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moneysense.ca, 30/04/08
Still Sour on Group RESPs
The more I learn about group RESPs, the less I like them. In the comments thread on an earlier post on Group RESP plans, a reader referred to the prospectus for the years 2000 to 2007 filed by the Canadian Scholarship Trust filed with SEDAR. I was initially excited to lay my hands on so much information – at last, I could compare past results of Group RESP with a self-directed RESP that holds fixed-income securities and make an apples-to-apples comparison between the two for a number of time periods in the past. The results would be interesting and hopefully conclusive.
Alas, it was not to be. While it’s possible to find out contribution information or EAP (education assistance payments that is made over four years to eligible students) information, it is hard to obtain both for the same plan. For instance, consider the 2007 prospectus. The Group RESP plan marketed by Canadian Scholarship Trust is called “Group Savings Plan 2001″. The contribution schedule is available in the prospectus and tells us that buying one unit for a newborn would cost $105 per year, for a 1-year old $115 per year etc. The oldest child that can be enrolled in the plan would be 12-years old for a contribution of $1,100 per year. While, the prospectus mentions that EAP of $600 was made for the 2006 year, the “Group Savings Plan 2001″ was offered only in 2006 and 2007, which means the oldest child enrolled in the plan in 2006 will be eligible for EAP in 2012. The Group plans offered in years 2000 to 2002 was called the “Optional Plan”, in years 2003 to 2005 was called the “Group Savings Plan”. So, it’s nearly impossible to tell how the plans have performed over the years.
The defendants of Group RESPs point out that the portfolio is invested in an “ultra-safe” manner. But, guess what? According to the prospectus for the “Group Savings Plan 2001″, about one-quarter (24.8%) of the assets is invested in index-linked notes. A fair comparison of group plans with self-directed RESPs, going forward, would be a 75% bond and 25% equity mix. I’m convinced more than ever that a self-directed RESP invested in a diversified portfolio in a low-cost manner is more flexible and almost certain to outperform any pooled RESP plan available today.
moneysense.ca, 30/04/08
Definite ripoff.
I just can’t understand the “safe investing” and “guaranteed” arguments – guaranteeing the principal is extremely easy – just buy mostly gics in a self-directed resp.
I do not see ANY reason why to go with Group RESPs when RESP accounts can be obtained for free with options such as TD efunds.
Group RESPs charge a lot of fees and steal your money if your child decides (or can’t) not to go to school after high school. The conditions of the program must be looked very closely before adhering. They lock people into staying in their programs with high penalties.
I would not consider Group RESPs even if their performance was better than mutual index funds.
Mike: I guess I didn’t pay attention before but I, for one, was surprised to see 1/4th of Group RESP assets in index-linked notes. Wonder if anyone is able to read the old WordPerfect prospectus. It would be nice to do an apples-to-apples comparison with self-directed plans.
I never did open an RESP for my kids because when I investigated a long time ago, there weren’t any truly self-directed RESPs that I could find. My kids are now too old, but I’m curious: are there any RESP accounts that allow the investor to choose his own ETFs or stocks without limitations?
I think regular readers know my position on CST from my other posts so I won’t goin to too much detail but I consider myself ’suckered’ by CST when my first child was born. I was 21 at the time, and a little impressionable. I should have shopped for options, but it seemed like a fine idea as explained.
Looking back it was a terrible plan, sure it’s safe but don’t expect to see any great gains. You would probably do better with a GIC RESP ladder . . . less fees and even safer.
CC – that is surprising that they would have index-linked notes although I guess it makes sense since a fund like that should be able to handle a bit of volatility in part of the fund.
MJ – self-directed RESPs let you invest in whatever you want. I think the only limitations are the same limitations that apply to RRSP- eligible securities ie you can’t have art, old cars etc in them…
My observations of group RESPs:
Very high fees – I took a close look at CST’s prospectus last year and it appears that the MER for their investment fund was approximately 5%. I calculated this by dividing the sum of the administrative fees and investment management fees by the fund total. To be honest, I didn’t think their fees were out of line since RESPs are very difficult to administer – the problem was more the small fund size ($491 million) which is a relatively small mutual fund.
The salespeople lie: This is second hand info, but I’ve read quite a few comments by group resp clients who say that the salesperson says there are no fees and that the fund is non-profit. This is a lie – most mutual funds in Canada are non-profit but the companies that administer them and provide investment management to them are for-profit. To say the resp plan is a non-profit and doesn’t charge any fees is just not true.
