Have you ever had the feeling you should sell your investments and hold cash in your investment accounts? Have you ever actually done it? Ever wished you had? Sometimes moving to cash is smart; sometimes it isn’t.

Most people don’t move to cash, or money-market funds, even though they really want to do so. Too often their advisor talks them out of it. I’ll bet that if you’ve ever brought up the idea with your advisor, you’ve heard a bunch of reasons why it would be a dumb move.

According to almost every advisor I know, they will tell you it’s a mistake.

The most common reason they use to convince you is, ‘When the market rebounds, you’ll miss the recovery if you’re just sitting in cash’. This is good advice. Since 1929, there have been 12 major negative markets on the New York Stock Exchange. In every case the market not only came back, but it actually went on to set new highs. Each time, if you had pulled out at the bottom, you would have had to buy back in at a higher level. This explains the common advice of staying put through difficult markets.

No one, not even your advisor, knows when, or even if, the market will come back, but history provides compelling evidence that it will eventually.

What you won’t often hear from the financial industry is that it does make sense for some people to move to cash, or at least to increase their cash weighting during market declines. It all depends on your time horizon. If history is a predictor of the future, the market will recover. When it will recover is the issue.

Starting in January of 1973, the market trended downward for most of the next 2 years. In all, it declined more than 40% from top to bottom. Sure, the market recovered, but it took almost 10 years. We had to wait until December of 1983 to see the market get back to where it was in 1973.

If you were invested in the Tokyo Stock Exchange in 1989, you are still waiting for that market to recover. The Japanese market hit a high in December of that year at 38,916. It closed today, April 23, 2009, at 8,847. More than 19 years later the market still has not recovered. In fact, it is still down by more than 75%.

The real reason that your advisor won’t recommend moving to cash is he has a huge incentive to keep his clients invested. Regardless of the fee structure of your account or how you pay him, your advisor’s compensation drops while you’re sitting in cash. If you move from equity mutual funds to money market funds, his compensation drops, in most cases to zero. If you sell your stocks for cash in a fee-based account, the fees he can charge you drop, and in turn, his compensation drops.

If you have a transaction-based account (where fees are charged when you buy or sell), you might think your advisor would be happy to place a bunch of sell orders as you move to cash. You’d be right. Advisors who charge clients per transaction have a greater number of clients move to cash during market turmoil. Go figure. However, once you’re in cash, especially in a downward market, it becomes more difficult for him to get you to buy something. He might get compensated once when you sell everything, but until you’re ready to get back in, he’s got a problem.

Even if your advisor really believed that the market was going to take a nosedive, he still wouldn’t advise you to sell.

If an advisor moved all his clients to cash and the market went up, some clients might sue. When the market declines, he can blame the market for your loss. But if the market increases while you’re on the sideline, he has no one to blame but himself. An advisor takes a huge risk by advising you to get out.

Even if his intuition proved to be correct about the market decline, after having moved all his clients to cash, the result would be that he saved his clients, but he had hurt his own business significantly. Even though his clients would think he’s a genius, he would have killed his revenue stream and jeopardized his own well being.

He has everything to lose and nothing to gain by suggesting that you cash out. His revenue is his lifeblood; don’t expect him to sacrifice that to save you.

When I was an investment advisor I met a lot of people who had been abused by the financial industry in one way or another. In fact, I heard so many horror stories from people who had been taken advantage of, that I became disillusioned with the whole financial industry. I felt so strongly about what was going on, that I decided to leave the industry and speak out about it.

I now teach people how to protect themselves and their nest-eggs from being abused by someone, or some firm in the financial industry. The fact is, many investors have been lied to, mislead and over-charged by their financial advisors. Even some financial firms act unethically with their client’s hard earned money.

I’m a big believer that preventing abuse is a lot easier than repairing it after it occurs.  Normally, when an individual client is taken advantage of and decides to fight back by taking on a big financial firm, the big firm wins the battle – but not always.

Sometimes the little guy wins big, as explained by the following Canadian Press article  from Investment Executive, published Sunday, October 3, 2010.

