RESPs and High Fee Mutual Funds

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.

High Fee Mutual Funds

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.

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Donuts, Graduations, Summertime and #MoneyTalk #Canada150

Guess what is back for a short time? The Dutchie! My old friend is back at Tim Horton’s to help celebrate #Canada150. For the true connoisseur of the dutchie, it is still available in the Atlantic provinces, it is just back in Ontario, for my enjoyment.

The Dutchie

Bring Back the Dutchie Tim Hortons!

I spent a lovely day a few weeks ago at my youngest daughter’s graduation from the Queens Faculty of Education. She already had a Science Degree from Trent, so this means my investments have now paid out 4 degrees, not bad pay out. There is another degree I have a small stake in, so I am hoping that pays out next year. For those parents unsure if they should put money in an RESP, yes this is a very good investment (and not just for the free money from the government).

One of the areas in Queens we visited had information on the “new” OSAP. If kids have parents that make less than $50,000 their tuition is “free”. The wording there is unclear to me. The Ontario budget stated, “Students from families with incomes under $50,000 will have no provincial student debt.“.  This is also misleading (in my opinion).

There will be higher non-repayable grants for lower-income students, which is good. Having graduates saddled with massive debts is a very American thing, let us remove it from the Canadian lexicon. Will this help lower-income families get their kids into University? My opinion is not likely that much. The funding is still too low, the tuition (and associated fees) continue to sky-rocket and the costs of living away from home at school can be very high (especially in large urban areas like Toronto).

The other part of the equation, is what will the Federal Government part of the Canada Student Loans program do?

Summer is now here, and the days are getting shorter (if you are in the Northern Hemisphere). Remember how you hated the winter months? These are the months you were waiting for.

Things I wrote

Given I haven’t put out a random thoughts post for a while, you’d think I’d have lots of things that I must have written, but I haven’t really. I did write Banking is Necessary, Banks are not , which pokes fun at the FinTech phenomenon that many folks are hyping.

Is there such a thing as Bad Budgeting ? Yes, if all you do is adjust your budget to balance your inflated spending, that is bad.

There are a few new features in Quicken 2017 update that are making it better than earlier versions. The Android and iOS clients are making things better, but there are still some odd crashes (and importing data is still kind of weird at times).

Fun Tweets

While my RDSP page is quite good, there are many people who have helped me and one of them is Milburn Drysdale. He has updated his website, and here is a great tweet to send to anyone looking to learn more about the Disability Tax Credit.

However, Michael James wins with the best retirement financial tweet of the week

👇 For more great financial articles from this week click here 👇

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Banking is Necessary Banks are Not.

This is a quote attributed to Bill Gates, which resonates with me. Whether the quote banking is necessary banks are not, is the real quote, or it is:

banking is necessary

Both of these quotes petrify banking executives, because they are both true.

Banks continue to claim they are embracing the use of technology, or FinTech as they would have you call it,  but that does not  ring true to me.

The reason I call bovine feces on this statement is my understanding of a few key factors in banks.

  • Banks do not like new things, until they are proven money-making ideas. Adaptation of new ideas is not any banks strong points (unless it makes them a lot of money).
  • The backbone of the #FinTech revolution is ATM machines and point-of-sale systems which are still running on Windows XP. #FinTech is not as futuristic as you might think.
  • COBOL programmers are still making a fortune from Banks , because Banks are afraid to upgrade their existing core system to a language from this millennium. This odd situation which arose with Y2K, where programmers were paid ludicrous sums of money to make the following change in systems:
    • 05 YEAR PIC 99
      * DEFINE A YEAR ONLY NEED 2 DIGITS
    • 05 YEAR  PIC 9999
      * NOW WILL WORK UNTIL YEAR 9999
  • Yes, that was a big money-maker for a few consultants (I am simplifying). These same consultants continue to make bags of money because banks are afraid to use a new language like say C++ or Java?
  • Banks have Fiefdoms and they don’t like playing with each other, thus they typically have very diverse computer systems. This I can guess on the basis of a few observations I have seen at a specific bank, which merged with a large trust company many years ago. The Trust Company still exists in parts of the banks system, which has lead to issues with systems interworking with each other.

