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PLANNING AND REAL WEALTH MANAGEMENT ©2016 Knowledge Bureau. All rights reserved. This entire work—print, audio and online--is licensed to AGF for use with permission. It is copyright protected and may not be reproduced by users in any manner, or stored on any system, without prior permission. For details on reproduction policy see: www.knowledgebureau.com. Disclaimer: Much care has been taken to produce accurate subject matter and to trace ownership of copyrighted matter in the material; however, the publisher will welcome any information that enables it to rectify any reference or credit, for subsequent editions. The material provided in this publication is provided for general informational purposes only. Laws, regulations, policy and procedures regarding this subject are continuously changing and the information and examples are intended as general guidelines only. This publication is therefore presented with the understanding that neither the publisher, authors nor AGF can be held liable for any actions taken as a result of the material presented. It is therefore recommended that professional advice be obtained before acting on any of the information herein. Users of the information in this module are responsible for their own actions and outcomes. AGF, Knowledge Bureau, its authors, lecturers and publishers expressly disclaim any and all liability in respect of any consequences.

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Course Content - Instructions for use: Step 1: Watch the Online Lecture View the audio-visual presentation for this course by logging in online. The online lecture will open in a new window (or tab). It may take up a minute for the presentation to load, depending on your connection speed, so please be patient. Step 2: Read the Knowledge E-Journal Review the online E-Journal for this course. Step 3: Take the CE Quiz Take the CE Quiz online. A mark of 60% is required to pass the course. A make-up Quiz is available for this course, if required.

On successful completion of the course: Print your certificates •

Knowledge Bureau CE Certificate

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Alberta Insurance Council Certificate

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Insurance Council of Manitoba Continuing Education Certificate

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Chambre de la sécurité financière Attendance Certificate

Need help? Click the HELP button available online.

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JENIFER BARTMAN, CA, CMC   Jenifer Bartman is the lead instructor and author of four certificate courses in the Knowledge Bureau Master Financial Advisor Designation Program in succession and business planning. Founder and Principal of Jenifer Bartman Business Advisory Services, the firm provides advisory and contract executive services to companies in the early, financing, growth, and transition stages of development. Service areas include business and succession planning, marketing and expansion strategy, financing readiness, financial analysis, and operational improvement. An experienced senior executive, she held the broad based role of Vice President & Chief Financial Officer of ENSIS Management Inc., a venture capital fund manager, for over nine years. Prior to this role, Ms. Bartman worked as a management consultant, providing consulting and business advisory services to organizations across a wide range of industries. Over the course of her career, she has been a guest speaker at various events covering a variety of topics, including succession planning and venture capital. She has developed and delivered an early stage financing webinar series for CPA Canada, attracting over 10,000 participants thus far. She holds the designations of Chartered Accountant (CA) and Certified Management Consultant (CMC) and is a graduate of the University of Manitoba, Faculty of Management where she completed a Bachelor of Commerce (Honours) degree, majoring in marketing and human resources. Ms. Bartman is also a consultant in CMC Canada's MAS/IRAP program. Ms. Bartman has been a sessional instructor in the University of Manitoba Intellectual Property and Technology Commercialization Management certificate program, delivering a course that she also developed. A published author (Master Your Investment in the Family Business: How to Increase After Tax Wealth) and Expert Contributor (It’s Your Money, Honey), her work has appeared in numerous venues, including Private Capital, Canadian Capital, Golden Girl Finance, Yahoo! Finance, CareerVision, Divestopedia, and Club Manager Quarterly. Ms. Bartman has a long history of community and business association volunteer positions, and has been involved with the Canadian Venture Capital Association since 2001. She is currently a member of the Professional Development Committee and the Editorial Board and has served on the Annual Conference Committee. She is also on the Board of Directors and Executive and Finance (Chair) Committees of Economic Development Winnipeg Inc. and is a Mentor with Futurpreneur Canada. She was recognized for her volunteer efforts as the inaugural recipient of the Intercontinental Hotels Group Canada 2007 CSTA Community Service Award, presented by the Canadian Sport Tourism Alliance.  

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LESSON PLAN PLANNING AND REAL WEALTH MANAGEMENT Online Lecture Knowledge Journal Reading Time CE Quiz

30 minutes 30 minutes 10 minutes

KEY CONCEPTS AND ISSUES - WHAT YOU WILL LEARN:       

What is real wealth management? What is an integrated financial plan? What is a multi-generational financial plan? What is a succession plan? Why is it important to create these plans? Who is the client? Why might a good financial plan (or idea) not be implemented?

