ArticlesThe following is a selection of articles and presentations on private wealth and other topics of interest from respected authors and industry commentators. All of these articles are freely available on the internet, but gathered together in one place for the convenience of our readers.

Topics

Advisors
Behavioral Finance
Family Business
Family Education
Family Goals
Family Governance
Family Office
Family Wealth Psychology
Foundations and Endowments
Future Trends
Goals-Based Investing
Integrated Wealth Management
Investment Governance
Investment Management
Investment Manager Selection
Investment Policy
Next Generation
Philanthropy
Risk Management
Succession Planning
Tax Planning
Trustees and Executors

The complex structure of the Canadian financial services industry has made it challenging to establish a single definition of wealth management as an industry and practice. And, perhaps because the term itself has not been clearly defined, the role of the wealth manager and the skills required of the role have never been formally established. Advisors catering to the HNW market operate through different channels at various types of firms and under various regulatory regimes. In recent years, there has been tremendous growth in the number of HNW clients and a corresponding growth in opportunity for financial institutions. The purpose of this report is to describe the trend towards greater integration of products and services catering to the HNW market and to demonstrate that with this trend the wealth advisory role is becoming a distinct field of practice.Read the Article

The choices facing wealthy families when selecting a wealth advisor can be overwhelming and confusing: How do you choose among the hundreds of private banks; trust companies; asset managers; brokerage firms; single- or multi-family offices; and investment advisory firms that advertise wealth management services? Bombarded with marketing material, it can feel overwhelming (sometimes impossible) for clients to discern the significant differences that exist between firms with very similar marketing messages. Further complicating the decision is the fact that the right choice for one family may be the wrong choice for another. How can a family be certain which kind of wealth advisory solution is right for them?
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In a previous white paper of this series, a framework for wealthy families was introduced to cut through marketing clutter that makes different wealth management firms look and sound alike, and to explain the fundamental differences among three main kinds of advisors: manufacturers and distributors (i.e., those firms which provide or sell financial products and services); and independent, fee-only fiduciaries (i.e., those firms that help families select and purchase a mix of products and ser¬vices but also have a fiduciary obligation to place the clients’ interests ahead of their own). This paper goes a step further to help families differentiate between the various kinds of wealth management firms, and also to understand the practical implications of working with each of the three main types of advisors. The objective is not to recommend one type over another, but rather to help families understand the business model and interests of each type so that their choice of which firm or firms to work with is an informed one.
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Behavioral Finance

Behavioral Portfolio Management

Thomas Howard (AthenaInvest)

Capital Market theory has passed through two distinctly different paradigms in the past 80 years – systematic securities analysis (Graham + Dodd) and then modern portfolio theory – and is experiencing the rise of a third. The currently ascendant paradigm, based on new research in the field of behavioral finance, promises to offer superior guidance to investors and advisors who hope to harness the pricing distortions created by widespread cognitive errors. To be a successful investor, you must make conscious decisions to redirect your natural impulses and focus on careful and thoughtful analysis. Staying disciplined in an emotionally charged world of round-the-clock news is a challenge.
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The Cost of Ignoring Behavioral Biases

Jay Mooreland (The Emotional Investor)

Behavioral biases influence us to think and act in certain ways. Biases are often subconscious and therefore may influence us without our knowledge. In other words, if you are a human being, you are influenced by these biases, and they may lead to costly errors. This article evaluates the recent problems at the national retailer J.C. Penney and how behavioral biases may have influenced poor decisions that led to the problems.
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In practice stock prices do not move that efficiently. Over the past few decades, the stock market has evolved and expanded in reach, giving rise to problems, anomalies, and challenges. Stock prices swing up and down without any change in the company’s fundamentals, meaning that investors move in herds and influence share prices accordingly. As a result, we need to understand how investment decisions are actually made.
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Behavioral Finance in Asset Management

Marcus Schulmerich (State Street Global Advisors)

Financial crises are taking place more frequently and their impact is spreading across the globe. Standard financial theory cannot explain that phenomenon, but behavioural finance theory offers some compelling explanations.
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The Confounding Bias for Investment Complexity

Jason Hsu, John West (Research Affiliates)

A preference for complexity is almost hardwired into investors, their agents, and asset managers because the intuition is that a complicated investment landscape requires a complex solution; a complex strategy also supports a higher fee from both agents and managers. Research shows that simple, low-turnover and complex, high-turnover strategies perform similarly on a before-fee basis, suggesting the former may have the advantage after tax. Simplicity leads to better investor outcomes not because simplicity in and of itself produces better investment returns, but because a simple strategy encourages investors to own their decisions and to less frequently overreact to short-term noise.
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Family businesses represent the most enduring business model in the world. The continuing success of family firms through the generations relies on ensuring that the next generation, to whom the baton will one day be passed, are motivated to take up the challenge and are fit for the job at hand. Business families often have a strong culture of “doing”, where parents instill in the next generation a sense of responsibility for their future and a desire to set ambitious goals. For those next gens who will work in, or be an owner of a family business this guide will be a useful resource and will provide practical knowledge and information.
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Though family-owned businesses are not bound by the same rules as public companies and thus are not required to have an independent board of directors, they can benefit from outside perspectives and expertise. As family businesses grow and enter new markets, and as the reins of control are passed to succeeding generations, often the family’s management skills fall short of the talent and experience needed to ensure long-term profitability. Without an external perspective, family companies can grow complacent and fall behind in a changing environment. This is where well-qualified independent directors can bring value.
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Ten Key Insights into Family Constitutions

Christian Stewart (Family Legacy Asia)

The majority of family businesses fail as a result of internal factors, rather than external factors. These internal factors include failure to plan for succession and family conflicts. Yet the surprising fact is that many family business conflicts are predictable and can be planned for. One of these governance tools is the family constitution, which defines the “rules of the road” for the family with respect to its relationship to the business.
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10 Tips for Managing Family Business Conflicts

