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Investment adviser Cliff Broetz had a recent conversation with a client who was “ready to pounce” on a market-linked GIC offered by a bank.

So he researched the information provided to advisers for that particular guaranteed investment certificate . The results surprised him so much he wrote me to share his findings and conclusion. Basically, it’s that market-linked GICs are engineered to target people who are “terrified of the stock market,” as the Parksville, B.C.-based Mr. Broetz put it in an e-mail.

Market-linked GICs offer the opportunity to make returns tied to various stock indexes or baskets of stocks with zero risk of losing money. You’d buy one of these GICs in hopes of doing better than a conventional GIC paying current interest rates.

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It’s well known that market-linked GICs are for timid investors. But the extent to which they’re designed to advantage the bank issuing them over investors may not be fully understood. The GIC that Mr. Broetz looked at had a four-year term and a maximum return of 28 per cent. His client thought that meant 7 per cent a year, but it actually means 6.37 per cent on a compound annual basis.

That’s actually the least of the issues with this particular GIC. According to Mr. Broetz, 10 of the previous 18 issues of this product have shown a zero rate of return to date. The other eight in the series are all less than 4 per cent as a cumulative return and most are less than 3 per cent.

The GIC that Mr. Broetz’s client found is linked to the performance of a basket of stocks that he described as “often excellent dividend payers and sometimes dividend growers.” He pointed out that dividends account for a significant portion of the returns from investing in the stock market over the long term. Unfortunately, no dividends are paid to holders of this market-linked GIC.

Mr. Broetz said the guarantee offered by market-linked GICs is meaningful to conservative investors, yet misunderstood. True, these GICs cannot lose money if the stock market crashes. But, as the GIC Mr. Broetz researched shows, it’s easily possible to make a return that is below what a traditional interest-paying GIC offers.

“These linked products prey on those that cannot understand the nuances of the product,” he wrote. “If you want a GIC, go get one.”

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