Monday, December 30, 2013

Education savings plans and the bank:
Do your homework!

The little girl isn't yet teething but she already has a education fund.

Both my granddaughters have RESPs (registered education savings plans). Open an RESP to put money aside for a child's future education and the government promises to sweeten the pot with a little grant money thanks to the Canada Education Savings Grant program. With growth within the fund untaxed, the money grows and compounds nicely over time. It sounds straight forward enough, but it isn't.

First, I've found it difficult to get information concerning RESPs from the banks. I've been to four different branches of two different Canadian banks and got a lot of conflicting information. A rep at one bank branch told me that to get grant money, I could not deposit the money for my granddaughter's education into a mutual fund. For that reason, the first money put into the RESP bought a GIC.

Another bank rep said that was wrong. This rep took my deposit and put it directly into a mutual fund. As other folk bought GICs for my granddaughter within the RESP and still others deposited cash, the question about mutual funds raised by the first rep still hangs in the air.

My one granddaughter has an RESP in which all donations are automatically invested. The other granddaughter with an RESP at another branch of the same bank has more than $600 sitting uninvested in her account. They refuse to even discuss any automatic investment approach, claiming this is not allowed.

Read everything you can on the government site. If you have any questions, call the government before taking your questions to the bank. Come the new year, I am going to make a few calls and update this post.

When you finally open an account and the first thing to be done is complete an investment risk questionnaire. The questionnaire is designed to allow the bank to set investment boundaries based on your personal tolerance for investment risk and market volatility. The bank representative assured my daughter the questionnaire was to protect her by enabling the bank to match her risk tolerance to her investment strategy. I say cut the gobbly-gook: The form is to protect the bank.

Rule number one: The banking representative selling the investment to be sheltered in the RESP, commonly a GIC or mutual fund, is not an investment expert. They are not representing you; They represent the bank. There is a reason for their somewhat opaque financial advice. They are not there to give out financial advice. They are simply there to sell the bank's products but without coming across as the banking industry equivalent of never-to-be-trusted car salesman in the automotive business.

Rule number two: In today's investment climate, no investment is totally safe. Some once traditionally safe investments now look to carry risk. And others, that once looked risky, now look risky to ignore. For a once safe but now possibly risky investment think of the oh-so-conservative GIC.

A non-cashable GIC with a one year term is delivering a yield of only one percent today. Inflation, according to Stats Canada, is running at 1.1 percent. This GIC may lose value over its term. This is not risk free.

The best GIC according to the info supplied by the bank was the Financials GIC Plus. It guaranteed a minimum of 1 percent annually with the possibility of paying as much as 20 percent over the five year term.

I sensed the bank representative was gently pushing the GICs as a safe place to stash a child's eduction savings. The bank rep did not want to delve too deeply into my suggestion of putting the mony in the TD Monthly Income fund. I have found that TD reps often pooh-pooh this income fund and try to steer one to other mutual funds in the TD stable. This is despite the fact that historically the income fund has bested a great many, if not the majority, of TD offerings.

Anyone familiar with investing knows a good balance of safety, income and growth is traditionally struck by a portfolio with a 60/40 split between stocks and bonds. The TD Monthly Income fund has about 59% in equities (almost 100 percent Canadian stocks) and 41 percent in fixed income and cash. It is damn near perfect. A nice perk is the MER (management expense ratio: a charge to manage the fund) is only 1.48 percent. Plus, this a no load fund.

A GIC paid only one percent over the past year. Compare that to the TD Monthly Income fund which paid 8.62 percent, and 2.57 percent of that was in monthly dividends. These dividends remain in the fund to compound thanks to the dividend reinvestment plant or DRIP.

The top five investment groups in the fund are financials, energy, real estate, utilities and communication services. These five account for a little more than half the funds investments. I know my son-in-law wants to have some exposure to energy. With the TD Monthly Income fund, his wish is granted.

Out of curiosity I compared the growth of the TD Monthly Income fund with the TD Energy fund. The energy fund was one of a number of funds recommended to my son-in-law by a bank rep. He has put some of my granddaughters' education savings into the energy fund following the bank's subtle persuasion. The fund charges a MER of 2.26 percent when last I looked. I wonder if the high MER plays any part in the fund coming so highly recommended.

To see this graph larger and clearer, click on the image.

One warning, but a big one. The stock market is volatile. There are no guarantees. No matter how well a stock, an ETF or a mutual fund has done in the past, it can not be assumed it will continue its winning streak.

That said, if, and I believe it is a big if, if the TD Monthly Income does poorly over the coming decade, I think a parent will have bigger problems than the loss of a few thousand dollars in an education savings fund. Such a loss would mean our economy was in the dumpster and the financial in financial free fall.

In my humble opinion, the 60/40 investment split offered by the TD Monthly Income fund should offer all the safety and security any reasonable person requires. Locking education money away in a low interest paying GIC is the investment that would give me sleepless nights.

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