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Market linked GIC
January 8, 2023
4:19 pm
Canadianbull
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Regular GIC vs Market linked GIC which one is better; Thoughts?

January 8, 2023
5:31 pm
mordko
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Regular. Market linked GIC is better for the provider.

You can easily create your own “market linked GIC” by combining a standard GIC and buying some stocks with ~25% of the budget (5-year horizon). And you’ll get better return at the end.

January 8, 2023
5:41 pm
savemoresaveoften
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Market Linked GIC's return is taxed as 100% interest income, while holding the underlying stocks or index, the dividend enjoys dividend tax credit, and any capital gain is only 50% taxable. In other words, holding actual equities has a huge tax advantage. Also the maturity of a market linked GIC is like a "forced sale" at maturity, no matter how the equities perform.

The only really selling point of market linked GIC is they protected ur principal, at the expense of a much lower guaranteed interest rate (compare to a regular GIC).

If one is so concerned about the principal, just do regular GIC.

January 8, 2023
5:57 pm
Loonie
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Market-linked GICs are almost always a bad idea. See previous threads on this topic.

I agree with above comments except that I wouldn't count on a good return in only five years. And please don't quote me past returns, which guarantee nothing whatsoever.

There are other issues with market-linked as well.

1.You are sacrificing guaranteed interest return, which is fairly high at the moment. This diminishes the value of the "principal guaranteed' promise.

2. They don't pay dividends. The issuer keeps the dividends while laughing at the person who bought the M-L GIC).

3. "Participation rates", maximum returns and special formulae for calculating your possible gain are for the benefit of the issuer.

It's possible to "win", sometimes, but you'd probably have similar odds and more fun at the race track!

I'd buy a large cap Cdn dividend fund or bank/insurance/utility /telecommunications stocks over one of these if I didn't want a regular GIC.

January 8, 2023
6:58 pm
Norman1
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One needs to ask why one is even looking at market-linked GIC's.

Greed? Fear of missing out on the returns of those who invest in stocks?

If one believes one can have the returns from investing in stocks, without risking anything, by placing money into market-linked GIC's, then one is not seeing reality clearly.

The banks and credit union like to suggest that if one had a five-year market-linked GIC and the underlying stocks are up 70% in five years time, then you will get your principal back plus 70%. The reality is that you won't be receiving +70% in five years with any of them.

Read the fine print that describes the calculations for what one will receive when the market-linked GIC matures. You'll find the calculation is not as simple as "n% increase in the stocks" results in a "n% payout on maturity".

We looked at one in the past. Lots had to line up in order get an extra 1.1% per annum more than a regular GIC.

It's also not true that one is not risking anything. Right now, one can easily put money in a five-year GIC that yields 5% per annum. $100,000 will become $127,628.16 in five-years. One is actually risking that $27,628.16 of interest by putting the $100,000 into a five-year market-linked GIC instead.

January 9, 2023
9:11 pm
Canadianbull
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So it's better to buy regular GIC because there no risk involved and profit is guaranteed as compared to market linked gic?

Thanks all for making the comments on this!

January 9, 2023
9:19 pm
Loonie
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Canadianbull said
So it's better to buy regular GIC because there no risk involved and profit is guaranteed as compared to market linked gic?
  

Essentially yes, although it's a bit more complicated than that.
Just avoid them and you'll be fine. Ignore pleas from bankers on behalf of their M-L GICs..

January 9, 2023
10:52 pm
Canadianbull
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Loonie thoughts on opening a GIC with brokers? What's the catch? GIC brokers are offering 5.50%-5.60% which is very attractive.

January 10, 2023
10:38 am
Loonie
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I don't think there is a catch. It's a legitimate business. They are providing a service to both you and the FI they represent, and they take their cut from the FI. In effect, the FI is outsourcing the deposit side of their business.

Things to consider:
1. It may be inconvenient to deal with a broker if you don't live near them. Some people have reported that it can be hard to get the paper work completed in time to get the offer if they live remotely.
2. There may be a minimum investment required.
3. Rates for registered products tend to be lower.
4. The broker is not offering advice on the FI in question; it's up to you to decide if it's an FI you want to deal with
5. Some CUs apparently take a dim view of existing members who use deposit brokers to buy new GICs from them. It has been reported that such members are then prohibited from buying more GICs directly from CU, but I have not verified this.
6. There has been controversy on this forum as to whether CU insurance covers these GICs since the insurance only covers "members" (at least in Ontario). It is alleged that the CUs oblige you with a "temporary' membership, but this is hard to verify. If you want to be extra safe, you might want to only buy CDIC-insured GICs from brokers if you can't get acceptable verification about membership issue.

January 10, 2023
10:57 am
Canadianbull
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Thanks again for responding on this!

January 10, 2023
3:42 pm
mmlt
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Anything the banks or CUs push is an always best for them thing. The last time I had a sit down at my local CU it was the same bs talk and I used the word "scam".

Thank goodness for this place.

January 10, 2023
4:44 pm
Norman1
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I wouldn't call them scams. But, market-linked GIC's are lousy deals.

The GIC issuer charges substantially for that guarantee of receiving at least one's principal back at maturity. People would balk if they saw the actual cost for the put option in what is essentially a bundle of stocks with put options.

So, instead the cost of the guarantee is woven into the formula of how the payout at maturity is calculated. That's why the formula is never "n% increase in the basket of stocks" produces "n% payout at maturity".

January 11, 2023
10:01 am
justsmileandnod
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Please add my vote to the growing tally that market-linked GICs are *horrible* products when you read the fine print.

What's the catch? GIC brokers are offering 5.50%-5.60% which is very attractive.

