The mutual fund market has now grown exponentially over the last 20 years. Equity investing has become more popular than ever and investors are more knowledgeable than ever. We now have more investment choices than we have ever had and our access to information is infinite.
For these reasons, Self-Directed RRSPs have become more popular than ever. In my opinion, if you have over $50,000 you should consider the merits of a Self-Directed RRSP. This threshold is not scientifically calculated; the threshold to consider a Self-Directed RRSP will depend on each individual investor’s personal situation.
Looking at the cost
Most Self-Directed RRSPs have an annual trustee fee. This fee is paid to the trustee to cover the administrative costs of overseeing the RRSP. In many cases, the trustee only makes income through these fees. Annual trustee fees range as low as $25 per year to $250 per year. In many cases, your financial institution may waive these fees under certain conditions.
The way to look at the cost of the Self-Directed RRSP is to take the annual fee and divide it by the total portfolio balance in RRSPs. If you are thinking about a Self-Directed RRSP, the objective is to consolidate a bunch of little plans into one plan.
For example let’s say the fee is $125 (or $133.75 with the GST) and your RRSP portfolio is $50,000. You fee represents 0.27% of the portfolio per year. The question you have to ask yourself is “Is there value in paying 0.27% for the benefits of a Self-Directed RRSP?”
The benefits of self-directing
- Consolidated statements. Often investors who deal with many different companies are inundated with paperwork. Consolidating your RRSPs into a single plan makes reporting easier and you will have one statement per RRSP plan regardless of how many financial institutions you are dealing with.
- Product consolidation. Investors who are dealing with many different institutions tend to have too many investments and duplication within their portfolio. Self-Directed RRSPs allow investors to see the bigger picture and reduce the number of holdings in a portfolio. With so many choices available to the investor, over diversification is a common pitfall.
- Easier administration. The administration for self-directed plans is centralized. Self-Directed RRSPs make it easier to trade investments particularly when you are moving money between financial institutions.
- Product selection. There are a number of products/investments that qualify for a Self -Directed RRSP. You can choose from conventional investments like GICs, Bonds, mutual funds and stocks. But Self-Directed RRSPs also allow you to invest in mortgages, small business corporations, and other non-conventional investments. Self-Directed RRSPs do give you a choice and control over product selection.
- Diversification by company. I’ve always believed that no single company has all of the best products in the market place. In fact, according to our research, every company has good products and bad products. If you have all your investments with one company, you are likely to have good products and bad ones. One of the goals of having a Self-Directed RRSP is to try to determine the strengths of different companies (what are they really good at?) and try to select products that play to their strengths. I believe diversification by company is best done with a self-directed plan.
- Managing Foreign content. Foreign content is monitored on a plan by plan basis. If you are dealing with more than one financial institution for your RRSPs, each company is responsible for monitoring the foreign content. Self -Directed RRSPs makes foreign content monitoring much easier, because you only have to monitor it from one source. Self-Directed plans also have the added benefit of making it easier to choose the foreign content investments.
- Conversion to a RRIF. If you are nearing retirement, many experts advise that you consider consolidating your investments into fewer plans. Converting to a Self-Directed RRSP to a Self-Directed RRIF is easy and seamless.
My two cents
Personally, I am a strong advocate of Self-Directed RRSPs (I have one myself). The more money you have in RRSPs, the more it makes sense. This list of benefits is not exhaustive and will not apply to everyone. Take the time to determine if these benefits apply to you. It will be the first step to determining if you should have a self -directed plan.
Not all self-directed plans are the same. If you decide that a Self-Directed RRSP is right for you, then you should shop around and do your homework. Different companies have different annual trustee fees. Make sure you look at other fees like trading costs, transfer out fees, de-registration, partial withdrawals, etc. Also, different self-directed plans have different stipulations as to what you can invest in. Some self-directed plans allow mutual funds only as an example.
Finally, having a Self-Directed RRSP does not mean you have to do everything yourself. You can still seek the advice and help of a financial advisor. For more information on RRSPs, check out my annual RRSP kit that can be downloaded from my website. Good luck!