Great-West Lifeco ordered to pay $456 million to policyholders

A stunning $456-million judgement in a class-action lawsuit against insurance giant Great-West Lifeco Inc. (TSX:GWO) is a sign the courts are being more aggressive in keeping tabs on how corporate Canada conducts its affairs, a high-profile lawyer said Sunday.

“It’s rare,” Tony Merchant said of the size of the judgement handed down Friday by an Ontario superior court.

The prominent Saskatchewan lawyer, who has steered numerous class-action suits through the Canadian courts, said the court is accepting the responsibility to monitor the way business functions.

“There’s nothing wrong with that, it’s just not usual in relation to what we’ve expected from our courts,” Merchant, who wasn’t involved in the case, said in a phone interview.

Justice Johanne Morissette ruled after a 45 day trial in London, Ont. that Great-West breached sections of the Insurance Companies Act by transferring money from the accounts of subsidiaries London Life Insurance Co. and Great-West Life Assurance Co. to finance the 1997 takeover of London Insurance Group, the parent of London Life Insurance Co.

The move prompted 1.8 million policy holders to join a class-action suit that has been making its way through the courts over the past 12 years.

Click Here to read more.

In my last post I left you with a question about Helen; a lady who followed the advice of her accountant and a life  insurance agent. Both of whom convinced her, a single lady with no children, to buy $1,000,000 of life insurance with the argument that she will save big on taxes.

In a nutshell, here’s what they had her do:

Buy a universal life insurance policy with a $1,000,000 death benefit. With universal life insurance policies there’s a minimum annual premium and a maximum annual premium. Each year, owners of these policies can choose to pay the annual minimum premium, the annual maximum premium or any amount in between. When people choose to pay more than the minimum premium, this is called over-funding. The over-funded amount gets invested inside the policy in an ‘accumulation’ account. In Helen’s case, the minimum annual premium was $12,000.

They then had Helen over-fund the policy by $48,000. They told her to deposit her $60,000 into the policy ($48,000 of voluntary over-fund + $12,000 insurance premium). The over-funded amount ($48,000) got invested inside the policy in a separate investment account.

The final step of their scheme was to get Helen to take a policy loan against the investment account. This meant borrowing $48,000 against the value of the investments in the policy ($48,000) from the insurance company and put the proceeds of the loan (48,000) into her personal bank account and therefore avoid the taxes.

I asked you if this strategy flies with Canada Revenue. If you said ‘no’, you’re right.  This is NOT an effective tax plan for several reasons, but that’s not really Helen’s biggest problem right now.

After the first year passed, Helen got a $12,000 invoice from the insurance company. They wanted the minimum premium to be paid for the second year of her new life insurance policy. She didn’t realize that she was committed to paying $12,000 every year. The fact is: in order to keep the policy alive, the minimum premium must be paid every year. She swears nobody explained that to her.

Helen called her accountant to ask about this bill. Her accountant just told her to pay it. He told her that it was all part of the plan. Helen asked him if this is an annual bill. He said, “I don’t know, call the life insurance guy”. So Helen did that.

The life insurance guy told her, “Helen, just pay the bill.”

By now Helen was pretty upset about the whole thing. She reacted by telling the insurance agent to cancel the policy altogether. She wanted to forget the whole thing.

You’ll never guess what the life insurance agent said.

He said: “Don’t cancel the policy right now Helen, I’ll pay your premium for you this year, then cancel the policy next year.”

Can you believe it?  The insurance agent offered to pay her premium for her for the whole year. Why would he do this? Is he just being a good guy?

That’s when Helen called me. She told me her story and asked me for advice. These were Helen’s first questions:

Why on earth would he offer to pay my premiums?
The insurance agent earned $28,000 in commissions for selling Helen this insurance policy last year. But, insurance agents are charged back commission if the policy is cancelled before the two year anniversary of the policy. All he needs is for the policy to be in force at the two year anniversary, after that, he could care less what she does. That’s why he offered to cover her premium ($12,000) in the second year. He’s better off to pay the bill than to be charged back $28,000 in commission. Not only is that un-ethical, but it violates the insurance act.

