TFSA sparks little innovation…for now

With the federal budget passing first reading in the House of Commons on Tuesday, product providers now have to start the process of building the ideal tax-free savings account (TFSA) solution for 2009. The problem is, with contribution room building at only $5,000 per year, it will be a while before the TFSA will really add much to their business.

As it stands, the TFSA is not a very lucrative proposition for fund companies who prefer to deal in multiples of tens of thousands if not hundred of thousands of dollars. Until an investor’s contribution room grows to a larger amount, say 10 or 15 years down the road, it doesn’t offer much benefit to the manufacturers.

In addition, during the early days of analyzing the TFSA, there isn’t any consensus on how the account should be used in an overall financial plan. If investors could deduct capital losses — which they can’t — it would be an ideal high-yield investment shelter, where investors would be more comfortable gambling some of their savings to earn hefty tax-free capital gains. On the flip side, the contribution cap restricts its value as a tax-free income-generating vehicle.

“Five thousand dollars a year is not a large enough amount in my view,” says Don Reed, CEO of Franklin Templeton Investments. “The issue you are dealing with here is that every investor has different objectives. If you can take gains out of an account tax free, some will want to have some aggressive investments and others will want to have some income-oriented investments. It’s going to vary, based on the risk tolerance of the investors.”

Reed says the TFSA is too varied in its usage to consider launching a product lineup specifically designed to cater to it.

“The TFSA should be part of everybody’s plan. I’ve got a fair amount of money invested in mutual funds, so I’ll probably set up an account once it becomes available in 2009. I’ll just direct $5,000 to that account,” Reed says.

AGF Funds plans to consult with its advisor network to see where the demand lies before determining where product opportunities are. Randy Ambrosie, president of AGF Funds, hosts “360 degree” dinners with advisors in which he directly engages them in conversation. He anticipates that the TFSA will be a hot topic.

“I think where we are focused with the TFSA is how advisors will use them. Let’s go back to advisors and ask questions,” he says. “How are you going to use these now? How are Canadians integrating this vehicle into their financial plan? What kind of products do you think will be most appropriate? How can we help you help Canadians?”

Like Reed, Ambrosie doesn’t see anything significant in the works over the short term. Over the long term, though, he notes that it could have an impact on funds, such as tax-efficient corporate class funds, which create a sheltered income.

“In the short to medium term, I doubt if the TFSA will have much if any significant impact. There will be some subtle impact we might be looking for,” he says. “The appetite for tax efficiency is growing. There is always going to be a lot of money outside of registered plans, and now [that’s the case for] the new TFSA as well. That is an area we are always going to have to find solutions for.”

Reed thinks his company’s T-series funds should remain appealing until clients start to build six-figure contribution space in the TFSA.

“I would say this is definitely not going to remove the benefits of T-series — not for one second. Even down the road, it’s unlikely it will do that,” he says. “With T-series, put $5,000 in in year one, and you got a 10% return. Are you going to want to withdraw $500? The answer I would say is no. Now, if you have $200,000 dollars in there, the answer is yes.”

Filed by Mark Noble, Advisor.ca, Mark.Noble@advisor.rogers.com