Advantages and Disadvantages of Holding a Self-Directed RESP Account at a Discount Brokerage

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When you first start a Registered Education Savings Plan you usually don’t have much money in it. But if you are able to contribute enough each year to receive the maximum Canada Education Savings Grant, and especially if you have more than one child and you can contribute $2500 each per year, within a few years you may have over $10 000 in the account. That’s when many people begin to think about ways to maximize their returns and to resent the fees they often have to pay for mutual funds. One option to consider is opening a self-directed RESP online brokerage account so that you can choose GICs from a variety of places or invest in stocks, ETFs and mutual funds; this article lists some of the advantages and disadvantages of RESP brokerage accounts.

Pros for Holding your Children’s RESP at an Online Discount Brokerage

If you wish to invest in Guaranteed Investment Certificates, you are not limited to the ones offered by a single bank which may only offer low interest rates. For example, if your RESP is at BMO InvestorLine, you can buy GICs from over 10 financial institutions including Home Trust and Equitable Bank both of which often pay rates significantly higher than the major Canadian banks.

You can invest in a mutual fund which mimics a daily interest savings account. The going rate is usually slightly less than paid by online banks such as PC Financial and Tangerine. (For example 1.2% vs 1.3%.)

You can buy units of low fee Electronically Traded Funds, ETFs, that mirror the performance of major stock exchanges such as the TSX or the NYSE

You can usually select mutual funds offered by a large variety of financial institutions with no fee required for the purchase and no penalty for selling the fund after holding it for 90 days (no load funds.) If there is a specific fund you wish to invest in, though, be sure to check that the brokerage offers that fund before opening your brokerage account. Each brokerage offers slightly different investment choices.

You have total control over how the money is invested.

Making new contributions to the RESP is usually as simple as a typing a few numbers on a screen and clicking enter. (No more sitting through sales pitches disguised as contribution meetings at your bank.)

You can check the details of your account and its earnings almost any time. You do not have to wait for quarterly or annual statements.

You can arrange to have contributions made automatically to your account on a monthly or annual basis. (This is also true of RESPs held at banks and of group RESPs managed by private companies.)

Cons for Holding your Children’s RESP at an Online Discount Brokerage

Many brokerages do not allow you to apply for all of the matching government grant programs. If you are planning to apply for grants in addition to the standard Canada Education Savings Grant, CESG, check with the brokerage to find out whether it supports the desired program before opening an account.

You may need to have a large minimum balance to avoid paying annual fees. (There is at least one exception to this.)

No one will provide you with guidance or advice about what to buy.

You will have to choose how to invest your money and if you lose money because of your choices there is no way to recover it.

If you wish to invest in GICs you may find the minimum purchase amount is very large. For example, the minimum at BMO InvestorLine is $5 000 per GIC.

If you wish to invest in a daily interest savings account fund, the minimum purchase amount may be large. For example, at BMO InvestorLine you have to keep a minimum balance of $5 000 in the fund, or sell all of your units.

A mutual fund you wish to invest in may not be offered for sale by your brokerage. For example, no brokerage currently offers the Tangerine mutual funds. Check before you open an account.

Occasionally there may be a minimum investment requirement for a mutual fund. This tends to be set by the mutual fund company, such as Steadyhand, however, not usually by the brokerage. If it’s a concern, check before opening the RESP account.

You will usually have to pay a commission fee each time you purchase or sell shares of a company or units of an ETF. The commissions vary from about $7 – $10 depending on the brokerage. Some brokerages may waive the purchase commission for some or all ETFs.

If you are planning to use a dividend re-investment program for shares or stocks in the RESP, be aware that

  • Brokerage accounts offer a synthetic DRIP. You will only get a new share or shares if your dividend payment is enough to purchase one or more entire new shares of the company. You cannot buy fractional shares in a brokerage account.
  • Each brokerage has a list of stocks and ETFs that for which it offers a DRIP. You may not be able to DRIP all ETFs or all stocks. If this bothers you, check whether the stocks and ETFs you want to purchase are eligible for a DRIP before you open a brokerage account at that institution.

If you transfer in your RESP from another institution, you may or may not be provided with good information easily about how much of the plan comes from your contributions, how much from the government grant/s, and how much from earnings made by the investments. I strongly recommend you keep clear records yourself!

The brokerage usually does not have any mechanism to stop you from over-contributing to the RESP. You should keep accurate records yourself about your contributions and make sure you do not exceed the $50 000 limit per child. Also, it will not warn you if you are contributing more than is needed to get the matching CES grant for that year.

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Advantages and Disadvantages of Enrolling in a Group RESP Through a Private Company

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There are many companies that offer to take your RESP contributions and invest them for you. In theory, when your child begins a program of education after completing high school, they then pay your child an amount as agreed to in the contract. Companies that offer this type of RESP include Knowledge First Financial (formerly known as USC Education Savings Plans Inc.), Heritage Education Funds and others. There are definite disadvantages to this type of RESP which may easily outweigh the advantages so please read on if you are considering investing in a Group RESP through a private company.

Pros of Enrolling in a Group RESP through a Private Company

For many plans, you do not make any decisions about how the money is invested.

For some plans, the amount your child receives may be higher than expected because your child will receive some of the investment earnings due to the money forfeited by other families who had to quit the plan before they received their share of the earnings on their investments.

In other words, if some other families couldn’t afford to keep making their contributions or if their child did not move on to higher education, your family may get some of the money generated by their contributions. (If you are the one getting the extra money, this sounds pretty good: but will you be the one getting or the one losing the money?)

You can set up the contributions to come automatically out of your bank account. (You can also do this for all other types of RESPs.)

The threat of losing a large amount of their money if they fail to keep making regular contributions helps motivate some people to keep contributing even when they would rather not.

Cons of Enrolling in a Group RESP through a Private Company

I have read many, many articles about the drawbacks of group RESP plans.

For some plans if your financial situation changes and you can no longer afford to make the required monthly or annual contributions, you forfeit your future benefits and you also lose all (or almost all) of the money you contributed.

You can forfeit thousands of your own dollars by quitting a plan.

For many plans, you cannot transfer your contributions and grants to another financial institution without paying fees which are so high that you get little or nothing back from the money you contributed or from the matching government grant money.

Some plans make it difficult to get your funds if your child goes into an unconventional educational program.

Some plans make it difficult to get your funds if your child begins higher education at a younger-than-expected age.

Some plans do not make it clear at the outset what the rules will be for receiving payments in the future for your child’s education.

Some plans have very high fees.

For many plans, you do not make any decisions about how the money is invested. (Yes, that can also be listed as an advantage.)

Personally, I feel the lack of flexibility, high fees, and unclear rules make these plans not worth considering.

Internet Resources Discussing the Advantages and Disadvantages of Pooled RESPs

You can read more discussions of the pros and cons of these plans all over the internet. Here are some places to check:

A CBCNews article: Group RESPs: reading the fine print

Ellen Roseman has written

A RedFlagDeals Chat Board posting: Does anyone have any experience with Knowledge First Financial, formerly USC Education Savings Plans Inc?

A Financial Wisdom Forum post: RESP from Industrial Alliance

I’d recommend you not consider these plans at all. If you do, please, please, please do not sign anything without reviewing it with your lawyer.

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Did you use a Group RESP to save for your child’s education? Were you one of the lucky ones who received excellent service and a high return on your investments? Or are you one of the ones who cancelled the plan part-way through and lost thousands of your own dollars? Please share your insights with a comment.