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As RRSP season closes and many Canadians prepare for tax time, a CBC Marketplace investigation reveals that financial advisers at some of Canada’s top banks and firms are giving consumers inaccurate, misleading and inappropriate advice.
Meanwhile, consumers face a complicated patchwork of regulatory bodies if they want to complain about bad investment advice, as some investor rights groups call for more robust consumer protection rules.
Since a third of Canadians rely on advisers to help them make financial decisions, Marketplace sent a person wearing hidden cameras to visit the five big banks and five popular investment firms in Ontario. The full investigation, Show Me The Money, reveals how individual banks and firms performed. The show, including practical tips on how to hire a financial adviser, airs Friday at 8:00 p.m. (8:30 p.m. NL) on CBC Television.
“That’s one of the worst pieces of advice I’ve ever heard in my life,” financial analyst and former adviser Preet Banerjee told Marketplace co-host Erica Johnson when shown hidden camera footage of one of the tests. “That was atrocious. That’s the only word to describe that advice.”
Hidden camera investigation
The tests revealed a wide range in the quality of advisers. Some performed well, giving clear answers and asking appropriate questions about the tester’s financial situation and risk tolerance. Other interactions, however, Banerjee found troubling.
In some cases, information was incorrect or misleading – even in response to direct questions, such as how fees are calculated. Some gave unrealistic promises about returns, including one adviser who said that a $50,000 investment should increase by $10,000, $15,000 or $20,000 in one year.
Others failed to adequately assess the customer’s risk profile, which advisers are supposed to use to ascertain the suitability of investment products they recommend to a person.
In an unusual twist, one firm tried to recruit the Marketplace tester to become an adviser herself. While some designations and certifications do require training, and individuals have to be licensed to sell specific products, “financial adviser” is not a protected term. There are currently about 100,000 advisers in Canada.
Several advisers in the Marketplace test neglected to include any conversation of paying down debt in their financial advice, which Banerjee says reveals a conflict of interest that most consumers don’t consider as they’re weighing the recommendations of an adviser.
“If you invest there’s a commission involved with that, or a percentage of assets,” he said. “But if you pay down debt, there’s no financial incentive for the adviser to do that. So that’s one of those conflicts of interests that people should know about.”
As a result of the Marketplace investigation, one firm suspended the employee and reported the behaviour to the regulatory body, the Investment Industry Regulatory Organization of Canada (IIROC).
Change coming slowly
The Marketplace test was similar to a broader mystery-shopper test in the UK by the Financial Services Authority. That test included 231 mystery shopping tests of investment advice at six major firms. The results of that test, made public last year, found that more than 25 per cent of investment advice was of poor quality because it was unsuitable or because the adviser did not collect enough information to be able to make the recommendations.
Ontario firms could face a test this year, as the Ontario Securities Commission (OSC) conducts a mystery shop to determine the quality of investment advice. While the OSC declined to provide specific details about its test to Marketplace, the results are expected to become public later this year.
However, investor rights advocates are critical of slow-moving efforts to provide better consumer protection. In a letter to the OSC, the Investor Advisory Panel pressed for reform, including how fees are structured and how complaints are investigated. “We have debated, discussed and studied the issues and their solutions for many years. It is time for decisions that will lead to a more robust investor protection regime in Canada.”
Among the most pressing issues: Financial advisers are not in fact required to act in the client’s best interest.
“There’s a big debate raging about that very issue right now,” says Banerjee. “So, it seems in a couple of years they will be bound to do what’s in the client’s best interest. But right now that’s not actually regulation.”
That runs contrary to the very reason many Canadians turn to advisers in the first place.
“If you walk into a financial institution, I think the average person on the street assumes they’re going to have someone who’s going to take care of all their financial issues,” says Banerjee. “But on the other side of the desk, there’s a wide range of people that you could see. Some of them are just order-takers or salespeople and others are true financial planning professionals.”
Patchwork complaints process
For consumers struggling with the consequences of bad investment advice, a confusing patchwork of organizations oversee complaints, including IIROC, the Mutual Fund Dealers Association (MFDA) and provincial securities associations. Each body oversees different types of complaints, depending on the nature of the complaint or the type of product the adviser is licensed to sell.
The Ombudsman for Banking Services and Investments (OBSI) also investigates complaints, but only for participating banks and firms. And OBSI has limited enforcement powers, offering only non-binding recommendations, so it’s entirely up to the bank or firm to decide whether or not to comply.
OBSI’s 2013 report, released this week, reveals a sharp increase in the number of banks and firms refusing to compensate investors for mistakes.
