head, but you rarely get hurt using the sponge bath approach since you are just dipping the sponge in the basin and wringing it out as you need it. You do not lose your entire principle when invested for long term. In our opinion, this is one of the few core investment choices that make sense inside of an RRSP. Particularly, since these are specially designed for a lifelong payout at or after retirement age. The sponge bath styled investment may not be a very glamorous product; however, it is designed for safety and it yields with positive results when chosen carefully and is well understood by the client. 6

7 These features can be discussed further if the client has questions / expresses interest. Additional Features and Benefits of Segregated Funds: Maturity Guarantee 75% or 100% of the initial amount invested, guaranteed to be returned to the investor after 10 years, 15 years or some other length of time specified in the contract. In the case of a 100% Maturity Guarantee, if the investment is worth more than the original investment upon maturity, the investor receives the market value of the investment. If it is worth less than the original investment, the insurance company will top up the investment back to the original amount deposited into the contract. NOTE: Guarantees do not apply to withdrawals made from the Seg Fund before the contract maturity date. The investor will receive the funds at market value minus any deferred sales charges and taxes if applicable (capital gains if the fund is up, capital losses if the fund is down). The maturity guarantee on the remaining funds will be adjusted proportionately. Death Benefit Guarantee 75% or 100% of the initial amount invested, guaranteed to be paid to the beneficiaries upon the annuitant s death. In the case of a 100% Death Benefit Guarantee, if the investment annuitant dies when the investment is worth more than the original investment upon maturity, the investor receives the market value of the investment. If it is worth less than the original investment, the insurance company will top up the investment back to the original amount deposited into the contract. Resets depending d on the features of the contract, the maturity and/or the death hbenefit guarantees can be reset. Some resets are done automatically on the anniversary of the policy, or on the annuitant s birthday. Other contracts allow for manual resets. Resets may push out the maturity guarantee another 10 or 15 years, depending on the details of the contract. No proof of insurability needed the annuitant is not required to be healthy in order to obtain these insurance contracts 7

8 This material can be used in further discussions about these products: Additional Features and Benefits of Segregated Funds: Maturity Guarantee 75% or100% of the initial amount invested, guaranteed to be returned to the investor after 10 years, 15 years or some other length of time specified in the contract. In the case of a 100% Maturity Guarantee, if the investment is worth more than the original investment upon maturity, the investor receives the market value of the investment. If it is worth less than the original investment, the insurance company will top up the investment back to the original amount deposited into the contract. NOTE: Guarantees do not apply to withdrawals made from the Seg Fund before the contract maturity date. The investor will receive the funds at market value minus any deferred sales charges and taxes if applicable (capital gains if the fund is up, capital losses if the fund is down). The maturity guarantee on the remaining funds will be adjusted proportionately. Death Benefit Guarantee 75% or 100% of the initial amount invested, guaranteed to be paid to the beneficiaries upon the annuitant s death. In the case of a 100% Death Benefit Guarantee, if the investment annuitant dies when the investment is worth more than the original investment upon maturity, the investor receives the market value of the investment. If it is worth less than the original investment, the insurance company will top up the investment back to the original amount deposited dinto the contract. Resets depending on the features of the contract, the maturity and/or the death benefit guarantees can be reset. Some resets are done automatically on the anniversary of the policy, or on the annuitant s birthday. Other contracts allow for manual resets. Resets may push out the maturity guarantee another 10 or 15 years, depending on the details of the contract. 8

9 The final fixture we find in the bathroom is the toilet. These instruments are the banks deposit takers. The toilet is designed to take deposits (savings/chequing accounts, GICs), and in the end, you have a piece of paper that is good for only one thing to report taxes. The only one making money on your savings account and GIC deposits is the bank itself; banks lend from your deposits to make money for themselves. These products are designed to pay as little as possible to the depositor and they rarely beat inflation in the long term. In the end you still have the liquidity from the toilet, but the toilet is designed to consistently underperform because of inflation. Yes, the banks do have mutual funds and other investment products as well. However, banks have been in this business for a very long time. You can make deposits into the toilet or splash around in the bathtub or shower for a while. Banks know that eventually your investments with them will end up in the toilet (savings, chequing, GICs). The choice is yours, but when you work with the bank, the information and service you receive from them as their client is overwhelmingly disappointing over time. Frustration often stems from this disappointment and some people say, RRSPs aren t any good; they perform poorly and they are fully taxed once you begin to withdraw the funds in retirement or even before retirement if funds are needed! 9

10 At National Best we have a saying: When you are older and/or retired, it is better to have a potential tax problem rather than a future income problem due to lack of savings; learn how and where to save and invest today! We can help you find many varied investment choices that are right for you. We want to assist you learn how to make proper investment choices that may allow you a more reasonable expectation or guaranteed growth, and a better understanding of risk and protection. Finally, we want you to have a better use of both registered and non registered assets in relation to your specific financial goals. We feel you will stand a better chance of achieving your own financial success having a National Best relationship to help you along your journey. We are here to encourage and help you from within our network of licensed advisors, and assisting you in almost all aspects of your financial life. 10

11 What do you like best about our bathroom analogy to explain mutual funds, exempt market funds, segregated funds and bank products? Which investment products do you think it makes sense to have in your bathroom? 11