How is my accountant involved?
Some un-ethical life insurance representatives and investment advisors team up with un-ethical accountants.  The life insurance agent simply pays the accountant (usually very well) to refer clients and endorse some particular financial strategy. People see their accountants as unbiased experts and rarely question the advice they get.

Did this strategy save tax?
No. This is not an effective way to reduce tax – it’s not even close. There are so many things wrong with this I can’t list them all here. There are a few strategies that would have worked well, but not this one.

Should she cancel the policy and unwind the strategy?
Probably – but not so fast. We haven’t begun to look at the real problem yet. You better sit down.

Helen is in a real pickle. Let’s take a look why:

- She owns a $1,000,000 life insurance policy even though she’s not married and has no kids.

- Her business has slowed down (this is the reason she wanted her cash out  in the first place) and she has another cash-flow problem this year.

- She has a loan from the insurance company for $48,000 that they’re charging her 8% on. That’s right – 8%! If that sounds high, it’s normal and it’s costing Helen $3,840 in interest each year.

- She wants to surrender the policy and use the $48,000 she invested inside the policy to pay back the loan, but the policy is subject to a 35% surrender fee to cancel it ($16,800).

- On top of all this, She’s at risk of a Canada Revenue audit, even higher taxes, interest and penalties.

- She has $0 cash left in her company account

- She has $0 cash left in her personal account

What should Helen do Now?

Helen’s choice is simple but not easy. She could:

1. Keep the policy in force and pay $12,000/year in premiums and $3,840/year in loan interest until she dies.

2. Cancel the policy now, pay the surrender fees, pay back the insurance company and forget the whole thing happened. If she does this, she’s out $32,640. ($12,000 paid for the first year minimum premium – $3,840 in loan interest paid to the insurance company – $16,800 in surrender fees to wind up the strategy)

3. Let her agent pay the premium in year 2, then cancel the policy next year. If she does this, she’s out $36,480 ($12,000 paid for the first year minimum premium – $3,840 (x2) loan interest paid to the insurance company for years 1 & 2 – $16,800 in surrender fees to wind up the strategy)

Either way, Helen is in trouble. What would you tell Helen to do?

Stay tuned for what Helen did.

After working for more than a decade in the financial industry, I saw a lot of things. I saw some of the best the financial industry had to offer, and I saw some of the worst things the financial industry does to people.

This is Helen’s story.

Helen J. is a successful 58 year-old self-employed oil & gas consultant. She’s worked hard to build her business and her income is usually over $200,000/year. She is single, has no children and by her own description, she’s a bit of a ‘workaholic’. Business has been going well and the bank balance in her company has grown to $60,000 in surplus cash.

Last year, Helen’s business slowed. She needed to dip into her cash surplus to maintain her salary draw. She asked her accountant about the tax consequences of using the cash surplus to pay her salary. Her accountant told her that this payment would be fully taxable but he suggested there was a way to get the $60,000 out without tax. Helen was very interested. The accountant told her she would save about $20,000 in tax. Helen was all ears.

The accountant suggested that Helen talk to his colleague. The colleague turned out to be a life insurance salesman. At first, Helen was skeptical about life insurance, but at the reassurance of her accountant, Helen decided to meet the life insurance guy with an open mind. When Helen met with the insurance guy, he also told her there’s a way to get that cash out of her business with zero tax.

Here’s what the life insurance salesman recommended that Helen do to get that cash out of her business tax free:

Buy a Universal Life insurance policy with a death benefit of $1,000,000. With any Universal Life Insurance policy there is a minimum annual premium and a maximum annual premium. Owners of these policies must pay at least the annual minimum premium, but can choose to pay more than this amount at any time. When people elect to pay more than the minimum premium, this is called over-funding and the over-funded amount gets invested inside the policy. In Helen’s case, the minimum annual premium was $12,000.

