Products evolve to meet new needs

“It’s a different focus than asset building. There’s a shift in mindset to preservation of assets and income creation, but they still need some growth to preserve the purchasing power of their savings,” says Moir. “Because there is no longer a regular paycheque, savings must last a lifetime, and there’s uncertainty as to how long that lifetime will be.”

There’s no ideal investment that offers both complete security, growth potential and a high level of return. Most advisors are finding an effective approach is to spread client assets among a variety of securities that includes both equities and fixed-income, with some focus on growth and some on interest and dividends.

Some advisors are also opting for a wedge of security in the form of products with guarantees on income or capital, particularly the guaranteed minimum withdrawal benefit products sold by insurance companies such as Manulife Financial Corp. and Sunlife Financial Inc., both of which are based in Toronto.

“Income and stability often go together for clients who have reached retirement age and don’t have as much time to recover from down periods in financial markets,” says Bill Bell, president of Aurora, Ont.-based Bell Financial Inc. “Reducing risk is not just about asset allocation; it’s about product allocation.”

Most advisors recommend a mix of preferred shares, common shares and real estate investment trusts to produce income through dividends and distributions, but these are publicly traded equities securities and can be highly volatile because of unpredictable markets.

Portfolios usually include a smattering of stable government bonds, as well as corporate bonds, which tend to pay a higher yield than governments but can be more volatile due to the uncertainty of the corporate world.

Moir will often create a ladder of staggered maturities using government bonds or guaranteed investment certificates to ensure that a portion of cash will come due on an annual basis. She finds the most suitable way to access corporate bonds is through professionally managed mutual funds, where managers can assess the individual corporate risks and create a diversified portfolio. But unlike individual bonds, a bond fund has no maturity date, so the investor can’t count on redemptions at par value at any specific point.

Also popular are income-oriented mutual funds or fund-of-fund portfolios offered by most major fund families. The products include a mixed bag of income-producing securities and stable equities, both Canadian and international, and often are designed to pay out a predetermined monthly rate of income to the client.

In addition to a stable income, these funds offer the chance for some capital appreciation. Some convert income payments as tax-efficient capital gains or return of capital, rather than fully taxable interest income, and this is a useful option for investors who hold assets outside of registered accounts such as RRSPs and registered retirement income funds.

Among the favourites of Barnaby Ross, vice president with RBC Dominion Securities Inc. in Toronto, in this category are: Acuity Growth & Income Fund, sponsored by Acuity Funds Ltd.; Signature High Income Fund, sponsored by CI Investments Inc.; and Sentry Canadian Income Fund, sponsored by Sentry Investments Inc., all of Toronto. Ross tends to mix these funds with others that specialize in corporate bonds, and in this area he recommends TD High Yield Bond Fund, sponsored by TD Asset Management Inc., as well as a couple of closed-end funds that trade on the Toronto Stock Exchange, including Canso Credit Income Fund, managed by Lysander Funds Ltd. of Richmond Hill, Ont., and OCP Senior Credit Fund, managed by Onex Partners LLC of Toronto.

Another way of finding juicy yields in the bond area is to go global. Ross likes Excel EM High Income Fund, an actively managed portfolio of sovereign and corporate emerging-markets bonds managed by Excel Funds Management Inc. of Mississauga, Ont. Its sister fund, Excel EM Capital Income Fund, bases its returns on EM High Income Fund but converts the interest income into capital gains, thereby generating tax-efficient returns.

Emerging-markets bonds are also available by way of exchange-traded funds, with ETFs from Bank of Montreal and the Toronto-based BlackRock Asset Management Canada Ltd.’s iShares division.

Another choice is the Templeton Global Bond Fund, offered by Franklin Templeton Investments Corp. of Toronto, which does not focus solely on emerging markets but includes some in its global mix. There is also a hedged version, to avoid currency risk.

Diane McCurdy, president of McCurdy Finan-cial Planning Inc. in Vancouver, likes the idea of diversifying by investing in real estate properties, and will put as much as a third of a client’s portfolio in Great-West Life Canadian Real Estate Fund, sponsored by Winnipeg-based Great-West Life Assurance Co., a fund that invests in a broad portfolio of real estate properties, including residential, commercial, industrial and retail.

Although the real estate asset class as a whole has historically shown a low correlation to broad stock market averages, the funds that hold the actual bricks and sticks offer the greatest diversification opportunities against other financial assets.

Also included in this group is London Life Real Estate, sponsored by London Life Insurance Co. of London, Ont., and Investors Real Property Fund, sponsored by Winnipeg-based Investors Group Inc. The attractiveness of real estate is primarily due to its rental income, but there is potential for capital appreciation.

“Because real estate assets are not traded daily in public markets, their values do not fluctuate as wildly,” McCurdy says. “Hard assets provide good diversification and a hedge against inflation.”

Although GICs are secure, current rates are pathetically low. Five-year GICs at major chartered banks are paying less than 2% a year, while the one-year rate is around 1.15%. And even these deposits are not without risk. If market interest rates go up, outstanding GICs, as well as bonds, will be less attractive than competing new investments, and because they have no growth potential, they offer no protection against inflation.

A middle ground is insurance annuities, including GMWBs. The appeal of these products is their guaranteed income for the life of the client, although there are trade-offs in terms of liquidity and assets available for estate planning. The GMWB products typically offer a 5% annual return as well as some participation in stocks, which allows for potential growth in income paid out. However, some of that growth will be eaten away by fees that are higher than regular mutual fund fees.

“With the GMWB products, the client never has to worry about running out of capital,” says John Horwood, director of wealth management with Richardson GMP Ltd. in Toronto. “The lifetime income guarantee is comforting to clients and helps them maintain some exposure to the equities they need for growth. It beats the heck out of GICs.”

Tina Tehranchian, branch manager and certified financial planner with Assante Capital Management Ltd. in Richmond Hill, Ont., points out that because annuities and GMWBs are insurance products, they offer the added feature of creditor protection, which is particularly attractive to her entrepreneurial clients who don’t have the benefit of pension plans sponsored by governments or large corporations.  IE

In the Mid-February issue: How advisor compensation may evolve in this area, from fewer commissions to more fee-based products.