|
The Hands-Down Winner
We feel a self-directed plan represents the best choice for those who have accumulated $25,000 or more in their RSP. Need convincing? Here are eight good reasons.
1. Professional Guidance
Most financial institutions offer several types of plans. Unfortunately, though, they are not always able to deliver informed, objective advice. Financial markets and the RSP rules become more complex each year. When you set up a full-service self-directed RSP, you usually team up with a qualified Investment Advisor who is responsible for providing ongoing service. Professional guidance – aimed at helping you make the most of your RSP – is never more than a phone call away.
2. Account Consolidation
RSPs are often opened at the last minute based on clever advertising or because an institution has a nearby branch. The result: a hodge-podge of uncoordinated GIC or mutual fund plans, a multitude of statements, many maturity dates to monitor, and no idea of the overall return earned on your retirement savings. A self-directed RSP lets you consolidate all of your existing plans into one easy-to-manage account.
3. One Size Does Not Fit All
A 40-year-old who plans to work another 20 or 25 years should take a different approach to saving than a 60-year-old who looks forward to retiring fairly soon. Your self-directed RSP can be tailored to your particular situation; you won’t have to settle for anything less than a perfect fit.
4. Objectivity
RSPs offered by banks, other financial institutions and insurance companies are typically limited to that particular vendor’s products. Self-directed RSPs are most commonly available at investment dealers, which are not tied to any one product line. For instance, National Bank Financial Investment Advisors have access to a wide variety of investment products from many sources – and are free to recommend the most suitable selection for you.
5. Capital Safety
A self-directed RSP can offer GIC and bond holders protection well beyond the $60,000 coverage from the Canada Deposit Insurance Corporation (CDIC) or the Quebec Deposit Insurance Board (QDIB).
Suppose your current RSP consists of one GIC or term deposit worth $80,000. If the investment’s issuer fails, you would get just $60,000 (capital and interest) from CDIC or QDIB. You could, of course, protect the full $80,000 by dividing it between two financial institutions, but would then have two accounts to worry about. Or, you could move your money into a self-directed RSP and then divide it between GICs from two or more institutions. As before, the full $80,000 would be insured, but you would have just one convenient account. Alternatively, a self-directed RSP can hold a wide range of treasury bills, savings bonds and bonds issued by the federal and provincial governments as well as certain Crown corporations. If you hold until maturity, those investments are all 100% government-guaranteed, with no limit on the amount protected.
Were you aware that CDIC and QDIB only insure GICs and term deposits running no more than five years? What if interest rates are high and you wish to lock in for a longer term? Bonds issued by the federal and provincial governments, as well as their Crown corporations, run as long as 30 years. And they even come in various foreign currencies. So, a self-directed RSP lets you protect far more than $60,000 with just one account, lock in rates for up to 30 years and even diversify by currency.
6. Superior Long-Term Returns
Diversification has always been the cornerstone of a sound investment strategy. By dividing your capital among several asset classes, you can smooth the volatility of your portfolio and increase your long-term return. For example, over the last 20 years, equities have been the top-performing Canadian asset class 7 times, bonds 9 times and money market instruments 4 times. If your RSP restricted you to only one type of investment, you would have been in the right place a little less than half of the time – at best.
All major pension funds base their investment strategies on asset mix and there is no reason why your personal retirement savings should be treated differently. A self-directed RSP is the only type of plan that offers both the flexibility and choice of vehicles necessary for proper diversification.
7. International Diversification
You can diversify by geographic region as well as by asset class. Research has convincingly shown that geographically diversified portfolios offer higher, less volatile long-term returns than portfolios that concentrate assets in any one country – especially Canada, which offers less than 3% of the world’s stock and bond investment opportunities when measured by market capitalization. Conscious of this, the federal government increased RSP foreign content limits to 25% for 2000 and 30% for 2001 and subsequent years.
Regular savings account and term deposit RSPs offer no international diversification. Certain mutual fund RSPs do offer foreign exposure, but at the expense of flexibility. The self-directed RSP is really the only type of plan that allows you to take full advantage of the many attractive investment opportunities outside of Canada.
Effectively, there is no foreign content limit for self-directed RSPs, since there are several ways of investing up to 100% of this type of plan’s assets in foreign securities. See the table of RSP-eligible investments and our discussion of the foreign content rules.
Consider your desired retirement lifestyle in setting your own foreign content level. Suppose you hope to spend every winter down south. Keeping 25-50% of your plan in U.S. dollar stocks and bonds, or mutual funds that hold them, would help protect your future ability to buy goods and services in the U.S., the Caribbean and Latin America.
|
Canada Represents Less Than 3% of
the World’s Stock Markets
|
|
|
|
Canada Represents Less Than 2% of
the World’s Bond Markets
|
|
|
8. Greater Involvement
Many people embrace the challenge of managing their own money. Others have no interest at all. A self-directed plan can accommodate the full spectrum. Even though you can make many decisions with such a plan, you don’t have to. You might do nothing more than make one annual contribution and put it into a GIC, a bond or perhaps a balanced mutual fund. We feel, though, that by taking a more active role, you will tend to become more involved – and more comfortable with – your overall retirement planning. Don’t forget that a qualified Investment Advisor can help you with every step of the way.
|
