Advisors prove value during income trust panic

By Andrew Rickard | March 18 2006 07:54PM

Many investors ran screaming from the market after they learned there would be a new tax on income trust distributions, but financial advisors interviewed by The Insurance Journal say they experienced relatively little fallout due to the fact that their clients were well diversified.

“The phone was pretty busy. I think the announcement caught everybody by surprise, but it wasn’t crazy,” says Daniel Sacke, an advisor with BMO Nesbitt Burns in North York. He attributes the calm response to the fact that most clients had less than 10% of their holdings in income trusts. He says he had been paring back on lower quality, smaller cap trusts prior to the changes anyway. “We emphasize properly diversified portfolios, and a significant proportion of our exposure was in REITs, which were not affected by this announcement, and didn’t experience a lot of volatility.”

Anthony Delabbio, an advisor with ScotiaMcLeod in Sudbury, reports a similar experience. Like Mr. Sacke, his clients had modest income trust positions and he had taken pains to prepare them for some volatility in the first place. “There wasn’t a knee-jerk reaction from our clients, but they were naturally a bit concerned.”

Since most of his clients are Canadian residents with non-registered accounts, Mr. Delabbio says there was no need for alarm. He points to a ScotiaMacLeod communication he sent to clients explaining the new rules. “There is no immediate impact on taxable investors from an after-tax distribution standpoint,” reads the report. “In fact, the planned further reduction in corporate taxes beginning in 2011 is a net benefit to taxable investors.”

Norm Beltrame, another ScotiaMcLeod advisor in Winnipeg, suggests that part of the problem was the way media sensationalized the change. “The worst reactions from clients came as a result of the following day’s local press coverage with a front page shouting ‘$19 Billion Loss!’”

But one person’s panic can be another’s profit. Besides maintaining current allocations to trusts, Mr. Sacke, Mr. Delabbio and Mr. Beltrame all say they were out bargain shopping during the meltown. “We are currently buying some good names at a discount,” says Mr. Beltrame.

Kim Shaheen, an advisor in Regina, Saskatchewan says most of his conversations have been political and not financial. “I’ve not had a lot of clients calling about the investments per se,” he says. “There’s a tremendous sense of betrayal. A lot of people felt misled by the Conservatives, and think that this move was completely unnecessary.” But, like all the advisors interviewed for this article, he adds that his clients didn’t have a great deal of money in income trusts, and were definitely not panicked or looking to sell out.

Thomas Barker, an advisor at RBC Dominion Securities in Richmond Hill, says his investment strategy included very little exposure to the trust sector. “My clients were pleased with the lack of negative impact,” he says. He recommends investors look overseas for opportunities, since Canada is fully valued, and favours dividend paying blue chips. He suggests flow through shares to reduce taxes, and preferred shares, structured notes and bond funds to augment bonds in a fixed income basket.

Indeed, much of the public’s negative reaction may have been due to misconceptions about the nature of “income” in the first place. The unhappiest investors are likely the ones who mistakenly purchased a product that didn’t suit their risk profiles.

“The word income, I think that’s really a misnomer. You have conservative investors who want regular interest income considering income trusts,” says Mr. Delabbio. “This isn’t a bond. This is a stock.”