NEW SKILLS TO BE MASTERED:   

How to incorporate “Real Wealth Management” into the financial planning process for your entrepreneur/business owner clients. How insurance can help with wealth preservation strategies. Recognize the various “planning opportunities” that are available to family businesses.

READING GUIDE - KEY QUESTIONS TO BE ANSWERED:  

Do you feel that using the “Real Wealth Management” concepts with your family business clients would enhance the value of your practice and the value you provide to your clients? Does the definition of “Succession Planning” relate to the other types of Financial Planning services that you provide?

LEARNING ACTIVITIES: To test the learning process, the student will answer THREE multiple-choice questions and contemplate the role of the advisor and insurance solutions, as required.

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PLANNING AND REAL WEALTH MANAGEMENT What is Real Wealth Management? Real Wealth Management is a financial planning approach developed by The Knowledge Bureau. One of the tenets of Real Wealth Management is the continuous acquisition, growth, preservation, and transition of wealth. Financial planning for a family business is an ideal opportunity to apply the concept of Real Wealth Management due to the continuous acquisition, growth, preservation, and transition of wealth as a business, family, and/or individuals progress and evolve over time.. To apply the principles of Real Wealth Management, the financial advisor begins by developing a Net Worth Statement for each individual family member, the family overall, and the business. This provides a starting point of where the wealth of each of the stakeholders is today. The Net Worth statement will identify issues and questions, such as:     

To what degree is there too much debt? Is the debt based on leverage and creating more wealth, or is it based on past indiscretions? What portion of an individual’s total net worth is their ownership position in the business? What portion of the total net worth is real estate? To what degree is income, dividends, or business profit being used to build more wealth?

It is also beneficial to consider what the Net Worth Statement should look like three to five years in the future, thereby providing the opportunity to identify goals and work backwards in determining how best to achieve the goals. When projecting the future value of this wealth, however, it’s important to also consider the liquidity of wealth. It is one thing for a company to grow in terms of value, but quite another for the business’ value to be liquid. Many business owners find that they have achieved great wealth “on paper”, but have a problem converting the paper value into real income or liquid investments. As a result, when projecting future value, it is important to measure liquidity and the degree to which a future lifestyle (i.e., the lifestyle after work) could be funded from the accumulation of assets. Why is this important? Because much of the jealousy or fear uncovered when dealing with family dynamics and personal issues has to do with concerns relating to of running out of money. Many concerns can be traced back to basic, primal issues.

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It is not uncommon for family business members to have very little understanding of their actual net worth. As a result, just preparing a personal net worth statement for each of the individual stakeholders is often sufficient to generate a change in the client’s attitude. Then, by creating a future oriented Net Worth Statement, the client can see where they could be in three, five, or even 10 years into the future. This is a very powerful tool, as it helps to answer the questions around financial security, and when people understand that they will be financially secure and know where this security will come from, roadblocks and fears often start to dissipate. When forecasting a future oriented Net Worth Statement, it is also possible to better understand the relationship between investments that produce liquid income, as compared to those that do not. This knowledge can help to better match investments to the particular needs of the client, resulting in better decision making and results. What is an Integrated Financial Plan? An integrated financial plan combines all aspects of a plan into one combined strategy. Real Wealth Management introduces the importance of always planning for the acquisition, growth, preservation, and transition of wealth. An integrated financial plan takes this into account, as well as multiple goals. These goals might relate to the success and growth of the business, career advancement, income, investment accumulation, retirement, or estate planning. Finally, an integrated financial plan will also consider all of the goals from each of the different stakeholders, including those that are personal, financial, family, or business oriented. As you can see, an integrated financial plan is exactly that: fully integrated between time, objectives, and all stakeholders. A comprehensive, integrated financial plan is able to demonstrate how the goals, issues, and risks for each stakeholder could be addressed via the overall plan. Due to the complexity of family enterprises and the fact that there could be many different stakeholders involved, comprehensive plans are often not put into place, especially if they conflict with the goals or objectives of one or more of the stakeholders. In simple terms, business leaders are often so fully engaged with addressing issues that relate to the company and the family that even basic planning can take a back seat and fail to be integrated into longer terms plans. This circumstance represents an important opportunity for advisors to help. Considering Stakeholders Let’s take a moment to review what is meant by the term “stakeholder”. In a family business, a stakeholder could include a wide range of individuals, such as: 

The Founder(s) (often Mom and/or Dad);

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Family members working in the business;

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Family members not working in the business:

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Key employees who are not family members;

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Individual shareholders;

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The ownership group, as a whole;

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The company; and

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The family unit.

