RESPs and High Fee Mutual Funds

RESPs and high-fee mutual funds seem to go hand in hand in Canada. Most RESPs are set up with an “adviser” (usually at a bank) who makes helpful suggestions as to where your money should go. The question to ask is, who profits from this advice? Sometimes, both adviser and investor, but always the adviser.

Estimated reading time: 5 minutes

Mutual Fund companies want you to buy high MER funds for 18 years, so they can profit from you. This does not mean that RESPs and high-fee mutual funds are inevitable.

Their goal is not whether your investment goals succeed. Their goal is to extract as much money from you in fees as possible and increase their profits. Mutual Funds are businesses, sometimes with shareholders and employees who want bonuses. Remember that, and you will be fine. Who and how are profits made is always the question to be answered.

Friends ask me about RESPs, as they are aware that my kids have graduated from University. They asked if I used the program. My answer is yes, but I start by warning them that when I set up these accounts, they were Canada Trust Mutual Fund accounts. The CT Mutual Funds turned into TD Mutual Funds, but it was not until later that I learned about the TD E-series funds I should have used (and the bear trap in using them).

The typical answers or comments that I get (that cause my gears to grind) are:

• I talked to my Manulife One guy and he helped set up the account for us.
• While at the bank, I saw an adviser who set up some RESPs.
• My insurance broker said they had an excellent product for RESPs so I had her set it up
• Someone told me about these great Group RESPs. It sounds like a great idea. After hearing this stuff, I usually go for a beer, and sometimes, I just weep.

Let’s unwrap these malodorous gifts. First, your Manulife One guy will put you into Manulife Mutual Funds because that is where he (or she) makes his or her money. These funds have MERs that are far too high for a shorter-term savings program like the RESP.

The same is true for your local bank. I once mentioned the TD E-series funds to my Bank’s “TD Mutual Fund Expert”. She looked them up and said she couldn’t sell me those funds. I asked why, the answer, “they don’t let me”. So TD doesn’t allow their “Mutual Fund Expert” to sell some of their Mutual Funds? You can buy only their I-series in your account, you cannot access their E-series, D-Series, O-series or any other unless you have a TD Trading Account).

Your insurance company’s RESP will be closed and the only thing you can buy is their High MER funds. I hope you are noticing a great deal of repetitiveness here.

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The Group RESP thing, I had to go look up and then almost cracked a tooth while clenching my teeth. Group Scholarship trusts are throwbacks to before the day of the  RESP. They can work for folks, and their forced savings is a good thing for many folks, but read all the rules very carefully. What are the penalties for taking money out quickly (or early)? Are there penalties if your child doesn't go to post­ secondary school? What are the rules about what is a post-secondary education?

If I could just hand someone a simple outline like say this article, this article or this article, I would, but I guess no one writes about RESPs much? Yes, that is sarcasm, why do people spend more time worrying about what organically grown kale they want to  buy, than this important  investment?  Rhetorical  question, don't  answer that.

Are RESPs a Good Idea?

An RESP is a great idea for your kids' education, but don't jump at the first one you see. Do some research; know what you are buying and how much it is going to cost you. Mutual Funds and other associated firms are hoping you get confused in terms of how much you pay in management fees. It can get confusing, especially with the grant money going into the account, which can muddle your figures. Your goal is to pay the least in fees, and maximize your growth and grants received.