Rate riser rip-offs

The end of September has come and gone and many investors are getting their 3rd quarter investment statements. It reminds me of the cartoon where there is a husband and wife playing hot potato with a mutual fund statement saying, “you open it”. To which a reply “No you open it”

It is hard to be excited about investing today. The bear market has been and continues to be one of the most painful bear markets in post-war history. Add in all of the depressing news about war, Anthrax and Bin Laden and you have a picture of pure pessimism.

In my last article, I talked about how investors are flooding to safe, guaranteed investments like GICs, money markets, T-Bills, and bonds. The trend may compound even further as we hit the Canada Savings Bond season. This year Canada Savings Bonds (CSBs) are paying 1.8% for the regular bond and there is a premium bond offering 2.3% in the first year, 2.8% in the second year and 4.0% in the third year. For more information about all of the Canada Savings Bonds, you can visit

The competition for CSBs should be fierce.

As my partner Tom Kofin and I flipped through the newspaper we were horrified to find an advertisement from a financial institution offering the Triple Value GIC. The only rate you see on the ad is 5.35% in large bold print. In small print it says “Third Year Interest Rate” with no mention of what you make in the first or second year. We called the financial institution to find that the Triple Value GIC is just another term for a rate riser GIC where you get a lower rate in the first year and the rate escalates over time. Specifically, the Triple Value GIC is paying 2.25% in the first year, 2.8% in the second year and 5.35% in the third year, but you won’t find this important information in the advertisement. The Triple Value GIC is the equivalent of a 3.46% GIC compounded for 3 years.

As dedicated rate shoppers, we took a look at an interest rate survey and found numerous institutions offering more than 3.46% for 3-year terms. In fact, the highest GIC rate was 4.15% offered by Canadian Western Bank.

I find the Triple Value GIC to be incredibly misleading and it is important for investors to understand what they are investing in. Other companies are also advertising similar types of products where you get 2.5%, 3.5%, 4.0%, 5.0% and 7.0% in the fifth year. This is equivalent to a 4.39% 5-year GIC. The best rate on that day by shopping rates was 4.9% offered by Canadian Western Bank.

A fickle industry

It’s amazing to think that the investment industry can be so fickle. Sometimes we criticize investors for being fickle but often we are compounding the problems ourselves.

In flipping through the newspaper this week, we were amazed to find Altamira advertising their Money Market Fund. Eighteen months ago, this same company was flogging high-octane tech funds and other sector-based products. Who advertises a money market fund? It must be a bear market when every other fund is likely posting negative returns.

Buyers beware in times like these. The media and investment firms will prey on your emotions and I offer some suggestions if you are considering these “Rate Riser” products.

  1. Be sure to ask what the equivalent compound return is for these rate riser products. Once you have this information, you can compare them to other rates. With rate riser GICs, you can manipulate the numbers to paint the picture you want but in the end, it is the compound equivalent that matters.
  2. Be sure to shop rates. Any GIC investor should take the time to shop for the best rates. Typically, you will find the difference between the best rate and the worst rate is about one full percent for any term across the board. A full percent difference compounded over time makes a huge difference.
  3. Take the time to understand why you are buying GICs today. If it is purely out of emotion and fear of the recent performance of your non-guaranteed portfolio, understand that investors often do the wrong things at the wrong time. According to IFIC, almost 55% of all money going into mutual funds went into money market investments. This is a sharp contrast from a year ago when money markets were in net redemptions. Remember that investors were flooding to Technology in early 2000 at the height of the technology bubble. A contrarian perspective may be the best strategy today.

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