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It is important for advisors to be able to assist all of the stakeholders to understand how all of the plans fit together for the benefit of everyone involved, including the business. This is not an easy task at the best of times, and is complicated in situations where stakeholders have varying perspectives. The real opportunity is to assist the parties in working together to make good decisions. In order to move the process of integrated financial planning forward, families need to work on the basis of consensus and inclusion, as well as recognizing areas of common ground. This approach builds trust over time, thereby minimizing the threat of old patterns, such as jealousy, fear, and conflict setting in and good plans failing to be implemented. For the advisor, an integrated financial plan can be the beginning to implementing larger and more complex solutions. As this important baseline information is put into place, it can set the groundwork for other areas and actually shorten the overall sales cycle, due to better information and trust being established. Finally, it is important to recognize that planning itself need not be a difficult process. In many ways, it can be somewhat repetitive and is a good place to utilize tools and templates to simplify the process. Stakeholder objectives and issues that might become apparent during the planning process include:    

Mom and Dad’s priorities might include exiting from the business, minimizing estate taxes, and having a healthy retirement income; Ae sibling group would typically need to work through who would take on leadership roles and own shares. Once this has been addressed, future wealth could then be projected, as per their objectives regarding wealth accumulation and liquidity; The family overall might have specific values, as it relates to the direction of the business or strategic philanthropy; and Objectives for the business might relate to growth, cash flow, and profitability.

The advisor’s role is to identify the objectives for each group and to demonstrate to the group how all of the pieces fit together. In order to do so, it’s important to understand not only the technical pieces, but where the family is at in terms of values and processes in order to make the necessary progress.

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What is a Multi-Generational Financial Plan? A multi-generational financial plan emphasizes the point that all planning should be considered from the perspective of both current and future generations. Why is a multi-generational plan important? As an example, if Mom and Dad designed the overall plan for everyone involved, there could be potential outcomes that are less than ideal. For example:  

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A child might be included in the plan, when in fact, that same child would like nothing more than to leave the business; A child might be excluded from the plan (and compensated in another manner), yet the reasoning for this arrangement has never been discussed or shared. As a result, this child might feel alienated and could harbor deep resentment toward their parents; The plan itself might create more conflict among the children in the future (i.e., such as the typical type of conflicts that exist between active and non-active shareholders, etc.); or Peace in the family might be intact, as long as Mom and Dad are alive, however, once they are deceased, the plan might fall apart if there isn’t “buy-in” from all of the children.

The fact that there is nothing technically wrong with the plan that Mom and Dad have implemented is irrelevant; the issue is all a result of the process,, or lack thereof resulting in unrest and conflict within the family, to the ultimate detriment of the company and everyone involved. Multi-generational planning solutions The simple solution to these potential problems is communication. Communication might appear to be a risk when, in fact, there are risks everywhere throughout this process. Making the effort to communicate and develop a plan that incorporates all generations is an important strategy in avoiding many potential pitfalls that could otherwise result. We know that some generations are not comfortable discussing feelings or talking about money. Conversely, we also know that many in the younger generations are likely to be more desirous to partake in these types of conversations. In many cases, it relates to a desire to be included in a meaningful way and to be aware of how family assets might be divided so that each family member can plan for their own future. Multi-generational planning is also important in terms of setting expectations. Since some first generation owners feel most comfortable leaving the task of succession planning to the next generation, it is important to communicate this desire well in advance. This approach gives the next generation time to develop strategies for working together, as well as time to deepen and strengthen their relationships. However, if Mom and Dad do not communicate their intentions to the next generation, time and opportunity are lost.

