RESPs and high fee mutual funds seem to go hand-in-hand in Canada. Most RESPs, are set up with an “adviser” of sorts (usually at a bank), who makes helpful suggestions as to where your money should go. The question to ask, who profits from this advice? Sometimes both adviser and investor, but always the adviser.
Mutual Fund companies want you to buy high MER funds for 18 years, so they can profit from you. This does not mean RESPs and high fee mutual funds are inevitable.
Whether your investment goals succeed is not their goal. Their goal is to extricate as much money from you in fees and increase their profits. Mutual Funds are businesses, sometimes with shareholders, and employees who want bonuses, remember that and you will be fine. Who and how are profits made, is always the question to be answered.
I have friends ask me about RESPs, as they are aware that my kids have graduated from University, so they ask if I used the program. My answer is yes, but I start with warning them that when I set up these accounts they were Canada Trust Mutual Fund accounts. The CT Mutual Funds turned into TD Mutual Funds, but it was not until later that I learned about the TD E-series funds I should have used (and the bear trap in using them).
The typical answers or comments that I get (that really cause my gears to grind) are:
- I talked to my Manulife One guy and he helped set up the account for us.
- While I was at the bank, I saw an adviser who set up some RESPs.
- My insurance broker said they had a really good product for RESPs so I had her set it up for
- Someone told me about these great Group RESPs, sounds like a great idea I usually go for a beer after hearing this stuff, and sometimes I just weep.
Let’s unwrap these malodorous gifts, first, your Manulife One guy is going to put you into Manulife Mutual Funds because that is where he (or she) makes their money. These funds have MERs that are far too high for a shorter term savings program like the RESP.
The same is true for your local bank. I once mentioned the TD E-series funds to my Bank’s “TD Mutual Fund Expert”, she looked them up and said that she couldn’t actually sell me those funds. I asked why, the answer, “they don’t let me”. So TD doesn’t allow their “Mutual Fund Expert” sell some of their Mutual Funds? In fact you can buy only their I-series in your account, you cannot access their E-series, D-Series, O-series or any other unless you have a TD Trading Account).
Your insurance company’s RESP is going to be closed and the only thing you can buy is their High MER funds. I hope you are noticing a great deal of repetitiveness here.
The Group RESP thing, I had to go look up and then almost cracked a tooth while clenching my teeth. Group Scholarship trusts are throwbacks to before the day of the RESP. They can work for folks, and their forced savings is a good thing for many folks, but read all the rules very carefully. What are the penalties if you take money out quickly (or early)? Are there penalties if your child doesn’t go to post secondary school? What are the rules about what is a post-secondary education.
If I could just hand someone a simple outline like say this article, this article or this article, I would, but I guess no one writes about RESPs much? Yes, that is sarcasm, why do people spend more time worrying about what organically grown kale they want to buy, than this important investment? Rhetorical question, don’t answer that.
Are RESPs a Good Idea ?
An RESP is a great idea for your kids’ education, but don’t jump at the first one you see. Do some research; know what you are buying and how much it is going to cost you. Mutual Funds and other associated firms are hoping you get confused in terms of how much you pay in management fees. It can get confusing especially with the grant money going into the account which can muddle your figures. Your goal is trying to pay the least in fees, and maximize your growth and grants received.
Oh yes and if you have one of the old style group plans….read the small print so you use them properly
If you want to pay the least in fees and make your share of market returns then the ideal answer is to buy index ETFS in your RESPs . However as per BCM experience this is not easy . Seems with RESP and RDSP few low cost companies want to run them. I have seen RESP with places like Qtrade but you have to be pretty savvy to do it and they cope with the basic grant but not the bonds or SAGES. WARNING : Most people lose the will to live when they start reading comments like this , they just dont have time to contemplate it. Two suggestions less evil than other options 1) as much as I dislike mutual funds for their ability to underperform the market ask your existing advisor to do your RESP NO LOAD , FEL on the basis, F series they are already getting paid for your RSP, TFSA etc . show me some love please. You can also look for a flat fee investment advisor who will charge one monthly amount for everything the whole family does not MERS. ( messege me if you want more info ) 2) To get away from stock picking guessing , more and more mutual fund providers are wrapping indexing ETFs in mutual funds. Take a look at some one like Invesco Powershares or Mackenzie that track benchmarks. It may not be the TSX or the SP500 but its a compromise . The series F MER is likely 0.75% range . Latly dont forget to dial back the risk from grade 9 . Far too many people had kids 100% equity in the 2008 crash and RESPs were wiped out just as they needed to use them
Not sure why you think that setting up or administering an RESP is difficult with a discount broker. Once it’s set up, and can be done easily online, you can buy low cost index funds or ETF’s, and even bond ETF. You contribute. The government gives 20% on top of that a month later, and you buy once or twice a year once you’ve accumulated enough funds to make it worthwhile to pay the trading commission, which could be $10-30, depending on the assets you have.
It’s not rocket science, but most people are not financially confident enough to take it on so they do it at the bank, insurance company, or scholarship company. DIY is the least expensive way, but does require a bit of work.
Agreed, but I do think it is a confidence thing for a lot of folks.