Watch out for this little trick if you have an online brokerage account and want to keep a serious amount of money in cash for a while.
BMO InvestorLine, RBC Direct Investing and TD Direct Investing are examples of brokers that restrict you to using an in-house investment savings account to park your cash, a policy that will reduce your already thin returns substantially. RBC currently pays 0.75 per cent on its RBC Investment Savings Account, as does TD on its version of this product. Alternative account rates range from 0.75 per cent for the Renaissance High Interest Savings Account to 1.3 per cent for the Equitable Bank High Interest Savings Account.
Investment savings accounts are this decade's money market funds. They're safe (deposits are typically protected by Canada Deposit Insurance Corp.), they're sold on a no-fee basis for the most part and they're liquid in that they trade just like mutual funds. If you want to keep cash in your account for an extended period, they're your go-to option over Treasury bills, cashable term deposits and other forms of cash.
Demand is strong for these accounts, and banks have responded by creating their own versions for customers. A problem arises when clients of a bank-owned online brokerage are required to use the bank's own investment savings account and denied the ability to choose a higher-paying offerings from competitors. One of the benefits of dealing with an independent online broker is that there are no restrictions on which investment savings account you use. Virtual Brokers allows clients to buy any such account, while Questrade offers more than a dozen options, including the Equitable Bank account mentioned above.
The availability of a wide range of investment savings accounts isn't a deal-breaker when choosing an online broker, but it's definitely something to consider if you're planning on holding a lot of cash. Yields from cash today are low to begin with. Why compound that by accepting lower returns than you have to?
Note to investors with fee-based advisory accounts: There are F-class versions of most investment savings accounts that pay slightly higher interest rates. RBC, for example, pays 1 per cent on its F-class savings account, while Equitable Bank pays 1.55 per cent.
Rob Carrick