RRSP Season

February 13th, 2010 by Potato

An RRSP is a tax-sheltering account. Any money you put in it is considered to be “pre-tax”, or tax-deferred, so you are not taxed on contributions you make. If, like most working Canadians, you pay taxes in advance as a deduction on each of your paycheques, this means that you can expect a refund of the taxes you paid on the money you stick in your RRSP.

You can contribute money to your RRSP any time through the year, and also all the way through to the end of February of the following year. However, people being the way they are, tend to leave it until the last minute creating “RRSP season” in February. It was into the midst of this chaotic selling frenzy at the bank that Wayfare made an appointment at the local TD to review her RRSP account (in fact, she was called in to update her risk profile survey). It was there that she was shocked by how misinformed the saleslady at the bank was (and believe me, they are salescritters and not “advisors” or “planners”).

After educating herself (with no small amount of help from yours truly, if I may pat my own back) Wayfare has realized that a lot of the products sold at the bank branch are expensive, with high fees (aka MERs) designed to make the bank rich, rather than her. So she (with some small amount of administrative confusion) converted her RRSP account to an e-series low-cost index fund account almost 2 years ago. At the branch, the salescritter saw that she was in these broad market index funds (~80% equities, ~20% fixed income), and said that her investments were too conservative for her age. Then she tried to sell her on a “balanced fund” which was “more appropriately aggressive”, with nearly 40% in bonds. For anyone who’s even remotely knowledgable about matters financial, you’ll immediately recognize that this is a far less aggressive fund (not to mention more expensive!). Wayfare actually had to hold the line to not get switched over to this poorer option — the sales push was fairly hard. And to add insult to injury, the salesperson spent the whole time selling, and never actually updated Wayfare’s risk profile, her original reason for going in! “We could do that next time when you make an appointment with me to switch over to these funds.” Give me a break!

A few years ago, being just a little less knowledgeable, she probably would have acceded to the salescritter’s suggestions (indeed, 3 years ago she walked out invested in a “market-linked GIC”, which while generally bad deals, was not such a bad idea in hindsight with the market crash of ’08).

So, to the rest of you: remember as you rush out to fill up that RRSP contribution room at the last minute with little time to check your facts that the salesperson at the bank branch is not necessarily your friend, and may in fact know less about the products they’re pushing than you do (or, at least than I do ;). If you’re young (as I believe most of my readers are), and if your RRSP is holding GICs (or equivalently, savings accounts or money market funds), then you’re probably doing it wrong (or have exceptionally low risk tolerance). You can hold stocks, bonds, cash, or mutual funds which own combinations of those. If you have a time frame of decades then you should probably have at least some exposure to equities (though the exact amount will depend on your risk tolerance). And fees matter.

One Response to “RRSP Season”

  1. Michael James Says:

    That’s an interesting story. Recently I was in a discussion about the explosion of ETFs offered by Canadian banks. The question was, what is their motivation if they make much more money with the expensive mutual funds? One suggestions was that they are just recognizing the inevitable and preparing for it. Half-joking I suggested that maybe there was an element of bait-and-switch where inexpensive products are used to draw people in, and they are then sold expensive products. Wayfare’s experience adds some evidence for this little theory.