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        3 NEWS
 Consumer polls roundup;

  Strong start for funds;
IDA's record-setting year;
     Budget wish list;
Big opportunity with small
     business owners.

            6 Q&A
  GMP’s hunt for high-end
   advisors; Insights from
 quantitative equity master          Analysis and Perspectives for Canada’s Financial Professional • February 2005 • Volume 1 No. 2 • www.advisor.ca
    Jim O'Shaughnessy.
                                                                                                                this incredibly successful franchise
                                                                                                                that has put them in front of some
                                                                                                                                                                 HEADS UP
                                                                                                                of the wealthiest people in the
                                                                                                                country. Time and time again,              Once again, Canada’s mutual
                                                                                                                they’ve done business with people          fund and brokerage industry
      8 PRACTICE                                                                                                who have come away saying, “Can            associations are calling on
  Thane Stenner on HNW
                                                                                                                you not manage some of my                  Ottawa to aggressively
    personalities; Who’s
  contributing to RRSPs.
                                                                                                                money?”What we will do in build-           increase the annual RRSP
                                                                                                                                 ing out this 100-         contribution limit in this
     10 COMMENT                                                                                       “Our goal is to            person      advisor       year’s federal budget.
 Larry Sarbit on the art of                                                                                                      organization     is           The IDA is calling for a
doing nothing; John De Goey                                                                           have 100 people
                                                                                                                                 create a very high-       contribution limit increase to
 pushes the professionalism                                                                           managing an                touch, high-end           $20,500 in the upcoming
          dividend.                                                                                   average of $200 group of very tal-                   budget, followed by annual
    12 RESEARCH                                                                                       million each               ented people who          increases until it reaches
  Labour fund risk; Trusts                                                                            in five years.”            are very focused          $27,000. IFIC would like to
     thrust into index.                                                                               James Werry                on the job of man-        see the limit hiked immedi-
                                                                                                                                 aging wealth and          ately to $27,000.
                                                                                                                preserving capital.                            “What the government
                                                                                                                 Q Why would GMP’s current clients         forgets is that by encouraging
                                                                                                                 be attractive to high-end advisors?       higher limits, they’re not
                                                                                                                 A If you think of the needs of            indulging wealthy people –
            16 TAX
                                     Reach For
                                                                                                                 people who have made a lot of             we’re talking about auto-
Jamie Golombek spotlights                                                                                        money, there’s a funny shift once         workers, labourers, teachers,
 the deduction of business
                                                                                                                 someone’s reached that point.             and so on,” IFIC president
expenses on a money-losing
   business; RRSP facts.

                                     The Top                                                                     They want to feel that their money
                                                                                                                 is working for them, but their pri-
                                                                                                                 mary need is capital preservation.
                                                                                                                                                           Tom Hockin told AER.
                                                                                                                                                               But tax experts believe
                                                                                                                                                           that Ottawa is unlikely to
  Business owners and the            Boutique targeting advisors who know                                        Q What type of advisor are you            raise RRSP limits this year,
   costly misallocation of                                                                                       looking for?                              because the 2003 budget
  permanent life policies.           where the wealth is                                                         A  We will employ people that             already introduced a phased-
                                     INTERVIEW BY SCOT BLYTHE                                                    manage money on a discretionary           in increase that tops out at
Pierre Saint-Laurent decon-                                                                                      basis for clients who wish to talk        $18,000 in 2006.
 structs “abnormal” hedge            Canaccord, First Associates,          GMP Capital. Managing Editor          to their advisor on every buy/sell            Visit www.advisor.ca
        fund returns.                Raymond James, Richardson             Scot Blythe talked to GMP             decision. And we will also steer          immediately following the
                                     Partners, Wellington West – all are   Capital’s new private client head,    money to outside money man-               Feb. 23 budget for a special
  25 MORNINGSTAR                     fishing for high-net-worth advisors   24-year Scotia McLeod veteran         agers.                                    online package of analysis
Will balanced and dividend
    funds remain hot?;
                                     to build out their franchises.        James Werry, about GMP’s plans           We’ll also, of course, use insur-      and industry feedback on
Dynamic Focus+ Diversified           How many of these advisors are        to create a 100-advisor boutique.     ance, which will primarily be for         the issues affecting you
  Income Trust; Hedging              there? That’s not insignificant for   Q Why is GMP getting into the         estate planning, tax-related tools        and your clients.
 exchange rate exposure.             the newest entrant, Griffiths         private client business?              or applications. A lot of people we       Doug Watt News Director
                                     McBurney, now publicly traded as      A   GMP, over the years, has had                     Continued on page 6

