Canadian Scholarship Trust

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor.

Canadian Scholarship Trust

Postby svt » 29 May 2007 11:19

I'm looking for info on Canadian Scholarship Trust (and the like). References would be appreciated with any comments. I have read the following topics:
http://financialwebring.org/forum/viewtopic.php?t=103375&postdays=0&postorder=asc&start=15&sid=9f238bf02941d9f924c13c9a1eecf04d
http://financialwebring.org/forum/viewtopic.php?t=102417&postdays=0&postorder=asc&start=125&sid=68bcf26f4578e2bbc7cbe93ecf80d1d0 (See 1st response of Aug 22).
http://www.cst.org/portal/page?_pageid=873,1,873_74029&_dad=portal&_schema=PORTAL (See 'Your Choice of Plans').

I see these issues (from CST website):
-loaded up front ($200/unit) - What constitutes a unit? How many units make up one RESP portfolio?
-are the enrollment fees paid back over the four years child is in school?
-if child does not attend PS educ. "may be able" to transfer up to 50k to RRSP, but must transfer to "Family Plan" first (assume this involves more fees). Also, does this include interest?
-no statement on website about not getting interest back, or losing unused funds to group

Are there any other resources on CST, other than company provided info, that you are aware of? I have read the OSC report (2004?), but mostly takes issue with sales practices.

The reason I am asking all this, is that a friend has put funds in CST and (as I have been doing a lot of reading for my own interest) I was looking for a critical analysis of CST, and plan to transfer to self-directed RESP. This will obviously bring penalties with early withdrawal.

Thx.
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Postby arthur » 29 May 2007 11:38

Not sure if this is an RESP but under General a lot of good points.
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Re: Canadian Scholarship Trust

Postby marty123 » 29 May 2007 13:16

svt wrote:I'm looking for info on Canadian Scholarship Trust (and the like).


If you're not into it, run away, and open a self-directed or mutual fund plan at a bank. If you're invested in it already, you have to download the 100+ page prospectus, read it from cover to cover, and make sure you understand absolutely everything that is explained in it. If you don't, rely on an independent source to explain it to you. The same applies to all pooled plans.

I have a copy of the prospectus, but couldn't find an easy link at CST's website (they don't need it to be easy to find!).

Disclosure: I don't own RESPs with CST, I just researched it.

I see these issues (from CST website):
-loaded up front ($200/unit) - What constitutes a unit? How many units make up one RESP portfolio?


A unit is a commitment to buy ~$100/yr worth of RESP for the entire contribution period of a newborn. If your child is older, a unit is worth more than dough. The front load of $200/unit essentially means that your entire first 2 years of contribution is lost if you cancel (it mostly went to pay part of the sales organization). There are other fees that are added up. You decide how many units you want to invest, up to something like 10 units or so. When you cash out, you get $xxx per unit.

-are the enrollment fees paid back over the four years child is in school?


I believe so, without interest. Check the prospectus.

-if child does not attend PS educ. "may be able" to transfer up to 50k to RRSP, but must transfer to "Family Plan" first (assume this involves more fees). Also, does this include interest?


No. It only includes the contributions you made (units bought) MINUS all fees, including the enrollment fees mentionned above and a slew of other ones. The CESG and interest is forgone.

-no statement on website about not getting interest back, or losing unused funds to group


Why would they? It's better to avoid these statements and just hide them in the 100-page prospectus and complex methodology for repayment.

Are there any other resources on CST, other than company provided info, that you are aware of? I have read the OSC report (2004?), but mostly takes issue with sales practices.


The sales practices are one thing, the fact that the money gets into a blackhole is a more serious issue.

The reason I am asking all this, is that a friend has put funds in CST and (as I have been doing a lot of reading for my own interest) I was looking for a critical analysis of CST, and plan to transfer to self-directed RESP. This will obviously bring penalties with early withdrawal.

Thx.


Check this thread on Canadian Business forums. It was fresher in my mind back then:

http://forums.canadianbusiness.com/thre ... eadID=7043

It's a lengthy thread with a lot of discussion about RESPs in general, but it ends with a review of CST's fee structure and the potential monies you can lose.[/quote]


In 2006 elsewhere, I wrote:
thing, a quick browse through the CST prospectus (it's 106 pages!) show that in addition to this $2000 setup fee, you have to pay about 1% in "MER" in the form of depository charges (up to $10/yr), administration fee (0.5%), investment counsel fee (0.1 to 0.3%), annual trustee fee (0.015%), etc.

The returns in the various accounts seem to hover between 3% and 5% over the past 5 years, and I don't know if there are other layers of fees there.

The actual ROI is closer to 7% because of discretionary payments made by the fund from unclaimed amounts (i.e. churn and drop-outs). They write:

General Fund monies are used to supplement basic Education Assistance Payments on a discretionary basis.There is no set formula used to determine the amount of these discretionary payments and beneficiaries have no contractual right to these supplements.There can be no assurance that sufficient funds will be available in the General Fund or that the Foundation will exercise its discretion to supplement Education Assistance Payments in any givenyear

I still understand very little about their calculations, actual fees and return, and I have little interest in finding out. Again, those who stick to the end and attend 4-year university will get a decent return (which they could have obtained from other sources) while those who stop contributing too late, those who don't plan to study 4 years (i.e. a 3-year BA or a 2-year college diploma or a shorter private/accelerated program) will lose the most. That alone is the biggest rip-off, where 25% of what you're eligible for gets paid each year. Therefore, if you attend a 1-year diploma or a 4-month accelerated program, you're S.O.L. Non-pooled funds will unlock $5000 the first semester (it's legislated) and the rest before the start of the 2nd semester.