Christian Stewart (Family Legacy Asia)

The majority of family owned businesses are likely to fail because of internal challenges, with the key issue being inevitable – and destructive – family conflicts. So if a family wants to pass a successful business on to the next generation, it needs to develop its own tools and systems for managing conflicts.
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Family Education

Recommended Reading List

Family Office Exchange

A great list of recommended readings from Family Office Exchange on raising responsible owners, financial literacy and philanthropy.
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There are many written and online resources for adults about personal finance. However, most of these resources are not very useful for parents who want to lay the foundation for good financial literacy with their children from the beginning. Here are some good-quality articles, books, websites, and professionals available to help guide parents and advisors in the area of financial literacy education. Use these as a basis for beginning a good financial education program in your family.
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Motivating and Helping the Overspending Client: A Stages-of-Change Model

Dr. James Grubman, Kathleen Bollerud, Cheryl Holland

The overspending client is one of the greatest challenges for financial planners. Poor budgeting, impulsive or addictive spending (regardless of affluence level), and the debt these habits can cause often result in a request for financial planning help. Most advisors take the rational, common sense approach of showing financial projections designed to heighten clients’ awareness and lead to fiscal restraint. When clients are simply not ready to hear about what will happen if they keep overspending, your best warnings will fall on deaf ears.
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Great Families Program

Independent Means Inc.

Financial education specialist Independent Means Inc. offers the Great Families Program, a unique family education curriculum around the ten basic money skills, uniquely tailored for each age group from children to young adults. It is worth a read for anyone who is thinking about family financial literacy.
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Purposeful Travel

John Morris, Dr. Richard Orlando, Hannah Shaw Grove

Purposeful travel is travel with an intended useful purpose, or with the goal of strengthening the family and its legacy. A family can use travel to address the challenge of successfully transferring its values – along with the family’s wealth – to subsequent generations.
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The Stories That Bind Us

Bruce Feiler (New York Times)

Studies indicate that children learn resilience when they hear what their relatives before them have faced.” If you want a happier family, create, refine, and retell the story of your family’s positive moments and your family’s ability to bounce back from the difficult ones.
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“The world is shrinking” has long been a catch phrase to describe how accessible the world has become; however it should also remind us of the proximity to danger. For anyone whose business and pleasure activities take them across the globe, that means leaving nothing to chance when it comes to ensuring their safety. Affluent clients who travel for business or pleasure need to think through everything from managing petty theft and lost passports, to kidnapping, to accessing emergency medical care in a remote location. This white paper covers the importance of proper planning and understanding the basics of personal safety when in an unfamiliar environment. It includes a checklist of common sense safety tips to reduce the primary risk of being the victim of a crime while traveling in a foreign country.
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Developing a Family Education Curriculum

Christian Stewart (Family Legacy Asia)

Families set up FOs to help preserve family wealth. It is common to refer to “family wealth” as going beyond the financial and social capital of the family to also include family human capital and intellectual capital. Just like there will be an investment committee and a philanthropy committee, there should be an education committee. The first task for the education committee will be the development of a family education curriculum.
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Family Goals

How Will You Measure Life?

Remarks by Clayton Christensen (Harvard Business School)

When the members of the class of 2010 entered Harvard Business School (HBS), the economy was strong and their post-graduation ambitions could be limitless. Just a few weeks later, the economy went into a tailspin. They spent two years recalibrating their worldview and their definition of success. The graduating class asked HBS professor Clay Christensen to address them on how to apply his principles and thinking to their personal lives. He shared with them a set of guidelines that have helped him find meaning in his own life.
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Redefining Wealth: The Four Types of Capital

Matthew Wesley (The Wesley Group)

Research shows that families that have managed to remain successful across generations have a different definition of wealth. These families see wealth as more than financial capital. They tend to see the true wealth of their family as lying in those things that will sustain and replenish the financial asset of the family and help to ensure family stability. These include: Human Capital, Cultural Capital, Social Capital and Financial Capital.
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Withersworldwide recently commissioned a research study to find out what it means to be wealthy in the 21st century, and whether successful families around the world are driven by wealth generation, wealth preservation or the application of their wealth. Five pearls of wisdom emerged which help to disclose the secret of family success. Each reveals how wealth can be stewarded for the benefit of individual families and society at large.
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Family Governance

Family Governance and Wealth Planning

BNY Mellon

Many financially successful, high net worth individuals engage an advisor to help answer important questions around protecting and transferring their wealth to their children and future generations. They often have questions such as: “How much is enough?”, “When is the right time to tell our children about our wealth?” and “How do I prevent our wealth from disappearing by our grandchildren’s generation?” Although investment management and estate planning solutions are certainly pivotal to answering these questions, family governance strategies can be equally important in preparing the family for the money, not just the money for the family.
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Key Questions for Reviewing Family Governance Arrangements

Christian Stewart (Family Legacy Asia)

This article provides a helpful checklist of fundamental questions to consider when reviewing the effectiveness of family governance arrangements.
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The beauty of a Single Family Office is that you can tailor it to your specific needs whereas the beauty of a Multi-Family Office is that you can benefit from those services immediately and usually at a much lower cost, instead of waiting for it to be set up. So what do you do? To determine what kind of Family Office you may require, and essentially to see if it is necessary to have one in the first place, this article outlines the pros and cons of both Single and Multi-Family Offices to try and help families make a more informed decision.
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The focus of this year’s report is on a distinctive arm of the private wealth industry, the single-family office, whose major defining characteristic is that all of its “clients” are members of the same family.
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The label of “family office” seems to be appearing more frequently, but how can you tell if what you are looking at is really a family office or just a private bank in disguise? While there is no set definition, this article outlines some of the key distinguishing characteristics of true family offices.
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Many multigenerational families of wealth find themselves re-revaluating the future of their single-family offices (SFO). As families grow, complexity increases exponentially. New generations have different needs and make different demands. These can be difficult to fund and scale in an SFO model. In the past decade many families have questioned the benefits and financial efficacy of the SFO model as they move toward hybrid models or entirely different service delivery options, especially the multi-family office model.
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The New Standard of Family Office Service

