Question from Globe and Mail reader Paul: We just had a baby and are looking to set up an RESP. We currently bank with one of the Big Six and I’m wondering if it’s best to set up the RESP at a retail branch with an adviser or through our direct investing account. Does it make much difference?
Answer from Darryl Brown, an independent investment consultant and founder of You&Yours Financial. He is also director of portfolio strategies at Spring Planning:
Welcome to parenthood, Paul. A huge congratulations to you and kudos for getting on the RESP train right away. Registered education savings plans are an incredible saving vehicle for your child’s future. For those who don’t know, the government kicks in an extra 20 per cent for every dollar you contribute – up to $2,500 a year – as part of the Canadian Education Savings Grant.
At one time, the most popular investment in RESPs were mutual funds. In recent years however, the increased scrutiny of high mutual fund fees has shifted RESP investments toward lower-fee options. The same stocks, bonds, mutual funds and exchange-traded funds in your tax-free savings accounts and registered retirement savings plans are similarly available for your RESP and a better option for a long-term investment like this.
As far as where to invest, it makes sense to stick with your Big Six bank if you’re already a happy customer. The good news is that if down the road you decide to change banks or platforms, such as moving to a robo-adviser, your funds are not locked away and there are generally no major punitive fees to transfer.
It sounds like you are already using your bank’s direct investing platform. Assuming you’re comfortable doing so, my recommendation would be to self-direct your RESP as well. Given the time horizon of an RESP, which is approximately 18 years, you’ll have access to a wider range of lower-cost products and save a whole lot in management fees. Over the lifetime of the RESP, not paying fees will make a big difference.
Whether you do it at the branch or self-directed, your RESP asset allocation is key. Like any investment, as your time horizon shrinks, so should the risk. In this case, it would make sense to hold a more aggressive mix focused on growth during your child’s youngest years. As they near their postsecondary education, this should transition to a more conservative mix. For instance, if you feel an asset allocation of 60 per cent stocks and 40 per cent bonds, 60/40, is a comfortable starting point for your portfolio now, as your child enters their teens your asset allocation should transition to 40/60, and be closer to 20/80 in the years immediately preceding their postsecondary education.
Having just survived my first year as a new father, my advice is to keep it as simple as possible. Whatever route is going to get things set up quickly and easily is the best route for now. It’s relatively easy to change things down the road if necessary and you’ll be much less sleep deprived then.
Definitely try to automate your RESP contributions so you’ve got one less thing to do. And remember, an RESP is a great place to direct folks who so kindly want to celebrate your new baby. The gift of education is priceless and takes up so much less space in your house than the endless onslaught of baby things you had no idea you needed.
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