Their prospectus is also hard to navigate and understand without a complete reading.

It seems better than Heritage at first sight. Heritage is more restrictive in paying out the funds for sure (show receipts, etc.).



and then also wrote:
Ok. I had to do it, read the whole darn CST prospectus and crunch the numbers. Just out of curiosity!

Let’s say you were planning on investing $85.50 per month in an RESP for a newborn. Let’s assume you place this investment into a no-fee mutual fund account expected to yield a conservative and constant 6% after MER (assuming a MER of about .5% is included as would be the case for a collection of efunds). You’d have $39,193 in 18 years including the CESGs.

Now let’s compare that with the cost of buying 9 units in CST @ $9.50 per month and paying $200 per unit for enrolment. With 100% going towards enrolment until the first $100 is paid and 50% afterwards, we get into a situation where such RESP will now be worth only $34,380 after 18 years. It’s the equivalent of a SD RESP yielding 4.7%. This $1,800 enrolment fee is having the same effect as a reduction in growth of 1.3% per year for 18 years.

In addition, various fees are added on assets in management. They include an annual trust and custodian fee (0.01-0.015%), an investment counsel fee (0.1% to 0.3%) and an administration fee (0.5%). Let’s ballpark the total of these 3 fees to 0.75%, which contribute to reduce the return on investment (we’re down from 4.7% to 3.95%).

Now, let’s apply a $10 annual depository fee (for the privilege of depositing mandatory contributions to the RESP). It appears small, but on $1026 worth of annual contributions, it equates a 1% front-end, which also can be equated to a 0.1% drag on a 6% annual return. We’re now down from 3.95% to 3.85%.

To further reduce our return, let’s now say that all investments made on your behalf have to go in (large part) government bonds or (in small part) in corporate bonds. That now means that your 6% return assumptions are totally wrong. There is another 2% performance reduction because of this asset allocation model and our return on investment is now down from 3.85% to 1.85%.

So I’m now saying that for the benefit of belonging to this plan, you’ll get (at most) a more realistic return of 1.85% per year. Therefore, you’d withdraw your original contributions of $18,468 and expect a payout in the neighbourood of $26,054 minus $18,468 = $7,567 or $842 per unit in EAP. It probably should be rounded up to $900 to account for minimal compounding between the 1st and 4th year of withdrawal.

Looking at the prospectus, it shows that EAPs being paid lately are around $700 per year, making the total EAP closer to $2,800, of which 45% is either discretionary or due to attritions. It leaves about $1,261 for those starting to study in 2005. The difference between the $900 and the $1261 can likely be attributed to lower interest rates compared to rates seen through the 90s and 80s. A $1,261 EAP is the equivalent of a $29,808 SD RRSP ($1261 x 9 units + refund of $85.50 x 18 years x 12 months) or a 3.3% annual return. That's what you'd get if you opt out of the pooled plan because you don't plan on going to a 4-year program.

Once we re-include the discretionary amounts paid out of attributions (only payable if you remain in the pool), we’re talking about $43,668, which is the equivalent of about a 7% SD RRSP. To get that, you have to see interest rates similar to what we saw in the 80s and 90s, we have to rely on discretionary grants that will double your accumulated income, and a lot of continued attrition. Oh. You also have to make sure you register and complete a 4-year program, or you’ll be out of luck.

If you want my opinion, you should assume you’ll be closer to $26,000 (1.85%) than to $43,668 (7%) going forward. It’s a pretty big gamble to take, because you are assuming perfect conditions to get the 7% (80s/90s interest rates, absolute certainty to attend university, absolute certainty to chose a 4-year program, absolute certainty to complete all 4 years, lots of people dropping off the pooled plan, etc.).

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Postby svt » 30 May 2007 09:37

Thanks for the response. I found the prospectus and am currently reading through.
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Postby George$ » 04 Jun 2007 18:51

Some time ago my daughter-in-law signed a CST for a newborn. That day I did a careful Excel analysis and showed her what a bad deal it was. She was able to cancel the next day.

My general rule:
"If it's complex and there is a salesperson pushing it and if it sounds too good - run away from it as fast as you can."
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Postby svt » 26 Aug 2008 11:36

svt
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Postby queerasmoi » 26 Aug 2008 12:22

I was enrolled in CST in the 1980s by my grandparents. At the time it was much more expensive to be a DIY investor and there were no government top-ups to education savings. Adding to which, my grandmother was in business selling the plans :) So I think it was a reasonable decision at the time.

But nowadays with cheap options like eFunds, or self-directed RESP accounts with no annual fee (Credential, E-Trade), and with the added flexibility in family RESP structures, I would totally go with a DIY approach.
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Postby scampbell » 14 Sep 2008 19:37

Ellen Roseman recently wrote a couple of articles in her blog. The "comments" are interesting.

http://www.ellenroseman.com/?p=187
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Re: Canadian Scholarship Trust

Postby Bylo Selhi » 27 Mar 2010 13:37

Daw: Simplified wording urged for scholarship trust plans - thestar.com
After a CSA investigation in 2003, regulators pressed marketers to stop misrepresenting fees, exaggerating the safety of investments, employing high-pressure sales tactics and calculating rates of return in an inconsistent manner. Yet families continued to complain they had been duped or treated unfairly by five marketing organizations that together manage more than $7.6 billion of families' education savings...
Sedulously eschew obfuscatory hyperverbosity and prolixity.
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