Hannah Shaw Grove (HSGrove LLC)

Wealth holders are moving to family offices for better service. They make the move because they want more responsiveness from their service professionals, and they are looking for more customized solutions and fewer transaction-like interactions. They want that integrated consultative support that allows them to believe their provider is thinking about the management of their financial affairs as a whole. They want to engage with providers who bring technical expertise and proficiency to the table without pushing products. They want to work with people and organizations that can harness extensive expertise on their behalf. In essence, they are looking for someone who is going to call them back and talk to them within a framework that is meaningful to them on a timeline that works best for them.
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Traditionally, whether acknowledged or not, a focus of international wealth management has been to use bank secrecy laws for the purpose of tax avoidance. An unstoppable trend toward greater global transparency, however, is rendering this model obsolete. International wealth managers who fail to adapt will not survive.
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Family offices gather the talents of financial, tax and legal professionals under one roof. Here’s how to know if you should trust them with your money.
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Family Wealth Psychology

The Psychology of Wealth

Marty Carter (Charles D. Haines)

Investment advisors tend to focus on the “hard” side of managing private client wealth, but they should give equal attention the soft side (i.e., the psychological factors). Advisors who do not understand their clients’ needs and objectives are unlikely to serve them effectively.
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While it is true that having money can create greater opportunities, it makes some people feel very awkward. Those who harbor deep feelings of regret, guilt, and shame about their money may fail to enjoy it and take advantage of the opportunities it provides. Such feelings frequently go unrecognized or unacknowledged, and thus are rarely discussed openly with advisors, or even family members.
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Foundations and Endowments

Starting a Foundation

Philanthropic Foundations Canada

Every year, more private foundations are being created. The number of donor-advised funds is also growing. Clearly, long-term giving is more and more popular among philanthropists. Choosing the giving option that suits you best starts with an examination of your motives, personal style and context, and value and interests. Legal and tax considerations are important to your decision, but your individual preferences are even more critical in determining whether a private foundation is the right option for you.
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This is an extensive compilation of papers from Russell Investments on the topic of asset allocation for nonprofit organizations. Issues addressed include best practices; spending policy and its interaction with asset allocation; inflation; liquidity; portfolio construction and the question of alternative investments; social responsibility; responding to volatility; currency exposure; the question of modeling liquidity, and the interactions between asset classes.
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Risk Management is the Cornerstone of Investing for Endowments and Foundations

Bruce Curwood, Heather Myers (Russell Investments)

In the high-return market environments that characterized much of the 1980s and 1990s, many investors focused on chasing alpha and all but ignored the fact that risk management is the cornerstone of sound investing. Extended bull markets lulled endowments and foundations into overreliance on expected return as they directed most of their energy to allocations and strategies that did little to mitigate portfolio risk. Years after the global financial meltdown, many investors are still insufficiently focused on risk management.
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Thoughts on Endowment Investing in the 21st Century

Margaret Towle (Yakima Rivers Partners)

Endowments possess certain characteristics, such as a long time horizon and undefined liabilities, that foster innovation in determining investment options. On the surface, this flexibility seems to hold a performance advantage over other institutional investors, such as pension funds. However, it also presents challenges. Trustees, investment staff, and advisors/consultants seem to be stuck in the mindset of the last century when it comes to managing endowment assets. To manage an endowment portfolio effectively in the 21st century requires fiduciaries and their advisors to employ a holistic approach to the process of investing.
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Future Trends

Financial Advisory Profession Careers

Deena Katz

Career paths for the financial advisory profession are looking bright. The number of financial advising jobs is projected to grow by 32 percent for the decade ending in 2020. During 2010-2020, that translates to 66,400 new financial advisory jobs. A new entrant to the financial advisory profession faces a critical decision about which distribution channel to pursue.
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The population explosion is almost over, with fertility below the replacement rate in many advanced countries and rapidly declining in most developed countries. In the next half century, economic growth will be robust, especially in developing countries, and will increase world wealth dramatically. These factors will make it easier, not harder, to preserve the natural environment and avoid shortages. This world of fewer and richer people will be greener.
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Despite thousands of scholarly and practical articles and much earnest effort by researchers, financial product designers, pension plan sponsors, advisers, legislators, regulators, and individual investors – we still have a retirement crisis. Retirees and those saving for retirement continue to struggle with the same challenge: funding lifetime income. How can this be?
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Goals-Based Investing

 

Goals-Based Wealth Management

Jean Brunel (GenSpring)

In this paper, the author discusses the value of a goals-based strategic asset allocation framework together with a comparable approach to estate and financial planning to create a new, integrated goals-based wealth management process. This framework is based on research conducted by behavioral finance experts.
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The Wealth Allocation Framework Revisited

Ashvin Chhabra (Merrill Lynch)

Modern Portfolio Theory has always advocated a diversified portfolio. However, in sharp contrast to these recommendations, a vast majority of investors are not well diversified. This paper introduces the Wealth Allocation framework which enables individual investors to construct appropriate portfolios using all their assets and liabilities and helps them meet their needs for diversification, protection and aspiration.
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According to the author’s research, a goals-based investing framework delivers better solutions than traditional approaches. The approach increases the likelihood of achieving specific goals while heeding the lessons of behavioral finance by capturing the ways that investors think and behave.
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Capital Sufficiency Analysis is the process of determining whether your family’s existing and anticipated financial resources will allow you to achieve your financial and estate planning goals. The analysis provides a framework for making decisions about future spending, investment allocation, estate and philanthropic planning.
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Goals based wealth management is a comprehensive approach to providing guidance to investors that allows them to use those assets to pursue personally meaningful goals. It involves developing a financial plan, identifying and prioritizing goals, analyzing and managing risk, allocating assets, managing asset location for tax purposes, rebalancing portfolios to maintain targeted allocations, and drawing income in the most tax-efficient manner. By incorporating financial planning, tax planning, estate planning and philanthropic planning, together with investment management as part of their overall wealth management strategy, investors can successfully align their assets with their life, and ultimately with their legacy.
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The Bucket Concept – An Old Idea for a New Market

