In today’s RRSP market, you not only need to identify an asset mix that is right for you. You also have a choice of ways to organize that mix.
There is no shame in sticking with conservative, interest-bearing investments guaranteed to go up, if that is all you feel comfortable with. “You take a lot of risks elsewhere in your life,” points out
David Stewart, “and for the retirement money to definitely be there, is a real comfort to some people.” However, that choice could leave you with deposits at several different institutions, which means you will have to keep track of them all yourself and make sure they are all reinvested when they reach maturity. The alternative would be to do all your investing through one financial institution. However, that means you would not be able to shop around to get the best interest rates. Plus, once you have passed the $60,000 point — the maximum amount covered by the Canada Deposit Insurance Corporation (CDIC) — you need to be sure your investments are spread around among different institutions. Given the multitude of inter-connections in the financial services industry today, you may be able to do that and still bank in one spot. But it is wise to check the arrangements with the CDIC (1-800 461-CDIC).
[ The One-Fund Approach 1
An alternative approach for someone just beginning an RRSP, or a conservative investor who wants to experiment, is to focus on a single mutual fund. A balanced fund — one that invests in a mix of equity and fixed income investments — is “an excellent place to start,” for someone interested in mutual funds says Martin Venema. Doing that minimal amount of homework to find the fund you feel comfortable with will save time, agony and missed opportunities later, says David Stewart. “It’s a no-brainer. Whenever you have some money you just put it into that fund.”
[The One-Family Approach ]
However, while the One-Fund approach is “a logical first step,” says David Mather, senior vice-president of Elliott & Page Ltd., investors with more to spend should consider diversifying.
So another approach is to find an entire family of mutual funds you feel comfortable with. You can do this by identifying a mutual
fund company that has a mix of funds, a philosophy and a performance record you like. You can also join the family of funds where you bank. This “one-stop shopping” approach gives you some of the advantages of a self-directed RRSP without having to pay the administrative fee: you can invest in several different types of funds and receive a consolidated statement of your holdings. For example, at the Royal Bank, you can invest in 10 different mutual funds, along with term and savings deposits, and receive only two regular statements to report on the whole lot. Royal Trust offers 19 different RRSP-eligible mutual funds (and the added advantage of lumping term deposits and mutual funds together as part of your RRSP, so that you can put 20% of that total amount into foreign content, rather than just 20% of your fund investments).
Depending on the situation, the one-family approach will probably also give you certain savings on commissions when you buy or switch funds. If your RRSP is at a bank, you can also have interestbearing investments in your RRSP, such as GICs. The disadvantage is, you are restricting yourself to the investment vehicles offered by that institution.
[ A Self-Directed Plan ]
For complete flexibility, however, “A self-directed RRSP opens the door,” says David Stewart. “Now you can go anywhere you want. But you also have to be prepared to make more decisions because there are more choices. But your reward should be that you get a better return.”
You can arrange a self-directed RRSP through a broker, a financial planner, a bank or a trust company. Instead of having different RRSP investments all over the place, they will be administered by one institution and you will get one single statement. That makes it easier to keep track of your investments. “You run into problems of inaction if you have six different statements coming in. You’re more likely to look after your RRSP if it’s all on one statement,” says Stewart.
A self-directed RRSP gets you out of the bind of investing in only one company’s products. For example, the Toronto Dominion’s Greenline Investor discount brokerage service offers a variety of investment instruments, including 400 mutual funds and GICs from six different banks and trust companies, not just the TD’s own products. “You can mix and match the whole dam thing up,” says Peter Campbell, manager of technical support for RRSPs at the TD Bank. Most banks and trust companies now offer both a discount investment service and a pricier, full-service plan.
However, a self-directed plan includes an administrative fee,
ranging between about $100 and $200 annually, depending on the plan and how much service you get. So it does not make sense for investors with only small amounts in their RRSPs.
CAN YOU MANAGE YOUR RRSP BY YOURSELF?
Another important question to ask yourself is how much help you will need or want in managing your RRSP. It is now possible to buy a wide variety of investment vehicles for your RRSP — some of them quite complex — with little or no advice.
Some self-directed plans come with an advisor. Banks now offer investment specialists, a broker can suggest what products you should buy or, if you are buying from a financial services company
such as Investors Group or the Laurentian Group, you get a financial planner along with a choice of that company’s mutual funds. Or you can hire an outside financial planner to counsel you.
However, for RRSP do-it-yourselfers, there is now a wealth of information — investment books and publications, regular newspaper reports, databases, company presentations and literature, and financial planning software.
Francis "do-it-yourselfers", vice-president of client services for Altamira Investment Services Inc., believes that motivated investors can manage their RRSPs competently on their own. Altamira, a “noload” mutual fund company, sells directly to customers via a 1-800 number. “Our clients tend to be quite sophisticated and knowledgeable. They’re not looking for advice, they’re looking for information, because they don’t want to surrender personal finance decisions to someone else.”
