Beat the bank: How to boost GIC investment returns
So you've had it with roller-coaster stock markets and want to put at least some of your retirement money into something that's rock-solid — something that will let you sleep at night. But what you'll quickly discover is that the risk-free returns of five, six, or even 10 per cent that you may have been offered years ago when you first set up your RRSP or other savings plan are now a thing of the past.
Still, there are some simple tricks that will help you squeeze better returns from investments that are generally considered to be low-risk.
First, forget the traditional mainstream options if you want to get the best return available. That old stalwart of the guaranteed investment crowd – Canada Savings Bonds (CSBs) – offered a paltry 0.50 per cent interest rate annually for the last issue. That's right — a half of one per cent. A premium version that limits cashability offered a whopping 1.00 per cent for the first year.
A recent survey of five-year GIC rates, meanwhile, shows the big banks are offering anywhere from 1.75 to 1.85 per cent annually. Cashable versions, when available, pay a bit less. It's better than the CSB rates, but still not much to crow about.
In fact, several "virtual" institutions like Ally.ca and Canadian Tire Bank offer more than that in their daily interest savings accounts.
But one thing many people aren't aware of is that you don't need to settle for the posted GIC rates the banks offer. There are several ways to get much better returns without giving up that precious guarantee on the investment.
It's certainly convenient to walk into your corner bank and buy a GIC. But what you usually won't get is the best rate.
The big six typically offer posted GIC rates that fall short of what many smaller institutions pay. They're not the only game in town, though – and as long as you've got access to a web browser, you won't have to pound the pavement to find a sweeter offer.
There are many websites that allow you to compare GIC and term deposit rates among dozens of banks, credit unions, trust companies and life insurance companies (insurance company GICs are known as GIAs – Guaranteed Interest Annuities). Many online financial media sites offer lists of some of the best GIC rates.
Cannex Financial Exchanges lists posted rates from more than 60 institutions on its site.
You'll notice that the main landing page also offers click-throughs to GIC rates offered by brokers. But the casual member of the browsing public doesn't get to see these rates, which are higher than the posted rates for the average consumer. The public can get these rates, but only if they use a broker.
So who are these brokers, you ask?
Most people know about mortgage brokers – people who shop the market to find the lowest mortgage rates for their clients. Many people have no idea that there are deposit brokers who do the same thing.
Things to ask when buying a GIC
- Compounding. Is the interest compounded daily or annually?
- Payment. Is the interested credited monthly or annually?
- Cashability. Most GICs are locked in until maturity. If you want flexibility, the interest rate will usually be lower.
- Minimum deposit size. Many institutions require as little as $500 but the highest rates will often go to the biggest accounts.
- Deposit insurance. All members of the RDBA only sell GICs that are covered by federal or provincial guarantees. Federal (CDIC) limits are $100,000 per account. Provincial guarantees vary.
The difference is that, for their clients, deposit brokers concentrate on finding the highest rates on GICs and similarly guaranteed products. They do this at no up-front cost to the client — their fees are paid by the financial institution.
The Registered Deposit Brokers Association represents more than 1,600 brokers and affiliates across the country. Their website (rdba.ca) allows people to search for a member broker in their area. These brokers serve as a one-stop channel for people shopping around for the best rates for GICs, term deposits, annuities and other guaranteed deposit products.
Brokers say they can often beat the big banks' posted rates by up to a full percentage point, depending on the term and the particular institution.
For instance, when the major retail banks were recently offering walk-in rates of no better than 1.85 per cent annually for a five-year GIC, many deposit brokers were quoting rates of 2.7 per cent for a similar term GIC.
Deposit brokers can access dozens of different institutions, including many smaller ones that tend to offer more interest because they don't have the expensive infrastructure of the big banks.
Deposit brokers can usually get better rates for their clients than if the clients walked into the same institution and asked for the same product directly.
"The rates we can access are higher because it's less expensive for the institution to issue those GICs through a broker than it is through the retail side of the operation," says Bill Ritchie, CEO of Vancouver-based GICdirect.com – one of the country's bigger deposit brokers.
Deposit brokers can easily spread deposits around a variety of institutions to keep clients completely covered by federal or provincial deposit insurance limits, too.
They can also design a GIC "ladder" using a variety of different institutions to maximize returns. For instance, the broker might put one fifth of the client's money in each of a one-, two-, three-, four-, and five-year certificate. When each GIC matures, it would be rolled over into a new five-year term.
"My policy is to recommend that clients ladder their investments," says Mary Rygiel, a partner at Toronto-based Conservative Investors Services. "It gives them liquidity and helps as interest rates increase."
On the day we checked with a few deposit brokers, the best one- and two-year GIC rates were being offered by the small Calgary-based Bridgewater Bank. The best three- and four-year rates came from a credit union. Another small bank offered the best five-year rate.
What don't deposit brokers do?
Well, some financial institutions don't deal with brokers. Most of the big banks do, but Royal Bank, for instance, does not.
Some smaller online banks and credit unions don't use broker channels either. They frequently offer even higher rates than deposit brokers can quote, since they don't have to pay any commissions. But you'll have to deal with them directly without the face-to-face help of a broker.
If you're in the market to invest a portion of your RRSP, RRIF, TFSA or non-registered money in guaranteed products, it just makes sense in today's low-interest rate environment to try to get whatever edge you can get.
And while it is certainly possible to get better yields than what GICs offer with a portfolio of high-quality corporate bonds and preferred shares, even that is too much risk for some investors.
"Baby boomers are at a point in their life where they're retired or heading into retirement," says Brian Smith, president of the Registered Deposit Brokers Association.
"With the [market] volatility we've seen over the last few years, many people want guarantees because they say they can't afford to gamble with their retirement."