Confusion, uncertainty, and worry surround these accounts, how can advisors help their clients understand them
Canadians are contributing to their RRSPs despite a host of negative feelings about the registered accounts. That was the core finding of a recent survey conducted on behalf of Edward Jones Canada. Despite 56 per cent of respondents saying they understand the value of tax deductions, 70 per cent reported some negative feelings about their RRSPs. 40 per cent felt confused, 37 per cent felt they were unsure if they were maximizing RRSP opportunities, and 36 per cent worried they aren’t contributing enough to secure their retirement.
Julie Petrera, director of financial planning at Edward Jones Canada, explained why she believes Canadians continue to contribute to their RRSPs despite a lack of understanding. She highlighted that these negative emotions are more tied to the long-term goals and impacts of RRSP contributions, and that these gaps in understanding present an opportunity for the wealth management industry to educate and improve the services they offer to clients now.
“Despite a lack of knowledge, people are aware of RRSPs. They know there’s a deadline at which you must contribute, and that there’s an upper limit. So it sounds like this is something they should do, Petrera says. “If you go to the grocery store and there’s a maximum number of items, you might buy that maximum because it means they sale is so good. That sort of thinking could be carried forward to the maximum amounts of RRSP room, with people thinking that’s the amount that’s best for them. It’s just human nature. But it’s encouraging Canadians to contribute despite not fully understanding how the account works.”
The short-term tax incentives baked into RRSP contributions, in Petrera’s view, also motivate some of the tendency to contribute without understanding. The prospect of a bigger tax refund in April is often incentive enough, even if the long-term future of that money is unclear to the people contributing it.
While cost of living has also risen and could challenge RRSP contributions, Petrera notes that only nine per cent of survey respondents said they couldn’t afford to contribute to an RRSP. Affordability, she says, may not be causing these negative feelings so much as a lack of understanding about how nuanced and complex these investment vehicles can be.
RRSPs, she notes, are a 69-year-old tool that was designed at a time when retirement looked very different. They’ve been augmented with changes to contribution limits and the securities they can hold, as well as pieces like the home buyers plan. They’ve been complemented, too, with newer accounts like the TFSA and First Home Savings Account (FHSA) which may further confuse investors without appropriate guidance.
The survey shows that Canadians may be contributing with full knowledge of the tax benefits, but without understanding that’s going to happen at the back end. Petrera sees a lack of understanding in how RRSPs fit into individuals financial plans. There is a lack of clarity around what role this money will play in their retirements, as well as how to ensure that it is optimally used. Questions around how the money will eventually be withdrawn and what problems it seeks to solve need to be answered to drive client confidence.
Answering those questions, Petrerea explains, speaks to how this industry has transitioned from a product distribution business to a service and solutions business. Wealth management firms now know that what clients want is to understand how an RRSP, or any other investment account, fits into their own goals and lifestyle aims.
“If we as an industry could articulate how this account or how contributions to this account fund that specific goal, for you, people would be understand them better and be more interested in using them,” Petrera says.
Individual advisors can do this for clients, though it takes work and education. It can also take some adaptation in language. Petrera notes that instead of encouraging all clients to maximize their RRSPs, like they used to, Edward Jones Canada advisors now tell them to ‘right size’ their RRSPs. This can help ensure that their contributions actually fit with their own plans and incomes, and that other investment accounts that may be more useful for other goals are also utilized.
Firms can also help educate the wider mass of Canadians. Petrera highlights her firm’s publicly available educational tools around RRSPs which can help show them some of the nuances involved in these accounts. There is also an evolving landscape of financial influencers in Canada and Petrera acknowledges that their communication style is effective. She would like to ensure that if these influencers seek to help educate Canadians about RRSPs, that they do so from a place of qualification and in a fulsome manner.
On an individual advisor level, Petrera notes that educating clients can give them confidence and further deepen trust. She notes that as advisors talk clients through this nuanced discussion, they ought to help share the ways retirement itself is changing. As people live longer and seek greater fulfillment in later years, many are returning to work or seeking other forms of work. Petrera highlights how this changing dynamic can also play a role in the conversations advisors are now having with their clients. RRSPs can be discussed in the context of an evolving retirement, too.
“The value that an RRSP can have is not just to think of it as contributing to an individual account and investing within it, but in answering the question of if and how an RRSP can fit into a client’s full financial plan,” Petrera says. “How do we make sure that they understand the value of doing that so we can raise their confidence.”
