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Most clients aren’t waiting until deadline day to make an RRSP contribution.Kenneth Cheung/iStockPhoto / Getty Images

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Registered retirement savings plan (RRSP) season has long been a hectic time for financial advisors as they connect with clients to encourage them to make their final contributions ahead of the Feb. 29 deadline. But Jason Pereira, partner and senior financial consultant at Woodgate Financial Inc. in Toronto, says most clients already contribute regularly to their RRSPs.

“Wind the clock back 20 years ago and RRSP season was a deadline. But the industry has done a good job at nudging people to [contribute] monthly wherever possible,” he says. Mr. Pereira notes the advent of robo-advisors has made it easier and more common for Canadians to automate their contributions.

In 2021, more than one-fifth of all tax filers contributed to an RRSP, according to Statistics Canada – a slight increase from 2020 – and the median contribution reached an all-time high of $3,890.

While the industry has long touted the benefits of dollar-cost averaging in its bid to get more Canadians to contribute monthly, some advisors are exploring the effectiveness relative to a lump-sum contribution.

“There’s no guarantee it’s going to work,” Mr. Pereira says. “Some years it will, some years it won’t.”

Kate Childerhose, financial advisor with Edward Jones in London, Ont., compares lump-sum investing to trying to time the market.

“Say you invested [a lump sum] in March 2020 when the market dropped horribly, your lump-sum experience is not great. Month-to-month contributions are hopefully going to smooth out your ride,” she notes.

Dollar-cost averaging or lump-sum investing: what performs better?

The Vanguard Group Inc. published a paper last April that found lump-sum investing outperformed dollar-cost averaging 68 per cent of the time using the MSCI World Index returns from 1976 to 2022. The paper compared dollar-cost averaging and lump-sum investing across markets, historical periods and simulated return scenarios.

The paper compared both investing styles using a one-year investment horizon for a $100,000 initial investment over three portfolios – a 100 per cent equity allocation, a traditional balanced portfolio, and a more conservative mix of 40 per cent stocks and 60 per cent bonds – and found that investors would have been better off making a lump-sum investment “in most historical market environments.”

A 2020 analysis from Benjamin Felix, portfolio manager and head of research PWL Capital Inc., compared the two investment approaches over a 12-month period in six countries’ stock markets. He assessed their performance over the next decade and found lump-sum investing beat out dollar-cost averaging roughly 65 per cent of the time across markets.

Samuel Rook, senior portfolio manager with Rook Wealth Management Group at RBC Dominion Securities Inc. in Toronto, notes that while lump-sum investing may be a slightly better strategy over time, many clients won’t buy into it.

“It’s really hard behaviour for people to save all this money to make an [RRSP] contribution in February because life gets annoying,” he explains. “If your washing machine broke down, you need a washing machine. There’s $5,000 less [for investing]. Doing it monthly works for a lot of people. They’re at least making sure they’re making the absolute minimum required for their plan.”

Mr. Rook says he has been “fairly successful” at setting up automatic contributions, although he still reaches out proactively to all of his clients in early February about making a final contribution for the year – even those who contribute on a monthly or quarterly cadence.

Meanwhile, Mr. Pereira says the “vast majority” of his clients aren’t waiting until close to the deadline to make a lump-sum contribution for the year. The only ones who do are business owners, for whom taking money out of the corporation all at one time in February once they have their full income picture for the previous year, is the most tax-efficient approach.

Self-employed clients and people whose incomes are largely or primarily commissions-based tend to contribute on a hybrid schedule, Mr. Pereira says. They contribute a monthly amount or contribute some months but not others, scaled to volatile earnings. Then, in February, they determine whether a top-up is warranted.

Ms. Childerhose of Edward Jones notes she often sees a last-minute rush of salaried clients looking to make top-ups after receiving an end-of-year bonus that boosts their income significantly. She says her client base is split quite evenly between monthly contributors and those who wait to contribute until they’ve seen their full income for the year.

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