With the RRSP deadline looming, Canadians are likely to follow old habits of contributing late and investing in mutual funds, according to recent polls.
However, financial advisors can help Canadians change things up this year with a less hectic contribution plan and a better understanding of different investments.
According to the TD RRSP Deadline Poll, 60% of Canadians will contribute to their RRSPs in the last two weeks before March 1. Survey respondents gave several reasons for their procrastination: not enough money throughout the year to contribute; contributing late is a good strategy; fear of market volatility.
One of the easiest ways for clients to break bad habits and dispel these myths is to make RRSP contributions automatic.
Advisors should start educating clients about the value of regular contributions and compound interest from the time they open an account, says Drew Abbott, vice president, investment advisor, TD Waterhouse Private Investment Advice in Toronto.
If a client doesn’t believe they have sufficient funds for regular contributions, Abbott suggests setting up automatic transfers to a non-registered account that can be transferred to an RRSP at year-end.
“That way they have the habit of savings,” he says. “And nine times out of 10, [clients] don’t see it, they don’t remember it or it comes out of their bank account and they know not to spend it.”
Like their contribution habits, Canadians are also predictable about their investment choices. According to a study conducted by Toronto-based BMO Financial Group, 72% of Canadians hold mutual funds in their RRSPs.
Serge Pépin, vice president, investment strategy, BMO Asset Management Inc. in Toronto believes there are two reasons for the popularity of mutual funds. First, Canadians may not be properly informed about other investment products. Secondly, mutual funds are familiar and Canadians feel comfortable investing in those products.
In the first case, it’s important for advisors to educate clients about the different types of products out there and how they may be better suited to the clients’ portfolios. “It’s really knowing what’s out there, what’s offered to the investing public,” says Pépin, “and then having that conversation with that particular client or investor.”
In the second case, if the average Canadian investor is feeling a little too complacent about their investment strategy, the rush of the RRSP deadline may be a good time to start something new.
Canadians who are unsure about how to investment their last minute contributions may want to consider exchange-traded funds, says Mary Anne Wiley, head of iShares Canada in Toronto, because of their low-cost, diversification and liquidity.
Advisors can get the conversation started, says Wiley, by comparing March 1 to January 1. “Think of the RRSP deadline almost like New Year’s,” she says. “Do something different, break the inertia of the past.”