By ROB CARRICK
Tuesday, July 20, 2004 - Page B11

Financial adviser Mike Morrow has noticed a difference in the way people invest for themselves and for their children through registered education savings plans.

"They say, I don't mind losing my money, but I don't want to lose my kid's money," says the proprietor of Morrow Financial in Thunder Bay.

Backing up this insight is the more than $5-billion invested in RESP scholarship trusts, which are the savings vehicle recently targeted by the Ontario Securities Commission because of their sales practices.

Scholarship trusts are a relatively safe, conservative way to invest for your child's university education. And yet, most people would be better off with a simple self-directed plan available from financial advisers, brokers and do-it-yourself on-line brokers.

The problem with scholarship trusts is partly the sales practices mentioned by the OSC, which include inadequate disclosure or misrepresentation of fees, lack of supervision of sales staff and exaggerated claims about zero risk.

Worse still are the many fees, rules and conditions that scholarship trusts impose on their investors. "I don't want to beat up on scholarship trusts, but I just think they're too confusing," Mr. Morrow said.

Scholarship trusts have been around for more than 40 years and now claim a little more than one-third of the total assets invested in RESPs. The sales pitch is folksy -- lots of pictures of shining-faced graduates and babies wearing mortarboards, plus scary numbers showing how expensive a university education is becoming.

These trusts differ somewhat from product to product, but generally they consist of a pool of investor money that is invested in safe securities such as government bonds, Treasury bills, guaranteed investment certificates and insured first mortgages. Annual returns in recent years have been in the 5-per-cent range, which isn't bad in the current low-rate environment.

As an investment, Mr. Morrow likened scholarship trusts to a bond fund. But you'd have to work hard to find a bond fund with the same level of fees and complex rules as scholarship trusts.

The fees are so onerous that even scholarship trust salespeople don't like to talk about them. The OSC listened to these sellers in action and too often found that salient details about fees were missing.

For this practice, and for others that included inadequate supervision of sales staff, the OSC imposed terms and conditions on five scholarship trusts, including the three largest players -- Allianz Education Funds Inc., CST Consultants Inc. and USC Education Savings Plans Inc.

The OSC said the issue of fee disclosure mainly concerns enrolment costs that people must pay when they join a scholarship trust. One trust has an example in its prospectus where someone invests $95 a month and pays $1,070 in enrolment fees during the first year, or almost 94 per cent of the total invested.

An example of the lack of fee disclosure found by the OSC: In some cases, people weren't told that if they withdrew early from a trust, they were in a position to lose some of their contributions because they had not yet covered all their enrolment fees.

Mr. Morrow is acquainted with scholarship trusts because he invested in one almost 10 years ago for one of his children. He's in a position to recoup his enrolment fees when money is withdrawn from the plan to pay for his son's postsecondary education (without interest), but he said there might be other trusts where you don't get the enrolment fee back.

If the fees don't put you off scholarship trusts, then check out the rules. Bowing out or making changes in your contributions can't be done without triggering all kinds of consequences, some of them potentially costly.

It's no wonder that scholarship trusts have seen their share of the money invested in RESPs drop to 36 per cent as of mid-2003 from 53 per cent in 1998, which is the year that Ottawa announced that it would match RESP contributions of up to $2,000 a year with a grant of 20 per cent.

Banks and brokers appear to be picking up market share at the expense of scholarship trusts, and that's just fine. Bank-sold funds and GICs can be a decent foundation for an RESP, especially when you consider that there are no fees other than maybe an annual administration fee of roughly $50 or less (fund management fees apply, of course).

The best approach is a self-directed plan held with a bank, broker or financial adviser that allows you to mix funds, stocks and bonds. Want to invest conservatively? With a self-directed account, you could buy a ladder of strip bonds and a dividend fund and then sit back.

Annual administration fees are usually charged on smaller-sized self-directed RESPs, but that's a fair a price to pay for the sort of freedom you'll never have in a scholarship trust.