Clients have a little less leverage this RRSP season

By Donna Glasgow | January 27 2009 01:29PM

Current market conditions have caused at least two players in the investment lending market to reduce their options while others have adjusted rates.

AGF Trust announced that it is no longer accepting applications for RSP loans. This policy came into effect Nov. 8. The company also announced that it is no longer accepting applications for its 100% No Margin Loan product.

Asked why AGF Trust made this decision, Lucy Becker, vice-president, communications of AGF Funds, provided the company's answer. "The entire financial services sector has been impacted by global market volatility and the credit crunch and AGF Trust is not immune to these global forces. In light of the current economic environment, and in order to continue to prudently manage our business, we have scaled back on some initiatives." The company adds, however, that it will still offer loan options to financial advisors and planners such as its "up to 3-for-1" investment loan product.

TD Canada Trust has reduced it options. The Insurance Journal obtained an announcement that was sent to Empire Life advisors regarding changes. It said that effective Nov. 1, TD Canada Trust would no longer offer 100% financing for investments. "The 100% loan and the 100% No Margin Call Loan will be removed from our list of products. Existing 100% loans will remain in place, but may not be increased."

TD Canada Trust is still offering its 1-for-1 No Margin Call Loan, its 2-for-1 Loan and its 3-for-1 No Margin Call Loan. But, it has discontinued its rate discount for larger loans. It also changed its interest rates to TD Prime plus 1%.

To explain the changes, the announcement stated: "The current state of the markets when combined with volatility that could extend for an unknown length of time has made it necessary to review and make changes to our investment loan program on a ‘go forward' basis. In addition, given the extreme margin compression that could extend for an extended period, we are changing our rates and amending our rate structure."

Kelly Hechler, a spokesperson for TD Bank Financial Group, said these changes apply not just to Empire but other investment providers as well. "These were program changes made by our investment lending services area in order to mitigate risk our business," she said, adding that the company would not speculate on whether other changes might be coming.

Chris Chard, regional vice-president, Ontario, Individual Distribution for Empire Life, explained that his company has investment leveraging program arrangements with TD Canada Trust, AGF Trust and B2B Trust for its segregated fund investments.

AGF Trust used to be the insurer's number one provider of RSP loans, he said. While he doesn't anticipate a big problem for advisors due to the changes, he added that "Whenever a program is reduced or eliminated, it provides less convenience."

When interviewed in November, Mr. Chard said that advisors do not seem concerned about the developments. But if this trend continues and it becomes more difficult for investors to borrow, that would have implications for advisors, he added. Leverage loans are good tools to have in an advisor's toolkit, he says. "If you take away advisors' tools, it reduces their effectiveness to provide solutions to their clients," Mr. Chard said.

He added that the 100% loan option where no prior equity is required from investors to pledge as security against the loan has been a popular product. For Empire Life, total RSP sales funded by RSP loans represents "a relatively small percentage for us, less than 10%."

Mr. Chard said he understands the lenders' decisions. "It's a reflection of the macro-environment. They have to do what they have to do."

Meanwhile, other players continue to offer the 100% loans, although rates are trending upward for this product. Manulife Bank recently sent advisors a notice that stated, "Although some firms are no longer supporting the 100% investment loan and RRSP loan markets, we are still committed to offering these products for your clients. However, we have found it necessary to adjust rates..."

Tom Nunn, assistant vice-president, HR and communications with Manulife Financial, said the company is staying in this market because "Manulife Bank is committed to the advisor market and these are important products for advisors."

Manulife Bank investment loan rates have increased by 100 basis points (bps) and RRSP loans by 175 bps. "Although the Bank of Canada rate has decreased, the cost of raising deposits in the current environment has remained very high, and therefore it is necessary to increase pricing to maintain profitability," he said, explaining the higher rates.

François Desjardins, president and CEO of B2B Trust, confirmed that B2B Trust is also continuing to offer 100% investment and RRSP loans. "Our advisor clients have come to rely on us to offer a full range of investment products - including investment and RRSP loans."

Like Manulife Bank, B2B has also recently raised loan rates.

Leverage demand

Mr. Desjardins adds that despite the current economic environment, he expects demand for investment loans to remain healthy this RRSP season. "Market conditions have definitely affected the investment lending arena. But what we have found is that despite a recent increase in rates, we are experiencing a continued demand for investments loans. We view this as a positive start to the 2009 RRSP season."

Mr. Nunn of Manulife said, "Even with higher loan rate structures, our actual RRSP loan rates are still very similar to last year's rates and our investment loan rates are lower than this time last year. So, these loans are still very affordable for clients. Beyond that, it comes down to clients being comfortable investing in these markets. Overall, we're expecting similar loan volumes to last RRSP season."

Dan Hallett, president of Dan Hallett and Associates Inc., an investment research and counsel firm, comments that he doesn't think rate increases will have a significant impact on RRSP lending because these loans are short-term, so paying one more percent in interest is not a big deal. However, he isn't predicting business as usual for the investment leverage market. "I think the challenge today is getting people to invest at all. Getting them to leverage to invest is going to be that much tougher."