Some people opening first home savings accounts are happy renting and using the accounts as an additional retirement savings vehicle.sorbetto/iStockPhoto / Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
More than $4-billion flowed into tax-free first home savings accounts (FHSAs) last year after they became available on April 1, but financial advisors and full-service brokerages were responsible for only a small fraction of the new accounts, according to a report from Investor Economics, an ISS Market Intelligence business.
FHSAs, which have a 15-year lifespan and allow Canadians who don’t yet own a home to contribute up to $8,000 per year to a lifetime maximum of $40,000, got off to a slow start, Investor Economics reported, as financial service providers took additional time to launch the accounts.
As of December 2023, Investor Economics estimates there was just less than $4.4-billion in FHSAs. According to government figures released the same month, more than 300,000 Canadians had opened the accounts.
By comparison, tax-free savings accounts (TFSAs) amassed more than $18-billion in assets in their first year. Will Stevenson, senior research associate at Investor Economics, says the expectation at the start of 2023 was for around $10-billion to flow into FHSAs in their first year.
Clients of financial advisors and full-service brokerages accounted for only about 5 per cent of FHSA assets, the report states. In contrast, about 70 per cent of FHSA assets were in branch networks. Online or discount brokerages, favoured by younger clients, claimed 20 per cent, while robo-advice platforms had 4.6 per cent.
Mr. Stevenson says it’s no surprise advisors represented a sliver of the total assets, given the average client for that channel is well into their 50s or 60s.
Yet, Cindy Marques, a certified financial planner, co-founder and chief executive officer of MakeCents in Toronto, says she’s not seeing much interest for FHSAs among her largely millennial client base.
Those who are saving for a home are mostly prioritizing TFSAs, she says, because it gives them greater flexibility to use the money in other ways if they change their mind. If FHSA holders don’t buy a home within 15 years, funds can be transferred tax-free to a registered retirement savings plan, registered retirement income fund, or withdrawn on a taxable basis.
Ms. Marques says some clients don’t have the funds to contribute to a new investment account, although she’s seeing interest from more affluent clients who can max out their annual contributions to other registered accounts.
“They may or may not be interested in buying [a home],” she says. “They’re just seeing the FHSA as a way to increase their RRSP room. Those who may need these incentives more are not the ones taking advantage.”
Aaron Hector, private wealth advisor at CWB Wealth Management in Calgary, says he’s also opened accounts for people happily renting and just looking to use the FHSA as an additional retirement savings vehicle.
Mr. Hector’s firm began opening FHSA accounts in November. There was “a rush at the end of the year to get as many opened as we could,” he says, to ensure clients could benefit from the carry-forward room for 2024, even if they didn’t have funds to contribute yet.
But Mr. Hector says he’s largely been opening accounts for children of his primary clients.
“It’s a good opportunity to get to know the kids a bit,” he says. “For a number, it’s the first time we’ve talked directly with the children.”
Mr. Stevenson also says these new registered accounts offer an opportunity to build relationships with the next generation of clients.
“If their dealer doesn’t offer it, [advisors] should ask for it because of the connection between the older clients who are maybe heading into retirement and their children and grandchildren. Securing that relationship across generations is very difficult,” he says. “If advisors want to use this to connect with those children, I think this is a great way, and the first new way they’ve had in a while.”
Accounts used primarily for savings, not investments
More than half (55.7 per cent) of total funds in FHSAs are in deposit accounts, the Investor Economics report found. Mr. Stevenson says that’s likely due, in part, to the slow roll-out, but also to investor psychology and “savings account” being in the name. The same thing happened with TFSAs at first, Mr. Stevenson says.
But he expects to see more investing products in the accounts this year as more firms offer FHSAs “and people get more comfortable using it as an investing tool,” he says, noting that deposit accounts in TFSAs eventually settled at around 30 per cent.
Mr. Stevenson says many clients likely opened the account and dropped money into a savings account purely to generate a tax benefit “and not necessarily as a core part of their investments.”
One-fifth (19.4 per cent) of FHSA assets were in exchange-traded funds (ETFs), according to the Investor Economics report, while 10.5 per cent were in equities, 7.8 per cent were in guaranteed investment certificates (GICs), and 5.1 per cent were in mutual funds.
Aravind Sithamparapillai, associate at Ironwood Wealth Management in Fonthill, Ont., says the clients he’s seen open FHSAs since his firm’s custodian made them available in the fall are primarily those with the means to save for a home but who are at least a few years away from a down payment. Those clients are in the position to be more aggressive in their allocation, he notes.
However, he says he wouldn’t be surprised if some of the ETF and mutual fund allocations captured by the Investor Economics report are to more conservative investments such as cash or bond ETFs, given the FHSA’s intended function.
Mr. Hector says he’s been allocating clients’ FHSA funds based on their priorities, time horizon and risk tolerance. Children of clients who are in early adulthood or still completing their post-secondary education and need much of the 15-year account window to save can invest more aggressively, he says. But for some, this is their first time investing and they may not be comfortable with volatility.
Ms. Marques says she recommends anyone whose timeline to purchase a home is two years or less to use a high-interest savings account within their FHSA. For those at least a year away from buying, a GIC can make sense.
“If it’s sitting in a chequing account, you’re not getting anything – you’re losing to inflation,” she says. “And if it’s a down payment’s worth, that’s a lot of money sitting there not being productive.”
For more from Globe Advisor, visit our homepage.