RRSP | Financial Crooks

ING Direct, now Tangerine.ca, offers a great service for quickly making a new RRSP contribution. You can make the contribution into a daily interest savings account RRSP, a cashable RRSP GIC, or a RRSP “Streetwise” Mutual fund by simply logging in to your online account and “moving” your money from your chequing or savings account into the RRSP investment you want. You can print your RRSP receipt immediately if the cash was already in your account, or as soon as the hold clears if your cash has to be transferred in from another non-Tangerine bank account. This convenience means we often make our new RRSP contributions to our ~~ING Direct~~ Tangerine RRSPs. Sometimes, though, a better investment opportunity comes up later and we want to move some of that RRSP money elsewhere. When that happened recently, I contacted ~~ING Direct~~ Tangerine to check whether it costs anything to move part of my RRSP to another institution.

Tangerine To Start Charging a Fee to Transfer Out RRSPs and TFSAs!

UPDATE: Please be aware that as of January 2015, Tangerine has started charging a fee if you transfer your RRSP or TFSA from Tangerine to another bank, credit union, brokerage or financial institution.

ING Direct Tangerine Does not Charge Transfer Out Fees for RRSPs

Here’s a direct quote from ING Direct Tangerine: “We don’t have unfair fees, so there’s no charge from us to transfer out your RSP funds. Before making the move, check with your other bank for any unfair fees they may charge you for an RSP transfer in the future. You don’t want the fee to eat away at your retirement savings.”

Their advice is sound. Most “big banks” charge a hefty fee to transfer money out of an RRSP at their bank.

How Do I Transfer some of my RRSP funds from Tangerine to Direct Investing, InvestorLine or Investor’s Edge?

Don’t take the money out of your RRSP to move it! You can NOT add it back to your RRSP. And you will have to pay a non-refundable tax on the withdrawal.

To move the money, you must transfer it, not withdraw it. The money will move directly from one RRSP to the other.

I’m going to quote ~~ING Direct~~ Tangerine again on this one:
“To transfer out your RSP funds from ~~ING Direct~~ Tangerine you will need to submit an RSP Transfer Form (T2033) to the other bank that will be receiving your RSP funds. You can find this form at your local bank branch or online at cra-arc.gc.ca. Once they’ve received your completed form, they’ll communicate on your behalf to move your money.”

In any situation where you are transferring an RRSP, you must have an RRSP account at both locations BEFORE you can make the transfer. If you want to transfer out, first set up the new account at the new bank or trust company so there is somewhere to send it to!

Where Can I Get a RRSP T2033 for Direct Investing, InvestorLine, Investor’s Edge or ING Direct Tangerine?

To get the T2033 form to move an RRSP from anywhere TO BMO InvestorLine, go to
https://www.bmoinvestorline.com/ILClientWeb/marketing/accountTransfer.do?method=displayMarketingForm&lang=E
or
https://www.bmoinvestorline.com/public/pdf/Trans_SD.pdf

To get the T2033 form to move an RRSP from anywhere TO CIBC Investor’s Edge, go to
https://www.investorsedge.cibc.com/ie/pdf/2033.pdf

To get the T2033 form to move an RRSP from anywhere TO RBC Direct Investing, go to
http://www.rbcdirectinvesting.com/transfer-an-account.html

To get the T2033 form to move an RRSP TO ~~ING Direct~~ Tangerine from another institution, login to your existing Tangerine account. From the menu on the left, click on the link Transfer RSPs to open the form.

How Long Does It Take to Transfer Money from One RRSP to Another?

And quoting once again:
“An RSP transfer takes 3-6 weeks to complete.”

Actually, that’s a bit on the quick side. It has taken me as long as 8 weeks to transfer an RRSP, and that was from one bank to that same bank’s self-directed brokerage firm!

So if you were thinking of moving the money fast enough to take advantage of a special GIC rate, it may not be fast enough. Call the bank or brokerage with the good rate and find out if there’s any way to have them “hold” that rate for you. (It’s not very likely, though, unless you’re bringing in a very large amount of money.)

If it’s for a quick investment opportunity like a low stock price, you likely won’t be able to move the money fast enough. In that case, consider whether you could make a new contribution to your brokerage account in time to make the purchase.

Please remember you will pay a fee to transfer your money out of Tangerine to InvestorLine or any other financial institution. BEFORE starting any transfer talk to the institution that will receive the money and ask them to pay the transfer fee. Get any agreement in writing BEFORE beginning the transfer process.

UPDATE: Please be aware that as of January 2015, Tangerine plans has started charging a fee if you transfer your RRSP or TFSA from Tangerine to another bank, credit union, brokerage or financial institution.