They sell the “guarantee” – this is similar to all the very expensive “guaranteed” products available from insurance companies which guarantee your principal. You pay a lot of money for basically nothing.
A group RESP salesperson got my name somehow after my twins were born. We made an appointment since I didn’t know much about RESPs at that point (I had read the gov’t pubs, but not shopped product). The sales pitch was very good. After it was done, however, something didn’t feel quite right. I took all the printed info she could provide and read in depth. As already said, what a ripoff.
Interesting details:
1) Commission came off upfront, around 20% if I remember correctly.
2) It was a non-profit that held the assets, but they paid high fees to the for-profit sales company.
3) They advertised an attractive rate of return, but it was based plan members that received ’scholarships’. These ’scholarships’ were funds that departing plan members left behind. If you didn’t do things just right, no ’scholarships’ and abysmal rate of return (not published).
I ended up with a medium MER, well diversified TD mutual fund instead.
Michael: http://www.google.ca/search?hl=en&q=%22Self-directed+RESP%22&btnG=Google+Search&meta=
http://www.tdwaterhouse.ca/services/respfeatures.jsp
http://www.rbcdirectinvesting.com/RBC:SBnCGI71A8UAJ8A0zkg/resp-account.html
http://www.cibc.com/ca/education/index.html
http://www.scotiabank.com/cda/content/0,1608,CID5655_LIDen,00.html#Registered
http://www4.bmo.com/investments/0,4629,35649_23994846,00.html
The key is to look for a ‘Self-directed RESP”. Most of these carry an annual fee if your account value is lower than $20-$25k (which is pretty nice for the banks because there are annual contribution limits which mean that for the first few years of an RESP they are guaranteed to get their annual fee).
Michael: Like others have commented pretty much every discount broker offers a Self-Directed RESP account that could hold pretty much anything. The only drawback, as oxCC has pointed out, is the fees, which are quite steep considering most RESP accounts are quite small and likely to be that way for many years initially. For our kids, we opened a TD RESP account and though the fund selection is quite limited, it’s enough diversification for a small portfolio.
Thanks to Mike and 0xCC for the useful information on RESPs. I guess it’s been a long time since I checked on them and found that I was limited to expensive (high MER) investments. There appear to be many truly self-directed choices now. $50/year is a little steep initially, but wouldn’t be too bad after a few years. Maybe I’ll open one for my grandkids within the next decade.
I did open RESP accounts for my 3 daughters and my son. I think it was a worthwhile investment vehicle but I will be moving my Son’s RESP to a self-directed one in the next few months as well. The investments that I put the Girls’ money in were way too conservative, but then again, I have been so badly burnt with investment stupidity (of my own doing) that I wanted to make sure we didn’t LOSE any money.
–C8j
I opened an RESP for my two kids in 1998 & 2000 (the years they were born) through CST and I consider that decision my biggest financial regret. My son is now 10 and has serious learning disabilities and may never go to university. Yet every month, month after month, I continue to pay these people so that I can get my $2400 back in fees when he turns 18. I will never make interest off these fees. If only I had invested it myself. And in the end all of the interest they earned off of my fees and deposits will go to other plan members and I will have to pay back the grant. If I had a family plan, I could pass it on to my daughter. What can I do now? Can I have it transfered to her?
We took a minimal group RESP with Heritage. I’m glad we decided to take their smallest plan with a wait-and-see approach about investing more with them.
We received our latest fund report. The funds are earning barely over 2% net of management fees. I could have done better had I put the money into GICs at the bank.
Makes me feel much better than 80% of our one child’s funds and 100% of the others are invested in a much better plan.
MJ: The TD Mutual Fund RESP accounts that I opened for my kids that allow me to invest in TD e-Series index funds do not charge any administration fee. The only fee is the MER that range from 0.3% to 0.5%. IMO, they are an excellent option for the initial years and can then be transferred out to the true self-directed RESP account. I’ve written about them in other posts: Link.
Kathryn: The CST prospectus mentions that you are allowed to change the beneficiary:
“You may change your Beneficiary at any time up to Maturity as long as the new Beneficiary is under age 18 and you have provided a social insurance number for the new Beneficiary”.
I’d recommend calling them and talking about your options.
Kathryn – you are allowed to transfer an resp to another person. If the beneficiary you are transferring to is a blood relative of the original beneficiary then you can keep the grants and earnings etc.
Keep in mind however the lifetime limit of $7200 of grants per child still applies, so any grants in excess of that amount will have to be returned.
