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Don't let fear drive you into a fee trap when working with an investment advisor – BNN

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Spiking market volatility and a renewed threat of global economic stagnation caused by COVID- 19 has sent stressed-out investors flocking to advisors.

Many advisors have been reporting a rise in new clients since last spring’s lockdown, and a new survey commissioned by Manulife Investment Management backs it up. It shows 63 per cent of respondents plan to seek investment advice in 2020 compared with half in 2019. And more than half of respondents in Canada indicated they were interested in retirement planning and investing advice.

It’s good that more people are looking for long-term retirement plans managed by professionals, but fear can lead investors into fee traps that consume their investment dollars.

The path to those fee traps typically begins with investors looking to coordinate a mishmash of investments in their registered retirement savings plans (RRSP), and tax-free savings accounts (TFSA). For the vast majority of Canadians, the only route to a diversified, professionally-managed portfolio is through mutual funds.

The price investors pay for diversification and professional management in a mutual fund is an annual fee based on a percentage of the money they have invested called the management expense ratio (MER). MERs vary depending on the fund company and asset class, but a typical MER on a Canadian equity fund purchased through an advisor is about 2.5 per cent.

That might not seem like a lot at first glance, but on a $500,000 portfolio of mutual funds, it adds up to $12,500 annually whether the fund makes money or not. That’s $12,500 each year not invested and not compounding, and potentially hundreds of thousands of dollars over a lifetime of investing.

Baked into the MER is a hidden trailing commission, or trailer fee, to compensate the advisor who sold the fund for “ongoing advice.” A typical trailer fee is one per cent annually – or $10,000 on a $500,000 portfolio of mutual funds each year.

Trailer fees are banned in most of the developed world due to the inherent perception of conflict of interest. You have to wonder if an advisor is selling a fund because it is right for the investor or because it provides the best trailer fee from the mutual fund company. 

And it get’s worse. 

Some advisors will direct investors toward segregated funds, which are essentially mutual funds wrapped in an insurance product. Seg funds have the potential to make money from the investments they hold but are insured, or partially insured, against losses on the principal amount invested over long terms – often 19 years. Investors pay for that extra security through higher MERs. Manulife – the company that commissioned the survey – for example, sells segregated funds with MERs above three per cent.  

Segregated funds have certain advantages for small business owners wanting to protect their savings in the event of bankruptcy, but sometimes appear in workplace defined contribution pension plans. 

Advisors sometimes push seg funds on unsuspecting clients through a regulatory loophole known as “the-know-your-client rule,” which requires advisors to document a questionnaire relating to return goals and risk tolerance, and only sell investments in line with the client’s answers.  

Some clients might not understand that all investments have some degree of risk and say they expect their savings to grow risk-free. Only segregated funds fit that bill.  

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com. 

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Key Outcomes for Foreign Investors in Vietnam's New Law on Investment – Lexology

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Vietnam’s revised Law on Investment (Law No. 61/2020/QH14)(“LOI 2020”) enters into force from January 1, 2021. The National Assembly adopted the LOI 2020 on June 17, 2020. It will replace Law No. 67/2014/QH13 (“LOI 2014”), which has been in force since 2014. Notable provisions of the LOI 2020 for foreign investors in Vietnam include the introduction of a “negative list” for foreign investment, increases in ownership thresholds for treatment as a national investor, a “national security” provision, new investment incentives, and additional measures to streamline investment procedures.

The LOI 2020 will be accompanied by implementing regulations, which are currently being developed by the Ministry of Planning and Investment, providing additional guidance as to conditions for investment in certain sectors, procedures for obtaining project approvals, and other key details.

Key outcomes in LOI 2020

Negative list. The LOI 2020 introduces, for the first time in Vietnam, a market access “negative list.” This means that foreign entities are afforded national treatment with regard to investment except in those sectors explicitly set out in an accompanying List of Restricted Sectors. This is a more permissive approach than previous iterations of Vietnam’s investment regulations, which followed a “positive list” approach, blocking market access except in listed sectors.

