Do you know the truth behind the GIC market in Canada?

Written by Ian R. Whiting, Staff and Contributing Editor

Back in the latter part of 2012 and into 2013, the Federal Government began investigations into pricing, yields and distribution challenges with GICs. As you would expect, there were many submissions from the major banks plus trust companies, credit unions and caisse populaires – there were a few independent submissions including one from IFDS – International Financial Data Services Canada – although most readers will never have heard of these folks. They are a behind the scenes operator who service over 50 financial clients – including Canada’s largest banks, insurance companies and global mutual fund companies. Their systems also run global investment back offices in Europe, the Middle East and Asia. IFDS is a joint venture between global financial technology leaders DST Systems and State Street Bank.

The main focus of IFDS’ report was the difference between large and small deposit taking institutions (DTIs), their respective roles in the markets, costs that impact both groups and the impact on consumers and the rates and services they receive. Interesting reading to be sure!

To give you a sense of the size of the market, here is an excerpt from the IFDS report. It is of particular note that of the total deposits of $2.439 Trillion dollars – only $224 Billion comes through third-party dealers – in other words, independent financial advisors and smaller DTIs.

Less than 10% of the total market, but an important part none-the-less.

The next graphic gives a clearer picture of the various parts of the GIC market and their relative contributions. As part of this information on segment contributions, more questions were raised – from what source(s) does the consumer receive the best rates – or are the rates the same across all channels?

Some readers may be aware of a quoting/processing service available through CANNEX. They are also a wonderful source of information on pricing and its’ variables. This very colourful graph shows the rate spread above offerings through the main channels. As you can see, third-party distribution rates are consistently higher than direct offerings – but the public does not seem to be aware of this fact!

As you can see, the rate spread at various intervals has been greater than 1.8% per year. When current rates are less than 2.00% in many instances, this gap that favours third-party distribution is an opportunity for these distributors including independent advisors.

So why is this such a big secret? Major DTIs don’t want the competition – pure and simple – it is profit motive. Major DTIs have engaged in a variety of anti-competition practices including restricting access by third-party dealers to their products and also not distributing products created by the small dealers. Fairness to Canadian consumers?
Large financial institutions, particularly the banks, hate regulation and anything that they perceive could have a negative impact on their earnings (or executive bonuses). They want unfettered access to the markets for themselves yet still want to be able to squeeze out competitors – all to the detriment of consumers.

Here is the problem statement from the initial pages of the IFDS report. See for yourself how this plays out for consumers. Is a restricted market good for consumers or the large DTIs?

Which entity should receive the benefits? My position, always the consumer and while I am not in favour of creating red-tape, but if the large DTIs don’t change voluntarily, then rules or financial penalties via our taxation system, need to be implemented.

Again, from the IFDS report…

Are these results bad for the large DTIs? Are they good for consumers? Can they be good for both parties?

A final excerpt from IFDS’ report…

Can you afford to accept 40% less on your rate of return by buying in-house from DTIs? Are third-party dealers and independent advisors a better alternative? You be the judge!

Ian Whiting

Ian R. Whiting CD, CFP, CLU, CH.F.C., FLMI (FS), ACS, AIAA, AALU With more than 40-years of experience in the industry, Ian has qualified 3 times for MDRT, completed LUATC in 1979, the LUAC Financial Planning Skills Course and attended numerous Schools in Agency Management and Sales Management through LIMRA. He obtained his CLU in 1987 while also completed his IFIC qualification and completed his Fellowship in the Life Management Institute with a specialty in Financial Services in 1988. In 1989, he completed qualifications for his Chartered Financial Consultant designation. In 1992, he qualified as an Associate of the Academy of Life Underwriters (Head Office underwriter qualification) and in 1993 he completed his Associate, Customer Service designation program through LOMA. In 1997, he qualified as a CFP and also completed his courses and exams to obtain the Associate, Insurance Agency Administration designation. In 1999, he completed the study and examinations to qualify as a Trading Officer, Partner and Director for Mutual Funds with the BC Securities Commission. As a result, he is also qualified as both a Branch Compliance Manager and Head Office/Provincial Compliance Officer. He served for nearly 18 years with the Canadian Forces (Air) Reserve (reaching the rank of Captain) primarily working with Air Cadets and was award the Canadian Forces Decoration (CD) in 1982. Long known as a maverick and forward thinker in the financial services world, Ian enjoys the challenge of learning new material and planning for the future evolution of his chosen profession.