These are the government resp rules so CST might have more restrictive rules. Like CC said, give them a call.
That is the best news I’ve heard in a long time. And we do have the room. Thanks!
[...] our friend over at Canadian Capitalist did a piece on Still Sour on Group RESPs where he continues his discussion on the topic of Group RESPs. I added my own comment to this [...]
Kathryn,
If I recall, there are a lot of learning opportunities that apply to the RESP plans. Your 10 year old son might not find university suitable when the time comes, but he may still wish to seek additional education from a trades school or the like. It could be worthwhile looking around for what else is out there.
An RESP sounds like a nightmare.
Experts on Credit, actually they are normally by far the best way to save for a child’s education. Where else can you get a guaranteed 20% return? Group plans take advantage of people who don’t know any better and then excessively charge them fees, which is why I don’t like them. Especially when there are simple and efficient ways to set them up that doesn’t take any more knowledge than setting up a group plan.
I’ve read all of the above comments and although all persons leaving a comment ‘profess’ to know what they are talking about…is anyone of them an RESP specialist…or did they just have their own problems with group RESPs, ie default, NSF, had other priorities than their childrens’ RESPs, etc. etc…interesting comments, I must say..but, valid? I don’t think so…Check with your banks, financial institutions, etc…MERs can be STEEP…just $100/mth for 18 yrs. with an MER of 2.1% can cost you $8000.00..did the banks, etc. tell you that? Are they returning any of your fees at the end of 18 years?? Check out their wrap fees, trailer fees, insurance, transfer fees, etc. etc…do you REALLY think they are doing this for nothing?? Wake up and get your facts straight!s though they know wha
Hey Sawyer, yes I’ve looked at bank plans and anything with high fees is not a good deal in my book. Take the CST group RESP, and use your same $100 a month. Have you noticed that they charge you $10.00 per year for the option to use monthly amounts? On top of this they charge 0.5% as an admin fee, up to 0.015 at a custodian fee, and up to 0.3% as a management fee. On top of all this insult, they also don’t let you earn interest in your first $2100 of deposits in order to keep you trapped once you realize the error you’ve made by signing up.
In their annual report they declare “In 2007, our investment performance for our group scholarship plans was 4% . . . ” which is before fees.
If you are risk averse you would be far better off in 5 year GIC ladders at any institution that doesn’t charge you fees for using them. If you actually want bonds and equities the TD E-Funds are a nice, simple, and cheap way to go. There are VERY few advantages to a group RESP.
How are your self directed funds doing right now after the stock market disaster? My group resp is doing fine.I hope your kids don’y have to go to schoool in the next 10 years beacause that’s how long it will take to recover from your self directed resp after what has happened this year!
Tim: My kids are 3 years old and the bulk of their education funds are in stocks (80%). So, as you might expect, the portfolio is down 22% but I’m okay with that. The point of long-term investing isn’t to check how your portfolio is doing every year — it is the end result that matters. I fully expect that stocks would have performed fine by the time they go to university. BTW, self-directed doesn’t mean you *have* to be in stocks. When kids are just a few years away from school, it is best to have most of the assets in GICs.
Tim, like CC my self directed plan is down exactly what you would expect from it’s peak value. I’m certain over the next 14 years until my son goes to college that there will be some good years too, I hope to see you on here asking how they are doing again when you see 20% gains on the TSX in 201[012].
My group RESP is exactly breaking even after all the fees they charge, just like they promised. Only because I signed up and had to stop contributions for my spouse to launch her business I’m down about 25% of my value on that one since they’ve confiscated the refundable enrolment fees (Hereby referred to as the ‘Lock in Fees’). Once you factor in the MER, the custodian fee, the lock in fee that gains no interest, the monthly payment fee and the low returns the group RESP basically simply protects your money. You would probably do much better with a GIC ladder in any financial institution that provide cheap RESPs if your sole purpose was to protect money.
I knew two things when I had a child. One: I wanted to save for her education, Two: I needed help. My eyes glaze over when you talk of laddered GIC’s, mutual funds, index plans, etc. I feel dumb, and you are likely to make me feel even dumber with your responses. Good thing I am very successful in my own non financial career.
Anyway, my daughter has just finished school and received more than we could have ever dreamed of by going with the Heritage Group RESP. I saved $2000 per year and when all was said and done, my daughter got over $85,000 by the time she was finished.
All those membership fees were paid back to me too!!