                                                                                                                 is factored in, GDP per worker         paper gain in the value of one’s
                      AT A GLANCE:                                                                               climbed 22% while take-home pay        home might not seem as tangible
              Debt Rising Faster Than Income (1989-2004)
                                                                           Wallet creep                          eked out a 3.6% gain.
                                                                                                                    “It’s hard to make a case as to
                                                                                                                                                        as the increase in hard debt,
                                                                                                                                                        Drummond notes.
        7    Avgerage Annual                                               BY DOUG WATT                          why households should be feeling          To boost economic well-being,
        6                                                                                                        better off knowing that individual     Drummond suggests a three-
                                                                           Despite a booming housing mar-        after-tax incomes have not seen the    pronged approach governments
                                                                           ket, continued low interest rates     gains of the economy,” notes           could undertake: improving pro-
                                                                           and high employment, the eco-         Drummond in a recently-released        ductivity growth, which in turn
                                                                           nomic well-being of most              study.                                 would boost real wages; debt
        2                                                                  Canadians has not advanced in 15         Drummond says the problem is        reduction; and, most importantly,
        1                                                                  years, according to TD chief econ-    mostly taxes – a combination of        a decrease in personal income tax.
        0                                                                  omist Don Drummond.                   bracket creep prior to 2000 and        “The top marginal federal-provin-
               Personal disposable      Household debt
                     income                                                   Between 1989 and 2004,             higher CPP and QPP premiums.           cial income tax rate is over 45%,
                                                                           Canada’s real GDP per capita rose        While Canadian household            which is nearly equivalent to send-
                                            Source: CIBC World Markets
                                                                           26% while take-home income            assets have grown fast enough that     ing half of a worker’s earned
                                                                           advanced just 9%. After inflation     net worth has never declined, a        income to the government.” AER
 6      FEBRUARY 2005 ADVISOR’S EDGE REPORT                                                                                                                                                  www.advisor.ca

