WealthTerra Capital Management: Understanding the Exempt Market

The stock market is a familiar place for investors, but what is the exempt market? In the video below, Nadine Wellwood, president of WealthTerra Capital Management, answers that question and explains how her firm helps investors navigate that arena.

In particular, she outlines why WealthTerra emphasizes alternatives to traditional investing and gives some examples of what non-traditional investments look like. In closing, she touches on the benefits of engaging a financial planner. “Money itself is not necessarily complicated,” she states, “but the world that surrounds money is very complex and very complicated. And although I think from an investor standpoint you cannot abdicate your responsibility … you do need to build a team of individuals around you that can help guide you, that can help provide you with the answers you need.”

For those not able to watch, here’s a transcript of the video interview.

RIN: Can you start by telling me a little bit about WealthTerra Capital Management and what it means to be an exempt market dealer?

NW: Certainly. WealthTerra Capital Management obviously is an exempt market dealer. “Exempt market” is simply a term that’s used for the private capital markets in Canada. [The] exempt market really only came to be as a result of regulatory changes in September of 2010.

[Being] exempt doesn’t really exempt us from anything. It really just is a term that’s used to say that we are exempt from offering a prospectus. So issuers that work in the private capital markets come together to raise funds for their projects — whether they be real estate, oil and gas, natural resources — and what they do is instead of going the prospectus route, the public route, they would … choose to stay private. And in doing so, they’re exempt from having to do a prospectus, but what they do have to do is provide a full disclosure document called an offering memorandum.

So, all of this, although it’s very new as far as being an exempt market, September 2010, it’s actually a very old industry and a very large industry.

RIN: What do you find your typical investor looks like?

NW: It’s funny. It depends on the province. Ontario, for example, to be in this market space, private capital markets, you have to be … an accredited investor. Now, an accredited investor typically qualifies under income, so you’ve had two years of [making] $200,000 a year plus, or $300,000 with a spouse, and you have a good likelihood of performing in the exact same method again this year. Or you have $1 million worth of net financial assets. So, that’s Ontario.

Now most of the other provinces in Canada are a little bit more lenient, and a little bit more flexible with respect to the financial requirements. So, for example, [in] Alberta if you have $75,000 of income per year and/or you have $400,000 of net financial assets, then you can qualify to invest within the exempt market space.

RIN: WealthTerra emphasizes alternatives to traditional investing. What does that look like?

NW: Alternative investing, that’s an interesting one. We’re seeing that term get used a lot more today, especially with the downturn of the market, especially since 2008. Alternatives really are private capital markets, private opportunities. In the public market space, you can go to any major institution and buy a mutual fund, for example. That mutual fund typically invests 60 percent equities, 40 percent bonds and [is] 100 percent correlated to the public markets. So whether you bought this stock or that stock is kind of irrelevant because if the markets go up, what happens? It goes up. If the markets go down, it goes down.

Alternatives are really just an alternative to the public market space. And in doing that, what you’ve truly done is diversify the portfolio so you’re not concentrated 100 percent in the public market space and you’ve offered your portfolio true diversification using alternatives, which are really just private market opportunities.

RIN: So there are lots of benefits to pursuing alternatives.

NW: Absolutely. If you’re not somehow today invested in the alternative market space, private opportunities, private capital, whatever you want to call them, you are truly overexposed. And as a financial planner as well as the president of WealthTerra, it’s very important to make sure that a portfolio is diversified. Asset allocation is probably the most important way to protect your wealth and your portfolio from downturns.

RIN: How might something like diamonds specifically fit into that?

NW: Diamonds are a unique investment opportunity, actually. Thank you for asking. With respect to diamonds specifically, they have a number of unique characteristics that really provide a good asset allocation to hold within a portfolio. The first one is they are truly a unique opportunity. They are their own independent asset class. When you look at correlation and diversification, this is the key. They’re non-correlated to gold and silver. They’re non-correlated to real estate. They’re non-correlated to the public market space, so they are an independent asset class. So, for 5 to 15 percent of a portfolio like you would with any other asset allocation, it makes a great way to diversify.

In addition to that, I use diamonds like I use silver and gold, I think, except for the fact that diamonds have a little bit more potential as far as an investment goes. I sleep very well knowing I’ve got silver and gold as an inflationary hedge and as an insurance policy should the fiat currencies of the world kind of collapse, catastrophic events — not saying they’re going to happen, but it’s nice to have a little bit of insurance. We always have insurance on a house, we always have insurance on our car for those moments of “what if…?”

Diamonds the same thing. They’re an excellent hedge against inflation. They also provide excellent insurance for a portfolio, but they have a significant amount of potential, I think, as far as upside returns go.

RIN: What kind of returns do your clients typically see?

NW: It can depend. If it’s a pure equity opportunity like private equity, which some of our accredited investors pursue, you can look [at] upwards of 20- to 40-percent returns. That is not a retail investor. The exempt market probably is looking at average returns of somewhere between 8 and 12 percent.

But it takes a look at the security more so than anything else. When you go in and you walk into an institution, and you say, “I’ll buy a mutual fund,” I might own 73 stocks. But what makes those individual stocks a good investment? In our industry, you’re looking at an opportunity. So you’re going to understand what the opportunity has to offer, what the risks are. You’re going to understand what the risk profile might be, but also what the return is.

We, in my opinion, look at risk-adjusted rates of return on an individual basis. And because they’re not correlated to the public market space, they can also provide a lot less volatility.

RIN: Finally, are there any words you’d like to leave investors with in terms of why they should engage a financial planner? Why is that a good plan?

NW: Why a financial planner? It’s interesting. Today, we’re seeing it more and more — people are trying to do it themselves. And it’s funny how money itself is not necessarily complicated. But the world that surrounds money is very complex and very complicated. And although I think from an investor standpoint, you cannot abdicate your responsibility because it’s your money — I always tell people my investors come to me and they go, “okay, I trust you, Nadine,” and I’m like, “no. Absolutely not. You trust nobody with your money but yourself” — but you do need to build a team of individuals around you that can help guide you, that can help provide you with the answers you need.

It takes a team in today’s world to truly understand what’s going on geopolitically, what’s going on economically — forecasting what’s going to happen is always a little bit of a guessing game. But if you put the right people together in the right environment, you’re going to stand a lot better of a chance. No individual knows everything, so the more people you can surround yourself [with] that have a good, educated knowledge base to work from, I think the better and the more success you’ll have in building wealth for yourself.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.