Others are less optimistic. “Almost anybody who’s doing it on their own is doing it badly,” says Warren Baldwin.
Doing it well takes time and self-discipline, suggests David Mather. “People approach it with great enthusiasm, have all the material and do a very comprehensive job — and then they let it wither. You have to stay on top of it.”
If you’ve let opportunities slip in the past — perhaps a GIC matured and you left the money sitting around for several months — then you probably do need someone helping you. “Some people say, No, I don’t have the time, I don’t have the interest, I’d rather have somebody do it for me,” says "do-it-yourselfers". “And that’s a perfectly acceptable solution, as long as the quality of the advice is good.”
HOW TO GET GOOD ADVICE
So how do you make sure you are getting good advice? Get referrals for advisors who deal with clients similar to you, ask lots of questions and interview several candidates before making a decision. “You’re looking for the same thing as when you go to the doctor,” says Blake Goldring, senior vice-president of sales and marketing at AGF Management Ltd. “Someone who will interview you about your finances, your net worth and obligations and determine what is most important for you. Not someone who gives you a set package — this is what I sell, take it or leave it. You should be sure that advice is customized to you.”
Many advisors, such as brokers and some financial planners, receive a commission from the companies that sell the products. As a result, many consumers are suspicious of “speedy and greedy” financial salespeople, says Dan Richards, president of Marketing Solutions, a research and marketing firm for the financial services industry.
However, Richards’ studies show that the industry is responding to the public’s desire for quality financial advice. In 1993, Richards’ researchers made calls to 250 brokers and planners, looking for investment advice. “In 90% of cases the response was, we should sit down and look at what your objectives and needs are and then we can talk about what you want to invest in.”
David Stewart, whose staff receives fees for sendee rather than commissions, says while commission people may have their biases, they are not so short-sighted as not to realize they have to keep their clients happy.
However, if you do have questions about why your advisor is keen on one particular fund, do not be afraid to ask questions.
Consumers also wonder if banks and trust companies, relatively new to the business of financial advice, can give their customers the support they need. Clifford Prupas, assistant general manager for retirement and term products at Bank of Nova Scotia, insists they do. “In order to sell mutual funds you must pass independent exams to become a qualified representative. We also have our own course that you must participate in to improve the quality of the guidance and information you give to customers.” Customers who want to buy mutual funds are urged to spend time with an advisor to make sure they have thought about their choices and understand the risks involved. Even customers who are only buying GICs are encouraged to plan their investments to protect them from interest rate fluctuations.
STICKING WITH THE PLAN
All too often, however, it is not a greedy advisor but a nervous investor who jumps around from one investment to another, rack-
Look for Part 3 in Maclean’s February 13,1995 issue.
ing up commission fees and losing money in the process.
“The most common mistake is the standard knee-jerk reaction to what’s happening in the market, says Patrick Ireland, manager of personal financial services for Investors Group. “The market’s going down so I’d better sell. Interest rates have gone up so I’d better get into that.” Such investors constantly miss the peak of whatever markets they’re in, selling low and buying high.
Instead, you can take a very simple approach: do your original homework of determining your goals and the right strategy for you. Then buy the investments and sit back and wait. “If your goals and objectives haven’t changed, why should your investments change?” says Ireland.
Mutual funds were designed precisely to relieve individual investors of the burden of trying to “time” the market, points out Laurie Munro, vice president of marketing for Mackenzie Financial Corporation. Munro, along with many other experts, says he would rather let fund managers decide the right times to buy and sell. “I work in the market and I’m still not capable of it.” Don Reed says his company does not want short-term investors. “We have a five-year time horizon and so should our clients. No one has lost money in a Templeton fund over a five-year period since the fund was started.”
HOW OFTEN SHOULD YOU REVIEW YOUR RRSP INVESTMENTS?
However, that doesn’t mean you should totally ignore your RRSP. Once or twice a year, it is a good idea to review both your portfolio and your goals and strategy to make sure they are still appropriate.
While it is important to resist that temptation to muck about, there may be occasions when it is valid to make changes to your RRSP — if there are major changes in your life, your income or your goals, for example, or if a stellar performance by one investment is throwing your portfolio out of balance. And sometimes an investment will turn genuinely sour. David Stewart suggests that when you choose a mutual fund, for example, you choose one or two comparable candidates and follow them as well. If your choice is consistently outperformed by one or all of the other candidates, it may be worth the trouble — which may include fees — to switch. “You shouldn’t accept mediocre performance forever.” Lorie Hamilton, marketing manager for retirement services at Royal Trust, says “It’s a mistake to put on blinders.” She advises investors to make a conscious decision about where they want to put each year’s contribution. “Don’t just stick it in your usual GIC or a favorite mutual fund.”
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