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Popular as they are with investors, guaranteed investment certificates generate a lot of naysaying in the financial industry.

Investing in something that can’t lose money always involves trade-offs, and it’s fair for advisers and others to point out how this rule applies to GICs. But banks and investing people aren’t just thinking of you if they try to steer you away from GICs: when you buy a GIC instead of other products and services, they make less money.

Banks have a fix for this problem: when people come in for a traditional GIC paying today’s great rates, sell them GICs with returns linked to the stock market instead. This happened recently to someone I know, and I thought it was a one-off. Recent reports from readers and contacts tell me it’s happening elsewhere.

If you value politeness, hear out a bank rep who flogs market-linked GICs. Then, say you want a traditional GIC. End of conversation.

Rates on traditional GICs vary widely, but as much as 5 to 6 per cent was possible for most terms in mid-November. Market-linked GICs offer the hope of doing better than that by linking their returns to stocks in a particular sector or index. You’re guaranteed not to lose money in a market-linked GIC, but your return is dependent on the underlying stocks.

Market-linked GICs are considered a “structured product,” which means they’re engineered to be profitable for banks. There are incentives and quotas to encourage branch staff to sell them instead of traditional GICs, which can lead to conflicts between what’s good for the bank and good for clients.

This brings us to the story of the market-linked GIC sold to Blair Richards’ now deceased mother back in 2017, when she was 92. Mr. Richards is the chief investment officer for the pension fund of workers at the Port of Halifax. His mother made him the executor of her will, which is how he found out his mom had veered away from her usual preference for traditional GICs into a market-linked product.

The GIC she was sold for her tax-free savings account had a five-year term and required investors to hold until the end to make any money. Mr. Richards’ mom passed away last year, just short of the required hold period. With the TFSA closed on her death, the GIC paid out nothing.

“There was no reason that I can think of where you would put a 92-year-old into an index-linked five-year GIC,” Mr. Richards said. “My mother was an optimist, but that’s really stretching.”

You could certainly do better than a traditional GIC with a market-linked product, but you could also do worse. Some market-linked products have a small guaranteed minimum return, while others may not.

Arguably, this is a good time to consider GICs linked to utility and bank stocks, and even the entire Canadian stock market. Share prices have been down or stagnant, and a rebound is conceivable over the term of a market-linked GIC.

Or, not. You have to decide if a guaranteed 5 per cent is better than the uncertainty and volatility returns from a market-linked product. Where the banks overstep is in pushing market-linked GICs on people who lack the investing savvy to fully understand the pros and cons.

One of the ways banks exploit these clients is to show returns for market-linked GICs for the entire term rather than in the annualized way used for regular GICs. A minimum return of 20 per cent for five years in a market-linked GIC is 3.7 per cent annualized, and a maximum return of 35 per cent is 6.2 per cent annualized. Or you could just lock in 5 per cent with a traditional GIC.

The tax aspect of market-linked GICs is another issue that is rarely discussed. Returns are classified as interest, not as the capital gains and dividends you get when investing directly in stocks. In a non-registered account, you pay more tax on interest than you do on dividends and capital gains.

Mr. Richards said he realizes that bank customers like his mom sign documents to indicate that market-linked GICs were explained to them and they understood. But he sees zero possibility that his mom really wanted the market-linked GIC she bought.

“She would defend the bank to the death,” he said. “But they were taking advantage.”

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