I was able to go to sleep at night knowing that I didn’t have to worry about bulls or bears or whatever.
Could I have done better? I have no idea. You will say I could have no doubt but I am perfectly satisfied with the choice I made those many years ago.
@kruller: I totally understand your point of view. If a parent has no interest or inclination to build & monitor a portfolio, then I don’t see why they shouldn’t consider a Group RESP. The only caveat I would add is to make sure they can keep up the regular contributions until the child is in University. That’s similar to someone hiring a handyman to replace the windows instead of doing it on their own. Yes, it costs money to hire a handyman but its their choice to do so.
I’ll let you in on a little secret that will likely offend every one of your financial senses…… I pay someone else to do my tax return too!! It must hurt you to hear that ey? lol… really I am hopeless with this stuff!
Thanks for the supportive response!
My older sister went to school on a group RESP from 1984-88…that means my dad invested in one of the really old ones that you didn’t even get your investment back if your child didn’t go to school (it was divided amongst the kids who went). Talk about faith! Unfortunately, he decided to go his own route with me, investing at the bank. When it came time to go to university, I only had 25% of what my sister had..and dad had invested the same amount of money. She was in university, I was unable to go. Couldn’t even get a student loan for what I needed (dad made “too much” money supposedly) so I decided to go to work and try and save to go to university.
At age 18, the only job I could get was with a company that sold encyclopedias, door to door. I worked hard and sold alot of books and sometimes families would say, “Now you created a problem for us..our kids are going to be smart and we are going to have to have money to send them to university (this was the 80’s remember)”. I would tell people about the group scholarship plan that my dad bought for my older sister in 1966 and only put $9 per month in and it paid for her tuition and most of her books for FOUR YEARS. I couldn’t name the company but I knew you couldn’t get it at a bank or insurance company and it was one of those “not-for-profit” companies.
One day, I ended up selling a set of books to the only District Manager for one of these companies, for their province! She said that they had heard about the girl selling books, door to door, advertising the company and asked if I wanted to actually get paid for it. That was over 22 years ago and not only have I personally enrolled hundreds of children in the plan I work for but I have collected on plans for younger sisters who were born after I started working with the company.
Over the years, I was offered far more money to sell other products that have trailers and residuals for my own benefit but the products were never better then the group plans we were offering to the public. Now, keep in mind, the plan is only good for long term savers and if you see yourself touching the money before the time comes, then these plans are not for you (but then again nothing is for you because if you spend it you no longer have education funds for your child and since they are the ones picking your nursing home, don’t you think whatever “financial crisis” you are going through, hands off the RESP?). So, best of luck to all you folks who want to play the stock market or buy GIC’s at the bank. I had to buy one of those for my nephew in England since he can’t have a RESP but I feel like it’s the booby prize. I have been willing to set aside personal financial gain because I have a conscious and must believe in what I sell. That in itself, I hope gives at least a few folks a reason to investigate throughly, on their own. Don’t listen to the people who have cancelled their plans to get the money out early but the folks who have a plan and have children attending school. I mean, if they don’t go you don’t have a financial problem, just make sure you don’t have the following excuses when they DO need the money to go:
1. Sorry, but I didn’t put your money into a secured investment soon enough and it will be at least three more years before it’s back to where it was.
2. There was no structured savings commitment so even though I started off strong, I didn’t save enough over the years to pay for much of your education.
3. I had an RESP but once it reached $25,000, I justified “borrowing” it to pay off our debt but was never able to put it back.
Talk to anyone who turned down our group plan a year ago and put it in the stock market and see what they say now. Whatever you choose, do your research and invest consistently. You have eighteen years to plan so there are no excuses!! Best of luck to everyone.
I am having serious issues right now as I have the opportunity to go and work for a group RESP company. Because my parents did not plan for my education, I did not go to university. I just felt like it wasn’t an option, I was afraid of debt, and its seemed beyond my reach. I did eventually go to a vocational school that did not really advance my life.
Now I am at a crossroads because as an individual without a degree my career options are limited. I could make really good money selling RESPs, but I find it hard to rationalize my way into selling a product I would not buy for myself.
I would not buy a minivan. That would not prevent me from selling one to someone who would find it useful.
Unless you feel RESPs are somehow cheat the purchaser of cash, then why not sell to those who need / want them?
DAvid
Very interesting comments from those who like GROUP RESP and those who do not. Transperancy of charges and fees is very important and in that respect, I believe TD Efund or such other institute should be more favourable compared to Group RESP where one does not have any control.
