The best GIC rates in decades are rubbing some people in the investment industry the wrong way.
They’re the ones who respond to returns of 5 per cent and more on guaranteed investment certificates by saying, ‘Yeah, but … .” GICs, even at 5 per cent, are in no way the answer to everyone’s investing needs. But it’s worth pushing back if your adviser badmouths GICs or dismisses them out of hand.
GIC deposits hit record highs at mid-year, according to a recent Investment Executive article that also noted the leading role advisers are playing in GIC sales. Kelly Gares, an adviser with BlueShore Financial in Vancouver, said the 5 per cent available from GICs is the same return commonly used for estimating the long-term gains for an investor who holds stocks and bonds in a balanced portfolio. “To think that you can get that return without any risk is very compelling and appealing,” he said.
But I’ve seen sniping at GICs from some investment industry people, often based on after-inflation returns. The latest inflation rate of 6.9 per cent means a negative real rate of return on GICs right now – there’s no way around this sad reality. But if you consider that there’s zero risk with GICs issued by a bank or credit union that is part of a deposit insurance plan, then a 5-per-cent return looks good overall.
Inflation is also temporary, which means GICs with terms of three, four and five years are likely to eventually offer positive real rates of return. For now, the promise of a 5-per-cent return for one or two years looks pretty good in comparison to the year-to-date losses for major stock and bond indexes.
Buying stocks and bonds at today’s lows is smart investing, if you’ve got a long-term horizon of five to 10 years or more. If you buy zero-risk GICs, you could end up with less. Then again, 5 per cent locked in looks appealing if you’re worn out by the stock and bond market ups and downs of the past three years.
If your adviser badmouths GICs, ask for a rationale and see how it meshes with your investing goals. While you’re listening to this explanation, bear in mind that GICs aren’t as lucrative as some alternatives for advisers who are compensated through commissions on products they sell.
An issuer of a GIC might pay an adviser a onetime commission of 0.25 per cent of the amount being invested multiplied by the number of years in the term of the GIC. By comparison, mutual fund companies typically pay advisers trailing commissions that on an annual basis work out to 0.5 per cent for bond funds and 1 per cent for balanced and equity funds.
GICs are a no-go for some people who might need access to their money and they’re likely to deliver second-best returns to younger people who can afford to take more risk because they have decades of investing ahead of them. But GICs also have their place in these uncertain times, even if some in the investment industry frown on them.
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Rob Carrick