Companies jockey for position on TFSA

Although never really in doubt, a new Conservative federal government ensures the tax-free savings account will be available January 1, 2009. The past two months have seen a deluge of financial institutions offering special registered TFSA accounts ready for action come January 1, 2009.

With a contribution limit of $5,000 a year, it will be a few years before the TFSA is a money-maker for advisors. However, as a value-added service, research suggests it will be indispensable.

A Harris/Decima poll from July suggested that affluent clients are the ones with the most pent-up demand to utilize the TFSA — 81% of respondents with more than $1 million in assets were intending to maximize their contributions.

In September, a research report from CIBC Capital Markets noted Canada’s cumulative contribution room for TFSAs was in the vicinity of $120 billion. There’s no sure way to estimate how much of that will be used, but the report suggested that if the TFSA’s success is even remotely similar to that of the British Individual Savings Account (ISA) — a similar savings vehicle — the amount could be substantial.

According to the report, the share of U.K. citizens who use the ISA has risen to 37% in 2008 from 22% in 2000. The average annual contribution is close to £2,500 ($4,800) out of the £7,200 maximum contribution allowed.

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Because the TFSA is limited in scope right now, the products offered are not likely to vary from provider to provider. There are some exceptions, most notably the products of Sun Life and ING Direct, which have additional incentives for investors who register for a TFSA now — months before the January start date.

Desjardins Financial Security is just the latest to offer special services in advance of the TFSA. The DFS Transition account is available immediately, and gives clients the ability to transfer assets in the account to a TFSA effective January 1, 2009. Desjardins says the account will offer “a competitive interest rate” in the meantime.

“Given the current economic climate, many Canadians will be looking for investments that provide good returns while offering stability in the mid- to long-term,” says Claude Paré, senior director of product development and marketing, individual savings, at Desjardins Financial Security.

Sun Life is offering a TFSA countdown incentive program for investors who sign up for a TFSA right now. Kevin Strain, senior vice-president, individual insurance and investments, for Sun Life Canada, says his company is offering a non-registered GIC with an enhanced rate to hold over investors until the January start date. The enhanced rate means your net return is comparable to a lower tax-free rate.

A client who pre-registers for a TFSA today with Sun Life would be eligible for a 90-day GIC offered at 3.3%. Strain says part of the reason for offering the incentive program is to get clients talking to advisors about how they should use the TFSA in their financial plans.

“The client switches over to a TFSA on January 1. This allows the advisor to get out and talk to them now,” he says. “The uses of the TFSA are so broad. It can be used for things like covering health costs, or it could just be used for additional retirement savings. It’s pretty small to start off with, but with larger deposits, this to me becomes a core piece of a savings program.”

ING Direct is offering a similar incentive program for its investors. Until December 31, investors who go with the ING Direct offering will receive a bonus interest amount on deposits of up to $5,000 that the depositor can use to cover the taxes on interest earned until the end of the year. The funds in this account will be deposited into a TFSA on January 1, 2009.

ING Direct’s president and CEO, Peter Aceto, says as soon as the government announced the TFSA, his company immediately got to work on trying to be the first to market with a TFSA since it complemented its suite of savings products so well. Corresponding with the launch is a very visible ad campaign focused directly on retail investors.

Currently ING Direct’s Tax-Free Investment Savings Account pays a base rate of 3%, calculated daily and paid monthly. An additional bonus equal to the interest earned will be credited on December 31, 2008.

Aceto says his company is therefore offering a de facto TFSA well before the January 1 deadline.

“We launched our TFSA in October. The benefit the government is going to give you in 2009 we are going to give you today,” he says. “Our interest rate today is at 3%. At the end of the year, any interest you made on that account, we are actually going to double it so that the net effect to our investors is that it will be a TFSA, even though the government is treating it that way until January 1.”

While not offering any incentives for early registration, RBC is selling its TFSA product on its flexibility and low cost.

“We are going to have a wide array of investment options,” says David Birkbeck, head of registered products strategy, pointing to the array of products the bank currently offers. “Also, we are going to have something we have used with other registered plans — an automatic TFSA contribution plan, called TFSA-Matic, which is similar to our RRSP-Matic program — and create a great opportunity for forced savings.”

Withdrawals on TFSAs will be tax-free, but that’s not to say withdrawals will be free of charge. RBC is waiving all fees for its TFSA for clients.

“We have decided there are no withdrawal fees, and there is no annual administration fee,” Birkbeck says.

Investors Group is being aggressive in promoting its TFSA vehicle for its network of advisors. The company’s emphasis will be on the planning needs for the TFSA. Investors Group is creating a large planning orientation program for its advisors on how to effectively use the TFSA.

Keith Potter, vice-president of products at Investors Group, says he anticipates close to 100% of the company’s consultants will adopt TFSA as a planning solution for clients in the upcoming year.

“We are going to be emphasizing the planning aspect on how to best use the TFSA, such as what types of investments you want to hold within that plan type,” he says. “We have one of the richest training platforms in the industry. We’ve already done a number of training conferences on the TFSA, and we have incorporated it into our training programs. When to use it and how to use it will be a key part of our approach. Very similar to RESPs and RRSPs, the TFSA will be a cornerstone of financial plans.”

Advisors can expect most of their dealer or banking partners to have TFSAs available for January 1. All of the major banks expect to have a TFSA product available, with Scotiabank and RBC already having the details of their products publicly available. In addition, Mackenzie Investments announced on Friday it is now taking applications for its TFSA platform.

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

(10/15/08)