The Bank of Canada's low-interest-rate policy may have homeowners licking their chops, but it has not been great news for everybody. Those who rely on interest from guaranteed investment certificates (GICs) and bonds have seen a dramatic reduction in earnings. HSBC Bank Canada, for example, currently pays just 0.4 per cent on one-year GICs. Last year, the bank offered over 3 per cent for the same privilege.
However, there is a quick and easy way for the savvy saver to claw back a portion of lost income.
Deposit brokers do for deposits what mortgage brokers do for mortgages. They shop around banks, trust companies and credit unions, looking for the highest rate. Deposit brokers can often find rates that are 50 to 100 basis points higher than the Big Five posted rates. (A basis point is 1/100th of a percentage point.) They might even get you a higher rate at your own financial institution.
Mary Rygiel, chairman of the Registered Deposit Brokers Association and principal at ConservativeInvestors' Services, says there is a wide disparity between rates. "Currently the major retail banks are offering walk-in rates of around 2.1 per cent for five-year GICs. We can get you as much as 3.25 per cent."
How do they do it? Deposit brokers operate on the high-volume wholesale level, reducing the need for financial institutions to maintain an expensive branch network and deal with pesky customers. The institutions pay deposit brokers directly and can pass cost savings on to you through higher interest rates. Moreover, deposit brokers access a network of smaller and less-known institutions that need to offer higher rates to attract deposit inflows.
Doing the footwork across a wide network of financial institutions enhances opportunities for clients. Lauren Millin, operations manager at GICdirect.com Financial Services, says: "A client in Ontario wouldn't have access to credit unions in B.C. [unless he or she walked into a branch there.]However, through a B.C. broker like ourselves, we can offer those rates to him/her."
While not all of the big banks offer GICs through deposit brokers, you'll recognize many of the names on the list, including National Bank of Canada, HSBC Bank Canada and TD Canada Trust. A list of deposit brokers and financial institutions that use the deposit broker channel can be found on the Registered Deposit Brokers Association's website (www.rdba.ca).
Are there risks to placing your money in smaller institutions? Ultimately, a depositor must face the risk of financial institution failure any time he or she places money in it. In Canada, a federal Crown corporation called the Canada Deposit Insurance Corp. (CDIC) helps to reduce that risk by providing deposit insurance on eligible deposits at member financial institutions. This adds a level of protection to the investor, especially if the financial institution learned its lending practices from Fannie Mae, the Federal National Mortgage Association of Washington. CDIC oversees most Canadian chartered banks and loan companies while other financial institutions such as credit unions and caisses populaires may be covered by provincial deposit insurance programs such as Deposit Insurance Corp. of Ontario (DICO).
Deposit brokers generally deal only with these protected institutions, but good practice would warrant double-checking the lists, and the terms and restrictions. A complete list of institutions that CDIC insures and just what is covered can be found on the CDIC's website (www.cdic.ca).
For the very wealthy - and risk averse - diversification is another reason to use a deposit broker. CDIC, for example, insures eligible deposits up to a maximum of $100,000 per institution. So those with large sums of money to invest would be exposed beyond that limit if a financial institution failed. Using a deposit broker, an investor with a large sum of money - say $1-million - could easily arrange for the money to be spread across 10 institutions. This ensures that the entire sum invested benefits from CDIC's insurance coverage.
That said, you do not need to have a lot of money to use a deposit broker's services. Minimum deposits can be as low as $500. Short-term deposits between 30 and 364 days normally require a minimum investment of $5,000.
Most investments made with your deposit broker are made payable to the designated financial institution, or are in trust to your broker. Make sure that your deposit broker provides you with a suitable acknowledgment that the trust account is approved and subject to suitable bonding procedures.
On top of finding you high rates on GIC products, deposit brokers might help you to implement a GIC laddering strategy, track maturities of investments, and deal in other products. Deposit brokers generally do not charge the end user directly for these services. In laddering, a portfolio is split across different maturities. For example, $100,000 might be invested in five increments of $20,000 across one-to-five year maturities. As each term expires, it is reinvested in the longer term. This strategy can diversify interest rate risk, provide a regular flow of liquidity when the shorter maturity expires and benefit from longer maturities' tendency to offer higher rates.
Thomas Hull, an investment adviser who offers deposit broker services at Dundee Securities Corp. points out another important advantage of deposit brokers: "Some financial institutions might offer relatively more attractive rates for certain time periods. Deposit brokers allow clients to build a GIC ladder using more than one institution."
Ultimately, it is their ability to source the best rates in Canada that makes deposit broker services so appealing. If you were buying a house, you wouldn't think twice about shopping around for the best mortgage. So why limit yourself on interest income?