It puts a class action lawsuit under a microscope

A pedestrian walks along a road near Kingston Hall on the campus of Queen’s University in Kingston, Ontario, in January 2021. A 2019 review of low-income investors’ experiences with crowd-sourced RESP providers by researchers at Queen’s University and the University of Winnipeg reported inaccurate marketing materials and sales tactics High pressure from salespeople.Fred Lum/The Globe and Mail

Remembers Lisa Lonergan The CST Savings saleswoman who sat in her living room four years ago, convinced her to buy A group registered an educational savings plan to save for their newborn daughter’s post-secondary education. The two women exchanged stories of new motherhood while Mrs. Lonergan nursed her daughter. “It was very personal and emotional,” she said.

Ms. Lonergan, a 39-year-old freelance project manager in Toronto, first contacted the group’s RESP after a friend recommended it. And that day in her living room, the pitch resumed: The saleswoman said the plan’s fees were lower than other financial institutions, and her investment mix was safe for building savings for her child’s education.

Group RESP providers require parents to commit a certain number of shares, called units, up front. Ms. Lonergan bought 25 and started contributing $208 a month. When her twins were born this year, she called CST again and opened up plans for them, too. But when she and her husband became concerned about the proceeds and asked about transferring their children’s online assistance programs to another financial institution, they discovered there was a huge barrier to getting out.

By then, the couple had contributed a total of $10,800 to their children’s IRP. Roughly $5,800 of it went to sales fees — the cost of opening accounts — that are preloaded, meaning parents must pay most of them before they can actually start contributing to their children’s education. It is also the amount they stand to lose if they move their plans elsewhere.

“I see that now [the saleswoman] Make slanted references, such as, “This plan really works if you stay at it for 18 years.” It wasn’t like she was saying, “The first $4,500 you donated isn’t yours,” Ms. Lonergan said. While she said the saleswoman disclosed a sales fee of $200 per unit, she didn’t think to ask what that meant. “I think if someone had said that to me, I wouldn’t have fallen.”

Ms. Lonergan filed a complaint with CST about the saleswoman, which the company dismissed on November 30. She and her husband have since filed a complaint with the Banking and Investments Ombudsman.

RESPs, also known as group scholarship plans, have long had a bad reputation in the personal finance world. Unlike individual or family RESPs, which parents can easily open at their bank or other financial institution Free RESPs are sold by private companies. The five major providers of group plans that are either active or closed to new members, and which have $15.7 billion in assets under management, have been named in a Quebec class-action lawsuit approved in 2021 that alleged a per-unit advance sales fee violated provincial securities regulation and law. civil in Quebec.

Companies selling it say the pooled structure allows parents to take advantage of a more conservative asset mix that protects their principal contributions, and participants can earn loyalty rewards for staying in the plan until their kids go to post-secondary school. Parents also share the investment returns of other plan participants who end their plans early, or whose children don’t get all of their education payments.

But RESPs have been criticized for sales fees, high fees, restrictive contract terms that can exclude parents even after they have contributed hundreds or thousands of dollars, and dense prospectus documentation that is difficult for the average investor to digest.

“People don’t understand what they’re getting into,” said Jason Pereira, partner and financial planner at Woodgate Financial in Toronto. While he said he has no doubt that many parents have had good experiences with RESPs, “I’ve rarely had a client, once I’ve explained how they work, who didn’t feel cheated.”

The Quebec lawsuit is the latest in a series of negative headlines for RESPs. A 2019 review of low-income investors’ experiences with crowdsourced RESP providers by researchers at Queen’s University and the University of Winnipeg reported inaccurate marketing materials and high-pressure sales tactics by salespeople.

In 2015, the Ontario Securities Commission brought criminal and quasi-criminal charges against three former sales representatives from Group RESP Corp. Knowledge First Financial and CST Consultants Inc. , and several employees at two Toronto-area hospitals in connection with allegations that maternity ward records were sold and used to market early warning programs to new mothers. The three financial firms said at the time that they had fired the employees involved and were cooperating with the OSC investigation. Both salespeople later pleaded guilty.

Established in 1998, RESPs are tax-sheltered investment accounts for parents to provide for their children’s post-secondary education. Parents can contribute up to $50,000 to a child and take advantage of a federal government program, the Canada Education Savings Grant, which provides 20% of parental contributions annually up to a maximum of $500.

Unlike traditional RESP programs, where parents can contribute on their own schedule, group RESP providers require parents to commit to a certain number of units in advance and make contributions to the plan on a set schedule. Participants still receive similar government grants through group plans.

