Yesterday a client sent me an email with a list of holdings in their CIBC TFSA:
You may have to click on the above to see it in greater detail, but what stood out to me was the first line from the client: "I didn't realize how shitty this was!!"
What is an "escalating rate" GIC? I wondered, so I decided to further educate myself: you can get more here: https://www.cibc.com/en/personal-banking/investments/gics/escalating-rate.html
But, in a nutshell, it is a "locked-in" GIC that escalates in payable interest over the 5 year time period. Check out the returns:
Again, you may have to click on the table above to see the detail, but pay attention to the far right column: "effective yield", at less than 1.5%.
If your personal level of inflation is at 1.5% (which is likely not the case, we use a 2.5% rate of inflation for our client Wealth Forecasts) then you are making absolutely no real return on this investment. Zero!
If you buy a GIC, you are effectively lending money to the institution that sold it to you. If you have a line of credit (with the same institution), you are turning around and borrowing that money right back from them at prime or prime plus whatever extra they are tacking on. Prime is 3.2% at the moment, so you are giving that institution a "gift" of at least 1.7% of your hard earned money.
Because you are not being properly looked after by that institution. Instead of saying: "oh, it would be a better use of your money to either pay down your line of credit or invest in something a little more advantageous (that might earn a return better than that which you are paying on your line of credit)", they are very comfortable and happy to take your money and add it to the other billions that they are sending to their bottom lines and paying out to their shareholders.
Because I / we care, we asked our client (in this particular case) what the holdings in their other account were, because it is important for us to understand what level of risk they might have in their investments that they hold away (from our management).
Some believe that it is safer to have multiple advisors. Perhaps, but you also have to make sure that if you are paying them (and you are, likely more than you realize), that you know what you are getting in return.
That is why we prepare Wealth Forecasts, to take a holistic view of our clients current financial position, project how they are going to get to their end goals and create a strategy for the best possible risk-adjusted method to get them to their goals.
I can tell you that a bank that so easily takes a chunk out of your financial hide, does not have your best interest at heart.
So why work with them for anything other than your banking needs, when their are folks out there (like us at High Rock) who will work with you to find the best possible solutions to your financial challenges at a very reasonable cost, with great levels of service and a fiduciary duty to always do what is in your best interest.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist