Self-Directed RSP’s: A Beginner’s Experience

Let me start off by saying that while I’m not expert, this is actually a good thing for most interested in this topic considering that most of the time, experts are confusing and too detailed in their use of jargon when all people want to do is have a brief layman’s overview (that’s what I’m telling myself anyway). As this blog is in the spirit of helping our members save money in whichever way possible, I thought I would share some of my own findings and experiences.

While my banking relationship with TD has been a pretty decent one for some time (compared to previous experiences), about 2 years ago, I was feeling pressure from friends and family about investing in RRSP’s (but it seems everyone really calls them RSP’s). Since I started a couple of different ones with my bank, these were ‘bank products’. One was a ‘Security GIC’ and the other a ‘Mutual fund’, into which I slit my investment 50/50. After 2 years of investing that money in those accounts, I have earned a profit of 2.8%. Now let’s factor in inflation over 2 years: 2012 was 1.52 and 2011 was 2.91, and unless I’m not doing something right, that totals inflation of 4.43%, which, in effect means I actually relatively lost money, at around the 1.63% mark. This was my math at any rate and it led me to the conclusion that I needed to think of other options.

The Advice from my Accountant

Something I bet most people are unaware of is that banks actually take a handsome cut from most investments placed with them. I have never ever been informed up front about any fees or costs for bank products before, but it sure is in the fine print. According to my accountant, the bank was charging me over 1.5% on the money I was investing with them (the rates were different for each product and there were fixed costs too), and some bankers are paid commission or bonuses as encouragement to get savers to invest their money with their bank’s products. Now for me, most services that offer commission to their employees results in a service that is not in the best interest of the customers. In fact, my accountant recommended that I try my hand at a Self Directed Registered Retirement Savings Plan SDRSP–being pretty tuned in with what’s going on in the world of shopping, he felt I had a general pulse of the market and its influencers.

What is SDRSP?

In essence, you do the work of the banker. Whereas products like mutual funds are managed as a group of assets by a banker, a SDRSP is completely managed by you. So you have the option to buy equity: from stocks and shares to bonds and more. Let’s discuss the options:

The Pros
You have more control over your investments;
The bank does not charge commission;
It can be fun and can teach you valuable financial lessons;
Most Canadian financial institutions have apps and web-banking to facilitate the management of the account, so these can be done from anywhere at any time.

The Cons
Since you are responsible for managing the portfolio, it takes time, effort and there are risks associated;
Sometimes trading can be addictive;
You may not have the knowledge or inclination to run this for yourself;
There are some costs to consider: every transaction you make will come with a price (varies between banks and the amounts in the account), mine is around $30 every time I buy or sell;
Most financial institutions–depending on which province you reside in–will charge between 10%-30% of ‘withholding tax’ when you withdraw money from the account (think of how an employer withholds tax on your behalf to give to the taxman). This is unless the money is withdrawn when it was designed to be (for those times when you are not working, due to sickness or retirement–in other words not earning a paycheck and fall under the taxman’s tax thresholds).

Conclusion

Now, my intention is not to sway anyone in one way or another. It personally opened up my eyes to the world of business and I see the world in a different way now (for good or for bad). But I like being in control, and I enjoy research above all. So I opened and started my own SDRSP about 6 weeks ago and have been lucky (or wise), although the market has been rather buoyant over the last 7 months and this trend has crept into 2013 nicely. I’m currently at around 7% above what I had invested, which is far above that of the rate of inflation. So I have made the decision to give it a year and see if I am still enjoying the process and making more money this way compared to standard bank products. Then if I am still happy, I plan on merging my normal GIC and Mutual funds into my SDRSP.

What about you? Have you thought about setting up SDRSP? How has your experience been so far? I’ll be happy to start a conversation about it.