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This article was originally published on theglobeandmail.com
Managing your own registered retirement savings plan, though daunting for some, is like having the world on a platter.
A self-directed RRSP gives Ray Zarb “the entire global market as far as opportunities.” The 55-year-old retired police officer from Ontario holds stocks, bonds and guaranteed investment certificates in his RRSP.
“There is just so much out there to pick and choose from,” he said.
Self-directed RRSPs can be opened at most investment or brokerage institutions. There is no distinction in tax law between a self-directed and regular plan, says Kevyn Nightingale, a tax partner with MNP LLP in Toronto.
“It’s just that if you go into your neighbourhood bank branch and open an RRSP, they only have the ability to sell you a limited number of the bank’s products. If you want a wider range of products, you need to go to a broker. The banks all have brokerage arms,” he said.
Building and maintaining a self-directed RRSP is no passive activity, though. It requires diligence but should yield a better result for most people, financial experts say.
A self-directed RRSP “opens up the windows of the world,” said Adrian Mastracci, president of KCM Wealth Management Inc. and a fee-only portfolio manager in Vancouver.
“We can buy GICs, bonds, stocks of any flavour, mutual funds – you name it. We essentially have a self-directed RRSP for each client,” he said.
Self-directed plans also provide for administrative advantages such as the consolidation of accounts an investor might already have. A plan holder requires only one self-directed account for all standard RRSP deposits, with a separate self-directed account required for all spousal RRSP deposits, Mr. Mastracci said.
Another important factor is that, despite the term “self-directed,” establishing and maintaining such a plan doesn’t preclude getting professional investment advice. The plan holder might meet with a professional adviser in person. Or clients might prefer getting electronic advice through a source such as a discount brokerage, Mr. Nightingale said.
Mr. Zarb chooses to meet directly with a financial adviser. “What works best for me is that face-to-face interaction with someone in the know,” he said. “No matter how much you think you know in the investment world, trends change so much.”
Self-directed investors who go without professional advice and take a more do-it-yourself approach, need to keep up with developments in the financial world as well as have the patience and discipline to invest and manage risk, a difficult endeavour, experts agree.
“It’s not something for the faint-of-heart,” Mr. Mastracci said. “It’s a long-term job. You may have to be at the helm 30, 40, 50 years. Somebody starting at age 40 could easily live to 90. How much of those 50 years are you going to be guiding the portfolio?”
Investors also must decide their asset allocation, sector allocation and currency exposure, says Jonathan Rivard, a financial adviser and regional leader with Edward Jones in Richmond Hill, Ont.
Behaviour and emotion also play big roles in managing a portfolio, Mr. Rivard said. How will an investor cope with stressful situations such as a market downturn? “That’s a lot to look after for the average person,” he said.
Many of the instruments available for investment in a self-directed RRSP are identical to those in other types of RRSPs. Among them are cash, mutual funds, stocks, corporate and government bonds and guaranteed investment certificates. Insured, arm’s-length mortgages and gold bullion also can qualify.
Self-directed plans also typically allow an individual to contribute eligible instruments in lieu of cash, or “in kind,” as the practice is called. Investors face significant tax implications, however, associated with moving certain instruments into an RRSP, especially if capital gains or losses are involved. Experts stress the importance of getting professional tax advice.
There is no minimum amount that needs to be invested in a self-directed RRSP. “Amount is not a significant determinant one way or the other,” Mr. Mastracci said.
The fees for a self-directed RRSP tend to be either very low or, in some cases, might even be waived by the investment firm if the balance reaches $25,000 or $50,000, experts say.
“What you’re going to pay for differently is advice. If you get an investment adviser, then you’ll likely be paying more, either because you’re going to be paying a direct fee, or it’s going to be buried in the cost of the products that you buy,” Mr. Nightingale said.
Watch out for hidden fees, he said. In some instances, investment advisers might be influenced by the size of the management expense ratio (known as the MER).
“They might be induced to sell you something that’s not the best product for you, but instead, the product that remunerates them the best,” he warned.
Related Topics:RRSP; Personal Tax
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