According to the report, banks and investment firms refused to pay back investors even when OBSI found wrongdoing in 10 cases last year. In total, investors were denied more than $1.3 million in restitution. The OBSI report called this trend “disappointing.”
Marketplace notified all of the banks and firms about the test and approached some for interviews, but all declined. Some viewed the test as an isolated incident; others vowed to investigate and take appropriate measures.
The Huffington Post Canada | Posted: 02/26/2014 5:48 pm EST | Updated: 02/26/2014 5:59 pm EST
The deadline to contribute to a Registered Retirement Savings Plan (RRSP) is drawing near, and apparently quite a few Canadians are leaving their contributions to the last minute.
Thirty-one per cent of eligible Canadians still planned on making a contribution before this year’s cutoff date, according to a poll conducted by Harris/Decima for CIBC from Feb. 13-17.
This year’s RRSP deadline is March 3, now less than a week away.
Out of that 31 per cent who still wanted to contribute so close to the deadline, just under half hadn’t made any contributions for that tax year, while the remainder had, but planned to contribute more.
The poll showed those most likely to procrastinate on planned RRSP contributions were between the ages of 25 and 44. CIBC said previous research indicated younger Canadians often need to balance their savings with debt repayment, which can result in delaying contributions.
A previous poll conducted in November 2013 for RBC said only 23 per cent of Canadians planned to contribute the maximum amount allowed. Younger Canadians are less likely to have the cash to make the maximum contribution, CBC noted, but just 20 per cent of people between the ages of 35 and 54 and 25 per cent of people over age 55 said they’d contribute the full amount.
Senior Manager with RBC Financial Planning Richa Hingorani said putting money aside on a regular basis can help make the process more affordable.
“Maxing out your contribution at the start of the year is great if you can afford it,” she said in a press release, “but for most Canadians, regular contributions throughout the year is a more realistic and effective approach.”
Christina Kramer, CIBC’s Executive Vice President, Retail and Business Banking, also noted the benefit of saving throughout the year, rather than scrambling to find cash close to the cutoff.
“Some Canadians find it difficult to come up with a lump sum for their RRSP, underscoring the importance of creating a budget and a regular savings plan for the year ahead to avoid the last-minute crunch,” she said in a news release.
CP | By LuAnn LaSalle, The Canadian PressPosted: 02/26/2014 8:29 am EST | Updated: 02/26/2014 10:59 am EST
MONTREAL – Canadians are still on target for a record year of personal debt despite ending 2013 by making a small dent in the money they owe, says credit monitoring agency TransUnion.
At the end of last year, Canadians owed a total of $27,368 on such things as lines of credit, credit cards and car loans, TransUnion said in a study released Wednesday.
That’s down $117, or 0.42 per cent, from $27,485 in the fourth quarter of 2012 — the highest level of non-mortgage debt on record.
“We’ve been told over and over and over again from so many places that we’ve got to get this debt down and we can’t make it happen,” said Thomas Higgins, TransUnion’s vice-president of analytics and decision services.
TransUnion is sticking by its prediction that average consumer’s total non-mortgage debt will hit an all-time high of $28,853 by the end of 2014.
“There’s nothing to give us any indication that the debt levels are going to start to come down in any noticeable chunk,” Higgins said from Toronto. “Right now, we’re still trending in that direction (to higher debt), for sure.”
Higgins said Canadians started to pile on debt in the years before the 2008 recession. He said he’d have to see Canadians’ personal debt being reduced consistently by $500 to $1,000 over four to six quarters before he would say “we’re sorting of heading somewhere.”
In the last quarter of 2013, consumers’ credit card debt and debt on lines of credit were down a bit, Higgins said.
But consumers spent a little less on holiday shopping only because they got “better deals” rather than consciously cutting spending, he said.
The study also found that loan delinquencies in the quarter ended Dec. 31 were down, meaning that consumers were making minimum payments on their debts.
“We may not be paying all of it, but we’re paying enough down so that you’re still in good standing.”
But Higgins cautioned that if anything impacts the economy, the markets or interest rates, delinquency rates are usually impacted first.
Meanwhile, the study also found that Vancouver residents experienced the biggest increase in consumer debt, hitting $41,077 at the end of last year, up seven per cent from $38,357 in 2012.
On the other hand, those in Montreal managed to reduce their debt by 5.5 per cent from $19,651 to an average of $18,563, the lowest among residents of all major Canadian cities.
Higgins said Vancouver generally has higher incomes allowing consumers to take on more debt, while consumers in Montreal usually save to buy bigger items or pay with debit cards.
In a report on Tuesday, Statistics Canada said Canadian families have become wealthier over the past several years, with net worth rising despite the well-documented growth in household debt and a setback from the recession.
