The investment industry has now grown exponentially over the last 25 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. How are investors to comprehend all their options like Mutual Funds, Exchange Traded Funds (ETFs), individual stocks, bonds, GICs, etc.
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For these reasons, Self-Directed RRSPs have also 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.
What is a Self-Directed RRSP?
A self-directed RRSP is an account, not an investment.
Related article: The difference between accounts and investments
A Self-directed RRSP is an RRSP account that allows you to hold many different types of investments under consolidated within one single account. Some RRSP accounts only allow you to hold mutual funds. Other RRSP accounts will only have GICs. Self-directed RRSPs give you more investment freedom and control. Contrary to the name, self-directed RRSPs do not have to be self-managed. Although a do-it-yourself investor will like the idea of using a self-directed RRSP, you can also have a financial advisor or Robo-Advisor help you manage your self-directed RRSP.
Looking at the cost
Most Self-Directed RRSPs have an annual trustee fee or account 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. Self-Directed Fees are account fees that are charged over and above any investment fees like trading costs, management fees (MERs), loads, etc.
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One 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. Your 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?”.
If your portfolio is worth $500,000 then the same Self-directed RRSP fee only represents 0.027%, which is much easier to justify.
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, ETFs 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.
- Conversion to an 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.
Self Directed RRSPs for the Do-it-yourself investor
Personally, I am a strong advocate of Self-Directed RRSPs. In fact, I have one myself at Questrade. I like Questrade because the fees are low and you can buy ETFs with no trading cost.
The more money you have in RRSPs, the more it makes sense to Self-Direct. 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.
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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.
Self Directed RRSPs for those that need help
Finally, remember that 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 or through some of Canada's Best Robo-Advisors.
Related article: Choosing Canada's Best Robo-Advisor
A Case Study
I recently met Samantha and Jake. They had Mutual Fund RRSPs at 3 different banks:
- Jake had a TD Bank RRSP with 4 different TD Mutual Funds
- Jake also had an RRSP at RBC with 6 mutual funds
- Samantha had a CIBC RRSP with one CIBC Balanced Mutual Fund
- Samantha has a Group RRSP account at Sun Life with one Balanced Mutual Fund
- Samantha also has an RRSP at RBC with 6 mutual funds (managed by her husband Jake)
Jake is keenly interested in investing and wants to delve into stocks and Exchange Traded Funds (ETFs). One of his options was to choose one of the banks and open a self-directed RRSP and move all the RRSPs together into one single self-directed RRSP account. He primarily works with RBC so he decided to open up a RBC Direct Investing RRSP account. He transferred the TD Banks RRSP and the RBC mutual fund RRSP in and started his do-it-yourself investing.
Samantha was not as keen to do it herself but did not like all the paper that the 5 accounts were generating. Samantha likes the idea of using a Robo-Advisor to manage her RRSP. She used Wealthsimple and they helped her set up a portfolio of ETFs after moving her three RRSP accounts to Wealthsimple.
They plan to compare their approaches to see who does better in the future.