Related Reading

RRSP Strategies Part 1: How to Best Get Your RRSP Money Contributed before the Tax Deadline

Join In
Do you ever use a strategy of quickly contributing to your RRSP at one location, then shifting it later to another? What was the longest you had to wait for a transfer to take place? Please share your experiences with a comment.

image of thin green double line

Investors are usually torn between conflicting ideals: they want security and high returns. Banks, the first shopping stop for people looking to invest, have tried to create products that satisfy both of these needs. One such product is the non-guaranteed GIC. These GICs don’t guarantee an interest rate. Instead, their return is based on some external index. This is when GICs get risky!

Investing for High Returns with High Security

Occasionally, it seems that high returns can be achieved with high security.

For example, in 1991 I had some GICs invested with a 10.5% interest rate for 1 year. But that wasn’t as good as it sounds, because in 1991, inflation was 5.6%. That means the after-inflation return was only 4.9%. The profit was even less if I used a rate of inflation more realistic than the CPI. So that return wasn’t very high although the principal and interest were guaranteed and insured so the security was high.

Right now I have a few shares in a “blue chip” stock telco stock that pays a dividend over 5%. That rate isn’t as good as it sounds. At any time a company can cut its dividend or its shares can drop significantly in price. For example, if a class action lawsuit was successfully won against Canadian telephone companies, share values might plummet. There currently are several class action lawsuits brewing against the Telcos. So while the return is high, the security is low.

Why Do Banks Create These Specialty Market-Linked GICs?

Banks knew these market-linked GICs would appeal to both the investors need for safety and greed for growth. The banks had another motive, though. By carefully capping the maximum profits the GICs could earn, but by only guaranteeing the principal, the banks guarantee themselves a profit—with a better chance of capturing any upside profit than the investors!

An Analysis of the BMO Blue Chip GIC, a Typical Market-Linked GIC

Here’s an example of these risky non-guaranteed GICs. The Bank of Montreal offers a BMO Blue Chip GIC for 1 year that is RSP eligible. UPDATE: This analysis is based on a product on offer in 2013. The product may have been changed since that time.

The principal is fully guaranteed.
(Not guaranteeing the principal would be a deal-breaker to investors.)
There is a guaranteed rate of return.
(This is honey to lure the bears.)
There is potential for additional returns.
(This appeals to greed.)
It is RSP eligible.
(This is strategic marketing. Many investors want GICs for their RRSP.)
It offers “exposure to a diversified basket of Canadian companies from various industries.”
(Note keywords: diversified; Canadian; various; companies; industries. The use of “basket” gives a picnic feel to the purchase, encouraging warm, cozy thoughts.)
The minimum investment is reported as a low $1000.
(Many conventional GICs can be bought at $500 or lower increments. This appeals to people who don’t have thousands to risk, but it still ties up a substantial amount of money for the investment term.)
It is eligible for CDIC insurance, up to applicable limits.
(They don’t mention the insurance is only on the principal.)
In the Details, they state that the GIC will be automatically re-invested unless other instructions are provided.
(This ensures if you forget it matured it will be rolled over locking it in for another year. This type of negative-option investing is quite favoured by banks. I hope they have improved their system for changing the reinvestment instructions. I had such huge problems with them in the past that I actually stopped investing in GICs with a major Canadian bank.)
It’s interesting that it will be automatically reinvested in a 1-year GIC at the current rate. It’s as if they KNOW you don’t want to re-invest in this Blue Chip GIC!
It is not redeemable prior to maturity and it is not transferable.
(If you get buyer’s remorse you’re still stuck.)

What Kind of Profit Can You Make from a Market-Linked GIC?

If you scroll down in the Details section for this product
Total Return Potential for the Term:
0.10% to 3.65% annually depending on the performance of the reference portfolio.

That’s right. The MOST you can make is 3.65% for the year. That doesn’t sound like a “high” return to me. Investing in BMO stock itself today would get you dividends of 4.608%!

The Three Strikes Against the BMO Blue Chip Market-Linked GIC

Strike One: The Choice of Stocks Used to Calculate the Rate of Return for the GIC

What do you think of when you think Blue Chip stocks? Personally, I tend to think telephone companies, banks, pipelines, and utilities. Here’s what BMO thinks:
AIM, Aimia Inc
PRE Pacific Rubiales Energy Corp.
G Goldcorp
MG Magna International Inc.
T Telus Corp.
TCW Trican Well Service Ltd.
TRP TransCanada Corp.
SC Shoppers Drug Mart Corp.
ESI Ensign Energy Services Inc.
CTC.A Canadian Tire Corp. Class A.

They have assigned a 10% proportion to each of those stocks.

I don’t even know what one of them is! (AIM). And the 3 energy sector related stocks are real no-namers too: No Suncor; No Imperial Oil. (Esso); No Irving Oil; No Husky.

According to their fact sheet, this GIC mirrors investments held 40% in Energy, 30% in Consumer Discretionary, 10% in Materials, 10% in Consumer Staples and 10% in Telecommunications.

Would that be your pick for a Blue Chip collection? As I said earlier, personally I would have expected:
20% Telecommunications; 20% Pipelines: 20% Utilities; 20% Banks; 20% Consumer.