I would like to here if any one has better suggestion.
Thanks
Mahendra
AS Group Plan pays benefit to child based up on number of Units Held and also unit prices if paid in lump sum are small at the early age, WILL not be advisable to BUY some UNITS say 2 units in 2009 ( $200 admin Fee and $800 lump sum ) do same in the 2nd year 2010 ($200 admin fee and may be $900 lump sum ) for 3rd year ($200 admin fee per unit and $1000 per unit)
Now for an investment of $2000 (1st year) + $2200 (2nd year) +$2400 ( 3rd Year) So you have 6 units and now for rest of the years you can use TD E Fund or Ultra Mira.
I will appreciate some feed back.
I am using a logic that get more units , paying lowest price As child gets older unit becomes expensive and eligibility for child’s participation is Based on Numebr of Units.
Thanks
Mahendra
Mahendra,
First of all, I do work for a Group RESP company. I feel you should know that up front. The first two paragraphs are for you, the rest is for anyone who wants the extra info.
To your first question, Group vs efunds – that is entirely up to you. It depends on your risk tolerance, your investment knowledge, your willingness to monitor the investment, and your comfort level with uncertainty. Simply put, that is entirely up to you. No one can tell you what investment is best for you, as they would be assuming your personal answers to all of those factors.
To your second question, I will say one thing, you are being pretty astute, and I have had that question asked before. A lot of people try to work the plan to ‘minimize fees’. What is not thought about as this is done, is that fact that the money is paid out based on units – the more you have, the more money you get. So what you save in fees, you also lose in money from the units. Does it make sense to put in the same amount of money as another family, only to see them get more back at the end? Either way, it is obviously up to you.
One point I have to make here, to anyone listening, is that this thread is for the most part very slanted against group RESP’s. I have no problem with that, as discourse is a good thing. I do however see some instances where things are not being compared fairly.
Obviously the market has had a rocky year, and I am not out there trying to bash it. I personally believe we should all have some of our funds in the sock market or mutual funds. One of the things I find amusing is that people who are touting stocks as the best way to go quickly shrug off the last 16 months of performance, stating the we have to look at the long term. This is obviously true. On the other hand, they consistently slam CST (and I am not necessarily a CST booster) on the basis of a 4% one year return. (BTW, it is currently 1.5% after fees) Obviously, it is better to look at long term numbers. The CST 5 year return is currently 4.5%, and this is after fees. The Heritage ten year return is 6.15%, after all fees paid. (where the poster above got 2% I would love to know) The USC most recent ten year return is 5.93%, again after fees paid. Basically, they are quite a bit ahead of the ten year average of most other safe investments. (I want to say all, but there may be some other safe investments that I have never heard of, that did as good or better – I never want to say an untruth.) The ten year average rate of return on GICs, which a few folks suggest would be a better choice that a Group plan, is 3.5%. (Source: Morningstar 07.31.09) Even before the return of membership fees and attrition, these plans will probably return far more money than a GIC.
I would also like to point out that some people here are promoting what is know as a ‘high/low’ strategy. What this means, quite simply, is that you invest for the first while trying to get as high a return as possible, and then shifting to a lower risk/return investment. This is fine for some people, but you have to be aware that there are a lot of unknowns and uncontrollable factors in that scenario. Imagine for instance that an 18 year investment is high risk for 10 years, and then medium/low risk for 8. If in the last 8 years the investment were to average 3.5%, what would the first 10 years need to return in order for it to equal a 6% return over the full 18 years? Is it achievable? Can you bank on it? And then throw in just one substantial downturn at just the wrong time, and its bad news. Keep in mind that this is the same strategy that should be used for retirement, but we have many more years to ride out the ups and downs in that investment and more people are comfortable with that.
Again, as I have posted before, one mad customer will tell 100 people, and 100 happy customers might collectively tell 1. The happy group plan subscribers are not surfing the internet, looking for people to tell. The unsatisfied ones probably are. As well, the information here in all of these posts may, or may not, be factual. Please don’t make any investment decisions bases on what anonymous poster put on the internet. I have invested for both of my children in a group plan, after a lot of research and that is how I ended up working for them – I am a satisfied customer. Obviously, not every product in the world is the perfect fit for everyone. I will suggest that if you want to research, you go to http://www.sedar.com and download the prospectus of the plan you are interested in, and make an informed decision. I will point out that not all the plans are the same, and some are not that flexible when it comes time to go to school, so research is key. Know all of your options, and I am sure you will be well served by what ever decision you make. Heck, even if you end up losing a ton in the market, you will still have more for your child than my parents had for me.
