Some advisors are taking an interest in TFSAs

By Donna Glasgow | February 12 2010 04:24PM

While the banks have grabbed the lion's share of Tax-Free Savings Account business since these plans were introduced just over a year ago, some insurance advisors are also embracing the new market.

Mike Rickaby, an advisor with Vancouver's Paragon Financial Services Inc., says he and his four partners are enjoying increasing success in winning their clients' TFSA business. "We've done quite well. Everyone who has maximized their RRSPs have bought them."

Mr. Rickaby estimates that currently 20% of his clients have invested in TFSAs through him and he would like this figure to rise to 50%.

He began offering TFSAs last year and found that some of his clients had already opened their TFSA plans at a bank. Often, they were under the mistaken impression that only banks could provide them, he explained. Mr. Rickaby adds that this year, he and his partners won some of this business away from the banks.

He explains that some clients were not pleased with the 1% they earned in their TFSAs at the bank and were looking for better returns by investing through a financial advisor. Mr. Rickaby thinks this will be an emerging trend in the industry as awareness grows among Canadians that there are other options than the banks for their TFSA money. "The banks got a head start. When clients see that this is not doing anything for them, they will look for alternative places to invest."

Another promising trend among Mr. Rickaby's clientele is that some clients who did not invest into a TFSA last year at all, are now putting in $10,000 - using their $5000 TFSA contribution room from last year and the $5000 for 2010.

Mr. Rickaby says that he knows that many advisors are ignoring the TFSA market. He says this is because they don't think there is enough money to be made from a $5000 investment and don't want to take the time to sell them. He sees this as an error that can allow the banks to get a foot in a client's investment door. "I'd call it short-sightedness. They could set themselves up for being attacked by a bank." He also points out that he usually sells to both a husband and wife for a total of $10,000 per year, so the money does add up and will build up to a substantial level in years to come.

Michel Kirouac, Vice President, General Manager of MGA Groupe Cloutier says that his firm has been promoting TFSAs for the past year among its advisors. In 2009, the advisors working with his firm opened 1,254 TFSA accounts with a total of $4.1 million in deposits. He said that sales started off slow but now are increasing 50% month over month. "Our sales are increasing every month and we expect at least 3,000 new accounts in 2010."

Sales picking up

While Mr. Kirouac is encouraged that sales are picking up, he would like to see a lot more growth in this area. He strongly urges insurance advisors to open TFSAs for their clients before the banks do it.

The generally low level of interest among insurance advisors for this product last year was mainly related to the small average deposit amount - $3,000 to $4,000 - often invested in secure investments that meant low commissions for advisors, he says.

In a presentation he recently gave to a group of 150 advisors, Mr. Kirouac explained that this amount is not so small when you realize that often by contacting one client, an advisor can open three TFSA accounts: the client, the spouse and perhaps an adult child. This means with 300 clients, an advisor has 900 prospects. Also, this year, TFSA deposits can now add up to $10,000 if the client didn't invest last year, he underlines. "Nine hundred clients with $10,000 each is $9 million of potential market. Even if you do one-tenth of this business, it is one million of new money," he adds.

He says his firm will keep pushing advisors to open TFSAs because the potential is huge for advisors and MGA. "If 1,000 advisors each opened 50 accounts, that would be 50,000 new accounts."

John Lutrin, Executive Vice President and Chief Marketing Officer of managing general agency (MGA) Hub Financial and Hub Capital, says that he has not seen life insurance advisors jumping into this market. "From our perspective, TFSAs are still relatively new and have yet to take hold in the life insurance marketplace. He also thinks the size of the sale is a major factor to explain advisor reticence to enter this market.

Most advisors are involved in retirement planning for clients and a $5000 investment is a less attractive opportunity than RRSPs or other retirement planning ideas, he says. Mr. Lutrin adds that the small investment amount means that advisors are limited in their ability to do much with this investment from a financial planning perspective. Mr. Lutrin believes that as clients' TFSA investment room accumulates to the $15,000 to $25,000 range, these vehicles will become more mainstream for insurance advisors.

Competing with RRSPs

Another major reason behind the lack of advisor involvement in this market, is that TFSAs compete head to head with RRSPs for clients' limited investment dollars, Mr. Lutrin explains. Most Canadians haven't maxed out their RRSPs and if a client has to choose between the two types of accounts, an advisor will generally prefer to invest their clients' retirement money in an RRSP.

He says this is due to the immediate benefit of the tax deduction the client will receive with an RRSP contribution. It is also because of "the mindset" of an RRSP which is much more typically longer term...whereas, "the whole mentality of the TFSA," especially when offered by a bank is a more transactional vehicle. "The TFSA is still a far distant second cousin to the RRSP."