Reaching for the top Continued from page 1                                           Q How about getting access to            same time, they have a whole lot of
                                                                                     bonds? You don't have a bond inven-      priorities, such as focusing on both      We want to build a very
                                            advantages. Being one legal entity,      tory. Who will you use? CanDeal?         sides of the client’s balance sheet,
       JAMES WERRY                                                                                                                                                      high-end culture, and
                                            as opposed to many, is one. It           CollectiveBid?                           and trying to serve the needs of
                                            doesn’t help if you deal with finan-     A It goes beyond CollectiveBid.          virtually everybody and anybody.          give the opportunity
                                            cial planning in one section of a        We will have a fixed income capa-        What we want to do is a high-end,         for direct ownership in
                                            large institution and brokerage in       bility. The reality is that any of the   high-performance culture focused          that business.
                                            another and counselling. You are         name bond firms that have big            only on one thing: doing a great
                                            going to have [account] consolida-       inventory are happy to sell product      job of investing money for clients.       each in five years. You can say,
                                            tion issues even online, until the       through other organizations. It’s a      That’s powerful, because human            “How many $200 million produc-
                                            client privacy and sharing of infor-     very liquid and very large market.       capital can’t be scaled. We want to       ers are there in the business?” A lot
                                            mation is pushed. Then, of course,       We will be passing on that product       build a very high-end culture, and        of $200 million producers five
                                            you have legacy systems that don’t       without markup to our advisors           give the opportunity for direct           years ago managed considerably
are talking to are licensed, and we         always talk to each other.               who simply want to find a facility       ownership in that business.               less than $200 million. We’re real-
will use an outside organization to         Q So, with this open architecture,       that gives the widest access to as       Q How will you recruit? One by            ly interested in talking to people
provide additional expertise, where         where does the actively managing         broad a range of products as we          one?                                      who may have only been in the
necessary, on complex cases.                advisor fit in or will you outsource     can.                                     A I think it is a one-by-one exer-        business for five or fewer years and
Q This is a broad range of client-          money management?                        Q Will clients have access to under-     cise, especially given our focus on       are not managing close to $200
advisor relationships. What are                                                      writing?                                 people who are in the top of the          million but are on a direct trajecto-
clients looking for?                        One of the nice things                   A  Absolutely. There’s a substantial     industry. Those people are smart          ry that will get them there.
A  There are a lot of consumers of          about the brokerage                      opportunity there, as with the           businesspeople. They have large           Q Let’s take a candidate who’s been
investment products and services                                                     research. The research is focused        dollars under management with a           in the business five years and has
                                            platform is that, by
who are quite hands-on and inter-                                                    on mid-cap equities, where a lot         large number of clients and they          $50 million in assets. How do they
ested in the specific decisions, and
                                            nature, it’s open                        of additional value-add can come         all have to do their due diligence.       get to $200 million? Is it by getting
then there are a lot of people who          architecture to meet                     from for portfolios that will prob-      They all have slightly different          more clients, getting more money
have neither the time nor the incli-        the needs of the clients.                ably continue to hold lots of the        ways that they approach the busi-         out of the clients, is it to do with
nation to want to get involved with                                                  large-cap securities. Those are          ness, and I think that in all cases,      some product innovation? What’s the
the nitty-gritty. Instead, what they        A   We want to be an entrepreneur-       things that truly become buy-and-        those people are making these             growth driver in this business, or is it
want is the trusted relationship            ial organization that is a home for      holds, whereas some of the more          kinds of decisions very carefully.        a takeaway game?
with somebody who understands               people who are serious about man-        exciting opportunities can come             But there’s also a real economic       A You know, it’s all of the above.
what they’re trying to achieve and          aging money for clients. In some         from mid-caps.                           benefit and as an organization            And you left one out. There’s a
that regularly reports to them,             cases, those people may have a           Q How important is access to             that’s something we’ll explore            tremendous cross-fertilization that
probably quarterly, but at the same         skill set and a track record. We         underwriting deals? How important        down the road, just as with GMP.          should come from the existing
time takes care of the day-to-day.          will search out money managers,          is access to a bond inventory? How       GMP was started nine years ago,           GMP franchise. Just step back and
Q How will GMP be different from            whether they want to formally            important is the separately managed      [became] a highly successful busi-        look at some of the companies
what's already on offer, particularly       partner with us or just have a           account platform?                        ness, went public last December.          that GMP has done business with
by the integrated, bank-owned bro-          arms-length arrangement will             A My own view, and what really           We’ll explore doing something             and the wealth that has been creat-
kerages?                                    depend on whether they bring fair-       drew me to do this, is tied back to      similar with this business down the       ed. Whether we are successful
A One of the nice things about              ly specific investment styles            your observation that the business       road.                                     in capitalizing on that in all cases –
the brokerage platform is that,             and/or types of performance that,        has gone through a tremendous            Q How big is your recruitment uni-        I don’t think we will be – there’s
by nature, it’s open architecture to        coupled with other types of per-         consolidation. I believe that the        verse?                                    certainly huge opportunity. That
meet the needs of the clients.              formance, will give a very nice mix      big, bank-owned franchises will          A Our goal is to have 100 people          would certainly be one of the
We’re there. I think we have a few          to satisfy specialized client needs.     continue to prosper, but at the          managing on average $200 million          drivers.                         AER