Under the LOI 2020, investment in certain sectors may be entirely prohibited or subject to certain restrictions or conditions. All investment, foreign or domestic, is banned in eight enumerated sectors (including trading in certain chemicals and identified narcotics. Under the LOI 2020, debt collection is newly added to this list of restricted sectors.1

Certain sectors are considered “conditional” for all investors, foreign or domestic, and may require formal approval (i.e., in the form of business licenses or other certifications).2 Such conditional sectors must “satisfy necessary conditions for reasons of national defense, security or order, social safety, social morality, and health of the community.” These sectors are listed in Appendix IV (“List of Conditional Investments and Businesses”) of the LOI 2020. The Government of Vietnam is expected to release implementing regulations further detailing conditional investment rules and procedures. Conditional sectors will also be listed on the National Business Registration Portal.3

Conditional investment rules apply to foreign investors, with additional potential restrictions including:

(i) Percentage ownership limits;

(ii) Restrictions on the form of investment;

(iii) Restrictions on the scope of business and investment activities;

(iv) Financial capacity of the investors and partners; and

(v) Other conditions under international treaties and Vietnamese law.4

These rules will be further explicated by forthcoming implementing regulations.

The List of Conditional Investments and Businesses of the LOI 2020 details 227 sectors with some changes from the LOI 2014. For example, sectors added to the conditional sectors list include water sanitization and architectural services. Certain sectors, including franchising and logistics, were removed from the list.

Lowering “foreign investor” threshold from 51% equity to 50%. Under the LOI 2014, enterprises 51% or more foreign-owned were treated as “foreign investors” for the purposes of investment activities. Thus, a company more than 50% owned by a foreign entity could still receive the benefits afforded to domestic enterprises. The LOI 2020 changes this, lowering the “foreign investor” threshold to 50%.5

Restrictions relating to “sham” nominee transactions. The LOI 2020 tightens rules regarding the use of Vietnamese nominees in order for foreign investors to access restricted sectors. An investment undertaken “on the basis of a counterfeit civil transaction” – also translated as a “sham” or “façade” transaction – can be terminated by the government.6

National security measures. The LOI 2020 states that investments shall be suspended or terminated if such activities are “harmful, or are in danger of harming national defense or security.”7 Notably, the terms “national defense” and “security” are not defined, leaving the Government of Vietnam interpretive freedom in applying this provision.

Investment incentives. The LOI 2020 introduces new incentives for investment in certain sectors, including:

(i) High-tech sectors, including software development, clean energy technologies, and information and communications technology-related products;

(ii) Recycling;

(iii) Public transportation;

(iv) Microfinance;

(v) Education;

(vi) Pharmaceuticals and other health industries; and

(vii) Investment projects for creative startups.

Further, the LOI 2020 provides for investment incentives in “[a]reas with difficult socio-economic conditions” and industrial zones.8 Such incentives may include tax incentives, access to credit, support for research and development, and other measures.9

Other notable provisions. The LOI 2020 includes a range of provisions dictating the terms for Vietnamese outbound investment and includes additional rules and guidance regarding investment approvals, including procedures for issuance, adjustment and termination of outward Investment Registration Certificates.

Outlook

While the LOI 2020 appears structurally more permissive of foreign investment, certain administrative hurdles remain in place (e.g., the requirement that investors acquire project-specific Investment Registration Certificates and high-level approvals for certain types of investments). Further, uncertainty remains as to the specific conditions for investment in the “conditional” sectors, as well as the potential use of the blanket national security provision.

Despite these administrative and political considerations, foreign direct investment in Vietnam continues to increase at a consistent pace – reaching US $38.2 billion in 2019, up 7.2% from the year prior – and appears poised to continue. Vietnam’s ratification of the EU-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in August 2020 and January 2019, respectively, also support the Government of Vietnam’s commitment to provide additional certainty and opportunities for foreign investors.

