# WHY do banks dominate TFSAs and WHY DON'T clients choose self-directed TFSAs?



## Jon Chevreau (Apr 4, 2009)

Hi everyone. Apologies for sporadic "attendance" here but RRSP/TFSA season very busy. Would be interested if anyone has answers to either of the questions poised in today's blog:

http://network.nationalpost.com/np/...n-t-most-people-open-self-directed-tfsas.aspx


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## brad (May 22, 2009)

I suspect it's partly because 1) TFSAs are so ideally suited for an emergency fund, and 2) the annual contribution limits are so low.

I'm one of many people who uses the TFSA as an emergency fund, although I suppose after a fair number of years it'll grow big enough to cover just about any emergency I can think of and I may expand my intended uses for it. But in any case, you want an emergency fund to be both instantly available and secure, so a bank (like ING) is a good place for it.

Since the annual contribution limit is only $5K, the earning potential on one of these is not really huge at the beginning (though I've heard the stories of people who invested their $5K and now have $30K to show for it; I've also heard stories of people who invested $5K and now have $500 to show for it). So when people think of a sum of $5K/year, they probably think more in terms of a bank account than a self-directed investment.

Those are my hunches anyway, I'm not saying they're necessarily logical or right, but I suspect that's the thought process that goes on in many minds.


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## gwcanuck (Apr 27, 2009)

I read the two articles this morning, but didn't see the blog until I saw this posting.

Banks dominate because everyone already deals with a bank, and relatively few deal with a financial advisor. They see the ads in the bank, and sign up because they think that is their only option. And of course the bank will push their product. All the local billboards advertise 'TFSA GIC's'. People have started to make the same mistake they did with RRSP's - that they are a product rather than a process.

Same reason for the 2nd response - because they don't know they can.


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## Dana (Nov 17, 2009)

I think banks dominate the TFSA universe because balances are still relatively small. At most, Canadians have contributed $10k to their TFSAs so far. When you factor in trading fees, custody fees and whatever other fees brokerages and money managers charge, the economics don't support larger brokerage and management firms soliciting for this small amount of business. 

In years to come when people have accumulated more significant TFSA savings, everyone will want a piece and we'll see more firms aiming their marketing at TFSA dollars. 

I was working in a bank when the government first announced the changes to RESP legislation (CESG grants) and it was a similar situation - your local bricks-and-mortar bank was one of the only options for your RESP because some discount brokerages didn't offer them right away - the administrative changes they would have to make weren't worth it to them yet.


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## CanadianCapitalist (Mar 31, 2009)

Like most Canadians, we have parked our TFSA contributions in cash. The main reason is that it is an ideal place to keep emergency / short-term savings. I suspect that as the TFSA room gets larger -- it is getting there because this year, the room for most households is at least $20,000 -- more of a TFSA will be invested in longer term investments.

We did keep investing last year in our RRSPs, RESPs etc., so parking TFSAs in cash has nothing to do with the deer-frozen-in-the-headlights syndrome.

BTW, I wonder why most Canadians opened a TFSA account with a bank. Most of these accounts pay much less interest than the competition. Granted, even a 1% difference is only $50 per year but 50 bucks is 50 bucks.


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## Sampson (Apr 3, 2009)

I'll wager that the name of the account has something to do with it.

While I don't believe Canadians are uneducated, I think that because 'savings' is in the name, and both the government and banks pitch the product with GICs and high-interest CD accounts, people go the bank route.

I'll bet that if the account was called TF-retirement-account, or TF-investment-account, things would be very different.


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## brad (May 22, 2009)

Sampson said:


> While I don't believe Canadians are uneducated, I think that because 'savings' is in the name, and both the government and banks pitch the product with GICs and high-interest CD accounts, people go the bank route.


That is a *really* good point, I never thought of that even though it was staring me in the face.


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## stardancer (Apr 26, 2009)

In 2009, I had not yet thought through the purpose I wanted for our TFSAs. So the first year, I parked both our contributions in GICs cashable once a year for 3 years. Since I got in before the interest rate crash, I will leave them in place, and they will form part of our emergency funds.

This year I wanted something different. Our RSPs and one non-registered account is under Financial Planning with TDW. Our planner regretfully said that he couldn't handle our TFSAs the way we wanted, as he was constricted to the allocation defined by our age and risk profiles. He was the one who suggested opening a brokerage TFSA (of course at TDW). So that's what we did this year.