Leslie Gottlieb, chief financial advisor and founder of Bright Start Financial, said she regularly sees clients who were part of group RESP plans, and their lack of understanding of the long-term nature and exact timeline of these plans is a common denominator. “In fact, clients’ circumstances can change over time,” she said. “It’s a huge commitment to make.”

The number of units parents purchase determines the total cost of the sales fee, which is paid upfront. All parental contributions go toward sales fees until half is paid off, and then a portion of their contributions until it is paid in full.

CST charges $200 per unit, which its plan prospectus says can range from 3.1 percent to 24.1 percent. of unit cost based on the contribution option chosen by parents. Knowledge First Financial, another RESP agent that since 2012 has gradually moved away from group plans to offering individual RESPs, has a slightly different structure. The upfront sales fee ranges from 1.5 percent to 9.5 percent of the parent’s total contribution goal, depending on the age of their child at enrollment.

Parents who continue to invest for the long term will have educational savings for their children, said Aravind Sethamparapilai, investment advisor and partner at Ironwood Wealth Management Group in Fonthill, Ontario. But the sales fee structure makes it economically unreasonable for them to exit the plans if they are in the early years of contributing. “If I stop you [may] You don’t technically have your money in the RESP group at that point.”

CST chief operating officer Peter Lewis said in an email to The Globe and Mail that over time it works in parents’ favor, pairing sales fees with lower asset management fees. He said the CST compared the fees for RESP holding units in a CST plan versus one owning mutual funds, and found that “the CST fees … are equivalent to the mutual funds of 1 to 1.5 percent.” [management expense ratio or MER]. “

He added that customers who have made all of their contributions and whose children collect all four education assistance payments when they go to school are refunded half of the sales fee.

Paul Renaud, interim president and CEO of Knowledge First Financial, said in an email that the company has “strong affordability and suitability requirements and practices,” and that its fees are in line with the industry. On average, given the total fees incurred, “our clients can expect to pay the equivalent of approximately 2 percent of their annual management expense percentage over the life of their investment, which is very common for long-term managed products of this type.”

But Mr. Pereira noted that parents can save for their children’s education at a much lower cost by opening a RESP account with a bank or robo-adviser and investing in exchange-traded funds, which unlike mutual funds don’t have offers built into their fees and tend to have lower exchange rates. much. “There’s really no reason to deal with a group [RESP] He said “.

The prohibitive cost of these plans is at the heart of Quebec’s class action lawsuit against CST, Knowledge First Financial and its subsidiary Heritage Educational Foundation, and three other providers of scholarship plans. The suit alleges that the per-unit sales fee for plan sponsors violates a 2005 Quebec regulation that sets group scholarship plan enrollment fees at $200 per plan, and is considered an “offensive clause” under Quebec civil law.

The lawsuit alleges that the lead plaintiff, Ching Wang, purchased 58.6 units of CST via two RESPs for his two children, paying a total of $11,720 in filing fees — nearly 60 percent of the total amount he contributed over two years.

Knowledge First Financial, which acquired Heritage in 2018, said that in addition to its gradual shift away from group plans, it has transitioned existing Heritage clients to individual RESPs in 2022.

The Quebec Group Scholarship Scheme regulations are an exception; There are no such sales fee ceilings in other provinces. However, in 2013, the Canadian Securities Administrators, the umbrella organization for provincial securities regulators, amended the rules for the Collegiate Scholarship Scheme to include a summary of the scheme and a detailed disclosure of the scheme.

These documents are designed “to provide investors with key information about the benefits and risks of the grant plan in a simple language format,” Ilana Kleiman, senior advisor for communications and stakeholder relations at CSA, said in an email to The Globe.

In a 2010 notice and request for comment prior to the changes, the CSA said many investors “had trouble understanding the unique features and complexity of scholarship plans.” Clearer and simpler disclosure of the prospectus is necessary, the CSA said, especially since the number of scholarship scheme investors, including those with low or modest incomes, has grown “significantly” since 1998.

The CSA has also set additional requirements for group scholarship applicants, including revising plans eligibility rules to match RESP eligibility rules under federal income tax law and requiring the Banking and Investments Ombudsman to handle any complaints from investors.

CSA is not considering any new rules for scholarship schemes. But Ms. Clemen pointed to her customer-focused reforms, which were implemented in phases from 2019 to December 2021, and require all registered investment firms, including providers of scholarship schemes, to provide additional cost-related disclosures before an investor opens an account.

Mr Pereira said improving disclosure is important but does not address the complexity of the plans. “These are complex, not standard investment accounts,” he said. “People say disclosure is all that matters, [but] Product design is important. The simpler you make something for others to understand, the less likely there is a misunderstanding now or in the future. This contradicts that.”


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