     Ignoring management                                                             strategies are absolutely active in
                                                                                     every sense of the word. We’re
                                                                                                                              or behind that long-term mean,
                                                                                                                              they tend to switch gears and go        The most consistent
     Jim O’Shaughnessy’s strict numbers and                                          passive in that we’re not trying to      the other way. Over the next 15 to      thing that any market
     hybrid active-passive approach has made                                         add extra value by interviewing          20 years, the real rate of return
                                                                                                                                                                      has is the human factor.
     his RBC funds outperformers                                                     the CEOs of the companies. I used        on the U.S. market will be in the
                                                                                                                                                                      People are hardwired
                                                                                     to joke if you want me to subtract       5% to 6% range as it approaches
     INTERVIEW BY KATE MCCAFFERY                                                     value we’ll go and interview the         that long-term mean again.              to fail as investors
                                                                                     CEOs.                                    Q Quote: “People get emotional          because we are
     Q You’ve established conventional          on the Europe and Far East           Q Is there anything that would           about things we shouldn’t get emo-      short-term-oriented.
     metrics for value stocks, namely           Asia (EAFE) universe. North          cause you to waver on that?              tional about and get very rational
     price to book and price to earnings.       American markets are fairly          A No. We believe that the dis-           about things we should be emo-          more valid than any longer-term
     Why do you also use price to sales?        efficient and we found that in       tilled wisdom of the market about        tional about.” I understand the first   experience based on data.
     A Empirical evidence. Price to             Europe and Asia the markets are      a management team’s ability is           part but could you explain the sec-        We believe in colour, we believe
     sales, of all of the ratios, emerged       not as efficient as they are in      just that — distilled in the num-        ond part?                               in stories, we believe it really will
     as the most stable and efficacious         North America.                       bers. We believe opinion and intu-       A For example, when I hear peo-         be different for our generation.
     in determining future results. I                                                ition and emotional reaction gen-        ple talk about why they’re marry-       The fact is that’s not true.
     think one of the reasons behind            We believe opinion                   erally lead to bad decisions. We         ing someone, and then they give a          Every market environment that
     that is sales are much more diffi-                                              want to be guided only by empiri-        list of things that could fit on a      we might approach in the future
                                                and intuition and
     cult to monkey around with than                                                 cal data.                                spreadsheet — I think that’s            except a great depression has
                                                emotional reaction
     earnings.They tell a more consis-                                               Q Any other indicators you keep          something you should be emo-            already happened. Will there be
     tent tale across time. P/E and
                                                generally lead to bad                your eyes on? You’ve said in the         tional about.You shouldn't be try-      another speculative phase? I can
     price to book both work, but they          decisions.                           past to expect modest returns.           ing to bring rationality in.            pretty much guarantee it. It’ll be
     work in a less consistent fashion.                                              A We look at long rates of return           The most consistent thing that       about something that’ll engage
     Q You’ve applied the model to              Q Are your MERs lower because        to various financial markets             any market has is the human fac-        the investor’s imagination and will
     Canada and the U.S. How does the           of trading costs?                    because regression to the long-          tor. People are hardwired to fail       make them believe that trees
     model hold up in other countries?          A Our MERs are lower because         term mean is one of the most             as investors because we are short-      really do grow to the sky even
     (RBC just launched an interna-             this is really a hybrid between      ironclad rules in financial markets      term-oriented. We have to have a        though all of our collective wis-
     tional O’Shaughnessy fund.)                active and passive management.       we’ve ever seen. We’ve seen that         personal experience and we              dom and experience says it isn’t
     A It actually works even better            We’re active in that our selection   whenever markets get well ahead          believe our personal experience is      true.                            AER

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