I was reviewing life insurance needs for a young couple that had just purchased their first home. As usual, I inquired if they had begun to save for retirement, they said they had an RRSP account with the bank. In fact they had begun years ago saving monthly. They agreed to drop off a statement for me to review and see just what they were in invested in. Imagine my surprise when I reviewed the accounts and found since 2008 the bank had been wise enough to lock their money in series of five year GICs at a whopping 1% and up to a high of 2%.
Invest short term
Curious I did a little research on the history of rates since 2008. I can invest through the RDBA so have access to this information. How would you feel if your bank had done this to you, when at the time the average 5 year rates were between 3 and 4%! In fact I could have put that money in a high daily interest savings account during that time at 2%. Now the bank says they cannot unlock these GIC'S so the clients must wait for each maturity to come up. On top of this they are charging $50 each time a maturity is transferred out of the bank.
Related article: Advice for GIC investors
The rule of 72
If we used the simple rule of 72, the mathematical formula for compound interest, you can calculate quickly how many years for the investment to double. So at 1% interest, (72 divide by 1= 72) it will be 72 years for the money to double! At 3% (72 divide by 3= 24) it will be 24 years. That is a very big difference in value over time.
Related article: The power of compound interest
Is the bank giving good financial advice?
Investors need to begin to question the financial advice from banks and stop this kind of treatment. I believe investing a client's money like this is not in their best interest, yet people continue to trust that the bank tellers and personal bankers are taking care of them. Most likely many of them do not even understand how they are hindering a clients future. Many have sales goals they must reach weekly and simply offer the products they are told to sell.
Related articles: Not all financial advisors are created equal
Why is it so many Canadians do not trust financial advisors, who have been trained to find products that are suitable for clients goals with their money? To add to the questionable advice given by most banks, they will also sell you creditor insurance on your lines of credit and mortgages. These products are often very expensive and insure the bank not the client and their family.
Canadians need to become more aware and more educated so they can question their banks and hold them accountable for the advice or lack of advice! Ask for an explanation of why and what your money is invested in.