Fees eat up child’s education fund
Scott Rickard has two young children and he hopes that one day they will to go to university. That’s why he set up a Registered Education Savings Plan.
“There was no question that starting a small payment regularly each month for each child was definitely the best thing for our children in the long run,” Rickard said.
By setting up the RESP he was eligible for grants from the federal government up to $7,200 per child and a one-time B.C. grant of $1,200.
But he was recently shocked to learn the RESP he set up 11 years ago for his son had made more money for the fund’s managers and advisors than it returned to his child. Fees had been eating into the investments.
Since its inception the investments had returned 3.19 per cent, while the annual management fees were 3.61 per cent. In the last five years it’s returned just 2.17 per cent, while paying out the higher management fee and in some years the fund has lost nearly six per cent.
“When I look at the numbers, each year, the people investing my children’s money have taken more of the returns than they’ve given back to my children for their investment,” Rickard stated.
His investment advisor had sold him a segregated fund or something that comes with an insurance element to guarantee a 15 per cent top- up on the contributions at the end of the term. However, if a payment is missed that top up goes away.
“That is one of the things that I think makes this a terrible product for people and really should not be promoted. Imagine you lose your job and are stressed out about trying to make your mortgage payment? Now you have to worry about not missing a payment on your child’s RESP,” Rickard added.
He says he can’t remember being told about the fees and says his advisor constantly focused on the extra 15 per cent top-up.
“It’s absolutely important and an obligation of an investment advisor to tell his or her client the fees that they will be paying on a product,” said Pam McDonald with the B.C. Securities Commission.
When you set up an investment plan you’re supposed to receive a fund fact sheet that outlines fees and commissions paid.
Rickard’s investment paid up front commissions of 5.44 per cent to the agent who sold the plan. If Rickard pulls out and transfers the fund into another investment, he has to pay surrender fees, taking more money out of the fund.
So what can you do to avoid such high fees? Remember an RESP is just a vehicle to hold an investment. You can set up a self-directed RESP and still receive the government grant money.
There are many investments with much lower fees, like Vanguard’s FTSE Canada All Cap Index, an exchange-trade index fund with a management expense ratio (MER) of just 0.06 per cent, or TD’s Canadian Index e-Series, with an MER of 0.33 per cent. Both funds have had five year returns over five per cent.
If you like mutual funds, which tend to have a higher MERs, look for no load mutual funds – meaning no commissions or sales charges.
Even a one per cent difference in fees can make a huge difference in your investment down the road. For example let’s say you’re paying 2.5 per cent in annual fees on $50,000 over 20 years with a return of 5 per cent, drop that by just one per cent and you’d put $17,558 back into your investment.
The B.C. Securities Commission has a useful fee calculator on investright.org for you to compare management fees.
Rickard says he’s has learned a lot about RESPs and would do things much differently. He recommends you ask a lot of questions and do your own research and not be swayed by an advisor who may be more interested in the commission than the long term return on your investment.