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It’s time once again to check the Q&A inbox to see what financial issues you’re concerned about. Here are some of the most interesting I have received recently.

Buying IPOs

Q – We are retired and manage our own investments through an online brokerage investment service with one of the major banks. For the most part we have been quite successful and feel we have enough knowledge to continue to do so. We do find we are missing out on some opportunities, though, and would like to understand our options.

We receive email alerts of “new issues” but have found that any of the better options (e.g. two Canadian bank rate reset preferred share options that were issued recently) were closed before we could even get online to make a purchase. I can recall someone referring to these announcements as “tombstones” by the time they reach the consumer, and it seems they are correct. Are we limited to using a broker and paying a management fee on all of our funds in order to gain access to such services? This seems counterintuitive, as any gains we would make in this case would be consumed by fees. – Mary M.

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A – Unfortunately, do-it-yourself investors are usually left out in the cold when it comes to initial public offerings (IPOs), especially hot ones. The underwriters allocate the shares to brokers, with preference given to those within their own firms. The brokers in turn offer positions to their clients. If the new issue is in demand, the allocation is usually rationed and only the best customers get a chance to buy in. The only time a DIY investor might get a crack at an IPO is if the issue fails to sell out quickly. That usually means it’s a dud and you don’t want it anyway.

You can advise your online broker of your interest in new IPOs but don’t expect much to happen. If you really want to participate you would need to open an account with an active advisor, preferably at a firm that does a lot of underwriting. RBC Dominion Securities and CIBC Wood Gundy are two examples.

Puzzled by A&W move

Q - Could you please shed some light on the A&W Revenue Income Fund agreement to the share offering led by CIBC Capital Markets that sold units below the market price. The press release states that the fund will get no proceeds from the offering, but the money will go to “long standing shareholders.” What does this mean to the common shareholder of this fund as the share price has dropped since the press release. – Susan F.

A - I reviewed the press releases associated with this announcement and they made little sense to me. So, I contacted the company and asked for clarification.

I received the following email from Don Leslie, the chief financial officer. “Sorry for the confusion. There are two entities – the A&W Revenue Royalties Income Fund of which the public can own units. It trades on the TSX. The other entity is the privately-owned entity A&W Food Services of Canada Inc. It is the licensee of the A&W trademarks owned by the Fund and is the franchisor of the A&W business. “The private company is the largest holder of the Fund (28.6 per cent) and is simply selling some of that ownership to the public by way of a bought deal with a group led by CIBC. There are no additional units being issued – simply a transfer of ownership from Food Services to the public. They were sold at a slight discount to the market which is customary with a transaction of this size. Securities rules do not allow the company to simply sell into the market due to the size of its ownership. “I hope that helps clarify matters.”

Thanks to Mr. Leslie for the prompt reply.

However, the units are still down from the $47 level where they were trading at the time this arrangement was announced. A total of 1.46 million units were sold at a price at $44.55. The fact that they are trading below that price as of the time of writing suggests that there is a market overhang that is taking time to clear. This may last for some time as trading volume is low – often less than 50,000 units per day – and investors tend to hold for the long term.

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Sentry fund

Q – How would you rate the Sentry Canadian Income Fund? My advisor has placed a high proportion of my RRIF in this fund. - (Name withheld by request.)

A – This fund invests primarily in large-cap stocks. The majority of the assets are in Canadian issues, but the fund also has about a 30 per cent exposure to the U.S. market.

Over the long term (10-15 years) the fund has outperformed its peer group, but it’s been sub-par recently. The three-year average annual compound rate of return to June 21 was only 2.96 per cent compared to 6.9 per cent for the category. Since 2016, the fund has been a third or fourth quartile performer. The MER is on the high side at 2.34 per cent.

Based on recent results, it would not be my number one recommendation. Ask your advisor why he put so much of your money into it and what trailer fee he is receiving. If you are not happy with the answer, consider a switch. – G.P.

RRSP/RRIF taxation

Q – Is it true that the government takes half the money in a RRIF or RRSP if the person passes away? Is there any way to avoid this? – Shelby

A – A RRIF or RRSP is taxed at a person’s marginal rate at the time of death if there is no surviving spouse. So yes, that rate could be 50 per cent depending on your province of residence and the size of the RRIF/RRSP and other income received.

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How to avoid it? Get a spouse/partner if you don’t have one.

Where to invest inheritance?

Q – I need suggestions as to how best to proceed. A little about my situation so you are able to best make recommendations. I will be 64 in September, net income per month is $2,000, will be debt free, no RRSPs, and an inheritance which will leave me (after paying off debt) $50,000. So, the basic question, which you have been asked thousands of times is: How best to proceed? – Ray N.

A – You say you have no RRSPs, so I assume you do not have a TFSA either. That means you could put the full $50,000 from the inheritance into a TFSA and I suggest you do that. As of Jan. 1, the lifetime contribution limit for anyone 18 or older in 2009 and has not had a plan is $63,500.

These plans work well for low-income people because the money is not taxed when it comes out. That means any withdrawals won’t affect your eligibility for the Guaranteed Income Supplement, which you should apply for when you become eligible for Old Age Security at 65.

When you set up the TFSA, you have to decide how much risk you want to take with the money. A very conservative route would be to keep it all in a high-interest savings account and/or guaranteed investment certificates. You won’t receive much in the way of interest but anything you do earn will be tax free. Alternatively, you might consider a portfolio of mutual funds or ETFs, which would offer more return potential but with higher risk. Given your age I would suggest a 50-50 split between bond funds and equity funds.

If you have a financial question you would like me to answer, send it to me at gpape@rogers.com. Write “Globe question” in the subject line. I can’t guarantee a personal answer but I’ll cover as many questions as possible in this space.

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Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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