When my husband has to take his first withdrawal from his RIF in December of this year, the $$ will just be rolled over into our TFSAs. I think we will put the contributions into the brokerage accounts for a few years, then reassess our situation.


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## Smac20 (Sep 7, 2009)

*Banks Dominate TFSAs*

It's simply about marketing. This is the same thing that happened when RRSPs were introduced. Banks did the heavy lifting when it came to marketing. After a couple of years many of these accounts were then transferred to invesment advisors that could easily produce better results. The same thing will happen with TFSAs.


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## Cal (Jun 17, 2009)

Agree w Smac20....It is marketed by the banks as a savings account, as it is called a savings account. Even though savings, is probably not the best way to earn tax free interest/income or capital gains.

Because of this marketing, the banks are all over it, as they make lots of money off of it. The 2% (if that) they are currently paying, is pale in comparison to what they lend the same money out at.


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## Berubeland (Sep 6, 2009)

I think the reason that banks dominate the TFSA market is because the majority of people are both mentally and physically lazy. 

People trust other people and don't find out information for themselves because they cannot be bothered to read a pamphlet or go on the government website to find out. They would rather trust a financial advisor than take their own destiny into their own hands. It they took their own destiny into their own hands they would be responsible for their own decisions. Many people would rather have someone else to blame.

Everyone is periodically at their own bank, once there they see a sign that says TFSA (if they are even that interested) and they can EASILY fill out the forms and get it accomplished. Opening a TFSA at ITRADE or Questrade is a lot more complicated and involved. 

I honestly believe that human laziness is the cause of the banks getting all this business. After all we live in a country where people are too lazy to get out of their cars to pick up food that other people have cooked.

I know I am a cynic by the way


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## NoLocus (Jan 23, 2010)

sdfgsdf


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## ssimps (Dec 8, 2009)

Cal said:


> Agree w Smac20....It is marketed by the banks as a savings account, as it is called a savings account. Even though savings, is probably not the best way to earn tax free interest/income or capital gains.
> 
> Because of this marketing, the banks are all over it, as they make lots of money off of it. The 2% (if that) they are currently paying, is pale in comparison to what they lend the same money out at.


I agree; for the average person who watches TV for several hours a day, how many ads to they see now from banks:

"Open a CIBC TFSA and pay no tax on your savings"
"Open a TD TFSA and pay no tax on your savings"
"Open a Scotiabank TFSA and pay no tax on your savings"

etc. 

They almost seem to market it as if they are taking the credit for the TFSA in the first place, so many people probably don't even know you can have self directed TFSA's


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## ssimps (Dec 8, 2009)

Berubeland said:


> Everyone is periodically at their own bank, once there they see a sign that says TFSA (if they are even that interested) and they can EASILY fill out the forms and get it accomplished. Opening a TFSA at ITRADE or Questrade is a lot more complicated and involved.


I agree with this too; it took me 5 minutes to open an ING TFSA online since I already had an account with them. When I talked with iTrade about openning an account, and I already have accounts with them, they sent me the 'short' forms to fill out; 2 - 3 pages, which I then was supposed to mail back with a cheque.

So I took the lazy route and the 3% rate currently offered by ING. 

Time is $ too.


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## Jon Chevreau (Apr 4, 2009)

Some good replies; thanks. FYI, the second item on the current FP Big Picture audio podcast is a 10-minute chat on TFSAs and RRSPs between myself and the Post's Pamela Heaven. 

http://www.financialpost.com/podcasts/fp-big-picture/index.html


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## OptsyEagle (Nov 29, 2009)

The banks dominate the non-advice driven market and therefore two reasons come forward why they dominate the TFSA world.


1) The accounts are too small and advisor driven plans are not interested in them ... yet, plus too many people probably just transfer money from a cash account to a TFSA, where the advisor gets nothing extra, but a bunch of paperwork.

2) Since we have had a large stock market drop and stock prices are so low, people will naturally graviate away from them and want expensive GICs, etc. (if they did anything else, they might end up making money and we can't have any of that). If you have GICs/interest bearing savings or both stocks/mutual funds and GICs, you might as well put your fully taxed GICs in the TFSA. Since advisors do not like flogging GICS, since mutual funds pay better, people tend to go to the banks for these.

Once the accounts get larger and the stock market stabilized (prices get higher), the non-bank competitors will attact them, en masse.


