Crunch time: Dealing with RRSP procrastinators

(February 25, 2005) The RRSP deadline is just a few business days away and it’s time to face up to those last-minute contributors. Investment habits might be changing, but every client base has its procrastinators.

Branch managers are booked solid — Lisa Ball, regional manager of BMO Mutual Funds in Halifax is expecting big sales as March 1 approaches, and advisors across the country are working, sometimes frantically, to get last minute, tax receipt clients in before the deadline.

“There are clients who seem to find it appropriate to do their RRSP contributions at the last minute every year,” says Stephen Ison, an investment representative at Edward Jones in Oakville. “The March 1 deadline is wonderful for focusing the mind on the issue.”

An Investors Group poll found fully half of more than 2,000 Canadians surveyed in September 2004, in fact planned to wait until the last possible minute to contribute.

The poll, conducted by Decima Research, shows only one-quarter of RRSP investors contribute on a regular basis while 70% of remaining investors wait until January or February to make their contribution. About 49% said they planned to wait until February.

Those habits might be changing, says Ison, who has been in the industry for 10 years and says the difference this year is more clients are actually choosing to organize their financial situation to make contributions on a monthly basis, or making their contributions at the beginning of the year, rather than waiting until the last minute. “There’s a greater proportion of people who are doing these two things,” he says. “I’m finding that people are getting better at planning.”

Both Ison and Ball say prevailing investor attitudes overall are more relaxed than in past years, and there appears to be fewer investors parking their contributions than in past years. “They’re actually investing their money which is different than last year,” says Ball.

It’s not entirely surprising given that markets made a significant run in the past year. Ison says the conditions are right to have another look at re-balancing client portfolios, and investing in fixed income contributions. But, he says for the holdouts who are still not entirely sure about what they’d like to invest in, parking their contributions for 30 days is as good a strategy as any. The key is following up on those accounts to make sure they’re properly invested once the pressure of the deadline has past.

“One of my favourite expressions about retirement planning using money market instruments is you can call it a way to go broke safely,” he laughs, but says a rushed decision isn’t any more productive. “Our clients understand perfectly well that no sensible decision can be made under those circumstances,” he says. “This is not an exercise where being impulsive is appropriate. When you have any doubt about what you think you’re going to buy, then don’t buy it. Park it. Think about it. Caution has always been well rewarded in our industry.”

The downside is parked money market investments are an easy and comfortable way to forget about planning for the year. Clients who better understand the effects of inflation when they make their contributions, might be more willing to make and keep a follow-up appointment for sometime in March or April.

“People truly do not understand inflation. They think of it being only 2%, but really it can be a lot more than that,” says Ball. “It’s not just the basket of goods we always hear about in the financials, it’s the actual things we use: a plane ticket, oil and gas, a cup of coffee, postage stamps, a loaf of bread. What did a cup of coffee cost 25 years ago and what will it be in 25 years? They really need to have their investments earning more than inflation.”

To do that, she suggests advisors review compounding interest principles to encourage maximum contributions and consider cases where an RRSP loan might be beneficial.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com