The Migration | Moving to the Exempt Market
NEMA in Conversation with Jack Comeau
Forward by Craig Skauge
Every year in the plains of East Africa something amazing happens. Millions of animals instinctively head out on a journey in search of greener pastures for themselves and their herd. Realizing the lands they currently walk are no longer sufficient to sustain life, they head on a lengthy journey filled with unknown curves and dangers all in the hopes of finding something better. It doesn’t all happen at once though…given the uncertainty in the journey it takes a few brave souls to test the waters and make the final cross of the Mara River to show others that while there are dangers in crossing, ultimately most will make it across unscathed. Jack Comeau is one of the brave souls in the capital markets making the brave journey from the familiar pastures of traditional financial planning to the exempt market, leading his clients and many other advisors to our world. Over 20 years, Jack has built a significant client base that keeps him extremely busy but he was gracious enough to give us a bit of his time and his thoughts on the exempt market.
What prompted you to seek out non traditional products for your clients?
It started shortly after the Dot-com / High tech meltdown that occurred in March 2000. The markets had just crashed loosing 50% to 85% of its value. Investors lost significant portions of their assets due to this severe stock market crash. Following this market correction, many money managers, economists, and analysts began suggesting that the markets would be trending in a prolonged ‘flat’ and ‘sideways’ market. In other words, they were projecting no growth in the market for the next 5-6 years. I did not know at the time if their analysis of the markets would be correct, however their arguments appeared to be very compiling and straightforward. This forced me to start looking for investments outside of the stock market. As a financial planner, my job is to build wealth for my clients. I realized that I would need to explore alternative investments in order to achieve this objective.
How did you get introduced to private placements/exempt marketing offerings?
I have been involved with private placement / exempt market products for approximately 12 years. I was first introduced to Walton land projects and Millennium tax-advantaged real estate properties back in 2000 or 2001. My clients responded very favourably towards these ‘new specialty’ investments, and I have been involved in exempt securities ever since. The level of interest with exempt products has grown substantially each and every year since I started offering them to my clients. Of course, these investments were not called exempt securities at the start.
You have had a number of advisors already follow your lead and move towards the exempt market. Do you see this trend continuing and if so why?
Many Investment Advisors have been frustrated with the lack of performance or lacklustre performances of traditional investments. Except for very recently, the TSX and the S&P 500 have generated meagre returns for investors over the last decade. Bonds and GIC’s are currently providing dismal interest rates, and bonds face potential capital losses as interest rates begin to raise. Investors are unhappy with poor investment returns, and are concerned that they will not be able to achieve their retirement and financial goals. They are voicing their concerns and frustrations to their investment advisors. As a result, more advisors are turning to the world of exempt market products and alternative investments. The level of interest in the exempt market world is certainly growing, and it is obvious that as this market grows, more advisors will switch from traditional investments to the exempt market. Advisors exploring the exempt market are surprised and excited to see the vast range and variety of exempt products available. They begin to understand how they can better diversify their clients, and provide yield to those seeking an income stream.
What do you appreciate about private placements/what do you get excited about with this industry?
I like a lot of things about the private placement / Exempt Market space. First of all, most of these investments involve hard or real assets that investors can ‘touch, feel, and step on.’ As a result they tend to be inflation-protected.
Secondly, most of these investments involve ideas that make sense… ideas that many investors understand, but often cannot participate in them by themselves because they lack the expertise or wealth. The exempt market allows the small investors to participate into these potentially profitable and understandable ideas.
Thirdly, investors are frustrated with the volatility of the stock market, and the high fees currently associated with mutual funds and segregated funds. Exempt market products typically have little correlation to the stock market and therefore usually exhibit little to no volatility.
Fourthly, it is becoming nearly impossible to be properly diversified by being invested solely in the market. An investment portfolio with exempt securities can provide investors with a much greater level of diversification than can be accomplished with stocks or mutual funds alone. As we all known, increasing the level of diversification generally has the effect of lowering the level of risk.
Lastly, many exempt products provide fixed and predictable income streams. Investors are asking for income-producing investments, and also are seeking predictable yields so that they can plan their retirement or finances more precisely. Exempt products allow investors to have that luxury.
What percentage of a client’s portfolio do you think is appropriate to have invested in illiquid exempt products?
First of all, it is important to acknowledge that not all exempt securities are completely illiquid. Many new offerings allow investors the ability to liquidate within a certain period of time. Many have deferred sales charges (DSC charges), often declining with time, should an investor wish to liquidate early, which is very similar to a mutual fund, or segregated fund. But, to properly answer this question is difficult, as every investor will have a different set of objectives, risk tolerance, time horizon, and return expectations. Therefore there is no “golden rule”. In many instances the proper asset allocation to exempt market products should range from 35% to 75% of investor’s entire portfolio. This in conjunction with stocks, mutual funds and/or bonds would result in the creation of a very diversified investment portfolio. The benefit of adding exempt products to a portfolio is the creation of more diversification, which generally means less risk, and the ability to bolster income for investors who require an income stream.
What do you think needs improvement?
A few things come to mind which I believe require improvement. First of all, it is very silly to think that every exempt product is of high risk nature. Surely the level of risk differs for each of the various exempt products. The categorizing of risk for each exempt product needs to be better defined. It is no longer appropriate to provide a blanket risk assessment for the entire market. Rather, a specific risk assessment should be provided for each exempt product that is specific for that offering. This could be initiated by the issuing company and then approved by the regulatory body (Securities Commission), much the same way that the risk of individual mutual funds are identified under current mutual fund regulations. Secondly, the level of documentation and paperwork required to implement a sale of an exempt product is absolutely outrageous. We are killing a lot of trees in this industry, and we need to move to less forms and documents. The investor is not made safer because of more forms and documents. I support a paperless system.
Where do you see the space going in the next five years?
I think that exempt products will become much more important in the next five years. This space is attracting a lot more attention in the last few years and investors are becoming more familiar with exempt market products.
Investors, particularly the baby-boomer investors, continue to be frustrated with traditional investments, and thus the search for ‘alternative’ investments will heighten. The low interest rate environment has forced investors to research higher yielding investment options. It is obvious that the exempt market space is gaining momentum and is attracting more investors.