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## Spidey (May 11, 2009)

I think there are some very logical reasons why banks dominate TFSAs. For most people a TFSA contribution is made after the RRSP contribution. Therefore probably for many people, this money is an extension of their savings account at the current moment. This is money, they may very likely need in the next couple of years for a new car, roof, or emergency. So under these conditions, it doesn't make sense to hold equities or even bonds. As Optsyeagle said, after TFSPs have been around for several years and people start building a more significant balance you will then see more diversification on TRSA accounts.


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## steve41 (Apr 18, 2009)

When you analyze the numbers, the TFSA and the RRSP are very close in terms of delivering a level after-tax/after-inflation income stream.

For the very low wage earner, the TFSA has a modest advantage and for the future lump sum income need, the TFSA has a similar advantage, but for most individuals in the MNW to HNW category, the TFSA is just not that sexy.

In fact, if you were to preferentially divert your savings to your TFSA in anticipation of a lump sum 'need event' and that need ended up not materializing, your overall plan might suffer.

Tax, and its behaviour over time is a crucial component of the analysis.


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## thepegger (Jan 25, 2010)

*TFSA's*

The banks have merely exploited peoples inherant laziness to do research for themselves. There has been plenty of information available since the beginning of TFSA's .

Thats why people complain constantly about advisors , they are too lazy to do it themselves. The internet era has enabled all to research as deeply as required to make investment decisions.

Sites such as this one allows everyone to read, link, research anything you need.

Dump your mututal funds ( except some low MER ETF's) and take on the rewarding job of making the wins your own and with experiance confidence grows and as confidence grows wins become increasing in number.


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## HaroldCrump (Jun 10, 2009)

It is all marketing.
And now that most discount brokerages are owned by the big banks themselves, this is perfect opportunity.
I think the TFSA was a God-sent opportunity for the banks who were losing all the mutual fund investing business since 2008 crash.
All of a sudden the banks are back on the bandwagon touting their products.
Forgotten are the days of how they and their advisors damaged people portfolios during 2007 - 2009.


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## Larry6417 (Jan 27, 2010)

*2 cents*

First question: obvious answer. The banks dominate savings and investment products in this country. They are widespread and almost all Canadians deal with them. I would be shocked if banks didn't dominate TFSAs.

Second question: obvious answer again. One may as well ask why most Canadians don't use self-directed RRSPs. I think many people simply don't have the knowledge to do so, and don't know how to educate themselves. Many people have bought into the myth that investing is too complex for the average individual.


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## Square Root (Jan 30, 2010)

*Not Big Enough*

For most people TSFA's just aren't big enough. Also should try to earn income that attracts full tax rates-ie interest in the TSFA. Save the lower tax rate income-cap gains and dividends for non registered accounts.


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## Square Root (Jan 30, 2010)

*Tfsa*

Balances just aren't big enough. Also, makes sense to shield fully taxed (ie interest) income in registered accounts and save any tax advantaged income (cap gains and dividends) in non registered accounts. Hopefully, interest rates don't stay low forever.


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## investnoob (Jun 29, 2009)

I have a tax free savings account. For now, I have 7500 bucks sitting in a high interest savings account. I decided on this because:

Interest being earned on my emergency funds were being taxed, so I might as well avoid those taxes; and

while I just opened a self-directed RRSP this year, I have no plans to make any contributions as I am still trying to top up my emergency fund (I had hoped to finish it last year, but a few things prevented that).

Disclosure, for perspective: I'm a 31 year old single male, and I have been paying into the federal government's defined benefit pension plan for the last 9 years - so contributing to an RRSP has not been a priority. Instead, I purchased a house four years ago, and hope to pay it off as soon as possible (by the time I'm 40).


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## cannon_fodder (Apr 3, 2009)

ssimps said:


> I agree with this too; it took me 5 minutes to open an ING TFSA online since I already had an account with them. When I talked with iTrade about openning an account, and I already have accounts with them, they sent me the 'short' forms to fill out; 2 - 3 pages, which I then was supposed to mail back with a cheque.


Isn't that ludicrous? You can't even go into a Scotiabank branch with ID and apply for an iTrade TFSA.

You really have to wonder what Scotia plans to do with iTrade. With their steps so far, you'd think the next thing they'll do is hold a contest for all new accounts where you can win a Toyota - before the brakes or accelerator are fixed.


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## Happyvdubber (Feb 26, 2010)

ssimps said:


> I agree with this too; it took me 5 minutes to open an ING TFSA online since I already had an account with them. When I talked with iTrade about openning an account, and I already have accounts with them, they sent me the 'short' forms to fill out; 2 - 3 pages, which I then was supposed to mail back with a cheque.
> 
> So I took the lazy route and the 3% rate currently offered by ING.
> 
> Time is $ too.