William Olinger, Benjamin Doty (Koss Olinger)

Investors are twice as concerned with losses as they are with gains, so it is easy to imagine scenarios where investors are more unnerved when the value of a total portfolio is impacted by a loss in equity values. This scared investor may order an advisor to liquidate all investments into cash, even though the portfolio is designed for short-term and long-term needs. A bucket strategy aims to address these concerns by taking withdrawals from reliable cash and fixed-income holdings and giving riskier fixed-income and stock holdings time to recover from market downturns.
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Integrated Wealth Management

The 10 Keys to Integrated Wealth Planning

GenSpring

Families of significant wealth often own a diverse mix of assets, including multiple residences, less liquid alternative or private equity investments, and valuable collectibles, all of which requires more sophisticated planning. The result of these unique circumstances is a somewhat different set of wealth management planning needs than those of other families. And, because no single advisor, no matter how talented, can serve these diverse needs, working with these families requires an integrated team approach.
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The phrase “wealth management” has been in use since the early 1990s to describe a comprehensive service model akin to financial planning, and more recently it has been applied to comprehensive investment advisory services for high-net-worth clients. IMCA conducted a comprehensive job analysis to define the role of a private wealth advisor. This paper summarizes the findings and key implications of the study.
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Alpha, Beta, and Now…Gamma

David Blanchett, Paul Kaplan (Morningstar)

This fascinating article is a must-read! When it comes to generating retirement income, investors arguably spend the most time and effort on selecting “good” investment funds/managers – the so called alpha decision – as well as the asset allocation, or beta, decision. However, alpha and beta are just two elements of a myriad of important financial planning decisions for the average investor, many of which can have a far more significant impact on retirement income. Morningstar presents a concept that we call “Gamma” designed to quantify the additional value that can be achieve by an individual investors from making more intelligent financial planning decisions.
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Fiduciary obligations have been increasingly top of mind for investment stewards, those individuals who are trustees, investment committee members, attorneys, accountants, institutional advisors, and anyone else who is involved in managing investment decision making. A well-thought out and structured governance plan can go a long way toward ensuring that investment stewards are meeting their responsibilities and obligations as fiduciaries.
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Fiduciaries seeking to ensure sound governance for their investment programs are increasingly outsourcing a substantial portion of their responsibilities to third parties with expertise in fund management and administration. Enter the outsourced chief investment officer, or OCIO.
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Owning possessions that are financially valuable, emotionally pleasing and culturally significant is a timeless tradition and one that shows no sign of abating. In the report, Barclays looks at the financial and emotional reasons high net worth individuals across the world have for holding treasure assets. They examine trends in the market for these particular assets, and assess behavioural biases and various risks involved in holding them.
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Stocks for the Long Run

Interview with William Bernstein

Consider an airplane safety analogy. Short-term risk is like turbulence. It can make fearful flyers very nervous and wish they could just get off the plane. The real risk of flying, though, is different – like long-term risk. It is the risk that ultimately, you won’t get where you’re going because the plane will crash. If you’re a long-term investor, you can recover from shallow risk and usually will if you understand it and don’t panic. Read the Article

The Great Debate

Debate between Professors Zvi Bodie and Jeremy Siegel

Professor Siegel’s point of view is that stocks are the most powerful way to protect and accumulate wealth over the long run. Professor Bodie offers a counterpoint to the traditional investment paradigm by showing that, in fact, stocks are very risky even in the long run.
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The Lessons of History – Endowment and Foundation Investing Today

Remarks by John Bogle (The Vanguard Group)

Over the very long run, it is the durable economics of investing – enterprise – that has determined total return; the evanescent emotions of investing – speculation – so important over the short run, has ultimately proven to be virtually meaningless.
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So what is value investing all about? This article starts by examining two concepts that are central to the value philosophy: the importance of a business owner’s perspective, and the irrationality of the stock market in the short term, and explores other key principles, including intrinsic value and the margin of safety.
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The Fecundity of Endowments and Long-Duration Trusts

Jim Garland (The Jeffrey Company)

Rather than focusing on market values, overseers of endowments and long-duration trusts should focus on the extent to which cash can be withdrawn from their funds to meet current spending needs without negatively impacting future withdrawals to meet future spending needs. Cash withdrawals can come from dividends, interest, or portfolio asset sales. This paper explains how to determine the fecundity (=fruitfulness, fertility, or a portfolio’s long-term ability to generate spendable cash) of a typical endowment or long-duration trust fund.
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To Thine Own Self Be True (Or: We Know We’re Not Frank Perdue)

Remarks by Jim Garland (The Jeffrey Company)

For many portfolios, the overriding objective is income, specifically income that grows to keep pace with inflation. There are three lessons in what the Jeffrey Company is doing that might apply even to taxable clients who have other objectives. The lessons are these: that taxes matter a lot; that you must take nothing for granted; and that you must never take your eyes off your clients’ unique objectives.
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Expected Returns on Major Asset Classes

Antti Ilmanen (Research Foundation of CFA Institute)