If you want to ask me a question, feel free. My email is canadianfinancialwizard@gmail.com although I would prefer to answer them here, as others might have the same question.
Cheers,
Mark
Thanks Mark for an excellent reply.
I will deifinitely visit Sedar website and get more details.
As you mentioned you work for Grop RESP company my question is do you work for a particular comapnay and if so which one or are you able to compare and sale units from any company.
If I deicde to buy units even for some years, I would like to deal with some one who can give pros and cons for all companies and assist to choose the best.
REGARS
Mahendra
@Mark: I don’t know how you calculate returns for Group RESPs. Group RESP subscribers can only earn a portion of their enrollment fees back, not the earnings on those enrollment fees. Therefore, the returns obtained by a Group RESP subscriber will be less than the fees earned on the portfolio offset by any boost from attrition. That’s exactly my point. Group RESPs will earn bond-like returns, provided you belong to the fortunate group that did not drop out. Canadian Bonds have returned 5.9% over 10 years, 5.55% over 5 years. That’s comparable to Group RESP returns you’ve posted even though as I pointed out in the post, the portfolios are invested in index-linked notes, which should boost returns.
CC:
First of all, thanks for allowing this discussion on the site. I am sure many people really appreciate it. I know I do, and I am jsut starting to have fun.
The returns on the Group plans are in the prospectus of each one. I realize that people do not earn interest on their membership fees. Let’s be clear about this, the membership fees are not ‘kept and invested’ – they are what goes to the sales side of the organization. I just wanted to make that clear, as I have seen a few posts with regards to that being what the people are thinking. (I blame the sales reops) The membership fee returns come out of a fund of money that the scholarship plan can use to give additional money to the children when they go to school. I consider it a bonus if they go to school – not a loss if they don’t. (I esplain the plan differently.)
As far as the Canadian Bond returns, we must be getting our info from different places. I just went to http://www.bankofcanada.ca/en/rates/bond-look.html
and this is the returns that they have posted:
MONTHLY Series:
V122558: Government of Canada marketable bonds, average yield, 1-3 year
Low 04/2009 0.80
Average 12/1999 – 11/2009 3.56
High 05/2000 6.26
This says that between 1999 and 2009, the average was 3.56%.
During that same time period, the Scholarship plans did much better. (They all did better, most by fair bit.) The do so because they can invest differently. They invest in a variety of things, always trying to maximize returns, while keeping the principle as secure as they can. You may or may not be aware, but this is due to National Policy 15, that the Securities Commission instituted upon them. Basically, all the investments have to comply with the Policy, and must be very secure. To your point of index funds, they can be in those, and they are PPN’s – Principle Protected Notes. Basically, to state that these funds are the same as investing in 70 bonds and 30 equities is not correct. There are many differences.
One of the big differences to how they can invest is due to the thing that some folks like to complain a lot about here – membership fees. One of the reasons they have the fees front end is to keep them lower. Say what you will about other investments, but to be fair, this is an actively managed fund, and there are costs to that. Because the fees are front end, there are few people who pull their money out unexpectedly. This allows for much better long term investment planning. For example, a bond fund can at any time have half of the investors pull their money out at one time. (probably won’t happen, but a possibility) Basically, they have to make sure that they are able to deal with unexpected redemptions. They cannot go and lock all of their money in 10 bonds, in off chance that they have to sell them. It does happen, though.
You looked through the prospectuses, and read through their assets. Can I assume that you know the difference between book value and market value? Are you aware of stripped bonds? Because the Scholarship plans have a pretty good idea of exactly when the money will be needed, they are able to take advantage of that. They might buy a stripped bond from a bond fund that is forced to let go of it. It might have a coupon rate of 4.5%, (which will be int the prospectus) but because the Scholarship plan picked it up at a discount, when held to maturity, it will yield much more. They can do other things to improve their returns, and a lot of it is based on the fact that they know that they won’t see a huge percentage of members pulling their money out unexpectedly.
I don’t know where you are getting the 5% numbers for bonds, and judging from the Government of Canada’s website, some Scholarship plans have beat bonds by over 2 – 2.5 %. I would argue that that more than makes up for the membership fees and loss of interest on them. Judging by the last ten years, most people would have done much better in a scholarship plan than CSB’s, even without the return of any membership fees. That is just a bonus if the child goes to school. I don’t know why you keep saying that these plans will only do as well as bonds, when they have done much better in the past. With the addition of PPN (which are principle protected) they are poised to considerably out perform in the future. Throw in attrition as an additional bonus, and these plans look even better.
