Keith Woolhouse
The Ottawa Citizen
November 1, 2005

It seems that no matter how much advice the investment industry dispenses, how many books are written or how many seminars are held, many investors have a lack of understanding about how to handle their finances. In many respects it's puzzling because stocks go only one of two ways, up or down. What could be simpler? Buy low, sell high. Therein lies the anomaly. This simple exercise has spawned an industry of vast proportions, employing millions of people and dealing in billions of dollars. Perhaps it is no wonder that a lack of knowledge persists. I get the impression that the industry is talking over the heads of its clients and not dealing with plain bread-and-butter issues to which everyday investors want answers and clarification. The discount brokerages must accept some responsibility for this. Their reduced commissions carry a price: the absence of advice forces investors to make their own decisions. The leading brokerages offer advice and guidance, but small fry investors have the misguided belief that they're only for well-heeled clients with five-figure bankrolls, and are scared off by the thought of high commissions. Like everything else, you get what you pay for. Commission fees are higher, but the advice that comes with them will pay for itself with intelligent investing. That leaves the mutual fund industry, which will soon launch its annual RRSP investment campaign. Over the next few months it will be hard to avoid the industry's presence in newspaper ads and television commercials. There's evidence that investors are back to their saving ways. Mutual fund net sales for the first nine months of the year were $18.4 billion, the highest since the same period in 2001. It's taken four years, but investors appear to have put their losses incurred in the high-tech crash behind them. There will always be bumpy periods, as witnessed by the broad retreat in October. But while interest rates remain exceptionally low, the stock market and mutual funds are a judicious choice of investment. The gripe with mutual funds is their management expense ratios (MERs). It wouldn't be so bad if there were some mechanism to compensate for a losing year, but that's not the case. It's hard to justify having to pay an annual fee on a stinker. Investors aren't the only one with a gripe. Mackenzie Financial Corp. polled 1,565 investors with 10 questions and discovered that Canadians have a horrible lack of knowledge on saving strategies. The average investor gets only a "C" grade on financial affairs, Mackenzie determined. The questions were straightforward and required a "True" or "False" answer. As the largest manager and distributor of mutual funds in Canada, with more than one million clients and $91 billion under management, Mackenzie has a vested interest in its clients' knowledge base. Only 15 respondents got all questions right to the survey conducted by Leger Marketing. Answers to four of the 10 questions fell into the dunce category, with a majority answering incorrectly. "The results are disappointing given that there's so much education about financial matters that you can't pick up a magazine or listen to ROBTv without some sort of education on tax and estate planning," says Mackenzie Financial vice-president Sandy Cardy. "Admittedly it is an arcane and intimidating area, so on one hand, while I may be disappointed, on the other I'm not surprised because there's so much to understand. But it does show that there are a number of strategies that are being missed by many Canadians and I still feel, as I have felt for a long time, that people are missing out on a lot of tax deductions and tax credits that they are entitled to." There was no depth to the questions, Ms. Cardy agreed, but the results showed that many need the guidance of a financial adviser. "If we had made the questions multiple choice, the results would have been a lot worse. There's a certain guess factor in some of these answers. What the result showed is that while many understand the basics of RRSPs, they aren't taking full advantage of strategies such as income-splitting and restructuring debt to make interest payments tax deductible." Try the True or False test yourself to see how you score. 1. "You can sell an asset for a profit and pay tax on the capital gain over five years, provided the sale is structured so that the proceeds are not collected right away." 2. "The Canada Revenue Agency does not allow you to gift your poorly performing stock to your children in order to trigger a capital loss and reduce future income taxes." 3. "An RRSP contribution enables you to defer tax on that contribution until you withdraw the investments." 4. "The interest costs of borrowing to invest are tax deductible." 5. "If you buy a mutual fund in December 2005 and the fund makes a taxable distribution in that month, you are not liable for the resulting tax in the 2005 calendar year." 6. "You can reap the tax benefits of a donation to charity in your 2005 tax submission provided the donation is made before the end of February 2006." 7. "You are allowed to contribute up to $4,000 each year to an RESP (registered education savings plan) and if you miss that contribution in any year, you can carry the contribution room forward to a future year." 8. "You can pay for adult children to take care of younger children in your household and deduct the cost of child-care expenses." 9. "A parent can take advantage of their child's unclaimed credits for tuition to a maximum of $5,000 of tuition and fees." 10. "For a tax credit, you can include all of your family's qualified medical expenses on your tax return." E-mail Keith Woolhouse at: fairshares@magma.ca Answers Percentage of those who answered correctly in brackets. A majority flunked Questions 2, 6, 7 and 8. 1. True (58%) 2. False (46%) 3. True (93%) 4. True (62%) 5. False (71%) 6. False (44%) 7. False (33%) 8. True (43%) 9. True (60%) 10. True (78%)