When a 9% GIC return isn’t quite what it seems: Mayers

But the headline was catchy: “Earn up to 9% per 3-year term,” it said.

A 9-per-cent return? At a time when money in a savings account is losing value each year after inflation? When the average three-year GIC earns 1.8 per cent? You can beat that with no risk?

There were more details at the bottom of the poster. And still more if you wanted to go to RBC’s website.

The products are a variation of GICs. Instead of a stated interest rate, the return is linked to a stock market index, in this case one of three: Canadian banks, Canadian utilities or a broad U.S. market index. If the index goes up, you make more. The maximum is 9 per cent over the three years which seems a little less attractive when expressed as 3 per cent a year.

As well, you can’t lose your principal: No matter what happens to stock markets in the three years, you are guaranteed a 1.5-per-cent return — 0.5 per cent a year. Not so hot either, considering plain three-year GICs pay three times as much.

All big banks and many insurers offer these products because people buy them. They have a surface appeal to very conservative customers, often elderly, who are dead scared of the stock market and ever-worried about just keeping up with inflation.

The marketing gives the impression there is a free lunch — a bigger return for no more risk. There is some extra gain, but very little. Most of the benefit goes to the institution selling the product.

“Market-linked GICs are really just insurance,” says Clay Gillespie, managing director of Rogers Group Financial in Vancouver, a fee-only financial planner. “You’re capping your upside and limiting your downside, but the marketing is quite appealing. You’re guaranteed to make money. People like that.”

Gillespie does not recommend these products to his clients. He believes combining a portfolio of conservative stocks with a basic GIC component offers far better returns with modest risk.

ATB Financial, an Alberta crown corporation that was formerly the Alberta Treasury Branch, has stopped selling index-linked GICs. ATB has 697,000 customers and decided these products are not in their customers’ best interest. They are too hard to explain, it is difficult to figure out the return and you have no control over what you get, as colleague Ellen Roseman summed up in a column last year.

Here’s a closer look at index-linked GICs:

Gillespie points out that there are very few three- or five-year periods when major markets returned nothing. So your hedge — taking a lower, but guaranteed interest rate in case they do fall — isn’t a good bet.

In an article last year, Oakville financial planner Dan Hallett, with HighView Financial Group, came to the same conclusion. Hallett looked at three- and five-year index-linked GICs offered by Alterna Bank. He compared the GIC returns with rolling three- and five-year returns of the S&P/TSX 60 index over a 25-year period. The three-year GIC underperformed 77 per cent of the time and the five-year GIC, 97 per cent of the time.

Hallett says his finding was specific to those Alterna products. But he adds that banks and insurance companies structure the products to minimize their costs.

“The advantage will always be with them,” Hallett says

In the end, index-linked GICs have a surface appeal and a small potential for gain. But you give up a lot.

You buy stocks and fixed income investments for different reasons. If you want safety, accept a lower return. If you want to make a higher return, you have to take more risk. There’s no way around it. Blending the two gives you the worst of both worlds.

More columns by Adam Mayers