Financial Crooks

I hate false and trick advertising especially when the financial institution posting the ad knows it is misleading and in fact is deliberately seeking to confuse consumers. On RedFlagDeals recently someone asked about a stock-market-linked GIC offered by one of the Big 5 Canadian banks that seemed like a really good offer. It seemed TOO good to me so I went to read the fine print. If another small Canadian financial institution advertised its regular old-fashioned GICs the same way, it could be trumpeting buy a 3-year GIC CDIC-insured from us and get a guaranteed 9.75 %.

What the Big Bank Stock-Market GIC Ad said: Minimum 2% Return, Maximum 18.88%

The reason the ad caught the reader’s eye was that it said the 3-year-term market-linked GIC had a guaranteed return of 2%. That’s not a great rate for a 3-year GIC but it’s not terrible either. And, of course, what else caught their eye was the possibility of an 18.88% return.

The Canadian Banks and Utilities GIC: Don’t Those Sound Like Safe, Sure-Thing Investments?

The basis of the GIC is that if the value of two indices goes up then you can share in the increase by getting a higher interest rate on your GIC.

The product is linked to the gains or losses in value of

the S&P TSX Bank Index, and
the S&P TSX Capped Utilities Index.

I’m sure that those two indices were carefully picked. They conjure up “safety” and “sure bet” and “dividends” in the minds of many Canadian investors.

What those investors may fail to consider, though, is how likely it is that those types of stocks will grow significantly in value over the next 3 years. How many average investors realize that dividend-paying utility stocks are expected to DROP in value as interest rates rise?

Do they know the big Canadian banks have recently reached “all time highs” in value and therefore have a lot of room to drop in value perhaps more so than room to grow even higher?

Many investors also know that banks and utilities pay dividends. They think that means that there should be an increase in value of the index and therefore a higher % paid to their GIC. However, the dividends add NO VALUE to the index and are not included in any way in what the person holding the GIC gets paid! It’s a trick used to make the buyer think they are getting a “sure thing” when in fact high dividends are likely to reduce the overall rise in value of the underlying stocks that form the index.

And what is actually included in the index, anyway? I went looking on the internet, and found some information on the TMX website that states that the S&P TSX Bank Index “includes all bank securities (GICS® code 4010) in the S&P/TSX Composite Index.” Does that mean it includes smaller banks like Laurentian, Canadian Tire and National? What about credit unions and trust companies? It’s not clear to me which stocks are in the index.

If I asked you which utilities would be included in the S&P TSX Capped Utilities Index what would you list?

I guessed Enbridge would be in there. After all, that’s who I pay for my natural gas. Is it?

Not according to the TMX website. The companies it lists are:

Algonquin Power & Utilities Corp.
ATCO Ltd. Class I Non-voting Shares
Boralex Inc. Class A Shares
Brookfield Infrastructure Partners L.P.
Brookfield Renewable Partners L.P.
Canadian Utilities Limited Class A Non-Voting Shares
Capital Power Corporation
Emera Incorporated
Fortis Inc.
Hydro One Limited
Innergex Renewable Energy Inc.
Northland Power Inc.
Superior Plus Corp.
TransAlta Corporation
TransAlta Renewables Inc.

No sign of Enbridge. Are these the companies that you are sure are going to grow in value significantly over the next three years?

Isn’t a 3-year GIC with a Guaranteed Minimum of 2% and a Possible Maximum of 18.88% a Great Deal?

Well, if it was 2% a year, guaranteed, and a possible 18.88% a year, probably yes.
That is NOT what is being offered though!

In defiance of all the standard ways to advertise a GIC interest rate, the quoted 2 and 18.88 percents are NOT per year!

The actual guaranteed rate is 0.6633 % per year, which compounds annually to add up to the equivalent of 2% over the entire three years. Many savings accounts pay more than 0.6633% per year. EQ Bank, for example, is paying 2.3% EACH year on its savings accounts.

The 18.88% is similarly misleading. That return is: “Equivalent to the total return over the term of the investment (i.e. not an annualized rate)” For example, it might be like getting just under 6% a year, for each of the three years, compounding to make the equivalent of 18.88% across the three years.

So you are really buying a GIC that will pay you 0.6633% a year for three years and that MIGHT if everything goes really, really well for three years for all of the utilities and banks in Canada, earn you 6% a year.

Which rate do you think the banks expect you to earn?

Remember that they also offer regular 3-year GICs at an annual rate of 1.35%.