Expected returns are arguably the most important input into investment decisions. This book discusses how to forecast returns of the major asset classes including stocks, government bonds, corporate bonds, and alternatives, under different parameters. It also reviews investment strategies and the effects of growth, inflation, liquidity, and different risk perspectives.
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The financial crisis of 2008/2009 increased plan sponsors’ desire to control risk-and we are still seeing the unfortunate effects. Sponsors are misapplying tools designed to monitor portfolios, and instead, are relying on them to build portfolios. Portfolio design and reallocation decision often are now driven by complex, but often incomplete, measurement tools. The purpose of this paper is to challenge this increasingly popular approach to portfolio construction and evaluation that relies on complex, quantitative models. As an alternative, a case is made for simple and transparent portfolios.
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In the wake of market volatility, many investors may feel a desire to change their approach and be more “nimble” or “opportunistic” in their pursuit of investment goals. In this paper, Robert Maynard, Chief Investment Officer for the Public Employee Retirement System of Idaho and Brandes Institute Advisory Board member, cautions investors who are thinking about abandoning traditional investment plans. He advocates policies that are simple, transparent, and focused rather than adopting increasingly popular “alternative” tactics such as illiquid instruments and vehicles, leverage, and complex, opaque investment strategies.
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The Longest Pictures

Merrill Lynch

In this remarkable reference chartbook, Merrill Lynch plots almost 100 charts on asset price returns, correlations, volatility, valuations and many other market and macro factors for the US, UK, Europe, Japan and Emerging Markets over very long terms. Investors can view US equity prices since 1871, Dutch bond yields since 1517, the oil price since 1861, risk premia since 1900 and German dividend yields since 1869 among many other charts. The study shows the secular trends of major asset classes and economic indicators, and the historical significance of where they are at today.
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Life Insurance as an Asset Class

Wayne Miller, Sally Murdock (Sun Life Financial Canada)

Permanent life insurance has always been a helpful estate planning tool, but in this report, the authors demonstrate its additional merits as an alternative asset class, specifically for those who wish to improve the return or reduce the risk of the fixed-income portion of their investment portfolio.
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Equities outside Canada, including those of developed and emerging markets, account for 96% of the global market capitalization, representing the majority of the world’s equities. However, according to the most recent survey from the International Monetary Fund, Canadian investors only allocate about 40% of their total equity investments outside Canada. This paper evaluates the short- and long-term impacts of global diversification and finds that Canadian investors should consider increasing their allocation to international equities.
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Successful investment management suggests focusing on those things within your control. Instead, too many investors focus on the markets, the economy, manager ratings, or the performance of an individual security or strategy, overlooking the fundamental principles that can give them the best chance of success. These principles have been intrinsic to Vanguard since its inception, and they are embedded in its culture and include creating clear, appropriate investment goals, developing a suitable asset allocation, minimizing cost, and maintaining long-term discipline.
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In the investing arena, “active versus passive” is a perennial subject of debate. This debate is often pitched in heated, adversarial terms, as if there were ultimately just one correct way to manage investments. What is missing in the debate is recognition that appropriate structuring and management of investments may well depend on investors’ relative situations. The overarching message is that best choices can vary across asset classes, investor circumstance, and perhaps even time.
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Investment Manager Selection

Three Challenges Of Investing: Active Management, Market Efficiency, and Selecting Managers

Remarks by John Bogle (The Vanguard Group)

In this now-classic speech by mutual fund industry leader John Bogle, he persuasively argues for ‘passive management with low cost funds’ as the safest way to assure a market return, and to eliminate the risk of materially under-performing the market.
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Over the years, Brandes Institute research has shown active managers, even the best-performing ones, suffered periods of weak returns relative to benchmarks and their peers. But the underperformance, up to three years, had relatively little impact on the best-performing funds’ ability to deliver success over 15 years. It may prove short-sighted to fire good managers when they inevitably underperform. Instead, consider other vital factors when evaluating managers-such as investment philosophy, process, organization culture and alignment with client interest-to help discern weak short-term returns from other, more serious problems.
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Is Skill Dead? – GMO White Paper

Neil Constable, Matt Kadnar (GMO)

Depending on which database you are looking at, between 80% and 90% of active U.S. equity managers will have underperformed their benchmark in 2014, making it one of the worst years for active management in the recent past. However, just because active management in general has been through a difficult period, it does not necessarily follow that what is past is prologue. As investors find themselves asking questions about their active managers given their recent poor performance, the authors from GMO have some insight as to what may be driving some of the headlines lamenting that performance.
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In this paper, the author addresses a few of the principal issues associated with selection of money managers including why it is so difficult to identify best-in-class managers in time to profit by investing with them, why past performance can be completely meaningless, what the characteristics of best-in-class managers are, and what approaches make most sense in optimizing the mix of managers in a portfolio.
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Active investing has been subjected to increasing abuse, particularly by those whose opinions are driven by the persistent accumulation of hard data and logical arguments. As we all know, active investing is on the defensive-even, some skeptics claim, “on the ropes”-having suffered a series of setbacks and increasingly virulent attacks. Especially scornful personal abuse has been aimed at active investing’s few remaining advocates. The time has come to mount a defense, not by the usual citing of occasional exceptions or by dismissing the challengers with colorful pejoratives but, rather, by looking at the broader picture and pointing out the many indirect benefits that skeptics-with their narrow focus on just “beating the market” for clients-apparently continue to miss.
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Evidence increasingly shows that a “crime” of extensive underperformance has been committed in mutual funds, pension funds, and endowments. In a pattern reminiscent of Agatha Christie’s famous novel Murder on the Orient Express, an investigation leads to a surprising, if inevitable, conclusion: The usual suspects – investment managers, fund executives, investment consultant, and investment committees – are all guilty.
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Performance investing has enjoyed a remarkably long life cycle, but the costs of active investment are so high and the incremental returns so low that, for clients, the money game is no longer a game worth playing. Investors – both institutions and individuals – are increasingly shifting toward indexing. As acceptance of indexing grows, clients and managers have an opportunity to stop focusing on price discovery (which has made our markets so efficient) and refocus on values discovery, whereby investment professionals can help investors achieve good performance by structuring an appropriate, long-term investment program and staying with it.
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Actively Passive

Gregory Friedman (Greycourt)

The evidence in support of utilizing passive investing as the core of long-only equity exposure is compelling, especially for taxable investors. While superior long-only active managers certainly do exist, identifying them requires enormous amounts of time, effort and expertise. More importantly, even if an investor is successful at identifying top performing active long only managers, the magnitude of excess return generated by “winning” managers can be quite modest. Investors should look carefully at each active manager and be cognizant of the issues that exist such as potentially higher taxes and higher fees relative to their index equivalent. We do believe that compelling active equity managers do exist and can be found but they are extremely rare and identifying them is extremely hard.
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The New Era of Manager Due Diligence

Deborah Kidd (Boyd Watterson Asset Management)

The movement of alternative assets into the mainstream presents challenges for both traditional and alternative asset consultants and investors. Alternative investments and strategies have substantially altered the landscape of manager due diligence. Many of the traditional principles guiding due diligence should be revised to reflect this new era.
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The investment policy statement (IPS) serves as a strategic guide to the planning and implementation of an investment program. It can serve as an important policy guide offering an objective course of action to be followed during periods of market disruption when emotional responses might otherwise motivate less prudent actions. This document provides sample elements of an effective IPS.
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Today’s increasingly complex investment landscape places greater pressure on the fiduciaries overseeing the investment pools of endowments, foundations and healthcare organizations. Fiduciaries are not only reexamining their current investment decision-making practices, but also seeking to ensure that those practices allow for enough flexibility in implementation to maximize the likelihood of investment success. Recognizing the increasing importance of the investment portfolio success to the needs of the broader organization, more fiduciaries are taking a holistic view, spending as much time on issues such as total enterprise risk management, good governance practices an spending policy as on asset allocation and investment strategy. Central to communicating the investment philosophy and decisions informed by this view is a clearly articulated investment policy statement, which serves as the foundation of an integrated and aligned oversight process.
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Investors desire return, but successful investment requires more than the desire; it needs an investment policy grounded in investor capacities to bear risk, to hold illiquid assets, and to exploit security mispricing.
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A Roadmap for the Roadmap

Simon Krinsky, Kathryn Hall (Hall Capital)

An institution’s or wealthy family’s mission, objectives, constraints, and governance structure will dictate a distinctive roadmap articulated in the form of the Investment Policy Statement (IPS). Ultimately, the IPS is a living, flexible document that should be reviewed annually and updated over time to reflect the current posture and forward-looking aspirations.
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Adaptive Investing: A responsive approach to managing retirement assets

Sam Pittman, Rod Greenshields (Russell Investments)

Retirees consistently express three primary needs concerning retirement wealth management: they want low risk of outliving their assets (sustainability), consistent income (predictability), and financial flexibility (liquidity). The authors believe conversations should shift from performance based on return and beating benchmarks to managing successful outcomes using the ‘funded ratio’ to inform asset allocation decisions.
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Next Generation

Financial Inheritance as a Family Conversation

Charles Collier (Harvard University)

The author believes that the true wealth of each family is not financial and, as such, recommends first discussing the principles that will guide your decision about how much to give your children. It makes sense to have these conversations before implementing various estate planning strategies. He argues that money is important, but not all-important. The best thing you can do for your family is to invest in their human, intellectual, and social capital.
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Retaining the Family Assets after Wealth Transfer

Diane Doolin, Carol Sherman (Institute for Preparing Heirs)

The great wealth transfer is well underway. Boston College Center on Wealth and Philanthropy conservatively estimates that $1 trillion will pass from one party to another each year during the next 50 years. But even the best investment strategy cannot ensure a successful wealth transfer. Family dynamics – how family members interact with each other and the family as a whole – have a far greater impact on wealth transfer than previously understood. When family dynamics are ignored in the wealth management process, assets frequently pass to individuals unprepared for all that inheritance encompasses.
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One of the worries most consistently voiced by families of affluence is how to raise children who are productive, motivated, responsible, and generous. In this article, clinical psychologist Dr. James Grubman explains how this task is difficult both for parents who have acquired wealth during their lifetime and for parents who were raised amidst wealth themselves.
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This article highlights common challenges for parents who have created significant wealth, many of whom face a classic conundrum— wanting to share the benefits of money with children, but wanting to control how the children use the money. How can parents trust their adult children to use the wealth responsibly? When can they risk giving up control, and how can they best prepare the next generation to take control? The article offers guidance on how parents can meet these challenges.
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In the broadest sense, estate and financial planning involve helping families pass on their wealth so that the next generation uses it wisely and well. Passing a pile of money to heirs is not a complete solution, as we see from the predominantly sad stories of lottery winners. Heirs must be prepared to receive their wealth and learn to use it according to the values of the family. To help them, they must inherit not only financial wealth, but many other capabilities, connections and resources that prepare them to achieve the highest and best purposes of their inheritances. This article explores six forms of wealth that families can pass on to their heirs.
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This article looks at the experience of wealthy families and how various origins of wealth can be a source of internal conflict, how individuals struggle to come to terms with great wealth, and how the quality of their adjustment can influence what happens with the money. These issues are important because they affect financial choices, how individuals face issues of inheritance and succession in their families, and how people raise their children.
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Immigrants and Natives to Wealth

Dr. Dennis Jaffe, Dr. James Grubman

A surprising statistic is that over 80% of wealthy households have achieved their position within one generation. Only 20% of the wealthy have been raised with inherited wealth. First-generation wealthy families (“New Money”) are much like immigrants, having travelled from the economic culture of their birth to a much higher economic level. Those marrying into wealthy families from a more modest background are also immigrants of a different type who make the journey suddenly. Many of the stresses experienced by individuals, couples, and families of affluence are similar to other types of immigrant experience, including the strains between first-generation parents and their native-born children and grandchildren.
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Multi-jurisdictional tax lawyer David Lesperance makes an interesting argument that getting this issue ‘right’ will be the most important factor in determining whether clients maintain and grow their wealth over their lifetime and future generations. If you think that he is overstating its importance, it is worth remembering that the decisions made by our own ancestors to move from their country of origin had a profound effect on the course of not only their own lives, but those of the generations that followed them.
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Have you identified what sustainability means to you with respect to your own wealth? Is it about leaving a legacy for children, grandchildren and the generations beyond? Is it about charitable intent? Or is it focused on ensuring that you and a spouse or partner have sufficient resources for the rest of your lives? Many families have a strong desire to make their money last for the long term. Yet their plans and goals for making that happen vary widely. They all face essential questions of how to get from here to there.
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If you own a cottage or vacation home, your personal, emotional and financial commitment to it is often very significant. Who will inherit the property and how and when it will be inherited become serious concerns and are often worrisome. Without proper planning, cottages and other vacation homes can become the basis for family disputes, turning what should bring the family together into what tears the family apart.
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The author of this article has worked with very successful and affluent families for nearly 25 years, and the issue of passing on values is the most frequent topic on which she is consulted. During these many years, and through the extraordinary openness of clients, she has learned five important lessons about values transmission. This article reviews each one.
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You want to protect your hard-earned family wealth from the fallout of any future divorce. A prenuptial agreement is called for, but few financial negotiations are as fraught with emotion. How do you talk to your child about this sensitive topic without causing friction in your relationship? And, how does your child raise the issue with his or her spouse-to-be without killing the romance? There are no easy answers, but understanding the fundamentals of prenuptial agreements will help ensure that the agreement is ultimately fair to all parties, achieves the family’s objectives, and will withstand any future challenge.
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Philanthropy

Your Guide to Personal and Family Philanthropy

The Winnipeg Foundation

There is a vast array of worthwhile causes, and many ways to support the ones that are important to you. More and more families are planning philanthropy together as an expression of shared values, to teach children about social responsibility or to continue or establish a family legacy. This guide will help you create a flexible philanthropic plan tailored to your own priorities and preferences. Using it to clarify the things that matter most to you, it can help you develop a meaningful and rewarding charitable giving plan that reflects your experiences, traditions, values and hopes.
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Risk Management

Understanding Family Enterprise Risk

Crystal & Company

The majority of family enterprises do not have a full time risk manager, and as a result we frequently see “siloing of risk” by boundaries such as family business, family office, family branch, family investment interests, or by accountability of decision making. Managing risk in silos has prevented family enterprises from understanding their total risk and developing an integrated insurance and risk management plan.
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For years, families of significant wealth and their advisors have limited their definition of risk management to the traditional dimensions of investment performance and insurance risk. Owners and advisors of wealth must recognize that a larger, more comprehensive view of risk management is necessary to preserve assets – human, intellectual, social and financial – for multiple generations.
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In this paper, the author argues that investment managers make a mistake if they try to focus on achieving high returns or high risk-adjusted returns and are likely disappointing investors in the long run. Instead, he argues that investment management should focus almost exclusively on managing the risks of an investment portfolio; above average returns will be a natural outcome of a proper risk management process.
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Risk Revisited

Howard Marks (Oaktree Capital)

Howard Marks from Oaktree Capital argues against the purported identity between volatility and risk. Volatility is the academic’s choice for defining and measuring risk, but it falls far short as “the” definition of investment risk. What investors really fear is the possibility of permanent loss. Of course, the problem with defining risk as the possibility of permanent loss is that it lacks the very thing volatility offers: quantifiability. The probability of loss is no more measurable than the probability of rain.
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A Better Way to Measure Risk Tolerance

Joe Tomlinson (Advisor Perspectives)

In building financial plans, it is critical that asset-allocation recommendations recognize the client’s ability to absorb risk. To aid in this assessment, advisors often utilize risk-tolerance questionnaires, but these tools have shortcomings. It’s as if the rational Dr. Jekyll fills out the questionnaire, but the emotional Mr. Hyde controls the investing. Better questionnaires are needed, and even that alone may not be enough.
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Succession Planning

All in the Family: Family Dynamics and Successful Business Succession Planning

Michael Babikian (Transamerica)

The successful transition of a business must give proper attention to the ‘soft issues’ of family dynamics. It is one of the most important factors that, in all probability, leads to a successful family business succession.
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Succession problems rank highly among the common causes of family business mortality. Ineffective succession can be caused by factors outside of the family’s control (for example, the sudden death of the business leader) but is more often caused things the family can anticipate and manage. The costs of mismanaged succession can be disastrous for the business; for its employees, customers and owners; for the family, and for family members who work in the business. The family that understands what can derail succession can prepare to meet these challenges. A business that is well led, supported by capable owners and a united, contributing family, with a long-term view of success, a business that is prepared for the future will stay on track.
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Succession Planning for Business Owners

Sean Sebold (Sebold Capital Management)

There are two equally important components of succession planning for business owners – transactional planning (selling or transferring the business) and wealth management (managing the proceeds of the business sale). The latter needs just as much attention as the former.
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The owner of a closely held business is selling his means of livelihood and more – the configuration of his financial portfolio. He’ll have to make the transition from relying on business earnings to living off the pool of liquid investment generated by the sale. Many business owners see this trade-off as inherently risky.
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Re-Energize with Enterprise

Scott Winget (Ascent)

Family wealth is notoriously difficult to maintain across generations. Exponential growth in the number of family members, combined with a lowering of risk tolerance invariably leads to low returns, ultimately causing the wealth to disappear and the legacy to collapse. How can wealthy family members overcome the natural inertia that exists in generational families, and how can they encourage their family to envision how they can contribute back to the pool and reinvest at an appropriate level of risk?
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Did you know that even if you’re resident in Canada when you die, if you own a property in the U.S. – perhaps a vacation home in Florida, a ski chalet in Idaho or U.S. securities – you may be subject to U.S. estate tax? This article from BDO looks at some of the U.S. estate tax issues that Canadian residents (who are not U.S. citizens) should keep in mind if they own (or are considering buying) U.S. property.
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The Long Arm of FATCA

