A Guaranteed Investment Certificate (GIC) is the most boring investment you could ever own.
Also known as term deposits, GICs are suitable for short to mid-term savings goals between 30 days and five years for example. They are a great way to assure that your money will be there when you need it.
GICs are issued by Canadian banks, trust companies, credit unions and life insurance companies. It's important for you to make sure your GICs are covered against insolvency through the following deposit insurance organizations: www. cdic.ca, www.cudicbc.ca and www.assuris.ca.
One key to maximizing the success of your GIC portfolio is to not get ripped off with a bad interest rate. I am reminded of this every time we survey the market for posting on our website.
For instance, last week, the best rate I could find for a five year GIC was 2.65 per cent, while a typical posted rate for one major Canadian bank was 1.75 per cent.
Those are both horrible rates of return compared to years ago, but that difference of 0.90 per cent on a $100,000 GIC portfolio still means $4,500 of lost opportunity over a five year period!
This highlights the steep price for customer service when provided through the branch banking system. It's the key reason for the haggling that's often required in order to get a better rate.
Financial institutions have to price their rates in order to both pay their overhead and earn a profit. They need to balance paying the lowest rate possible on deposits while charging the highest rate that the market will bear when lending.
Many "haggleweary" GIC investors have responded by using the services of financial advisors who provide deposit brokerage services.
Also known as deposit brokers, these advisors will work on your behalf to shop the market and place the best GIC rates.
Financial institutions usually offer them much better rates than are available through the branch networks, often through subsidiary institutions. In short, the deposit broker works for you rather than for any one financial institution.
Upon maturity of the GIC, the deposit broker will repeat the process to make sure that you are always getting the best rate, without requiring you to run your cheques from one institution to another.
Rest assured they do not do this for free. Financial institutions typically pay a commission to the advisor of 0.25 per cent per year.
This is a bargain for the financial institution, as they do not have to pay a dime of the deposit broker's overhead nor any marketing expense.
Take the time to research and discuss this with your independent financial advisor. You can also request our complimentary GIC Strategy guide by calling me at 604-241-4357.
Richard Vetter, BA, CFP, CLU, ChFC, is a senior financial advisor and branch manager with WealthSmart Financial Group / Manulife Securities Incorporated in Richmond. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund.