With interest rates at attractive lows and RRSP contribution limits rising every year, topping up the nest egg with an RRSP loan may be a viable option for some clients.
For advisors looking for solutions for cash-strapped clients, a handful of suppliers offer quick and easy loan services. Although clients can walk into any of the chartered banks for a loan, many advisors offer this service to enhance client relationships and prevent funds from going to a competitor.
Financial institutions that serve the advisor channel include AGF Trust Co. , owned by Toronto-based AGF Management Ltd.; MRS Trust Co. , owned by Toronto-based Mackenzie Financial Corp.; Manulife Bank, owned by Toronto-based Manulife Financial Corp.; and B2B Trust, owned by Montreal-based Laurentian Bank of Canada.
John Bennett, executive vice president at AGF Trust, says advi-sors are “polarized” when it comes to the product. “Some love it and work around that tax strategy,” he says, “while others don’t or are not aware of other solutions.”
AGF Trust offers three main RRSP loan vehicles to advisors for their clients. The flagship, short-term “contribution loan” can be obtained for a preferential rate of prime minus 1% on a minimum of $1,000 with a term of one to two years. This loan is geared toward people who want to pay off the loan in a few months and they often take their RRSP refund and “knock it down,” says Bennett. The preferential pricing applies to loans that will be invested in an AGF product or a self-directed RRSP at an AGF-approved dealer.
AGF also offers a “top-up loan,” with a $2,500 minimum and a term of three to five years; and a “maximizer loan,” with a $5,000 minimum for a term of six to 10 years. As loans get larger and amortization periods become longer, rates increase to as much as prime plus 2.5%.
As well as the above trio of options, AGF offers a “pre-authorized contribution” loan for advi-sors whose clients prefer the ease of monthly contributions.
“To be honest,” says Bennett, “we take a lot of ideas from advi-sors, package them up and deliver them to other advisors.”
Some advisors build their businesses through contribution loans, while others focus on getting clients to catch up on unused contribution room. Advisors will apply for five-figure loans on behalf of their clients, Bennett says.
To help advisors show the power of compound interest, AGF Trust provides chart analysis, prospecting material and letter templates.
MRS offers similar RRSP loans and interest rates, starting with a $1,000 minimum loan at prime minus 1%. RRSP loans are offered year-round and contributions can be directed to one of two places: a Mackenzie RRSP mutual fund product or an MRS self-directed RRSP.
MRS also offers a “deferred option,” so an advisor can meet with a client early on, beginning Nov. 1, and have the loan signed and approved but defer funding until February, so the client is not paying interest until then. The loan will be funded automatically during the second week of February, but the client can defer payment for six months.
“So, the client would actually be signing up on Nov. 1,” says Paul Standnick, assistant vice president of banking products at MRS, “but not making a payment until July.”
Manulife Bank offers a 90-day, deferred-payment loan for clients who want to use their tax refunds to make lump-sum payments before the loan kicks in. “The advi-sors we work with like to provide full financial planning for their clients,” says Scott Bergen, product director at Manulife Bank. “This is a tool to help clients keep their retirement planning on track.”
This year, Manulife Bank will offer two-year RRSP loans for clients who want to make larger contributions more manageable.
B2B Trust offers RRSP loans to the advisor channel and to product manufacturers such as fund-management companies that participate in B2B’s Distribution Alliance program. The minimum loan is $2,500 and loans are available at both fixed and floating rates. The first monthly payment can be delayed for up to six months, but interest accrues from the date of the loan.
At B2B, the floating-rate loan charges the prime rate if the loan is amortized over two years or less; rates rise to prime plus 2.5% for a six- to 10-year loan.
@page_break@As well, online tools make applying for RRSP loans fast and easy at all the providers. AGF Trust was one of the first lenders to offer 24/7 online applications with automatic approval for all clients for new RRSP loan applications up to $2,500.
Likewise, at Manulife Bank, which has been offering RRSP since 1994, the majority of online loans up to $19,000 are usually approved immediately. Using an online application tool — which will be updated this December — the advisor puts in an application, hits “submit” and, within seconds, gets a response.
Jeff McCartney, an investment advisor at ScotiaMcLeod Inc. in Toronto, considers an RRSP loan a good strategy, especially at the early stage of building wealth. “I’m a big proponent of dollar-cost averaging,” he says. “The ability to get compound growth from being in an RRSP is a much better solution than doing nothing.”
AGF Trust’s Bennett has seen a new wave of investors in the past decade. “The population is aging,” he says. “Ten years ago, people did not have $100,000 in RRSP contribution room.”
For advisors with clients in their 50s making six-figure salaries, that presents opportunities if they’re open to new strategies. IE
Enhance client relationship by offering loans
A number of institutions offer RRSP loan strategies that keep clients out of the big banks
- By: Diane Cawfield
- November 12, 2007 November 12, 2007
- 12:59