When the tax-free savings account was introduced last year, it was hailed as an innovative new way for Canadians to build their savings. But TFSAs have been slow to take off, hampered by the financial crisis and lack of consumer awareness. Many advisors\u2019 clients also say they weren\u2019t feeling flush enough to save.
But as markets begin to stabilize \u2014 and you become better briefed on the TFSA\u2019s finer points \u2014 industry-watchers say interest in the new savings vehicle could start to surge.
Catching this wave is where financial services firms can make the biggest difference with their marketing efforts, says Wilmot George, director of tax and estate planning with Toronto-based Mackenzie Financial Corp. <\/b>
\u201cThe more education we provide, the more the public will turn an eye toward the TFSA and the advantages it provides,\u201d he says.
Mackenzie hopes to see 50% of Canadians opening TFSAs within the next three to five years.
That means there is a lot of room for growth. A recent study, commissioned by MacKenzie and conducted by Montreal-based Leger Marketing this past March, found that only one in five Canadians have opened a TFSA.
Although 44% of the 1,541 respondents in the study cite \u201clack of money\u201d as the main barrier to opening a TFSA, the real reason Canadians haven\u2019t opened one is simply because the TFSA concept is relatively unknown, George says.
\u201cWhen you have a new plan such as the TFSA, it takes a while for the information to get filtered out to the public,\u201d he says. \u201cIt takes a while for the public to digest the workings of that plan; and it takes a while for the public to get in touch with their financial advisor and find out how best to use the plan.\u201d
One of the best ways to overcome client resistance, George says, is to make it clear that savers can start with virtually any amount; although the TFSA has a maximum contribution allowance of $5,000 per year, there is no minimum required to open a TFSA.
It\u2019s also helpful to remind your clients that moving existing assets from unsheltered accounts to a TFSA can be advantageous. \u201cWhat Canadians need to understand is that even if you don\u2019t have disposable cash to invest in a TFSA,\u201d George says, \u201cif you have other non-registered assets, you can consider moving those into a TFSA to take advantage of tax-free growth.\u201d
\u201cWe need to evolve our discussions with clients,\u201d says Emmanuel Hergott, divisional sales leader with Toronto-based BMO Retail Investments Inc., <\/b> \u201cto a point at which the TFSA is no longer just seen as a rainy-day fund but can also be looked at as a place to hold short-, medium- and long-term investments, especially as the contribution room increases.\u201d
For BMO, this means training clients to think of TFSA contributions in the same way they typically treat contributions to an RRSP or a registered education savings plan, Hergott says: \u201cEven if it\u2019s $50 every two weeks, that\u2019s still something. No one said you have to hit $5,000.\u201d
To educate the public further about some of the TFSA\u2019s less obvious uses and coax clients to make use of the account, Mackenzie is developing a new \u201cfrequently asked questions\u201d list that it plans to distribute to advi-sors later this year.
\u201cThere are lists on the market right now,\u201d says George. \u201cBut we are going to try to build on what\u2019s out there and add some newer information that may have come to light in the past year.\u201d
Hergott and Gillian Riley, head of retail deposits and services with Toronto-based Bank of Nova Scotia<\/b>, say their firms are also in the process of unveiling new marketing materials about the TFSA. However, these materials won\u2019t be geared only toward promoting TFSAs.
\u201cWe want to shift our focus for 2010 to be more specific about how TFSAs can be used in financial planning strategies,\u201d Riley explains. \u201cWe want to leverage TFSAs as a part of [broader] financial planning discussions so that [such discussions] become ingrained in the full conversation with an advisor about how you are managing your savings and investments.\u201d
BMO\u2019s retirement market group says that one-third of people aged 65 and over have opened TFSAs. BMO based its findings on its own internal data and the results of the Leger Marketing study.
@page_break@The TFSA\u2019s ability to shelter capital gains and interest income from taxes, says Hergott, is what appears to this group of seniors.
In the case of capital gains, any gains realized on investments in the plan will be sheltered, and these gains will not be considered part of the accountholder\u2019s TFSA contribution limit.
And pension income or income from a RRIF that is not needed for living expenses can be placed in a TFSA, in which interest can accumulate tax-free.
With the popularity of TFSAs among seniors in mind, George says, Mackenzie will gear a portion of its new FAQ list to address questions that arise about estate planning.
For instance, clients may be interested in knowing how the TFSA can be integrated into their estate plans. Depending on the province of residence, most Canadians are permitted to designate a beneficiary for their TFSA. This allows them to pass the assets in the account directly to heirs outside of the deceased accountholder\u2019s will, similar to the way that the proceeds of a life insurance policy can pass directly to a beneficiary.
This saves time and avoids the fees that an estate is assessed when a will is probated. However, this structure should not be used when heirs are minors or otherwise not competent to manage their own financial affairs.
BMO\u2019s retirement market group has also found that 25% of people aged 55 to 64, and 15% of those under the age 45, have opened TFSAs. These statistics are evidence that financial services professionals need to do more to reach young Canadians.
Mackenzie\u2019s George agrees: \u201cWe want to help younger Canadians understand that, from the age of 18, they can take advantage of a TFSA and they don\u2019t need lots of money to invest. When we work with our financial advisors, we are going to say, \u2018Look at younger Canadians and how they trail the rest of Canadians with respect to the TFSA\u2019.\u201d
Although BMO has observed that a large portion of its TFSA holders are seniors, over at Scotiabank, it\u2019s a mixed group across the board. \u201cThere\u2019s not a specific pattern,\u201d says Riley. \u201cWe have seen a large variety of individuals open a TFSA, from first-time homebuyers to seniors.\u201d
Although the motivations of Scotiabank customers may vary when it comes to opening TFSAs, on average they are making good use of their contribution room, Riley says: the average balance in a Scotiabank TFSA is $4,000.\tIE<\/b>
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