Over-fund the policy. He told her to deposit the $60,000 into the policy ($48,000 of voluntary over-fund + $12,000 insurance premium). The over-funding amount ($48,000) will be invested inside the policy in a separate investment account.

Take a policy loan of $48,000 against the investment account. This means borrowing $48,000 against the value of the investments in the policy ($48,000) from the insurance company.

Put the $48,000 proceeds of the loan into her personal bank account avoiding any taxes.

The life insurance guy explained to Helen that this maneuver lets her move cash from her corporate account to her personal name without having to pay tax on it. In fact, he told her that she doesn’t even need to report it to Canada Revenue. Helen wasn’t sure if this was really true, so she met with her accountant again to explain what the insurance guy was recommending. What do you think the accountant said?

Not only did Helen’s accountant confirm that this strategy was completely tax-free, but he even recommended she do it. Helen said, “he told me it was such a no-brainer that he was going to do the same thing himself”. What would you have done if you were Helen?

Although she didn’t completely understand how this strategy worked, she thought that if it was good enough for her accountant – it was good enough for her. So Helen bought the policy and followed the plan that was laid out for her:

She deposited the $60,000 cash into the policy, creating an over-fund of $48,000 ($60,000 – $12,000). Then she borrowed $48,000 back from the insurance company against the over-funded deposit she just made into the policy.  Then she put the $48,000 she just borrowed into her personal chequing account without any taxes, and began to spend it personally.

Is this a good tax planning strategy? Has the accountant and insurance guy figured out a tax loophole? Or are they misleading her just to sell her some insurance?

I’ll let you know in my next post.

I feel like I’ve got a stock that I’m reading the paper every day to watch how it does!

I can’t help but check in with Amazon.ca regularly to see how the book is doing on the best sellers list.

We’re not planning to do any major media on the book until it’s reached all the bookstores in Canada (likely middle of May), but it’s already climbed to #4 on the Personal Finance list, and it’s been on the Top 100 list now for over 30 days.

It amazes me that so many people pre-order a book before it’s available — but I certainly appreciate every person who does! 

I appreciate you being here and joining me on this journey of education and empowering the individual investor.

If you have a question that you’d like me to comment on, please post a comment here on the blog and I’ll do my best to respond to it.

I’m very proud to announce that as of today, The RRSP Secret is officially published and the book has come off the printing press.

I received my first copy of the book today, and I can’t tell you how exciting it is to have the final product in my hands — finally.

Writing a book is an incredible undertaking, but I’m now happy to be able to share this powerful information with Canadians.  I really hope that the book helps many others recognize what’s really going on with their money, and how they can finally empower themselves to take control and make better decisions for themselves, and their family.

The book is available through Amazon.ca, Chapters online, as well as all major book retailers across the country.

So, if you decide to purchase the book, I genuinely appreciate your investment of time and money – and I hope that you’ll get great value from it, as well as all of the bonus resources that we’ll be posting to this site!

This is Greg Habstritt, and I want to welcome you to this site!

For many years, I’ve watched how the average Canadian simply gets ripped off by the financial industry.

I wish there was a nicer way to put it, but that’s exactly what’s happening. 

The entire financial system is set up to take maximum advantage of the individual investor, who’s helpless against the billion dollar marketing machine.

Writing  my book, “The RRSP Secret”, was one way I felt I could try and help fellow Canadians learn more about investing, and be able to make better decisions on their own.

If you’ve already bought the book, I geniunely appreciate your support, and I hope that it’s helped you understand some of the “hidden truths” about the system, and empowered you to make better decisions going forward.

The purpose of this website, and the blog, is to help you gain even more perspective and insight into mastering your finances, and becoming an Engaged Investor.  Through this site, you’ll also meet one of my very good friends, and a recovering financial planner – Allan Schieman.

Al shares my passion for helping investors take control of their money, and he’ll be a regular contributor on the site.

If you have a question or comment, please feel free to post a comment here on the blog, and we’ll do our best to answer whatever questions you might have!

To Your Success,
Greg