However, there were big differences across age groups, regions and family types and economists noted that the biggest single reason overall for the improvement was rising house prices, which are widely expected to moderate or even fall in the next few years.
Still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)?
The fact is it’s all about the tax. Here’s a quick refresher of the tax-free registered savings account:
How much can I put into my TFSA? Since the beginning of 2013, you can now contribute up to $5,500 a year. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn’t a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It’s also worth noting that your withdrawals won’t compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.
It’s a great retirement savings tool: If you’ve successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, keeping in mind your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won’t reduce your taxable income, you won’t receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP. By contrast, any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only. However, any withdrawal you make from your TFSA will be tax-free and the funds are not declared as income.
Don’t forget to diversify: Consider shaking things up with a little diversification. You can choose investment options like stocks, bonds, mutual funds and guaranteed investment funds (GIFs). Also, you now have the option of borrowing your full contribution limit. However, unlike other investment loans, the interest paid on this loan cannot be used as a tax write-off. If you could afford to, contributing to each year’s maximums in both plans would be ideal. Of course, it comes down to finding a balance between creating a strong nest-egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals.
Millennials, Here’s All You Need to Know About RRSPs
Unless you live under a rock, you’ve probably heard a lot about RRSPs lately. As the March 3 deadline looms, most Canadians are hurrying to figure out their RRSP contributions for 2013. But if you’re a millennial, all this RRSP talk might be prompting more questions than answers. And the numbers suggest there are questions.
A 2013 Intuit survey found that 61 per cent of millennials (those born between 1980 and 1995) have a TFSA or RRSP, compared to 77 per cent of Canadians ages 34 and above. Forty-three per cent of millennials report they have an RRSP. For the majority of Canadian millennials, this is a missed opportunity. And even if you are contributing, are you sure you’re getting the most out of your RRSPs?
Let’s start with the basics: what is a RRSP?
A Registered Retirement Savings Plan (RRSP) is an investment account designed to encourage saving for retirement. And while that seems like a long way away, there are immediate incentives by way of tax benefits. Essentially, RRSPs are tax shelters, which reduce your taxable income, and enable tax-deferred growth.
So what does this all mean, and why should you care?
All RRSP investments grow tax deferred, meaning you only pay taxes on the money invested, including profits, when you make a withdrawal. Since you will theoretically have a lower income in your retirement years, the amount taxed on your withdrawals will be significantly less. All this means more money for you in your golden years.
You also reap a very significant tax credit, since RRSP contributions lower your taxable income. For example, if you make $40,000 and contribute $5,000 to a RRSP, your taxable income will be $35,000. Essentially, RRSPs allow you to keep more of what you earned.
There are many options to choose from when you first invest in an RRSP. Popular choices include mutual funds, guaranteed investment certificates (GICs) and RRSP savings deposits. Setting one up is easy, since most banks and employers offer seamless ways to get started. What’s important to know is how much you can actually contribute, which this year is 18 per cent of your 2013 net income, to a maximum of $24,270.
Sound good to you?
Here are some tips to help you get the most out of RRSPs:
Get filing: Not earning much? You should still file your taxes. Even if your returns are small this year, you’ll start building up your contribution room for later on when you have more income to invest in a RRSP.
Start small: The average Canadian millennial is saddled with debt thanks to unemployment and rising tuition costs. According to the Canadian Federation of Students, students in Ontario and the Maritimes average over $28,000 in debt. If you’re in this position, focus on paying off all your debt first, while putting a small amount into your RRSP. Even $20 per month will grow over time and set you up down the road.
Get a bonus on that bonus: Bonuses are great, but taxes make a huge dent in them. Try contributing your bonus to a RRSP, and you’ll reduce the amount that’s taxed. Put yourself in a lower income tax bracket: If you’re making above the minimum income bracket, this is your chance to keep your tax rates low. If you can, contribute the difference into your RRSP. You’ll pay lower taxes, and have more set aside for the future.
Diversify: There are many investment options when you set up a RRSP; don’t waste this opportunity and put all your contributions in one type of investment. Try spreading them out between a more conservative account, like a GIC, and a more risky mutual fund or stock that has higher potential for growth. You tend to have less financial commitments in your 20s and early 30s, like children or a mortgage, so now is the time to take some risks.Be in it for the long haul: The benefits of a RRSP come with leaving it open until later in life. If you expect you’ll need some of your savings sooner, spread you saving between a RRSP and TFSA.
RRSP time doesn’t need to be confusing. Consider your situation, investment goals and how you can get the most out of your money. Your future self will thank you.