Author: Mike Holman

Apparently most investors are using their TFSAs for safe instruments such as GICs and high interest savings account, even though they are eligible for equities, such as stocks and bonds.  I’ve seen a couple of instances where the name “Tax Free Savings Account” was blamed because it contains the word “savings” which apparently is confusing. Gordon Pape brought it up in his article and Jonathan Chevreau wrote a whole post on the theory.

For some background, here is my post on TFSA rules.

The name has nothing to do with it – think about this – RRSP is a very successful account used by many Canadians.  What does the “S” in RRSP stand for?  Wait for it….yes, “Savings”!

How is that Canadians are comfortable putting equities in their RRSavingsPs, and yet they are so confused by the TFSavingsA, they are stuck investing in GICs and high interest savings accounts?

People who think that you can only buy GICs in TFSAs are the same people who think you can only buy GICs for the RRSP or worse – they think you “buy an RRSP”.  That issue is just plain investor ignorance.  No name change can combat that sort of thing.

Here are my reasons why investors like having GICs and high interest savings accounts in their TFSA

Advertising

The banks advertise more.  ING in particular, easily smoked every single other financial institution out there with its marketing and implementation when the TFSA came out.  People associate banks with GICs and high interest savings accounts, which is one of the reasons for a lot of investors playing it safe.

Simple marketing

If you are trying to attract customers to sign up for a new type of investment account, the last thing you want to be doing is confusing them.  The TFSA has a set of new rules to be learned, adding more investing options like stocks and mutual funds doesn’t make for good advertising.

Good implementation by the banks

ING was the first institution to offer a “pre-TFSA” account in the fall of 2008, so you could make your contribution early.  They didn’t really put the money in a TFSA account, but rather a non-registered account.  The interest in a non-registered account is taxable so they doubled the interest payment to cover the taxes, in effect creating their own temporary synthetic TFSA account.  On January 1, 2009 they transferred the money to a TFSA account and everyone was happy.  They have continued to offer this “bonus” every fall.  Obviously they spent a ton of dough on advertising, but it seems to have paid off.

What were other companies doing? Not much – I recall Scotia allowing people to set up their accounts early, but I don’t know about the other banks.  What about the discount brokerages and mutual fund companies?  They did nothing, while ING and the banks got all the TFSA money.

I’m not trying to play the blame game here – it really doesn’t matter to me which companies have more TFSA assets.  However, the point is to show why most people set up TFSAs with their bank and invest conservatively.  It’s not because they are stupid or are poor investors – it’s because the TFSA was a new investment account and the banks (especially ING) were the only visible option at the time.

Small account size

TFSA contribution room was only $5,000 per person in 2009.  In the grand scheme of things – this ain’t much.   GICs are easy – some of this money will get converted to mutual funds and stocks/ETFs over time.

Emergency fund

I can’t speak for anyone else, but my wife and I decided to start an emergency fund.  This has to contain liquid investments which means a high interest savings account.  The interest on this money, while puny, is considered taxable income.  Putting this money in a TFSA is the smartest choice for us.

Tax sheltering makes sense

You can talk about different tax strategies until the cows come home, but the fact is that if you are going to own investments which produce interest income – putting them into a tax-sheltered account makes the most sense.

Short term investment horizon

The TFSA is far more suited to short-term investments than the RRSP.  Someone who is saving for a house downpayment, a new car, a vacation, a house renovation will have a fairly short time line for that money and needs to keep it safe.  Hello GIC!

Fees

A lot of discount brokerages charge a lot of money for trading stocks and ETFs – it’s just not worth it for a smaller account.

What will happen in the future?

Going forward, I think the amount of TFSA assets invested in equities will increase as investors have more contribution room to play with.  The TFSA account is still pretty new – as more investors learn the rules, more will open accounts that can invest in mutual funds or stocks and ETFs.

If you are thinking about moving your TFSA from one company to another – check out my TFSA December strategy to save transfer fees.

What do you think?  Any particular way the TFSA should be used or is any method ok?

