PAC participants promise profits through steady contributions

(January 2, 2003) With RRSP season now nipping at the heels of investors and advisors alike, mutual fund companies may be wondering whether investors plunking down lump-sum $5,000 and $10,000 contributions will be enough to push fund sales ahead after a year of redemptions. Those companies may be overlooking a source of steady investments — one that they themselves promote to encourage investors to stay the course through markets down and up.

Research from Investor Economics, a Toronto-based consultancy, suggests that the most stable customers are not the ones who make the mad rush to beat the tax deadline at the beginning of the year, but the ones who have taken to heart one of the basic lessons of investing: dollar-cost averaging. They do it through pre-authorized chequing accounts (PAC) or what Investor Economics prefers to call pre-authorized purchase plans (PPP). They account for mutual fund purchases of roughly $2 billion a quarter — at a time when statistics from the Investment Funds Institute of Canada show redemptions of roughly $3 billion a quarter.

These regular investors are often considered “a nuisance” by fund companies, Investor Economics suggests, because they’re buying three or four funds at $50 a pop every month. “Many industry executives complain that the average PPP purchase amount tends to be too low to justify the administrative overhead, especially if the money is split among several funds,” Investor Economics Insight says. “But anecdotally, we have noticed that many companies have not raised their minimum PPP investment in years.”

In an earlier report, Investor Economics indicated that the reluctance of mutual funds to process many small transactions had left the group RRSP and defined contribution marketplace open to the dominance of insurance companies already habituated to collecting small monthly premiums.

Related Stories

RRSP Survival Guides

Small investors provide steady inflows for pooled funds

Reform RRSP/RPP system to halt erosion, says C.D. Howe Institute

RRSP contribution levels expected to remain steady despite stock slide

Canadians took up less RRSP room in 2001

While these investors may make small contributions, they are not small investors. On average, they invest $218 a quarter. Still, they account for anywhere from 5% to almost 10% of monthly sales. In its November Insight report, Investor Economics describes them as “a client who is always ready and willing to invest — no matter what the market climate. Better yet, this person is pretty much interested only in long-term funds, always reinvests distributions and generally does little redeeming.”

The Investor Economics research is based on 24 reporting mutual fund companies who represent about 75% of the $400 billion mutual funds marketplace. Interestingly, the report indicates the deposit-takers — the banks, caisses and credit unions — are not the dominant forces, even though they are most geared to appeal to a mass market. Mutual fund companies have twice as many regular savers as the banks do, as measured by sales. Still, bank savers invest more than twice as much: $562 a quarter compared to $218 for all PPP contributors.

To be sure, the small monthly investor gets market jitters too. However, Investor Economics reports that after one of the worst quarters in investing, the one ending September 2002, PPP contributors saw their share of mutual fund purchases jump to 9.4% of the total. Looked at another way, while overall mutual fund sales have dropped 36% from their peak in March 2002, PPP contributor sales fell just over half of that, down 19.2%.

“The industry combats the lure of market timing by continually urging individuals to have a plan and stick with it, preaching the gospel that ongoing investment pays off over time. Isn’t that what PPPs are all about?” Investor Economics concludes.

Are your clients regular contributors to RRSPs, or do they make lump-sum contributions? Who’s more disciplined at saving? Share your ideas on how to make those last-minute investors into PAC/PPP clients in the “Surviving RRSP Season” forum of the Talvest Town Hall on Advisor.ca.