You make a lot of statements, which are opinion, and state them as fact. For instance, but not limited to:
“Therefore, the returns obtained by a Group RESP subscriber will be less than the fees earned on the portfolio offset by any boost from attrition.” This is an opinion statement, as I am sure you cannot see the future. As well, like I said earlier, if (I cannot see the future, but I fully expect them to) the Scholarship plan well over performs the bonds, GIC’s, etc., attrition will be a moot point, it will be just a bonus.
“Group RESP’s will earn bond-like returns” Historically they have outperformed, and as you yourself have said, the addition or the PPN’s should boost returns. I am not sure why you end up at this conclusion. Again, this is an opinion statement. It would be just as logical for you to say that you know what mortgage rates will be for the next 20 years, or that bonds will have a 5% 20 year average, 20 years from now. I have no problem with you having this opinion, but you have to realize that some people who read this will make financial decisions based on your ‘facts’. I am sure you don’t want to mislead anyone, and most people have a tendency to state their opinion as fact, I am just pointing out that it could mislead people. I appreciate and respect that you have this website, and that you allow this debate on it, so please, don’t take offence to this. That is not my intent. Believe it or not, I agree with a lot of what you say in your posts, and respect your your answers, as you are level headed, and not trying to scream or slander.
Here is an interesting thing for you to consider. Some in the industry would love to see National Policy 15 disappear, but that is up to the SC. These people would like to invest in the market, and roll the dice for the big returns. What they have found, however, is that the majority of Scholarship Plan members do not want that. They are in it because they want it safe. A lot have other investments elsewhere, and just want their children’s money safe. Another thing to think about, not everyone has your tolerance to risk. As well, a lot of families have one member who doesn’t like risk, so for the child, they go extremely safe. I switch a lot of people over from banks and mutual funds, and some of them are in GIC’s, and I see their statements. They aren’t earning 5% – closer to 0.5%. I am amazed what banks are doing, and they lock it in for years.
Obviously you are a fan of TD, their efunds, and etf’s, and they are great for those who want them. I have noticed a few people say thanks, and that they are going in that direction. What I think will be the norm, though, is that people will read your posts, and all the others, and get confused. (and a little scared) They will ‘commit’ to researching, and put it off. They will then walk into the bank one day, and a teller will recommend an RESP. Done deal, but maybe 2 years too late, and in an inferior product. Like it or not, banks and mutual funds are getting the lion’s share of the investment business. That is why the Scholarship plan people compare against them. The etf people are a select few, and to be quite honest, they probably never let a rep in the door. You have to face facts, this is less about fees, and more about wehter or not people want to do their own investments. Most people do not want to – it is as simple as that.
CC: Another thing for you to look for, are the biggest funds out there. You will find that a lot of the massive funds are secure. They aren’t giving outrageous returns, and yet they have billion dollar funds. The reason is simple, some people wnat their money safe, and your definition of safe isn’t theirs. (I am assuming that you feel stocks are safe if you have the time to ride out the usp and downs. I am not arguing that point, just showing that not everyone shares it) I have sat with people who tell me they are less concerned with returns, than they are with the though of losing money. Some people have a zero tolreance for risk.
To be quite honest, a mutual fund RESP at a bank is a better investment than what my parents had for me. (zip) I would prefer that a family start that at day one, than be scared, wait to research, and start something better when the child is 5. At a 6% rate of return, it takes twice as much money to start when the child is 5 than when the child in newborn. Starting early is key.
Another thing that slightly bothered me was an ‘ambulance chaser’ comment that I saw earlier. (not sure who posted it) The bottom line is that people usually keep their investment where they started it. I do switch a lot of people from banks and mutual funds, but half of that is because they bungle the investment so much. Not everyone who has an investment going wants to hear about a different way to do it. We want to talk to the families early because we know that if we don’t, they most likely will set up at a bank. I have no problem with someone hearing what I have to say, and going somewhere else for their RESP. I tell everything upfront, so I have no worries about someone coming to me later on saying, ‘you never told me that’. I just want the opportunity to say my piece. (and a large percentage of people do like it)
I want to finish by saying that I do feel for the people who have posted here, with the different misconceptions that they started a plan under. I do believe it is possible that you folks were deliberately misled by the sales rep that showed you the product. I have seen and heard a lot in the industry. I truly wish that the sales reps who act in this manner would exit the industry. (While I really like the company I represent, I believe that there are a few snakes among it as well.)