Withdrawals from an RRSP account are subject to taxation as opposed to TFSA accounts which can be dipped into without penalty. "It's easy in, easy out," he says.

Therefore, it's not through ignorance or apathy that insurance advisors have not been selling many TFSAs, Mr. Lutrin underlines. But while RRSPs still dominate, this may change down the road, he adds. "In five or 10 years, the TFSA might not yet be an equal brother to an RRSP, but it will become much more neck and neck."

Presently, though, he describes the TFSA business coming through Hub as "a pittance" compared to RRSP business.

Tony Ryan, Executive Vice President of MGA Financial Horizons Group, an MGA, says he also thinks TFSA sales will pick up among advisors. "It's like any product. It will gain traction over time."
He says his firm has seen a number of TFSA sales, but he doesn't see it as a product that advisors will sell alone. "It is difficult to see a broker driving 40 miles to pick up a $5000 TFSA." But they will sell it at annual review time along with other products, he explains.

Mr. Ryan suggests that familiarity will breed success. "It generally takes awhile for Canadians to warm up to new products. We're skeptical by nature."

He adds that fifteen or so years ago, banks were doing a better job selling RRSPs, but financial advisors steadily gained ground. The same trend will likely repeat itself with TFSAs, Mr. Ryan predicts.

Making choices

When a choice has to be made between investing in a TFSA or RRSP, Mr. Rickaby of Paragon Financial says the client's age and financial situation are the key factors. So far, his TFSA sales have been made to older clients who already have their financial houses in order. "This works great for people who have already retired." But for clients in their highest income earning years, investing in an RRSP makes more sense because of the tax deduction, he adds.

Mr. Rickaby says one ideal client group for TFSAs are people who have retired early, and have not yet reached age 65. These clients might be at a low marginal tax rate presently, but this situation could change when they reach 65 and their Old Age Security (OAS) and Canada Pension Plan (CPP) benefits kick in.

For these clients, he is encouraging them to take some money out of their RRSPs each year and re-invest it in a TFSA because the earnings within these accounts won't affect their taxation rate later on. In addition, having less money in their RRSP or RRIF at age 65, will perhaps reduce potential OAS clawbacks.

He also sees the TFSA as an ideal investment vehicle for younger people in low taxation brackets who do not benefit as much from an RRSP tax deduction. Putting $5000 a year into a TFSA from ages 18 to 25 would result in a sizable down payment for a first home. But so far, he hasn't had any younger clients invest in a TFSA. "The fact is a lot of young people, and even two-income families with kids in school, don't have the money to put into a Tax-Free Savings Accounts. Many are living paycheque to paycheque."

Investment strategies

Mr. Rickaby says his biggest TFSA sales are in segregated funds or mutual funds. More conservative investors, who don't need the money in the near future, are investing in 10 year GICs at 4% interest.

Meanwhile, some clients have decided to aggressively invest their TFSA money in the hopes of making high returns in a tax sheltered account via individual stocks. Due to the market recovery in 2009, many of these clients made large tax free gains. A few of the firm's clients are up 500% and now have $25,000 in their TFSA accounts, he notes.

While Mr. Rickaby is life-licensed, one of his partners is a stockbroker, allowing clients access to stocks if they are ready to accept the risk with their TFSA money. Mr. Rickaby underlines that it is important that clients understand that they cannot deduct losses if investments are held in a TFSA.

David Spector, Director of wealth management with MGA Qualified Financial Services, said his firm has been promoting the TFSA inside of a guaranteed minimum withdrawal benefit (GMWB) structure, such as Manulife's IncomePlus, or Desjardin's Helios product. "We enter them into a product that will produce a flow of income tax free." So far, he says QFS' advisors have put 200 clients into a TFSA with a GMWB investment.

If a client would apply this strategy beginning at age 30, by age 60 he or she would have a lifetime income tax free, says Mr. Spector. He adds that with this strategy, QFS has been "thinking outside the box." A person who begins early could end up with a half million dollar nest egg of tax free money. "If you're young enough, you can accumulate like crazy."

Mr. Spector says that while his first choice would be to have a client contribute to both their RRSP and a TFSA, there is no question that he would take the TFSA over an RRSP if a decision had to be made between the two. "I love it."

Meanwhile, for Mr. Ryan of Financial Horizons, the beauty of the TFSA is its flexibility. It can be used for long-term retirement funding goals, or for other purposes such as an emergency fund. It is better to use TFSA funds during an emergency than drain an RRSP and face penalties, he contends.

Mr. Ryan says the TFSA's flexibility enables financial advisors to integrate them into a client's overall financial plan in a way that is best suited to that particular client. "It's not a cure-all, but another tool for advisors."