They are making you bet half of your guaranteed interest on the stock market surging ahead for three entire years.

Where Can I Get a CDIC-insured 3-Year GIC that Pays 9.75 % ?

If you mean that pays 9.75 % per year for 3 years, no where in 2018.

However, if you use the misleading advertising techniques used for that market-linked GIC above, you could get this GIC immediately in February 2018 at Oaken Financial.
They are offering a 3-year CDIC-insured compound non-cashable GIC that pays 3.15% per year. If you use the same weird math as the bank did in its ad, that means it is paying 9.75 % as the “total return over the term of the investment (i.e. not an annualized rate).”

Trick advertising aside, I’d look seriously at the GIC offerings at smaller institutions like Oaken Financial.

3.15 % for a CDIC insured GIC is a lot more

than the 0.6633% offered as the minimum rate for the market-linked Big Bank GIC, and
than the 1.35 % that same bank offers for a non-cashable 3-year GIC.

If you’re in the market for a GIC, buy a real one. And if you want to dabble with the possible higher gains in the stock market, buy a small amount of a stock index. Don’t be confused by trying to combine the two things.

Related Reading

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Did you or one of your friends or relatives lose money buying a market-linked GIC? Or are you one of the very, very few who actually managed to make more money from one of these products than from a regular GIC? Please share your experiences with a comment.

I read an interesting discussion recently about the costs of owning a home. A person was surprised that his friend had to pick up a second job to pay the bills after buying a house and wanted to know if the cost his friend quoted per month was normal. It led me to go back through our bills to find out how much we pay a month to run our house on top of the costs to pay off the mortgage.

How Much Do You Budget to Pay for Hydro, Natural Gas, Water, Property Taxes and Insurance per Month for a Detached House?

We live in a large city in Ontario but we don’t live in Toronto. Our house is detached, fairly old, but not particularly large.

The costs for things like electricity vary quite a bit from month to month, so I’ve taken our annual costs and divided them by 12, rather than report an actual month by month number. Most companies won’t annualize your costs, though, so be prepared to have some months where your bills are much higher than others.

In 2017, our home cost us

$124 Electricity / Hydro
$48 Water (including Storm Water and Waste Water charges)
$94 Natural Gas (including to burn for the water heater and for the pilot light in a seldom used fireplace insert)
$405 Property Taxes
$82 Home Insurance

How Much Should I Budget Per Month to Run Our House?

So our total costs for heat, hydro, water, property taxes and insurance add up to:
$ 753 per month.

Add in a typical cost for cable TV, internet, home phone and cell phones and you’re easily at almost $1000 per month. I didn’t include those because it would be easier to reduce or eliminate those costs than the ones I’ve included.

You can compare our costs to those reported by others for 2017 for homes around the GTA on this RedFlagDeals forum post.

What Else Do I Need to Budget For?

Other costs that might have been included in your rent are for:

Cable TV
Internet and Home Phone

Other common costs for home owners include:

Annual and perennial plants and shrubs
Landscaping consumables like wood chips, mulch, yard waste bags or bins, new soil, fertilizers, bird seed, insecticides for lawn grubs, ants or wasps
Gasoline or Transit, if you need to start commuting to work
Household Tools and Consumables, including snow shovels (which break and get stolen), yard work tools, building and repair tools, vacuum cleaners, ladders, lightbulbs, mops and brushes, buckets
Minor Decorating On-going Costs, including for re-painting, draperies or blinds, area rugs, furniture, art work
Big Ticket Maintenance, including a new roof, new windows or doors, a new furnace and air conditioner, new appliances
Big Ticket Renovations, including re-tiling and re-fitting bathrooms, the kitchen, new flooring (carpets, hard wood or tiles)

You need to estimate each of these costs, divide it by how many years you have to save up to pay it, and then include that amount of saving and spending in your monthly budget.

For example, you won’t necessarily have the $7000 for a new roof every 15 years if you haven’t saved the $40 a month for 15 years to pay for it.

What Other Home Expenses Do Some People Pay for?

Lawn and yard maintenance, including annual aerating, fertilizing
Snow removal
Gutter cleaning
Driveway sealing
Window washing

Can I Carry a Home For the Same as My Rent Payment?

Unless you are renting one seriously over-priced place, you probably can NOT expect to own a home for the same monthly cost as you pay for rent. I enjoy owning a home but I do not think it saved me any money!