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Ironically, if transition of the business is to occur by way of non-family members, a significant amount of disclosure, negotiation, and discussion would need to take place in advance of doing so. Yet, when transition remains within the family unit, business owners tend to shy away from these important conversations, finding it easier to resolve when the transaction occurs with a third party. Advisors have an important opportunity to start the conversation and bridge the gaps between the parties when the process becomes uncomfortable. Including multi-generational planning as part of the process is a great opportunity to teach the next generation about a number of important areas, including the succession process, legal agreements, ownership, and the business opportunity going forward. Why not take advantage of this opportunity to strengthen the business and the family for generations to come? What Is A Succession Plan? Succession planning, in simple terms, is the transition from one group of “leaders” to another and from one group of “owners” to another. In other words, someone needs to lead the business and someone needs to “own” the business. Depending on circumstances, this might (or might not be) the same person(s). The process of transitioning from one group of leaders to another and from one group of owners to another might also happen at different times, which can be a common occurrence in family businesses for a variety of reasons. From the perspective of the business, succession planning is important to ensure that the company has the necessary leadership and resources to fulfill, if nothing else, the basic assumption that it is a going concern. Companies all make commitments to help customers, generate products and services, and fulfill the obligations to which they commit. When a company has uncertainty at the leadership level, it is possible that all of this could be in jeopardy if the leader was suddenly taken from the business. Ensuring continuity is a basic reason why every company should have a succession plan. In the case of family businesses, it is not uncommon for the company to support a number of family members, be it by way of direct employment or as a result of owning shares. Family businesses that have not planned for how the company would continue to operate in the absence of the owner, or to whom leadership (and ownership) would transfer place the family members and their livelihood in a position of risk. Despite this, many business leaders fail to undertake succession planning. Succession planning is a comprehensive process, which is one of the reasons why many business owners tend to avoid it. Areas to understand as part of the process include the following:    

What is the vision and future direction of the business? What skills does the business need for it to be successful in the future? Who has these skills today? How would the business obtain these skills in the future? Who, within the family group, has an interest in a leadership role?

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Who, within the family group, has an interest in owning shares? What are the responsibilities and commitments related to owning shares? Who is prepared to “live up” to these responsibilities and commitments?

When first considering these areas, family members tend to get caught up in technical issues, such as “how will his shares be transferred to me?”, etc. The bottom line is that there are typically various strategies for doing so and there are many good technical advisors who could assist in this regard. What the starting point should be, however, relates more to what the parties want to happen (in terms of what is in the best interest of the business), with the technical structuring following thereafter. Put another way, there are different ways to transition shares to other individuals over time. The shares could be transitioned as part of the “estate plan” (i.e., upon death), or they could be transitioned gradually and form part of the “retirement income plan” (i.e., redeemed over time by the company). Therefore, the manner in which the shares are transitioned is a “tactical” decision, but the underlying strategy and implications of doing so often relate to other issues. As a result, the ultimate objective of who will own the shares (and how it would occur) represent the more important strategic decisions that should be determined first. Why is it Important to Create These Plans? This course recognizes that family businesses are often not particularly successful when it comes to transitioning to a new group of owners and leaders. There are various reasons why this is the case, and many relate to a lack of communication, shared goals, inability to resolve conflicts, and difficulty in terms of knowing where to begin. As a result, we propose that advisors consider a utilizing an approach that includes addressing the following areas to help families move through this process:   

Building a shared vision. Helps clients to identify shared objectives and establish corresponding governance structures. Understanding family dynamics. Recognizes that it is the soft issues that derail many advisory solutions and helps to address the issues and raise the likelihood of success. Utilizing planning and Real Wealth Management. Includes the topics that have been discussed in this module; the need for a fully integrated, multi-generational strategic plan.

It is critical to create a plan to ensure that the needs or objectives of all stakeholders are met. If this does not occur at the planning stage, moving to specific product or tactical solutions is not likely to be successful. Who is the Client? At this stage it is important to discuss another important point related to this whole process: who is the client?

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Due to disclosure and/or other important legal issues, some are of the view that an advisor can only (and perhaps, should only) represent the interests of one entity or person at a time. In the context of this module, we want to determine the best overall course of action that addresses the objectives and issues of all stakeholders, in order to get to the right solutions. While one’s personal bias might taint their opinion in one direction vs. another, if advisors educate and position themselves as facilitators, they have the ability to be truly neutral to any specific outcome. And, if the advisor is aware of their own personal biases, they are in a position to share these up front with the client. Yet, in the case of some advisors, in order to be truly neutral, it means that they need to be paid as a facilitator, whereby their compensation is not based on the sale of a specific product or similar solution. Rather, the role, as facilitator, is to coach the client through the overall process. This would include coaching the client through the pro’s and con’s of various tactical strategies recommended by the various members of the advisory team at each step in the process. With this in mind, it is important to ask: Is this a role that you wish to pursue, or would you prefer to position yourself within the team of advisors? Regardless of your answer, someone needs to be the facilitator, and this person should be compensated as such. Understanding the implications and where you best fit within the process are important in terms of how you will work with clients. Be sure to also understand any independence guidelines that might be associated with your professional designations, as well as any associations to which you belong. Integrated Financial Planning Priorities Some advisors, when working with a family business, make the mistake of placing their priorities ahead of the client’s priorities, an approach that focuses more on “getting the sale”, rather than on helping the client through the process. To take on an integrated planning role, you must be able to link together a combination of financial security strategies, wealth extraction strategies, and wealth preservation strategies. The integration of these strategies is what is the most important at this stage in the process. Priority #1: Wealth Preservation Strategies: The most important step in the planning process is to help the client protect what they have already built. This includes protecting wealth from any number of things, such as tax, divorce, death, disability, company failure, fraud, liability, etc. In the context of a family business, wealth preservation strategies include things such as:  