As has been mentioned, there is no catch. FIs pay brokers to get deposits for them. It's faster, easier, and cheaper than doing it through retail channels. Plus, the FI can turn off the taps when they hit their targets, but without blowback from customers. For example, late last year a credit union (Rapport I think?) offered 5.9% on a 1-year GIC for a single day. They can do that through a broker without triggering a revolt from enraged customers who wouldn't get that deal.

I think the question you may be asking is: why don't more people use brokers if the spread between what they offer vs. what you can get walking into a FI is (in some cases) significant?

I think the answer is the same as: why do some people pay Rogers and Bell $150 a month for internet access, and the people next door pay $50 a month for the same (or sometimes even better) access?

It's because most people don't know that deposit brokers are a thing (and I was one of them until about 5 years ago). So, they just go by the posted rate. It's not that they are deciding not to go with a broker. It's that they don't know they could (granted some people may know that brokers exist but are more comfortable working directly with an FI, but I'd suggest that the majority of people who buy GICs have no idea that they could be getting the same GIC from the same FI through a broker for a significantly higher rate).

As for what deposit brokers earn -- I think the conventional formula is something like total investment amount x .0025 x length of term = commission. So in a $200,000 5-year GIC, I think they'd get $2500 or something in that area. Not bad for maybe 15-30 minutes of communication, paperwork (yes they still use faxes) and data entry.

January 12, 2023
9:13 am
fionag11
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Re: GIC Brokers. I think the catch is you're left high and dry when your GIC matures to track down this FI you don't have a relationship with and figure out how to get your money where you want it. So you're paying for that premium rate with a little more hassle on your part both to get it in the first place and then again at the end.

I used to do this but now I've decided my time and peace of mind is worth more and I stick with one credit union that consistently gives competitive rates among if not always the absolute highest available.

January 12, 2023
9:19 am
justsmileandnod
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fionag11 said
Re: GIC Brokers. I think the catch is you're left high and dry when your GIC matures to track down this FI you don't have a relationship with and figure out how to get your money where you want it. So you're paying for that premium rate with a little more hassle on your part both to get it in the first place and then again at the end.

It's never been a hassle for me. A few weeks before the GIC matures you get a call from the broker asking you what you want to do. You can either use the funds to get a new GIC from any FI the broker deals with, or they mail you a post-dated cheque.

I've actually had more hassle dealing directly with FIs that screw up the renewal instructions sf-yell

January 12, 2023
9:19 am
Norman1
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There's no hassle at maturity for me either.

At maturity, the same deposit broker can arrange to renew the GIC with the issuer, reinvest the funds in a GIC from a different issuer, or have a cheque issued.

January 12, 2023
11:56 am
fionag11
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It's never been a hassle for me. A few weeks before the GIC matures you get a call from the broker

That sounds like the way it should be, but what happened to me I wanted the money transferred to another account, and the broker told me I had to contact the issuing FI and arrange that myself. Maybe because it was a RRSP?

January 12, 2023
12:34 pm
savemoresaveoften
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fionag11 said

It's never been a hassle for me. A few weeks before the GIC matures you get a call from the broker

That sounds like the way it should be, but what happened to me I wanted the money transferred to another account, and the broker told me I had to contact the issuing FI and arrange that myself. Maybe because it was a RRSP?  

broker is only taking ur GIC order and instructions etc, anything beyond that you do have to deal with the FI yourself. This is for your protection, you simply dont want the broker to have authority to "move your funds, etc" !

January 12, 2023
1:47 pm
Norman1
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fionag11 said

…, but what happened to me I wanted the money transferred to another account, and the broker told me I had to contact the issuing FI and arrange that myself. Maybe because it was a RRSP?

It was because account was an RRSP and you wanted it transferred at maturity to an account with a financial institution the broker did not represent.

Otherwise, the broker will help you fill out the RRSP transfer form from the receiving financial institution. Broker would then be paid the deposit brokerage commission by the receiving financial institution.

RRSP/RRIF/TFSA account transfers are always initiated by the receiving financial institution and not by the relinquishing one.

January 24, 2023
1:27 pm
butterflycharm
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justsmileandnod said
Please add my vote to the growing tally that market-linked GICs are *horrible* products when you read the fine print.

What's the catch? GIC brokers are offering 5.50%-5.60% which is very attractive.

As has been mentioned, there is no catch. FIs pay brokers to get deposits for them. It's faster, easier, and cheaper than doing it through retail channels. Plus, the FI can turn off the taps when they hit their targets, but without blowback from customers. For example, late last year a credit union (Rapport I think?) offered 5.9% on a 1-year GIC for a single day. They can do that through a broker without triggering a revolt from enraged customers who wouldn't get that deal.

I think the question you may be asking is: why don't more people use brokers if the spread between what they offer vs. what you can get walking into a FI is (in some cases) significant?

I think the answer is the same as: why do some people pay Rogers and Bell $150 a month for internet access, and the people next door pay $50 a month for the same (or sometimes even better) access?

It's because most people don't know that deposit brokers are a thing (and I was one of them until about 5 years ago). So, they just go by the posted rate. It's not that they are deciding not to go with a broker. It's that they don't know they could (granted some people may know that brokers exist but are more comfortable working directly with an FI, but I'd suggest that the majority of people who buy GICs have no idea that they could be getting the same GIC from the same FI through a broker for a significantly higher rate).

As for what deposit brokers earn -- I think the conventional formula is something like total investment amount x .0025 x length of term = commission. So in a $200,000 5-year GIC, I think they'd get $2500 or something in that area. Not bad for maybe 15-30 minutes of communication, paperwork (yes they still use faxes) and data entry.  

Do brokers offer GICs in TFSA too?

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