There are many things you should consider when choosing a financial advisor.  One of the items is their academic training.  Would you rather be advised by someone with the minimum amount of qualifications or someone who has made the effort to take extra financial planning courses?  Unfortunately, in Canada it is possible to become a “mutual fund salesperson” with very little training.

Here is a list of Canadian fee-only financial planners.

Depending on what you want from your advisor, their qualifications might or might not be important to you.  If you want to quickly set up an RESP account at your local bank, the in-branch investment specialist will probably be good enough.  If you are looking for advice on retirement planning including tax and estate issues, then you will want someone with more knowledge.

I’ve listed four common financial planning courses and designations.  When you are researching potential advisors, ask what courses they have taken.  Another idea is to ask when the last time they took any kind of training.  If they haven’t done any training in a while, ask how they keep up with recent changes in taxes, laws etc.

As Dr Rathgeber pointed out in the comments – don’t forget that just because someone has qualifications and knowledge, doesn’t mean they will use it for your benefit.

There are many other courses that are available – feel free to list any in the comments if you think they should be mentioned.

CFP – Certified Financial Planner

This is the only course listed that I haven’t completed any part of.  It is a very demanding course with two lengthy exams.  Basically you have to take the course approved by the Financial Planning Standards Council.  Then you write the exam and pray that you pass.  In order to get the actual CFP designation, you need three years of direct financial planning experience.

The material is quite extensive and covers all the various financial planning areas such as taxes, retirement, estate, investment planning.

I would suggest that if you want to hire a financial advisor that the CFP is the main designation that you look for.  It really encompasses all the subject areas necessary for financial planning.

CFA – Chartered Financial Analyst

The CFA designation is more appropriate for investment management, rather than financial planning.  Portfolio managers, investment analysts are the key jobs for this designation.  It is however, fairly common for CFA graduates to become financial planners. I would say this is the hardest designation to get – you have to write three lengthy exams and have four years of related investment experience.

Back in a former lifetime, I passed the first level of this exam.  I did the reading for the second level, but due to a career change – I never completed the 2nd level.  I’d love to get this designation now, but you need several years of investment experience to get the designation, which I can’t get with my current job.  It’s not worth the effort and money if I can’t get the actual designation to brag about.  🙂

PFP – Personal Financial Planner

This PFP is a Canadian program offered by the CSI (Canadian Securities Institute).  I’m not personally familiar with this course, but apparently it is popular with bank employees.  It is a CFP qualifying course which is a definite vote of confidence.

FCSI – Fellow, Canadian Securities Institute

This section was provided by reader JT

FCSI is Fellow, Canadian Securities Institute. As you can probably guess from the name, it’s the CSI’s highest level of recognition and its requirements are the most demanding.

To get it, you need to complete:

• One of the CSI’s accredited designations: CIM, CSWP, FMA (although this has been being discontinued);
• One additional course (easily satisfied by completing the CPH)
• One ethics module

In addition, you need a testimonial from an existing FCSI holder and need to satisfy certain CE requirements.

Despite the list of requirements, it’s not *that* much work for a career advisor. I think you’ll find this designation should be pretty widely-held amongst full service advisors.  It’s unlikely that someone selling mutual funds in a bank branch would have it, though.

CSC (Canadian Securities Course)

This course is a much harder course than the IFIC.  The material is more detailed and there is a lot more of it.  I remember thinking that this course wouldn’t be a lot of work, but I was wrong.  The CSC covers all the material from the IFIC plus topics like stocks, options, and bonds.

For any job involving investments other than mutual funds, the CSC is usually mandatory.  A broker’s assistant would need this, call centre employees for discount brokerages should take this.

For investors – this is a decent course to take.  It’s a fair bit of work, but you will learn quite a bit.

This course is self-study with a written exam.  It is suggested that 135-200 hours of study are necessary and I will agree with that.

IFIC – Investment Funds in Canada

This course is the easiest financial planning course available.  It is the minimum qualification to sell mutual funds in Canada.  How easy is it?  I wrote the exam without studying and passed easily.

The IFIC is suitable for a beginning investor, however I’m not sure if it’s worth the money given the plethora of financial advice articles on the web.  It covers basic financial planning and mutual funds.  If your (future) job involves selling mutual funds or giving advice on mutual funds then you will need to take this course.