Two other notable laws of interest to foreign investors will also enter into force from January 1, 2021. The new Law on Public-Private Partnership (PPP) (Law No. 64/2020/QH14) will strengthen and codify provisions relating to PPP projects at the law level (as passed by the National Assembly), which could potentially reduce the uncertainty and ambiguity of the legal framework applicable to a particular infrastructure project. Meanwhile, the amended Enterprise Law (Law No. 59/2020/QH14) streamlines the regulation of the establishment, operation and governance of corporate entities in Vietnam and enhances protections for minority shareholders, among other key provisions.

LOI 2020 is available here (in Vietnamese).

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Foreign Investment in UK Finance Set to Drop on Covid, Brexit – BNN

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(Bloomberg) — Big financial services firms are set to avoid investing in British businesses next year, discouraged by the uncertainties of Brexit and the Covid-19 pandemic.

Only 10% of of global financial services firms are planning to establish or expand operations in the U.K. in the coming year, down from 45% in April, according to a report by consultancy EY published Monday.

“U.K. financial services entered the pandemic in a very strong position, having led the rest of Europe in attracting overseas investment over the past 20 years,” said Omar Ali, U.K. financial services managing partner at EY.

The decline in appetite suggests the sector’s absence from the European Union trade talks “may have started to affect investor sentiment,” Ali said, while Covid-19 has made government support and infrastructure more important for those looking to invest.

The poll of 220 decision-makers painted a rosier picture in the medium term, with 53% expecting the U.K. to be more attractive for foreign direct investment in three years’ time.

©2020 Bloomberg L.P.

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COVID-19 Investment Warning: The CRA Can Tax Your TFSA! – The Motley Fool Canada

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A lot of Canadians weren’t actually that great at saving before the pandemic. Many lived during the last decade in relative ease, knowing that we had a strong economy that was only getting stronger. However, what we probably weren’t aware of was the increasing debt that both our country and others racked up.

Then the pandemic hit, bringing the Canadian government’s debt up another $15 trillion between January and September for a grand total of $272 trillion as of writing. We’re actually leading the charge in debt, ahead of countries like Japan, the United States, and the United Kingdom.

So, Canadians started to get their affairs in order, and that included their cash. In many cases, it meant opening up or taking advantage of a Tax-Free Savings Account (TFSA). With another TFSA contribution limit on the way in January, many are looking for another opportunity during perhaps another market crash. But before you do, the Canada Revenue Agency (CRA) has a word of warning.

The TFSA can be taxable

The TFSA can be taxed, but only under certain conditions. The TFSA is meant to get Canadians investing in Canadian business. So, the first problem is if Canadians are investing in companies outside Canada. If so, you’re subject to taxation on those returns. This can be a serious problem, as with a market crash, there were tons of great companies that saw the share price plummet. Just make sure those shares are Canadian. This also means making sure you’re investing in a company on the Canadian market, as many companies are listed on both the TSX and NYSE, for example.

Second, you can be subject to tax if you go beyond the TFSA contribution limit. If the TFSA was limitless, you could invest any time you wanted, as much as you wanted, and potentially make a killing! The CRA doesn’t want to miss out on those taxes. So, it creates a limit year by year. That way, if there’s a huge initial public offering (IPO), you only have a couple thousand to invest, rather than a hundred thousand.

You also can’t use your TFSA like a business. This happens if you’re making huge trades, trading too often, or making too much money basically. This is a bit of a grey area, so you must be careful. It seems the number right now the CRA is going off of is $250,000. If you make that much in returns, the CRA will want to take a closer look at how you’re making that money.

Finally, beware the TFSA contribution limit! Yes, I already mentioned this, but there’s another problem. You have $69,500 worth of contribution room this year. But let’s say during the pandemic ,you took out $20,000 to help with bills. Now, you’ve made that money back and want to put it back in your TFSA. Not so fast!

If you’ve already reached the TFSA contribution limit for the year, you cannot put money in your TFSA again, or it will be subject to taxes. You have to wait until next year, and then check out MyAccount on CRA or call CRA to see how much room you have available. Don’t mess it up!

Bottom line

The TFSA is an excellent tool to use during the pandemic, but be careful. You don’t want to take full advantage and then fall under these categories. If you do, it’ll make that TFSA contribution limit basically worthless.

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