The Canadian Securities Administration wants to reform the mutual fund fee structure in Canada and earlier this year awarded two studies to review whether commission-based compensation changes the nature of advice and influences mutual fund sales.
The first report was prepared by the Brondesbury Group made it clear that commission-based advice creates problems that need to be addressed. York professor Douglas Cumming released the second study this week and found that – to no surprise – mutual funds that pay trailer fees attract higher inflows from investors, even when they perform badly. These types of funds also tend to perform worse than other funds that do not pay trailer fees.
He said his report does not draw conclusions about what regulators should do next because he was asked only to study mutual fund data.
“It’s not my job to tell them to go ban trailer fees, but the data say a very clear picture about what’s going on in the industry.”
Hopefully these reports will give regulators enough ammunition to make serious reform to the mutual fund industry and do the responsible thing by phasing out trailer fees altogether.
Canadian investors take note: Britain’s ban on embedded fees and sales commissions has led to a rapid drop in sales of the most expensive fund products to clients.
This week(s) recap:
Last Monday I looked at how first-time homebuyers are getting into the market.
Last Wednesday Marie showed us how Canadians are spending their money.
And last Friday I shared 5 ways to take control of your money.
Over on RateHub I opened up about misusing credit cards back in college and how my relationship with credit cards evolved over time.
On Monday I compared taking CPP early vs. late.
On Wednesday Marie explored the real cost of starting a family.
And on Friday I explained how to set up an RESP.
Weekend Reading:
Valeant was Canada’s largest company three months ago. Now it’s being called the next Enron.
Motley Fool’s Morgan Housel just had a baby and shared some thoughtful financial advice for his son.
Tom Drake rounded up some great personal finance tips from Canadian money experts.
Michael James on Money looks at the difference between typical spending and average spending.
Alan Whitton from Canajun Finances asked if robo-advisors are a God-send to investing?
Some frugal lessons from The Frugal Girl on this week’s edition of Because Money.
The Diderot Effect: An Anecdote from 250 years ago may help explain why we always feel the need to buy more.
Feeling ambushed by credit card offers? Here’s how to win the war on plastic.
Rob Carrick says it’s time for Canada to stop coddling the housing market.
Carrick also argues why downsizing to a condo in retirement won’t always cut your costs.
Steadyhand’s Tom Bradley explains how to narrow the behaviour gap that’s hurting your portfolio.
Here’s some great insight from Ben Carlson on what they don’t teach you in business school.
Adam Mayers interviewed accountant Mark Goodfield about a tough topic – inheritance. He explains why a little plain speaking now will a lot of heartache later.
Tim Cestnick lists five ways to use up the capital losses in your portfolio.
Should you avoid dividends because of the OAS clawback? John Heinzl explains.
Here’s how to plan your retirement finances if you know you’ll have more money than you need.
Jason Heath talks power of attorney and taxes – here’s what you need to know.
Heath also explains where to get good investment advice even if you don’t have a lot of capital.
Have a great weekend, everyone!
My wife and I made it a priority to set up an RESP for our daughter just a few weeks after she was born. As new parents with little free time we weren’t sure where to go and what type of account to set up. To complicate matters, we were bombarded with pamphlets and brochures promoting group RESPs and scholarship trusts.
We found the best advice was to open a self-directed RESP at our bank and to set up the account as a family plan, rather than an individual plan. That’s because we knew we wanted to have two children, and with a family plan parents have the ability to name more than one beneficiary.
The account was easy to open and set-up our monthly contributions. We just had to bring our social insurance numbers, as well as the social insurance number for our newborn to name her a beneficiary.
Why set up an RESP early?
We wanted to set up an RESP right away, even though we could only afford small monthly contributions at the time. Here’s why:
- Tax-free growth – Even though your child may be 18 years (or more) away from attending post-secondary school, small contributions can add up quickly. Setting aside just $50 a month for 18 years with an annual return of 4 percent will add up to more than $15,000 by the time your child is ready for post-secondary.
- Canadian Education Savings Grant (CESG) – The government contributes 20 cents for every dollar that you contribute to your RESP (up to $500 per year) through a program called the Canadian Education Savings Grant. Where else can you get guaranteed 20 percent return on your investment? When you include the CESG with the example listed above, the total adds up to approximately $20,000.
We felt it was important to just get the RESP open and start early with whatever contributions we could afford. For two years, that amounted to just $50 per month. But as our budget allowed it, we bumped up our contributions to $100 per month, and now, after our second daughter was born, we contribute $150 per month for each child.
There’s a lifetime contribution limit of $50,000 per beneficiary, however outside of receiving a large inheritance there is little point contributing more than $2,500 per year – which is the amount needed to maximize the CESG grant.
Is there time to catch up?
RESP rules state that you can catch up one year of contributions each year in order to take advantage of the grant. For example, if you haven’t contributed for the first five years, in each of the following five years you can double your maximum contributions (assuming you have the money), so you could put in $5,000 and get $1,000 worth of grants and use up your unused contribution room.
What you can’t do is contribute $20,000 in one year to try and get the grants from the previous five years. Once your child reaches the age of 10 then you start to run out of time if you want to catch up and max out the grants.
How to invest inside your RESP:
The simplest and cheapest way to put your RESP contributions to work is by purchasing a GIC or term deposit through your bank. Rates are low, but remember you’re already getting a 20 percent return on your investment through the CESG grant.