Strike Two: The Dividends Are Not Used to Calculate the Rate of Return for the GIC!

I honestly expected dividends to play a role in the performance of the stocks and therefore in the expected rate of return for the GIC. So I researched the current dividends for the mirrored stocks:
AIM 4.172; PRE 1.931; G 1.86; MG 2.268; T 3.724; TCW 2.169; TRP 1.84; SC 2.669; ESI 2.575; CTC.A 2.029

Then I found the Product Profile sheet and discovered in extremely fine print, it says:
“The rate of return for the term is determined without reference to any dividends or distributions paid on the securities.”

In other words, they ignore the dividends when deciding if you get the 0.1% or the 3.65% !

Now by definition, Blue Chip stocks are chosen as investments because they pay good dividends and are stable companies. They are not usually bought because they have strong growth (capital gains) potential.

Yet the return for this Blue Chip GIC is based solely on the capital gains (growth) of these stocks!

Strike 3: The Method of Calculating the Growth is Subject to Change at the “Agent’s” Whim!

Ok, if the return for this GIC is based solely on the capital gains of the stocks it mirrors, I thought I’d look at the last 5 years of stock prices for each stock. Here’s what I found:
AIM climbing steadily. AIM has a lawsuit against it in the UK.
PRE big drop in 2011 and early 2012
G big drop in 2012, slight rebound in 2013, currently dropping
MG climbing quickly after big drop in late 2011
T climbing steadily
TCW big drop end of 2011 through 2012, leveled off in 2013
TRP climbing steadily
SC flat since 2011
ESI bounces annually but doesn’t really go up for last 4 years
CTC.A very slowly growing

Frankly, that’s not a very promising picture.

But it doesn’t really matter, because in the same very fine print in the Product Profile I found:
“Each variable rate of return is the average of the effective returns on each security in the Reference Portfolio on the applicable calculation date (the “Average Effective Return”). The effective return of each security is based on the actual return of each security calculated as the percentage increase or decrease in the price of the security (the “price returns”) from the second business day after the issue date to the applicable calculation date. The effective return of each security used to calculate the Average Effective Return on a calculation date is determined as follows : if a price return is positive, the effective return is the maximum return for each security as set out in the Terms and Conditions for the GIC; if the price return is equal to or greater than the minimum floor return as set out in the Terms and Conditions for the GIC but less than or equal to zero, the effective return is the price return; and if the price return is less than the minimum floor return, the effective return is the minimum floor return. If market disruptions or other special circumstances affect the calculation of the return, the calculation agent may adjust or delay the calculation or payment of interest, estimate the value of a security in the Reference Portfolio, replace a security and/or determine the amount of interest, if any, that may be payable in an alternate manner.”

I’ll make that last bit legible:
“If market disruptions or other special circumstances affect the calculation of the return, the calculation agent may adjust or delay the calculation or payment of interest, estimate the value of a security in the Reference Portfolio, replace a security and/or determine the amount of interest, if any, that may be payable in an alternate manner.”

Say, what?! Someone just gets to arbitrarily decide the amount of interest IF ANY based on an alternate manner which you have not understood or agreed to? They can “replace a security” without your knowledge?!

I CALL: “FOUL!”

And I call you a fool if you buy this market-linked GIC. (Sorry, Mom.)

Read and Fully Understand All the Terms and Conditions Before Buying a Market-Linked GIC

I suppose there may be some market-linked GICs that make sense. Based on the ones I’ve seen, though, I‘d be very, very wary.

If you lock in $1000 for 1 year with a guaranteed return of only 0.10%, you’ve basically agreed that $1 in interest is acceptable to you. $1. For one whole year. At ING Direct, based on the rate today on a RSP savings account you’d get 1.35% or $13.50 on $1000. I know which one I’d choose.

Background Reading:

Stats Canada, Consumer Price Index Historical Summaries
Financial Post Canada’s Telcom giants face $18-billion class action suit over system access fees. http://business.financialpost.com/2012/06/28/canadas-telecom-giants-face-19-billion-class-action-suit-over-system-access-fees/?__lsa=70f3-e215
Other suits against Telcos
http://www.classaction.ca/classaction-ca/master-page/actions/consumer-protection/current-actions/bell-canada.aspx
http://www.cbc.ca/news/canada/north/story/2013/03/04/nwt-bell-mobility-lawsuit-anderson-911.html
http://www.cjad.com/CJADLocalNews/entry.aspx?BlogEntryID=10491462
Product Profile for the BMO Blue Chip GIC
http://www.bmo.com/pdf/term/BCGICSheet-Eng.pdf
GIC webpage for the BMO Blue Chip GIC
http://www.bmo.com/home/personal/banking/investments/gic/gic-navigator/bmo-progressive-gics/bmo-blue-chip-gic/details?tpFilter=0