There is an old financial planning maxim that purchasing the shares of a bank is a better investment, than purchasing the retail products they offer their clients. If retired individuals only purchased shares of Canadian banks throughout their life, the combination of capital appreciation and generous dividend income would have provided more than a reasonable rate of return.
However, unless an individual is financially unsophisticated or has a very modest level of investments, it is best to shop around before purchasing any financial products from a bank. They have helpful staff, but in many cases, their products are not competitive.
Let’s pick on TD Bank, although these comments may be applicable to other institutions as well.
Let’s look at the current rates offered in their savings accounts.:
TD Every Day Savings Account – The highest rate paid is .05%
TD High-Interest Savings Account – If the savings account has a balance of less than $5,000, their high rate of interest is 0%. The maximum rate on the account is .50% which is ten times higher than their Every Day Savings Account, but still horrible in today’s market. Since this product is marketed as a high-interest account, it is an indication that one should be skeptical of their marketing claims.
TD ePremium Savings Account – This account pays over 1.05% on amounts in excess of $10,000. If the balance is less than $10,000, they pay no interest – zero, nothing, zilch
There is seldom a reason to invest in these ridiculously low rate products. The various internet financial institutions will offer significantly higher rates of return on savings accounts.
TD Bank traditionally offers lower rates than its competitors. They try to mask their low rates by offering periods of 14 or 18 months. Their current rate as of March 30 on a 14 month $50,000 GIC is 2.25%. A 15-month GIC on the same amount is 1.30%.
One individual who uses TD Direct Investing was amused to find that this discount broker (which is owned by TD Bank) that finds the highest rates in the market has never offered him a TD GIC in over 20 years. The reason – their rates are not competitive.
How to Purchase GICs – Open an account with a discount broker such as TD Direct Investing or Investors Line (all the large banks own such a company) and they will shop the market to determine the highest rates available. As a general rule, you can earn at least .20% by shopping the market as compared to accepting the rate offered by the bank.
The bank is well aware that seniors and the unsophisticated tend not to shop the market, they roll over their GIC at the highest rate offered by TD Bank.
If a family is in the market for mortgage financing, Canadian banks are a major player in this market. If you approach your banker and ask for the best rate, it is rare that a mortgage broker cannot get a lower rate, by getting quotes from other lenders.
Bottom Line – Banks provide financial planning advice and may be an excellent source of expertise for clients who are unsophisticated or those with modest levels of savings. However, if an individual has a savings account or purchases a bank GIC, they are often receiving a lower rate of interest that is available elsewhere in the market. Unfortunately, many seniors will not shop the market and end up settling for lower rates of interest. Banks are aware of this truth and as a result, they gain financially by offering less than competitive rates of interest. Many seniors do not understand that higher rates are available elsewhere, while others have developed a relationship with their bank staff and never question if higher rates are available.
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Managing Investments in Retirement
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