We’re willing to accept a bit more risk in hopes for greater returns by investing about 75 percent in equities and 25 percent in fixed income.
We chose the TD e-Series family of index funds; contributing equal amounts to each of the Canadian index fund, U.S. index fund, International index fund, and Canadian bond fund. Here’s what that looks like:
| Canadian Equity | TD Canadian Index – e (TDB900) | 25% | MER – 0.33 |
| US Equity | TD US Index – e (TDB902) | 25% | MER – 0.35 |
| International Equity | TD International Index – e (TDB911) | 25% | MER – 0.50 |
| Canadian Bonds | TD Canadian Bond Index – e (TDB909) | 25% | MER – 0.51 |
The total cost of this portfolio is 0.42 percent, which is a fraction of the cost of a typical bank mutual fund. As my children get older, I’ll dial down the risk by increasing the allocation to fixed income. So when my oldest child turns 10 or 12, the allocation might look like this:
- Canadian equity – 20 percent
- U.S. equity – 20 percent
- International equity – 20 percent
- Canadian Bonds – 40 percent
By the time my children are a year or two away from attending post-secondary, I hope to have their entire RESP portfolio invested in fixed income guaranteed products in order to protect their college fund from an inopportune stock-market meltdown.
RESPs are not rocket science, but they’re definitely a step above the RRSP and TFSA in terms of complexity – especially in the withdrawal phase.
If you’re looking for more information on how RESP accounts work and how to set up an RESP, check out The RESP Book by Mike Holman. This book is very useful for parents, no matter what stage they are at with RESPs.
Having a child is a life-changing event that few of us can ever truly be prepared for. The enormous responsibility of having a little one completely and solely dependent upon you, as well as the absolute joy this little being will bring, can be overwhelming.
You can plan as much as you want, but most people have no way to gauge the impact of this new little miracle on their financial bottom line.
Also, the biggest personal cost – if your child is healthy – is time. You will lose time for yourself, leisure time, sleep time, and pretty much any other time you can think of.
So what’s the real cost of starting a family?
Mothers see the biggest loss of personal and leisure time when their kids are newborn to two years old and the time cost nearly doubles with 2 children. Interestingly, time costs go down when there are three or more kids in the household. (Dads also see a drop in personal time, but much less than moms.)
Besides spending time with children mothers also become household managers. They pay more attention and time to meal prep, bill paying, laundry, shopping and so on.
Make peace with the fact that your schedule, your time commitments and many of your relationships will change.
New babies cost money
You may have heard the calculations that raising a child to the age of 18 can cost anywhere from $72,000 to over $250,000 (depending on the source), excluding childcare, secondary education, and lost income. Children can be the second largest expense after housing costs. But it’s the first year of life that’s the biggest financial shocker for most new parents – hence the baby shower.
Essentials: Food, clothing, diapers, car seat, high chair, stroller, sling, crib, other nursery furniture, activity items (bouncer, play mat, etc.) baby bath and toiletries.
Not essential, but we all do it: Professional photos, toys, nursery decorations, and announcements.
Baby gear ideally should come from family and friends. People tend to register for weddings and bridal showers but don’t seem to apply the same logic for babies. Everyone loves to buy baby stuff – it’s adorable.
Find whatever else you need second-hand through Kijiji or Facebook swap & buy sites.
Your friends and family will be thrilled to outfit your child with everything s/he needs so make sure you set up a registry (most baby stores now have them) and include everything you can think of – not just newborn gear, but toddlers’ as well. Leave the dad-to-be at home for the registration (he doesn’t have a clue), and bring a seasoned mom with you – she knows best.
Stay home or go back to work?
If you’re a parent you’ve surely been privy to the unbelievable amount of sometimes vitriolic chatter (especially online) surrounding the question of whether a mom should stay home when she has kids, or go back to work.
Let’s first acknowledge that even having the ability to choose between those roles is a privilege. Many parents don’t have the option; they must work to make ends meet. Look for the financial break-even point.
Related: How we prepared to live on one income
So what do you do if you have that choice? Sometimes working isn’t only about money – it’s about fulfillment, career, vocation and roles.
How happy will you be either opting in or opting out? Not all costs and benefits are financial.
Alternatively, going back to work just to be miserable probably wouldn’t be worth the personal cost to your happiness and lost time with your child. The bottom line is do you have a choice to stay home for a while? Can your family keep its current quality of life if you choose not to work? Or are you willing to downsize your lifestyle somewhat? Go after your household expenses with a hacksaw.
The time you spend raising children is a fantastic investment in both their future and yours.
Childcare
The “after work shift” with small kids is demanding, but what can be more stressful is finding acceptable – and affordable – childcare. Many parents are on waiting lists and have to juggle their baby’s care among babysitters, friends, grandparents, or the other parent.
Once a spot opens up in a day care centre it can be expensive. Costs in most major cities top $1,000 per child. According to Global News, monthly full-time care costs can range from $152 (certain Quebec cities) to $1676 (Toronto).
A live-in nanny (if you have the room) may be the least expensive childcare option for three or more children. Many also do housework, cooking, shopping, and errands that will save you valuable time.
Final thoughts
In addition to prenatal classes, the best thing you can do to prepare for your new baby is get out of debt.
Life insurance is a must. And, make sure you take advantage of all the benefit programs and tax credits the government offers.