BINGO!

TD e-Fund (Applicable to TFSA, RRSP, RESP)

-Go into a branch
-Complete "Risk Profile"
-Open a temporary Mutual Fund (or TFSA?)
-Argue with the FA about not "needing a TD chequing account"
-Go Home
-Locate e-Fund conversion form 
-Complete, print, attach void cheque to link your non-TD chequeing account, snail mail 
-Wait 5 days
- Now you have a TD e-Fund account. 

but wait... there's more!

- You don't have a EasyWeb account nor a TD access card, Call TD, request access an card 
- Wait 5 days
- Use your new access card to register for an EasyWeb account
- Log in and setup you portfolio of e-Funds

but wait... there's more!

- PPP (pre-authorized payment plan) can be setup for a minimum purchase of $25, but what e-Fund will get the money? 
- Setup a "leap frog" PPP schedule so that each e-Fund gets an equal amount through out the year

but wait... there's more!

- God forbid you want to use TD e-Funds for a self managed RESP! OMG... GOC won't deposit grant money to the e-Fund. And oh did you know that TD MF's (e-Fund or otherwise) are not eligiable for anything but CESG's? 
- Now you need to setup a Money Market MF for the grant money
- Wait for the Money Market account to hit $100 before buying e-Funds ($25 is only for PPP, one time purchases must be $100 per e-Fund)
- Rinse and repeat each year. I imagine you get good at it after a while.


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## DrStan (Apr 5, 2009)

Happyvdubber said:


> BINGO!
> 
> TD e-Fund (Applicable to TFSA, RRSP, RESP)
> 
> ...


The e-Series are fully eligible for the CESG. They are not eligible for the additional top-up grant for low income families. If you are not a low income family, this doesn't make a whisper of a difference. 

If you really think these steps are way too much work, then you deserve to get a 1% rate on a "high interest" savings account at your local bank. It's a bit of an inconvenience, I admit, but once it's set up, it's done. The low fees make it worthwhile. By the way, your friendly TD advisor will provide a bank card when you visit to open the mutual fund account. That will save you the whopping five day wait to receive your card in the mail.


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## Happyvdubber (Feb 26, 2010)

DrStan said:


> The e-Series are fully eligible for the CESG. They are not eligible for the additional top-up grant for low income families. If you are not a low income family, this doesn't make a whisper of a difference.
> 
> If you really think these steps are way too much work, then you deserve to get a 1% rate on a "high interest" savings account at your local bank. It's a bit of an inconvenience, I admit, but once it's set up, it's done. The low fees make it worthwhile. By the way, your friendly TD advisor will provide a bank card when you visit to open the mutual fund account. That will save you the whopping five day wait to receive your card in the mail.


Inconvenience is an understatment. It's a PITA and in this day in age, unacceptable. I don't think I'm lazy for saying so. 

It's funny how the "e-Series" boasts making use of the latest and greatest interweb technologies; yet to set one up, they use every old school method in the book. They don't even take a fax for christ sake.

The OP asks why people are not taking advantage of self directed TSFA's, I feel this is the answer. I'm not saying people shouldn't do it, but I can understand why so many are missing the boat with these types of hoops to jump through.

BTW, that's why I said "only CESG".


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## DrStan (Apr 5, 2009)

Let's face it, the e-Series is a very low margin product for TD. I'm sure after all expenses are accounted for, they make minimal income compared to the regular series. Would it be logical for it to be easier to get into the e-Series versus the regular funds? Of course not. It would be the same as a car salesman steering you towards the absolute cheapest, stripper model, instead of the gussied up high profit one. 

This is an investment for savvy people who are looking to minimize their costs and are willing to do the footwork themselves. For a long-term investor, this means a few hours of messing around followed by years of benefits. Not a bad trade-off. 

But I digress. Many TFSAs are geared to savings simply because people don't understand what the TFSA can do as a long term retirement savings vehicle. People don't know what a marginal rate is; don't know what their money could be doing for them; don't know how much tax or mortgage interest they pay... so to expect the Average Joe to get what a TFSA is... well... that's just dreaming. That's a good thing, though. If too many people made a good use for the TFSA, the government would be tempted to change the rules to recoup their tax losses.


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## Happyvdubber (Feb 26, 2010)

Agreed. (post count +1 )


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