Increasing your returns as an investor means taking on more risk, with one big exception.
It’s possible today to boost returns from cash in your account simply by choosing the right investment product. The risk level in these products varies minimally, while the interest rates they pay can differ by close to a full percentage point.
The most productive 15 minutes you can spend on your portfolio in mid-2023 just might be to tweak your cash holdings using high interest savings accounts (HISA). Here are some thoughts to get you started:
Competition on rates is heating up
There are at least 13 different providers of investment savings accounts that are bought and sold like mutual funds, which means you need a fund code when placing your order through an online broker. These accounts are typically considered bank deposits and thus eligible for deposit insurance where the issuer is a member of Canada Deposit Insurance Corp.
In the bad old days of low interest rates for savers, returns on investment savings accounts varied little between issuers. Today, there is a fair bit of daylight between the top and bottom rates. The Scotiabank Investment Savings Account (fund code DYN6000) had a rate of 4.6 per cent this week, as did the BMO High Interest Savings Account (BMT104). Meanwhile, the Equitable Bank High Interest Savings Account (EQB1000) offered 4.2 per cent late in the week.
For a survey of investment savings account rates, check out the Mr. Thrifty blog – click on the High Interest Savings Account link and then on the Investment Savings Account headline.
If your broker blocks you from buying high interest savings ETFs, try T-bill or money market ETFs
Investment savings accounts also come in a popular exchange-traded fund version that offers an after-fee return around 5 per cent, but without deposit insurance. One proviso with these products is the potential for regulatory changes that result in somewhat lower payouts. Another is that three big online brokers, BMO InvestorLine, RBC Direct Investing and TD Direct Investing, block their clients from buying them.
A workaround for both of these issues: Consider an ETF that holds treasury bills or a broader range of what are known as money market instruments. Expect a slightly lower yield with these ETFs than investment savings account ETFs, but wider availability.
Money market securities are debt issued by governments and corporations that mature in a year or less. These securities should be considered very low risk, but not risk-free.
BMO, RBC and TD block clients from buying both high interest ETFs and mutual-fund-style investment savings accounts that compete with their in-house, mutual fund-style investment savings products. RBC and TD both paid 4.3 per cent this week on their investment savings accounts.
You may be able to get extra yield from Series F investment savings accounts
As noted, investment savings accounts are not mutual funds. But they’re sold like mutual funds, which means they often come in two versions. There’s Series A for the investing masses and Series F for clients of advisers working in a fee-based arrangement. That’s where you already pay 1 to 2 per cent of your account assets per year to the adviser as a fee for advice.
The reason why all of this matters is that Series A accounts typically pay 0.15 or 0.25 of a percentage point less than Series F. The missing returns for Series A are routed to your online broker for what’s known in the financial industry as a yearly trailing commission.
Online brokers are banned from collecting mutual fund trailing commissions, which are designed to compensate advisers and their companies for the continuing advice they provide to the client. Online brokers are considered order-takers only and thus cannot receive mutual fund trailers.
The trailer ban for online brokers doesn’t apply to investment savings accounts, which means your broker can sell Series A and thus receive trailing commissions. But that doesn’t necessarily mean you have to settle for the lower-paying Series A. Try placing an online order for Series F – some online brokers allow these orders, while others do not.
U.S.-dollar investment savings accounts are also available, with higher rates
Many issuers of investment savings accounts offer both Canadian- and U.S.-dollar versions. The U.S.-dollar funds are attractive right now because they pay more than Canadian-dollar accounts. Example: RBC’s Series A account paid 4.65 per cent late this week, a premium of 0.35 of a percentage point over the Canadian-dollar version. CDIC protection extends to U.S.-dollar investment savings accounts.
Brokers are starting to adapt to demand for investment savings products
In the interest of promoting best practices, let’s focus on how BMO InvestorLine handles investment savings accounts, also known as high interest savings accounts or HISAs. Click the Trade link at the top of the website for clients and you’ll see a series of categories that includes HISAs, GICs & Bonds. Under HISAs, you’ll find a full inventory of the products available.
BMO is one of the Terrible Trio of brokers that blocks clients from buying competing HISAs, so only BMO’s Canadian- and U.S.-dollar products are available. But buying these HISAs could not be simpler. No Google searches to find the right fund code – just click the trade button beside each individual HISA product.
Most brokers have made progress in guiding clients to guaranteed investment certificates, which are hugely popular right now as a bond alternative or diversifier. It’s time to make investment savings accounts similarly easy to find.
Rob Carrick