Owning guaranteed investment certificates is kind of like watching paint dry.
That's the point, right? Zero drama.
But the lack of excitement with GICs also works against them. Although there are some ins and outs to GIC investing, they get little attention in an investing universe that cares mainly about stocks and bonds. Let's fix that, with a list of five things GIC investors need to know.
1. Credit unions are beating the banks
McVay and Associates, a consultant to the financial industry, says bank market share for GICs has fallen by 4.6 per cent over the past five years, with credit unions benefiting most and trust/mortgage loan companies next. Banks aren't competing much on rates, and so investors are increasingly going elsewhere.
Big bank five-year GICs were going for 1.75 to 2.3 per cent this week; credit unions, trust companies and online alternative banks were widely offering at least half a percentage point more. Unless they offer premium rates, small players like credit unions have trouble competing against banks in the GIC business. Keep in mind that money raised through the sales of GICs is lent out in the form of mortgages. Without a brisk GIC business, a lender can't be a player in mortgages.
McVay and Associates says the two financial institutions making the biggest gains in GICs are Home Trust and Equitable Bank, both of which are mortgage lenders. Home Trust was advertising a 2.9-per-cent rate on its website this week, while Equitable Bank offered 2.91 per cent.
2. Not all deposit insurance plans are created equal
Canada Deposit Insurance Corp. is a federal Crown corporation that protects member bank and trust company deposits for up to $100,000, including GICs with terms of five years or less. Find a list of CDIC members online at cdic.ca/Pages/Members.aspx.
Credit unions have their own provincial deposit insurance plans and they vary in how they operate. Of particular interest is the plan in Manitoba, where several credit unions operate online banking divisions offering premium rates on GICs and high interest savings accounts. Examples are AcceleRate Financial, operated by Crosstown Civic Credit Union; Achieva Financial, operated by Cambrian Credit Union; and, Hubert Financial, run by Sunova Credit Union.
The Deposit Guarantee Corp. of Manitoba (DGCM) exceeds CDIC by providing unlimited protection of deposits at credit unions and their online banking divisions. But because DGCM is not part of the Manitoba government, the strength of the protection it offers is not quite at the level of the federally backed CDIC. Note that your deposits in Manitoba credit unions are protected regardless of what province you live in.
When selling GICs from Manitoba-based credit unions, deposit broker GIC Wealth Management takes special steps to ensure clients understand their deposit insurance. "We have them acknowledge and sign a waiver that it isn't government-insured," said Brandon Brot, a partner at the firm.
If you're considering a GIC from any credit union, visit its website first to check out the details of its deposit insurance plan. Some of these plans – Ontario and Alberta, for example – are provincial government agencies or have government backing.
3. Deposit brokers can get you top rates
Deposit brokers offer much the same type of service as mortgage brokers – they survey a wide range of financial firms for the best rates available and they handle the paperwork for you. Deposit brokers are paid directly by GIC sellers and their compensation is pegged to the amount invested and the term. Customers of deposit brokers pay nothing out of pocket.
Here's an example of why consulting a broker is worthwhile. Early this week, the brokers at GIC Wealth Management were offering five-year GICs in the 3.15-per-cent range from Home Trust. That's a better rate than Home Trust advertised on its website.
Mr. Brot, of GIC Wealth, said financial companies looking to raise funds will sometimes reach out to brokers with special rate offers. "Any broker who has been around for quite some time usually has relationships with the institutions."
Mr. Brot said his firm deals with about 40 different financial institutions. When clients invest $25,000 or more, the firm will make house calls to pick up and deliver documents.
You can find a deposit broker near you using a search engine offered by the Registered Deposit Brokers Association.
4. Deposit brokers are primarily salespeople
The RDBA administers a few designations for the industry, including the Registered Deposit Broker (RDB). But unless a broker has additional accreditation like the certified financial planner (CFP) or registered financial planner (RFP), it's best to regard him or her as a seller of GICs and not as a financial adviser.
When handing money over to a broker, be sure it's in the form of a cheque made out to the financial firm you're investing with. Ultimately, you're a customer of that firm, not the broker. "If we were to go out of business tomorrow, it wouldn't impact you because you have a certificate directly with your institution," Mr. Brot said.
The online broker GIC bid.com works along the same lines – it matches you with the best rate offered by the 10 or so financial firms it works with and then leaves it up to the bank, trust or credit union to finalize the investment with the client.
5. Insurance company GICs are worth a look
Sometimes called guaranteed interest accounts (GIAs), insurance company GICs offer competitive interest rates and an estate planning benefit that makes them particularly attractive to seniors.
Mr. Brot said that upon death, the proceeds from a GIA would be paid directly and without penalty to a designated beneficiary. This money would not be part of the deceased person's estate, and it would not be subject to probate, legal and other legal estate fees. Should you want to discreetly leave money to someone after you die, GIAs are an option.
If an insurer is a member of Assuris, the policyholder protection agency for the insurance industry, its GIA deposits are covered for amounts up to $100,000.
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For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).
Rob Carrick