Liar liar

(December 2006) What did we learn on Halloween night? Was it the fact that good planners should track the number of trick-or-treaters each year and correlate the turnout with the weather and other factors so they can predict accurately and buy the right amount of candy? Or was it that we don’t want to bet our clients’ money too heavily on the words of a politician? Although the accountants and engineers in the crowd might lean toward number one, most of us had better heed number two.

After Finance Minister Jim Flaherty’s announcement on the taxation of trusts, newspapers were filled with horror stories of Nortelesque proportions about people who had “lost” hundreds of thousands of dollars within 10 minutes of the TSX opening bell on November 1.

What first riled me was the obvious negligence of the “journalists” who took these tall tales at face value and reported them. No retired couple in Bobcaygeon lost $900,000—that’s impossible.

Or is it? As tales started to filter out, and Beasley appeared on a few open-line radio shows, our worst fears were confirmed. Once again, some advisors (and many do-it-yourself investors) had forgotten the hard lessons learned in the early days of this century. They had yet again bet all of their clients’ chips on one number, ignoring the fact that the same number can’t keep coming up forever.

If that analogy is a little obtuse, what I’m saying is they had their clients heavily or completely invested in income trusts. They may have even been using them as a replacement for bonds in the fixed-income portion of the portfolio, and were buying small-cap trusts willy-nilly in place of solid corporations, simply because of the higher yields. They forgot that you can’t get something for nothing, and that high yields require taking on higher risk.

My clients have investments in income trusts—everyone’s clients do. That’s inevitable given the mass migration over the last few years. (I speak as one out of 10 advisors who admitted to using trusts. It’s just amazing how many advisors and brokers told me they “did not have a penny of client money in trusts.” Methinks their pants were on fire, or they really did not understand what their high income and balanced mutual funds were invested in.)

For clients with income as their primary goal, some investment in trusts made absolute sense. But betting someone else’s farm on any one sector, no matter how hot it appears, is never responsible advising. If you poke an angry bear repeatedly and it does not react, that does not mean it has given up its power or become less dangerous. Always beware of the claws.

I didn’t see Flaherty’s announcement coming. Naively, I still believed that “no” meant “no” (a holdover from my dating years, I suppose). But fear, or common sense, or smart analysis kept my clients away from too much exposure to that too-good-to-be-true area. Or maybe it was my subconscious belief, instilled in childhood and reinforced ever since, that something will always rain on my parade or someone will pee in my favourite cereal, that saved us.

Whatever works for you, use it to resist the temptation to put too many eggs in the next hot basket, even if it means clients complain their cocktail party mates one-up them. They will definitely thank you in the long run.

Beasley Hawkes is a pseudonym. He is a practising financial advisor with a firm he’d rather not name. Hawkes can be reached at advisorsedge@rmpublishing.com.

(12/04/06)