Category Archives: Self Directed Investing

Where Should I Start a Self-Directed RESP?

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As I mentioned before, we didn’t start RESPs for our children until the eldest was 10 years old.  Up till then we were busy paying off our mortgage and dealing with some other financial necessities. That meant, though, that we didn’t want to invest heavily in stocks or anything else that might plummet in value and take a decade to recover. After all, that eldest child will need the money in the year she turns 18 if she goes on to “higher” education. So it wasn’t till very recently that I decided we might want to start a self-directed brokerage account Registered Education Savings Plan, RESP, for them.

Why Would a Self-Directed RESP Be Worthwhile?

Again, as I mentioned before, you don’t have to buy stocks in a self-directed brokerage investment account. You can also buy good-old-fashioned GICs. The kicker is that the smallest GIC you can buy is usually $5000.

On the other hand, once you have one $5000 GIC, each year you could add any amount to it, from $1 on up. That’s because when a GIC matures in a brokerage account it is paid out in cash. You can then use that cash, plus your newly contributed cash, to buy your next GIC.

Why would it be better to buy the GICs in a brokerage account? Because the interest rates available through the brokerage account are usually better than those you can get dealing directly with a bank or financial institution. (There are some exceptions. It appears that you might get a better GIC rate dealing directly with, say, ICICI but many of these institutions do not offer RESPs.)

Of course, if you start contributing to a RESP when your child is a toddler, you have a much longer time to recover from a market downturn and you might want to buy some index funds (ETFs) with a very low expense ratio (MER) which try to capture the return of an entire stock exchange like the TSX or NYSE. You could buy units in these ETFs within the self-directed RESP brokerage account as well.

Or you could buy shares. That has a much higher risk of losing money, though.

OK, If I’m Going to Open a Self-Directed Brokerage RESP, Where Should I Go?

There are two sets of brokerages to consider:

  1. The “Big 5” Canadian banks all have brokerages. BMO has InvestorLine. CIBC has Investor’s Edge. RBC has Direct Investing. ScotiaBank has iTrade. TD has (get this) Direct Investing. They used to be TD Waterhouse, but they recently changed their name. It may cause a little confusion!
  2. Then there are quite a few independent or smaller brokerages. These include ones like QTrade, Questrade, Disnat, Interactive Brokers, HSBC InvestDirect, National Bank Discount Brokerage, Credential Direct, Virtual Brokers and I’m sure there are other ones whose names elude me at this time.

(I’m not very familiar with the independent or smaller brokerages so most of this article is about the Big 5. However, you can research the others using the same ideas described below.)

Narrowing Down the Choices for a Brokerage for a RESP

Stick With Your Existing Brokerage to Reduce Fees

If you already have a discount brokerage account, chances are good your best choice is to host your RESP brokerage account at the same institution. Usually this will allow you to get the lowest possible commissions on buying and selling ETFs and stocks as you can pool your capital to meet the discount requirements. (If you’re only buying GICs and/or no-load mutual funds, though, this may not matter.)

Check Minimum Investment Requirements and Annual Fees for RESP Brokerage Accounts

Many brokerages require a minimum balance in the RESP account in order to waive an annual or quarterly fee. These balances can change often, so always double check before signing up with a brokerage.

As of September, 2013, here are some of the annual RESP fees and minimum balances required to avoid paying them:

  • BMO InvestorLine:  A minimum balance of $25,000 is required or there is an annual fee of $50.
    Source: http://www.bmoinvestorline.com/home/getting-started/il/accounts/resp
  • CIBC Investor’s Edge: NO minimum balance is required; no annual fee!
    Source: https://www.investorsedge.cibc.com/ie/features/no-fee-resp.html
  • RBC Direct Investing: A minimum balance of $15,000 is required but can include investments in other Direct Investing accounts, or else a fee of $25/quarter ($100/year) is charged for the RESP account.
    Source: http://www.rbcdirectinvesting.com/commissions-fees-schedule.html#fees
  • ScotiaBank iTrade: A minimum balance of $15,000 is required but can include investments in other iTrade accounts, or else a fee of $25/year is charged for the RESP account.
    Source: http://www.scotiabank.com/itrade/en/0,,3694,00.html
  • TD Direct Investing: A minimum balance of $25,000 is required or else there is an annual fee of $50 plus tax.
    Source: http://www.tdwaterhouse.ca/products-services/investing/td-direct-investing/accounts/resp/index.jsp
    http://www.tdwaterhouse.ca/products-services/investing/td-direct-investing/accounts/index.jsp

Consider Investor’s Edge For Low Balance RESP Accounts

If you only have one child and you are just starting your RESP, you may only have a small amount to invest. If it’s $5000 or more, though, you could want to get a brokerage account to get better GIC rates.

One place to check into in this situation is CIBC. As of September, 2013, CIBC’s Investor’s Edge was advertising that there is no annual fee for a RESP brokerage account.

Consider Brokerages with No Fee ETF Purchases

If you plan to buy ETFs within your RESP, you may want to consider brokerages which offer ETF purchases with no fees. Some brokerages, like Questrade, advertise no fees on all ETF purchases. Others like iTrade offer no fees on some ETFs. (Source: http://www.scotiabank.com/itrade/en/0,,4200,00.html ) You’d have to check whether the brokerage you are considering is selling the ETFs you want for no fee. Also be aware that most of these brokerages are actually refunding the fee AFTER you’ve paid it which may or may not suit you.

Not All Brokerages Offer Excellent Paperwork and Customer Service

It’s also a good idea to check public chat areas like RedFlagDeals and the Canadian Money Forum for feedback on any problems investors have been having with their brokerages. Cost is not the only factor to consider when picking a place to invest your hard earned dollars.

Check Whether the Brokerage Can Handle Any Grants Your RESP Contributions May Receive

Generally, most brokerage accounts can handle the Canada Education Savings Grant, CESG, monies.

If you are also eligible to receive other monies, such as the Canada Learning Bond or the Alberta Centennial Education Savings Plan you may not be able to use a brokerage account. Some of them juts can’t (or won’t) handle the paperwork and accounting required for these other sources of money. Be sure to check the details for each brokerage you are considering before signing up.

Which Brokerage Did We Pick?

To be honest, I still haven’t decided! That’s near the top of our financial “to do” list, though.
UPDATE: As of January 2014, we have a self-directed RESP at BMO InvestorLine. Search for posts on how it’s going!

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What do you think? Where should we open our RESP brokerage account? Where did you open yours? Please share your opinions with a comment.

Related Reading

Why Do Rising Interest Rates Affect Real Estate Investment Trusts, REITs?

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I like Gordon Pape’s style of writing. When I started trying to understand our finances a few years ago, I read through all of his books. When I started to take control of our investments using self-directed brokerage accounts, I subscribed to two of his newsletters, Internet Wealth Builder and the Income Investor. I learned a great deal from both. From time to time, I renew my subscriptions and I learn even more. For example, in a recent Income Investor I read an informative article on REITs that included information about why rising interest rates affect REITs.

Why I Care About REITs

I have been trying to arrange our investments so that by the time we actually retire we will have a steady stream of income. I realize this is not an approach everyone wants to follow. Some people want to maximize their actual portfolio value, often by realizing huge capital gains; they prefer to wait until they are actually retired to figure out how to use that money to generate an income.

I’d like to have a steady stream of income developed long before retirement. So as an experiment, I bought a small amount of a REIT several years ago. Without warning (to my inexperienced eyes) it took a plunge in value this spring. The distributions have not decreased and the holding still is worth more than I paid for it, but even so, I thought it was time to find out what had happened and why. (And whether I should sell now or hold on.)

Why Did Real Estate Investment Trusts Drop in Value in June?

In May and June, in the USA, the US Federal Reserve indicated that it might stop buying back bonds at its previous levels. According to Kevin Mahn in Forbes, many investors decided that meant that a rise in interest rates was imminent. That led to a hit on REIT prices.

Why Would Rising Interest Rates Matter to REITs?

According to Rob Carrick in the Globe and Mail, many high yield (income-driven) investments dropped in value when investors became hopeful that interest rates were on the way up. He says pipelines, utilities and REITs all decreased in price.

In other words, market demand for REITs might decrease if interest rates (and income rates) increase for fixed income investments. Many investors would prefer to take little or no risk provided they can get a decent rate of income from their investments. They will want to get out of REITs and even blue-chip dividend-paying stocks if they are able to get a similar rate of return with a much lower risk of loss. Decreased market demand would usually result in lower share or unit prices for REITs.

Mr. Carrick also points out that many REITS borrow money to finance new acquisitions. Higher interest rates would mean these REITs would have less profit to distribute to share holders.

Other factors cited by many reports include the possibility that if interest rates rise, people’s ability to buy houses will decrease, which will depress the economy because they won’t spend on all the things needed to maintain and use those houses, which will reduce the demand for retail and commercial properties which will impact REITs. Sounds a bit like the old “for want of a nail the kingdom was lost” nursery rhyme.

Should I Sell My Small REIT Holding Now or Not?

One thing all the financial articles online agree on is that REITs will either go down in value or go up.

Yep. No one has any idea what’s going to happen.

I read logical agreements that said “up” and others that said “down.”

Given I have a very small (actually tiny) amount of our future tied up in a REIT, and given that it is one of the REITs that is generally approved of by the pundits, I think I’ll just keep it. For one thing I don’t have any brilliant ideas of where else to invest that small amount of capital.

It’s times like these, though, that re-affirm our decision to keep a huge amount of our savings in money-losing (to inflation) GICs. Even though we are steadily losing ground on that portion of our portfolio to inflation we sleep better knowing it’s the back stop to our more volatile investments. Again, this is not the approach I recommend others take. I have no financial training and no second sight into the future. It’s just what we do.

Related Reading

  • Why REITs look ripe this summer
  • Understanding The Three Rs: REITs, The Real Estate Recovery And Rising Interest Rates
    http://www.forbes.com/sites/advisor/2013/08/15/understanding-the-three-rs-reits-the-real-estate-recovery-and-rising-interest-rates/
    This article pointed out that you can invest in a REIT that holds self storage locker units. Who knew?! And that there seems to be no correlation between this type of use of real estate and interest rates or the housing market. I guess if I did sell our REIT I could buy one of these ones instead.
  • Real Estate Investment Trusts are Sources of Retirement Income

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Do you use REITs as part of your income-generating portfolio? Are you going to bail out now that rates may be rising? Please share your views with a comment.