Annual tax reviews to identify steps that could be taken each year to reduce current and future taxes; Up-to-date Wills, Marriage Agreements, and Buy/Sell Agreements that will help to ensure that shares stay in the family and do not end up in the hands of inlaws due to death or divorce;

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Up-to-date Life Insurance Funding, to provide appropriate capital to complete buyout transactions upon death; Key Person Insurance, for both death and disability to ensure that the company has sufficient capital to pay off loans, replace key people, and provide appropriate operating capital reserves; Use of Trusts and Holding Companies that could help to protect capital from creditors; and Life, Disability, and Critical Illness Insurance that could be used to ensure that all agreements are appropriately funded and will be executed as planned.

Priority #2: Financial Security for the Senior Generation: One of the most common reasons why advisor recommendations are not implemented is due to the feeling of insecurity and uncertainty of the senior generation about the security of their retirement income. Retirement security boils down to a collection of “needs” and “wants”, with the needs being the basic essentials. Does the senior individual have a secure income that would meet their “needs”, where this income is not dependent on the highs and lows of the business? If the answer to this question is “no”, then money should be moved from inside the business entity to some form of a personal asset. When this is complete, the senior individual might be then more open to discussing other issues. In many cases, this is typically the most common issue that would create a delay in other decisions being made.

A DV I S O R T H I N K TA N K : Planning Pointers 

When beginning the planning process, spend as much time as is necessary on establishing how a safe, comfortable retirement income would be available to the departing senior generation individual.

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Next, you might also need to consider recommending appropriate long term care plans, ensuring that the risk profile of the personal investment assets match the retirement income strategy, and ensuring that the interim estate plan is up to date.

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It is important that the surviving spouse/partner is also financially independent of the business, in the event that one of them dies unexpectedly or shortly after retirement.

How could you best achieve agreement on the implementation of these critical concepts within your family business clients?

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Priority #3: Wealth Extraction Strategies: A component of the financial planning process for family businesses is related to extracting wealth from the company so that the business owner could hold this wealth personally. This is an important step in the process, as it creates financial independence from the business. Many business owners put forth the belief that reinvesting back in the company could generate a greater return than investing outside of the business. In many cases, this is true. The problem with this approach, however, is twofold:  

The wealth is represented inside the business by share value and/or capital assets. Very rarely is this money liquid; and. By reinvesting back into the business, the owner is placing a greater and greater reliance on finding a buyer that is willing to pay the right amount at precisely the right time in order to “unlock” this wealth.

In order to provide greater flexibility in planning the affairs of the owners in the future, it is important to plan for continuous extraction of a reasonable amount of wealth out of the business on an annual basis. This could be achieved by using planning strategies, such as:      

Maximizing RRSP contributions; Individual Pension Plans; Retirement Compensation Arrangements; Insured Corporate Annuities; Insured Retirement Plans; and Use of the Capital Dividend Account (i.e., some buy/sell agreement strategies open the door to increase the tax free withdrawals from the business through the use of the Capital Dividend Account).

An advisor’s value could be greatly enhanced by the ability to design and implement integrated financial strategies. These strategies need to consider the impact on both the senior and junior generations, the cash flow of the business, and the priorities for each of the key stakeholders. For example, in many situations, payout strategies are designed for the benefit of the senior generation, without considering if the business has enough cash flow to support the plan. As an alternative, it might be beneficial to transfer assets into the name of the senior generation and then pay rental income on these assets as a means of generating retirement income for this individual. The rental payment could be tax deductible (as an expense) to the company (i.e., effectively, the younger generation), making it less expensive to the business to provide a high level of secure income to the departing owner. Using life insurance to complete the transaction upon death might also be another inexpensive way to complete the buyout effectively for both generations.

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It is an art to design a plan that balances the needs of multiple generations, the family, and the business all at the same time. The advisor’s responsibility is to know when to use each tool, to anticipate the impact each tool would have on other stakeholders, the long term flexibility of the family and the business, and to know how to structure each tool properly. This is not an easy task and represents the value of a good advisor.

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NEXT STEPS This completes the written portion of your course material. Please return to your Student Resource Centre and take the CE Quiz for your certification and accreditation.

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