GICs, RRSPs and TFSAs – what make sense for you?

As usual for this time of year, financial institutions across Canada are trying to find a way to separate you from your money – not actually stealing it but rather asking you to give it them (lend) in return for some interest over some period you select.

There are traditional GICs that pay a fixed rate for each year in the term you choose.  There are “rate-riser” GICs where the nominal annual rate increases each year – usually contained in 3-year versions.  Some are cashable before maturity, others are locked-in (unless you happen to die of course).  Some companies issue and promote index-linked or equity-linked GICs and even use words such as “risk-free” to try and confound potential purchasers.

The traditional parts of the banking system (banks, trust companies, credit unions and caisse-populaires) generally restrict their offerings to those with maturities of 5 years and less.  The only reason being that they can then promote “your capital is fully guaranteed or protected” by deposit insurance through CDIC (Canadian Deposit Insurance Corporation) or the CUDIC (Credit Union Deposit Insurance Corporation) or some other provincial or territorial equivalent body.  All true, of course, but what does that really mean to you and I?  Nothing, quite frankly.

On the insurance side of the fence, these same products are available but terms can (if you so choose) stretch up to 20 years and are also protected to similar limits by ASSURIS – the insurance industry equivalent to CDIC and CUDIC coverage.

GIC ladders are increasingly popular as people are reluctant to lock in large sums for a single term since no-one is able to predict future rates – and if rates go up, everyone wants in!  A ladder works quite simply.  You divide your investment into say 10 equal pieces. With 1/10th, you purchase 1 year GIC, with 1/10th you purchase a 2-year GIC – then repeat until all 10 pieces are used.  You now have 1/10th of your money coming due every year so you can catch rising rates and are protected from dropping rates.  As each matures, you then just buy 10-year GICs.  Do this with each years’ deposit to your RRSP and TFSA, and in a short time, you have a well-balanced GIC portfolio.

No doubt you have heard or read about Equity- or Index-linked GICs.  Many financial institutions market variations of these products.  The intention is to provide the guaranteed return of your principal and give you the potential of higher returns based on some external equity fund or market index.  There are no options for early withdrawal.  Let’s visit with Sarah and Lee.  They are making plans for their annual contributions and are frustrated with the choices available for several reasons.

This product is not always available.  Many institutions only offer these products during “RRSP Season”.  In addition, sales of new issues are sometimes suspended because of periods of poor market performance.

Limited choice of terms.  Usually these products are only offered for a 3 or 5 year term.  If Lee and Sarah want a different term, they are out of luck.

Limited choice of equity or index links.  The company offering the product makes the investment choice.  All issues have a maximum rate of return that they will pay – a cap on returns.  Clients are in a take-it or leave-it position.

Lee and Sarah are looking for greater choice and control over their investment, both in duration and the investment performance portion of the GIC.  They are looking for a better way to invest and get the best of both worlds.  There is good news for them – it can be done and without the restrictions of the other products.

Lee and Sarah, together with their financial advisor designed their own equity-linked GIC with no restrictions, full flexibility and no cap on returns.

First, they choose their own term.  In most cases, a longer term – say 5 to 7 years at least, is preferable.  Time is their friend since it gives the equity portion of their investment a higher probability of good returns.  A term of 10 years or more is even better!

Next, they buy a plain, regular, off-the-shelf redeemable GIC to guarantee their full principal. After discussing things, they decide a 7-year term is appropriate and they have $75,000 to in their current plans.  After pushing a few buttons on a financial calculator and knowing the 7-year GIC rate is 4%, they need to deposit $56,993 today so it will be worth $75,000 in 7 years.

Finally, they choose their equity investment.  With just over $18,000 left to invest in equities, they now consult their advisor for an appropriate solution.  They can use mutual funds, segregated funds, Index funds, ETFs or individual stocks or bonds.  Their advisor will have them complete a Risk Tolerance questionnaire to determine appropriate choices.  This will be their profit with no cap!

Sarah and Lee are happy to have control of their investment with no upside limits and no restrictions on liquidity or withdrawal.  Shouldn’t you take control of your choices?

Don’t try and make your decisions in a vacuum.  A well-qualified advisor is your friend – particularly one has access to broker-direct services throughout both the traditional and insurance-industry GIC product line.  Check with the Money Magazine, Fall 2014 issue and you can see that sometimes using a deposit broker can increase yields on traditional GICs by up to 40%!

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.