The vast majority, though, are very happy with their investment – they just aren’t shouting about it on the internet. If you look at the number of complaints logged against the group plan industry, it is a tiny amount versus the amount of families that are enrolled. As well, it has more to do witht the way the plan was presented/sold, than what the plan actually is. Any industry will have some bad apples, and therefore some complaints.
All I can say to the people who are reading this post, keep educating yourself, and do what is comfortable for you. For example, there is a fellow here who started a CST plan, and is now very unhappy with it. I think it is Traciatim, but I could be wrong. Simply put, if he had fully understood the plan when he was first shown it, he either would have not signed up, or not be complaining now. Judging by some of the comments that he has made, I am quite sure the plan was poorly explained to him at the time. I would be bitter as well if I felt I was misinformed or lied to. This leads me to believe that the problem isn’t with the plan, (again, not a CST booster) but with his level of understanding of the plan. The blame for this falls mostly on the sales rep, although some must be shouldered by him. I can assure you that while the industry has had some dark days, and we will still hear more about ‘I wasn’t told – this wasn’t explained’, a lot has changed in the last 5 years. The bad reps are getting weeded out, compliance is stronger every day, and disclosure much better than in the past. I believe that the worst days for the Scholarship plan industry are behind us. (for the record, the Security Commissions have been working aggressively with the group plans, and that has been very good for the investors.) If anyone is told something that they feel isn’t true, I ask them to report that sales rep to their provincial security commission.
My longest post yet – think I broke a record.
Cheers,
Mark
Mahendra,
I am only liscensed to one company, and I am quite sure that is the case for all reps across Canada. You are smart to try to get the pros and cons of all the companies, but you will find most reps only know the product they represent, and some times just barely. They only learn enough about the other plans to sling a little mud, and most times it is not true. Of all the reps that I know, I think I am the only one who reads each companies prospetus every year.
That being said, unless you stumble upon someone like myself, you will have to go to sedar yourself, and read all the prospectuses. I can assist, if you like, by giving you questions to ask, and areas to look, but the rest you have to do on your own. Feel free to email me, and I will send you a list of specific questions. All financial products are sold ‘by prospectus’, and you ahve seen on this board what can happen if you just listed to a rep, without doing some reading for your self. I will help you by telling you where to look, but I won’t just give you a list, as I feel that everyone should read the prospectus of what ever product they are purchasing.
Cheers,
Mark
@Mark: You should know better than to simply take the *average coupon yield* of a 1 to 3 year GoC bond and compare it to the total returns of a portfolio of bonds and say Group RESPs did better. And I don’t know where you are getting numbers that show Group Plans did better than the past. Here is the comparison of the Canadian Scholarship Trust portfolio with the benchmark (70% DEX Short-Term All Government Bond Index / 30% DEX 91 Day T-Bill Index) from *their own report* of fund performance:
5 years:
CST Return: 3.4%
Benchmark: 4.2%
10 years:
CST Return: 3.9%
Benchmark: 4.8%
FYI, the prospectus mentions that returns were dragged down by investments in variable-rate securities.
http://www.sedar.com/GetFile.do?lang=EN&docClass=15&issuerNo=00011658&fileName=/csfsprod/data99/filings/01369763/00000002/C%3A\SEDAR\MRFPfilingJuly2009\MRFPFamilyENJuly2009.pdf
I stand by statements I’ve made about Group RESP plans. Since they invest in a portfolio of bonds, the returns obtained (before taxes) will reflect the experience of any investor in bonds.
Now we come to fees. The CST Fund own report says that admin fees are 0.5% of portfolio. The Portfolio Management fees are 0.10%. Excluding, the impact of enrollment fees, it costs an investor 0.60% to invest in essentially a short-term bond fund. A DIY investor can buy a 5-year GIC and achieve comparable returns and pay no fees at all. Or they can invest in a low-cost bond fund for roughly the same cost.
I don’t have a problem with Group RESP reps pointing out these plans provide parents who have no inclination to build and manage a portfolio an option to save for their child’s education provided they don’t fall into the unfortunate category of children who are dropped from the plan. I also don’t have a problem if it is correctly disclosed that all that hand holding costs money that I estimate to run at around 2% annually. What I do have a problem with is claiming incorrectly that these funds can somehow magically make better returns *after* accounting for fees. It is simply not credible.