RESP-O-matic

Opinion

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This article was published 17/06/2023 (844 days ago), so information in it may no longer be current.

Parents want to help. But they worry their help won’t be enough.

The findings of a recent survey of Canadian parents regarding their children’s future post-secondary education show many want to help their children with post-secondary education costs, realizing it’s getting increasingly expensive.

What’s more, they recognize higher learning — be it a bachelor’s degree or a trade — is likely necessary for their kids to get ahead.

The survey by Embark — a financial technology company that previously under another name had been a long-time provider of group RESPs (Registered Education Savings Plans) — polled 1,000 parents across Canada, including Manitoba.

And it found 81 per cent of respondents felt it was their duty to pay for their children’s post-secondary education with more than half indicating they would go into debt to do it.

Driving their determination is the widespread belief — 92 per cent of those surveyed — that higher learning opens doors.

Yet the survey also hints there may be a general lack of knowledge of RESPs, finding only 46 per cent of parents polled know about the Canada Education Savings Grant (CESG).

If you’re among the unaware, the CESG is essentially free money from the federal government to help save for your children’s post-secondary education.

“There is a huge opportunity for more Canadians to save into this program because so many are missing out on those free grants,” says Andrew Lo, president and chief executive officer of Embark.

It’s a boon indeed. The CESG offers a 20 per cent top-up to a maximum of $500 a year on your contributions (with even more potentially for low-income Canadians). All told, each child in a RESP can receive a maximum $7,200 lifetime. (The government also offers the Canada Learning Bond for low-income families to contribute to a RESP.)

Yet the take-up rate of the grants is less than optimum with about only 40 per cent of families eligible in Manitoba receiving the grants, Statistics Canada data show.

Embark aims to change that with its new offering — a robo-adviser service specifically designed for RESPs.

“Embark is a digital platform that makes it really easy to sign up and start contributing as little as $10 a month to start saving for your kids’ education,” Lo says.

What makes the platform unique is not that it offers automated management of a portfolio of exchange-traded funds (ETFs) at a relatively attractive fee cost (about 1.65 per cent per year).

What makes it notable is its automated glide-path that de-risks the portfolio as your child gets closer to post-secondary.

“It’s basically de-risking your investments over time, and as it de-risks, the portfolio manager can make tactical calls to overweight and underweight certain areas of the marketplace,” says Robert Armstrong, director at BMO Global Asset Management — which manages Embark’s investment portfolios.

Typically, portfolios start out for children just a few months old with an investment portfolio consisting of 90 per cent stocks and 10 per cent bonds.

But by the time the kids are ready to go to post-secondary, the portfolio is generally more like 90 per cent bonds and 10 per cent stocks, he says.

While Embark’s platform is new — launched this year — it’s not the only game in town.

For example, “RBC and BMO are the market leaders in glide-path RESP portfolios,” Armstrong says.

Embark may soon be a leader in this space too, he adds.

Certainly, its forerunner company — a not-for-profit called Knowledge First Financial — had long been a sizable player in the RESP space, managing $6 billion in assets. Yet its recent metamorphosis into Embark illustrates a big shift in the industry whereby previous group RESP providers have changed their models to automated, low-fee robo-adviser-style platforms.

Their previous incarnations, while helping millions of families save for post-secondary, were not without their drawbacks and controversies, including allegedly unfair sales charges and fees, and rules that disadvantages families that dropped out of or stopped paying into the plan (which in turn, helped those who stayed with the group plan).

Lo says Embark is not a group RESP provider.

It only provides access to individual and family RESPs with an affordable fee structure.

Furthermore, individuals who drop out of the plan are not subject to rules other than those set out by Canada Revenue Agency, including that unused grant money is returned to the government and taxes are paid on investment growth (unless individuals have contribution room to transfer that capital to a RRSP).

Yet while fintech companies like Embark may have a compelling offer for parents trying to get started, any financial institution can help you start and manage an RESP.

“This really falls under the basic role of a financial adviser,” says Robert Tetrault, senior portfolio manager and branch manager at CG Wealth Management in Winnipeg.

Yet he also understands the psychological inertia that weighs on parents preventing them from getting started.

“Starting the RESP can feel overwhelming where parents are going, ‘Arggh! Now I have got to get a SIN (social insurance number) for my kid?!’” among all the other duties of parents of young children.

But starting early pays off in the long run as contributions and grants have more time to grow, he adds.

Financial advisers, including those at Embark, can also help you get started along with all the other details on the journey toward eventual enrolment in post-secondary, including the often-complicated process of unwinding RESP money to pay for post-secondary, Lo says.

“We understand all the details and rules behind how to withdraw on a government grant and tax-efficient basis.”

Indeed, that guidance can prove beneficial because, when done right, families can truly maximize the value of the RESP.

Given Embark’s recent survey findings, it’s a proposition that likely appeals to many Canadian parents.