More information

Check out my post on how financial advisors get paid.

Canadian Penny Stocks Blog wrote a good analysis of the CSC – Is the Canadian Securities Course For You?

I had someone ask me recently what a “cash account” was. They were under the impression that it was a temporary holding account for doing RRSP transfers between financial institutions, which is not the case.

A “cash” or “non-registered” account is an account that is not tax-sheltered in any way. Any kind of income or capital gains will be taxed. Most people have chequeing or savings accounts which would be considered non-registered accounts. You can also have a non-registered or cash account at a brokerage where you could buy stocks or bonds.

An RRSP account is considered a registered account. Contributions produce a tax receipt and withdrawals are considered taxable income. Any earnings inside the account are not taxable.

If you withdraw money from your RRSP and put it into a non-registered account (or spend it), that withdrawal is considered taxable income. The money is no longer tax-sheltered.  If you wish to transfer RRSP money to a new RRSP account at a different bank, you can do this without doing a taxable withdrawal by completing a T2033 RRSP transfer.  Doing a T2033 RRSP transfer properly will ensure that you maintain the tax-sheltered status of your investment money.

How to do a T2033 transfer

• Step 1 is to set up an RRSP account at your new financial institution.
• Step 2 is to request a transfer from another institution. You will then be asked to fill in a T2033 form.

You don’t have to notify or talk to your current advisor or institution.  They will get the transfer request and will send the money along.

Most of the form will be self-explanatory – generally you have to provide the account number and address of your existing financial institution.
One section which is a bit trickier is the “in-kind” or “in-cash” transfer section.

In kind transfer

If you transfer your investments “in kind”, that means that you transfer your specific investments over to the new company without selling and buying. An example would be if you own 100 shares of BMO stock at Scotia iTrade online brokerage. You’ve decided to go with Questrade brokerage because you like the name better, so you tell Questrade to complete the transfer “in kind” because you don’t want to sell the BMO shares.

You can only do an “in kind” transfer if the investment you own is available at both financial institutions. Most stocks for example, would be available at all brokerages whereas as a GIC purchased at a particular bank wouldn’t be offered anywhere else.

Why do an in kind transfer?

The main benefits for an in-kind transfer are:

• Taxes – No tax consequences resulting from selling your existing investments. This only applies to investments in a non-registered account.
• Cheaper – Some securities such as stocks cost money to buy and sell.

In cash transfer

Moving your investment “in cash” means your investments at your current brokerage will be sold and the resulting cash will be transferred to the new broker where you will then buy new investments. This also referred to as a “cash liquidation” transfer. If you ask for an ‘in-cash’ transfer, you don’t have to do the actual selling – your financial institution will handle that for you.

Why do an ‘in cash’ transfer?

Typically you would do an “in cash” transfer if your current investments are in-house investment products that are not sold at the new institution. An example might be a certificate of deposit or a mutual fund. For example you might own 3 mutual funds at fund company ABC – you decide you would rather invest with fund company XYZ, so you would do an “in cash” transfer – sell the ABC funds, move the cash, then buy your new funds at XYZ.

Transfer fees and how to avoid them

Most institutions will charge a transfer-out fee is you move your account to a different company.  They usually range from $125-$150 for stock account and can be as low as $50 for mutual fund accounts.  Check with your current financial company to see if there will be a transfer-out fee.

The way to avoid the transfer fee is to ask your new financial institution to cover the transfer fee.  If you are moving a decent amount of money, then the odds are quite good they will pay it.  It doesn’t hurt to ask!

Summary

If you are moving registered money (ie RRSP,TFSA,RRIF) from one institution to another financial institution – you need to complete the proper transfer so that the government doesn’t think you have cashed in your account, which will have tax consequences.

For RRSP accounts, doing a T2033 transfer will maintain the tax-sheltered status of the RRSP funds.

• Transfer in-kind means you are moving your existing investments to the new account.
• Transfer in-cash means you are selling the investments and moving the cash.

Most companies charge transfer out fees – ask your new financial institution to pay it.

For a detailed comparison of all the Canadian brokerages – check out my Canadian discount brokerage comparison.