Beat the bank: How to boost GIC investment returns
By Tom McFeat, CBC News
Posted: Jan 16, 2012 7:09 AM ET
Last Updated: Jan 16, 2012 6:47 AM ET
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.
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.
'My policy is to recommend that clients ladder their investments. It gives them liquidity and helps as interest rates increase.'—Mary Rygiel, Conservative Investors Services
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."
Top News Headlines
- Toronto mayor's brother says he never dealt drugs
- The brother of Toronto Mayor Rob Ford has vehemently denied allegations in Saturday's Globe and Mail that he was involved in the illicit drug trade in the 1980s. more »
- Hockey Canada votes to ban bodychecking in peewee hockey
- Hockey Canada's board of directors voted to eliminate bodychecking from peewee-level hockey on Saturday in Charlottetown. more »
- Neil Macdonald: How serious is Obama about curbing the drone surge?
- In a key speech this week, the U.S. president set out a host of supposed new safeguards for America's controversial practice of remote-controlled rough justice. But as Neil Macdonald writes, the underlying rationale for drone use has not fundamentally changed. more »
- Ontario man lost in Australian mountains has survival skills
- The sister of an Ontario man who disappeared in Australia's Snowy Mountains nearly two weeks ago says she remains hopeful he will be found, partly because of his training as a Canadian Forces reservist. more »
Latest Business Headlines
- Growing appetite for American whisky straining supply
- Fans of some American whiskies might soon be scrambling to find their favourite brand because of a seemingly insatiable demand for bourbon, rye and other styles of whisky that shows no sign of abating. more »
- Royal Bank pledges not to outsource jobs for cash savings
- Royal Bank has promised it will never outsource a Canadian job to a foreign worker solely to save money. more »
- Canada threatens retaliation over U.S. meat-labelling rules
- The federal government is threatening "retaliatory measures" against the United States in a dispute over meat-labelling rules that Ottawa and the World Trade Organization consider discriminatory. more »
- Canada ranks 3rd last in paid vacations
- Canada ranks third last among economically advanced countries in the amount of paid vacation time it guarantees its workers, a new U.S. study indicates. more »
The data on this site is informational only and may be delayed; it is not intended as trading or investment advice and you should not rely on it as such.