Canadians are increasingly using Tax Free Savings Accounts to shelter equity investments.
Sandeep Gosal, senior analyst with Investor Economics, explains that when Tax Free Savings Accounts (TFSAs) were first launched in January of 2009, Canadians were highly risk averse following the market meltdown of November 2008. At the same time, the banks were the market leaders in promoting TFSAs. The result was that, initially, most TFSA assets were captured by the banks and most of the money was put into savings accounts.
Shifting to equities
Now, however, even within the banks, some of this money is shifting to equity investments such as mutual funds. “Where savings and fixed term deposits at first accounted for 96% of the assets, mutual funds have steadily increased their share and now they account for 17% of the assets within the retail bank channel,” says Mr. Gosal (see tables, page 29).
Mr. Gosal does not have a specific breakdown of what percentage of assets are going into equities via brokerage channels – full service brokerage, online discount brokerage and financial advisors – but he says these channels are certainly steering more TFSA money into equity investments. “From our discussions with these companies, most of the money is in equities, so that could be anything from directly held securities, to ETFs (exchange traded funds), to mutual funds.”
In terms of assets, Mr. Gosal says assets invested through the online discount and full service brokerage channels are growing quite quickly. Back in early 2009, some of these brokerage firms had not enabled TFSA sales on their platforms, so they were a little late out of the gate in allowing their investors to open these accounts. All of them now have enabled TFSA sales, he adds.
Banks, meanwhile, were strongly promoting TFSAs from the outset and some were offering promotional interest rates. ING Direct, for example, was an early leader in this market among retail banks and branchless institutions due to its strong promotion and a pre-registeration strategy. ING was ranked second in the TFSA market in early 2009 but is now ranked fifth, notes Mr. Gosal.
Number of accounts
As of June 2011, the number of TFSA accounts opened were just over 8.5 million. Mr. Gosal, underlines, however, that this does not mean that there are 8.5 million Canadians who have opened TFSAs, since it is possible to open multiple accounts within the same financial institution and across different financial institutions.
Another interesting fact revealed by Investor Economic’s data on TFSAs is that 12.5% of TFSA accounts within the retail bank channel have no balance – they are open but not yet funded. “The reasons for this vary,” says Mr. Gosal. “One possible explanation is that perhaps when people go to a bank to open a new bank account, they’ll open a TFSA at the same time because the paperwork is very streamlined.”
With respect to TFSA balance amounts, people generally have balances below $5000 or over $10,000, Mr. Gosal adds. “There is not too much in the middle. Only about 17% of accounts have a balance between $5,000 and $10,000; about a third have a balance over $10,000, and 37% of funded accounts have a balance of less than $5000 and 12% have no balance at all.”
Total assets from all channels have grown from just under $10 billion at the end of March 2009 – the first quarter in which they were launched – to just over $54 billion at the end of June 2011.