There are countless other examples out there, but this belief that FinTech will be changing things for Joe (or Josephine) Six-Pack any time soon is a falsehood.

Automation of systems continues with Banks, but again, these are cost-saving measures, not technological leaps forward. Being able to photograph a cheque to deposit cuts down on the  bank having to archive cheques, mail out cancelled cheques, etc., so it was finally adopted by the big banks.

The applications on Smart Phones are allowing banks to close more branches, and cut down on employees, again a cost-saving measure.

The Future is so Bright?

We need banking services, but, unfortunately the way the banks implement them, leave a great deal to be desired. The business of banking will see many changes over the next few years, but not quite as many as a lot of financial pundits think.

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Quicken 2017 Update

A while ago I wrote a review of the Quicken Business & Home 2017 (Canadian Version) . In that review I mentioned the Quicken iPhone/iPad app (I think there is an Android version as well). I have a better perspective on the subject, after trying them out.

Quicken 2017

Quicken 2017 Canadian Edition

I installed the Quicken app on my iPad and on my iPhone and initially I didn’t think about using it, but that has changed. Most of the time (when I remember), I will enter new transactions on the Quicken 2017 App, and sometimes even take a photo of the receipt.

The application itself seems to have some brains in it, as it will use the GPS and map data in your phone to try to guess where your expenditure happened. An example was when I was at Costco, and in the parking lot, I input the ridiculous  amount that we spent, and the App filled in the “Spent at” field with Costco. You can override this capability, but this is kind of nifty (while being a privacy concern too).

Another Step in the Right Direction

If Quicken continues to support these adjunct programs for its Quicken system (in Canada) this may be a big plus to the whole program. My hope is that the Quicken Cloud has a high level of security around it. The information in the Cloud would be highly valued by hackers.

If they could make Quicken 2017  easier to track investments that would be better. Currently there is a lot of manual data entry to track your investments.

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Bad Budgeting

I am not someone who deals with a budget well. I simply try to not overspend, but every budget I have had, I have broken, or abandoned. Everyone needs to understand their limitations, and I know mine.

I was reading an article (on Life Pro Tips on reddit)  which said after you set up your budget, you should revisit it every six months. On the face, this sounds like a good idea, and if you have discipline it should work. My opinion is that this kind of tinkering, could easily lead to lifestyle creep.

For those that have not read my thesis of lifestyle creep, let me sum up. As your income increases, lifestyle creep, is when your lifestyle over steps that income inflation. Instead of saving more, many folks simply spend more, and that is bad.

Bad Budgeting and Lifestyle Creep

How can adjusting your budget every 6 months lead to lifestyle creep? Simple, that is the definition of lifestyle creep. Think of the following rationalizations you might have doing this tweaking.

  • You notice, normally,  you never have enough cash, two days before you get paid. You just got a 5% raise, you decide to not increase your saving, so you have enough money those last 2 days. This is the prototype for lifestyle creep.You should increase your savings level by 5%, and figure out how to spend less. Don’t treat the symptoms, cure the illness.
  • Your income has increased by $350 a month, and that is precisely how much you need to buy a car (on a 7 year term). This equates to adding a $4200 a year anchor to your life. This tweak could cause other ripples in your budget tweaking, which will sink you financially.
  • Thanks to a bonus, you now have a 5% down payment, and at current interest rates you can afford to make the monthly payments on a mortgage.  If you can’t tell all the things missing from this, you need to get help.

Conclusions

If you have intestinal fortitude, and can keep from rationalizing spending too much, then this idea might be a great idea. For others like me it is a cautionary tale. There are still others like Michael James who just don’t really need a budget, and good for them!

 

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