Clients still astounded by the TFSA

By Mark Noble | October 27, 2009 | Last updated on October 27, 2009
4 min read

For advisors, the introduction of the tax free savings account in January has been a nice little sweetener to a pretty sour year for getting new money. The novelty of the TFSA is far from worn out, a new survey by RBC suggest clients still don’t understand what they are or how to use them — which is opportunity for advisors.

A majority of Canadians (71%) are aware of the Tax Free Savings Account (TFSA), although three-quarters of Canadians (76%) have not yet opened a TFSA, according to the RBC Financial Priorities Poll of more than 12,000 Canadians.

RBC says the primary reasons why Canadians say they have not opened a TFSA are either because they don’t have the money to invest (51%) or they don’t fully understand how a TFSA works (22%).

Almost just important for advisors is that four-in-ten (41%) Canadians who have heard of TFSAs said they want to know more about them. This knowledge gap, is an opportunity for advisors to educate clients, says Lee Anne Davies, head, Retirement Strategies for RBC.

“Talking to a financial advisor can help you understand the benefits of a TFSA, find the money to invest and get the right advice about investment options that are the best fit for you and your financial goals,” said Lee Anne Davies, head, Retirement Strategies, RBC.

What are the pre-conceived goals for TFSA investing? The survey finds nearly an even split between, emergency saving (36%), sheltering savings from tax (31%) and long-term savings for retirement (30%).

The average contribution is $2,998. The survey found that only 44% of Canadians who have opened a TFSA have made the maximum contribution of $5,000 and one-in-three (33%) contributed $1,000 or less.

A pre-approved authorized chequing (PAC) plan can help break down some mental roadblocks for clients. It’s generally easier to get clients to contribute in smaller sums and it exits their account for they spend it.

Davies told, clients would probably have an easier time managing contributions through systematic withdrawal plan. For example, RBC has the TFSA-matic.

“We have an automatic debit-approach clients can access for as low as $25 a month. You can automatically have your TFSA contribution withdraw from your bank account and put it towards your TFSA. I don’t think people have thought about that option and how easy it can be to implement,” she says.

Selling TFSAs

Robert Abboud, a CFP with Ottawa-based Wealth Strategies says it’s easy to target clients for a TFSA pitch. If they sizable assets outside an RRSP or a cash account the advisor help set up, you should suggest they put excess savings into the TFSA.

“We go through every client who’s got a cash-account or a non-RRSP. If you got non-RRSP assets in particular, we strongly suggest you open a TFSA. We’ll call these clients to remind them to move the five and five ($5000 contribution limit for each spouse) for married couples in a TFSA, and next year we’ll do it again and again,” he says. “If they have a non-RRSP [investment account] we’ll generally trigger a sale or a loss, typically it’s a loss, and move it into the TFSA and have it parked there for a deferred gain,” he says. “

Abboud points out that clients who did this earlier this year, look like heroes to clients. They made the most of a bad situation through tax-loss selling and if the money was reinvested and put in a TFSA, all of the gains that have occurred have grown tax free.

This has also substantially enlarged the size of the TFSA, including substantial excess contribution room should the client withdraw funds and later reinvest.

Abboud is finding clients are aware of the TFSA due to intense marketing and news coverage, but many still don’t understand its basic features. For example, he’s had numerous instances where clients believe they will receive a tax-deduction from the government akin the RRSP.

”Like the RBC survey, I find clients don’t fully get it either. Too many think there is a tax-deduction, rather than the idea they will not pay any taxes on all of the gains. We try and educate clients on it. In the end you’re not sure if it’s always fully understood,” he says. “There does seem to be a misconception that they are eligible for a refund.”

If you can convince a client to commit to a TFSA, particularly with a PAC plan, he finds it will drive new assets into your business that weren’t there before.

“If somebody is already doing a PAC, and it’s not an RRSP, you might as well redirect to the TFSA, that’s not really new business for the advisor. I’ve had a couple of cases where because there was so much publicity on the TFSA, it has inspired clients to save every month and contribute to their TFSA. Prior to that they were doing everything they needed for the plan – the TFSA was able to squeeze a little bit more out of them by their own request,” he says. “That would all be new money to us that was not there before.”

According to the RBC poll, when clients do invest, they are choosing to be quite conservative. The top three investments were savings accounts (33%), cash (20%) and GICs (18%).

Mark Noble