Ed McCarthy

US expats often encounter challenges living overseas, but FATCA—the Foreign Account Tax Compliance Act—is making life even more difficult for some of them. FATCA requires foreign financial institutions to give the IRS information about financial accounts held by US taxpayers or those held by foreign entities in which US taxpayers have a significant ownership interest. In addition, US citizens who own foreign financial assets above specified amounts must file an annual ‘Statement of Specified Foreign Financial Assets’ form with their tax returns. Media reports describe US citizens being “locked out” by foreign financial services institutions that are canceling their accounts and refusing to open new ones. FATCA’s filing requirements are also exposing past tax-reporting errors and generating potentially large liabilities and penalties.
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The family cottage is an important part of the legacy for those who wish to leave it for future generations to enjoy. What many don’t realize, however, is that cottage have increased significantly in value, and 50 per cent of this increase could be taxable at death. There are several strategies you can use to help ensure a tax-effective transfer of the family cottage to your heirs.
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Canadian citizens and residents may be exposed to U.S. estate, gift, and generation-skipping transfer tax (together, “U.S. transfer taxes”) on the value of certain property gifted or transferred during lifetime or on death. Without realizing it, you and your executors and trustees may have certain liabilities and obligations under the U.S. transfer tax regime. The key is effective co-ordination between both the U.S. and Canadian tax regimes to minimize tax and optimize each situation, including by taking advantage of deferral opportunities and available exclusions, credits and deductions.
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An estate trustee is the person, or one of the persons, named in the last will and testament of the deceased who is appointed specifically to administer the will and to ensure that the final wishes of the deceased are respected. It is someone who is considered trustworthy and responsible – often a spouse, close friend or family member; however, if the estate is complicated it may be a professional, such as a lawyer, accountant or corporate trustee. Since it is a position of trust, choosing an estate trustee—as well as accepting the responsibility of being an estate trustee—are decisions that merit considerable thought. Read the Article

Seven Keys To A better Beneficiary-Trustee Relationship

Romar Carl, Eric Sanderson (Ascent)

Beneficiaries who view the trustee as an obstacle between them and “their” money are often frustrated, while beneficiaries who view the trustee as a partner to facilitate the trust creator’s wishes are more often happy with the trust arrangement. Not knowing the purpose of the trust and not understanding the fiduciary duties imposed upon the trustee to carry out that purpose are the most common reasons why some beneficiaries see trustee decisions as unreasonable or arbitrary. The most productive and satisfying relationships between beneficiaries and trustees may be those in which the beneficiaries are willing to learn and understand how the trust is required to function and where the trustee is willing to teach and mentor the beneficiaries. When this relationship works, a trust may no longer feel like a burden.
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Four Questions to Consider When Selecting a Trustee

Hartley Goldstone, Kathy Wiseman (Navigating the Trustscape)

Are you finding the selection of a trustee challenging? Are you wondering about which qualities to look for in a trustee? Will your choice serve your family well over the years, perhaps generations? This article provides some very helpful insights into this extremely important decision.
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A classic article by Jay Hughes. Every day somewhere in the world a human being who is cast in the role of “beneficiary of a trust” accuses her or his trustee of being unresponsive to her or his request to be heard and to be represented. How can a trust set up to benefit one human being by another come to such a tragic place? Easily, when we understand that the relationship between the trustee and the beneficiary is an arranged marriage.
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Trustees duties are numerous and complex, and can be an onerous task with significant exposure to liability. Before accepting an appointment as a trustee, clients should take time to consider the nature and scope of the fiduciary obligations they are being asked to assume. The purpose of this paper is to provide an overview of the duties all prospective and existing trustees should be away of regarding the exercise of the office of trustee.
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This helpful checklist from Manulife of executor’s duties (based on distribution in Ontario with a valid will) is a valuable tool for anyone tasked with this important role.
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Most people give significant thought to the investment professional they choose to manage their investment portfolio, the legal counsel to draft their Will, the realtor they choose to sell their house or the contractor they choose to repair it. But what kind of rigour do they use to choose the person who will make financial decisions for them and be in control of their assets, at a time when they are losing or have lost the ability to do so themselves? This paper discusses how you can protect yourself with a Power of Attorney, and important considerations to mitigate your risk when choosing one or more attorneys.
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Acting as an attorney (under a Power of Attorney) is a tremendous responsibility and one that should not be given — or taken on — without careful consideration. If you have been appointed as an attorney, you are required to act exclusively for the benefit of the individual who appointed you. This is a complicated undertaking — one that can seem especially overwhelming if you are also caring for a loved one. This article provides information on the duties of an attorney appointed under a Power of Attorney for property and explains how to get help with those duties.
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Six Core Fiduciary Duties for Financial Advisors

Knut Rostad (Institute for the Fiduciary Standard)

Fiduciary care embodies the highest standard of excellence. Throughout history, fiduciaries have held a unique and important role in law and the investment profession. Fiduciaries must possess two sets of attributes: (1) the technical expertise, i.e. experience and specialized knowledge that equip them to render advice (due care) and (2) an undivided loyalty to their client. This article outlines the six core duties of a fiduciary.
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A newly developed paradigm of planning for wealthy individuals and families is aimed at both promoting individual and families flourishing and avoiding or at least alleviating negative family dynamics and the “dark side” of inherited wealth. Because trusts are a key part of the landscape for a wealth family and a key purpose of establishing a trust structure is often to preserve and pass on family financial capital, it makes sense to ask the question of what this new paradigm of planning means for trusts, trustees, protectors and the advisors who set them up, and how flexibility of the trust concept can be taken advantage of.
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