GICs vs. Robo-advisors

by Jordan Lavin December 11, 2018 / 2 Comments

There are many ways to invest your money. One that gets a lot of mention on this blog is guaranteed investment certificates (GICs). These investments have been around since the dawn of time, trusted by generations of Canadians.

Another you may have heard of is a financial technology known as robo-advisors. This technology is relatively young – the biggest Canadian robo-advisor has yet to celebrate its fifth birthday. New and exciting, robo-advisors are disrupting the wealth management industry and catching the eye of many young investors.

These methods of investing are different in more ways than just their age. So, let’s take a look at GICs vs. robo-advisors.

The investment

When you invest in a GIC, you’re depositing your money with a financial institution. The bank keeps your money for a fixed term of anywhere from 30 days to 5 years, and pays a fixed amount of interest when the term is up. It’s similar to a savings account, except you can’t withdraw your money before the term is up.

When you open an account with a robo-advisor, it will purchase a portfolio of investments on your behalf based on your personal objectives and risk tolerance. The portfolio will primarily consist of exchange traded funds, or ETFs. Robo-advisors could also purchase other kinds of investments on your behalf, like stocks, bonds, and mutual funds. Over time, the robo-advisor will buy and sell investments automatically to keep your portfolio balanced in line with your preferences.

The provider

When you open a GIC, the investment is 100% run by the bank or credit union you open it with. They hold the money and they pay the interest.

When you open an account with a robo-advisor, there are a few different layers. The robo-advisor will work with a brokerage to purchase a variety of different investments on your behalf. The money goes to sellers of those investments, and the investments themselves are held by the brokerage.

The fees

There are no fees on GICs. Banks and credit unions make money on GICs by using your deposits to fund their lending activities. They charge a higher rate of interest on money they lend out, and keep the difference when they have to pay you back.

Robo-advisors charge fees that are typically in the neighbourhood of 0.5% of the value of your account per year. The fees cover the work they do to manage your portfolio, and the hope is that your return on investment will greatly outweigh the fees.

The terms

When you buy a GIC, you’re locked in for the term. That means your money could be inaccessible for a month, a year, or five years. You will usually get a higher GIC rate when you lock in for a longer term. Because GICs pay a fixed interest rate for a fixed term, you’ll know on the day you sign up what it will be worth at maturity.

When you invest with a robo-advisor you can typically cash out any time you want, but your portfolio’s value will change from day to day. Most people who have made money with these kinds of investments have stayed invested over the long term, and resisted the urge to cash out.

The risks

GICs are virtually risk-free. There are checks and balances throughout the system that ensure there’s no way to lose money on a GIC investment. It would take a complete economic collapse for a Canadian to lose money on a GIC.

Robo-advisors are the opposite. It’s your own responsibility to do due diligence on all of your investments, and the value of your investments can change dramatically and without warning.

The returns

GIC rates are advertised up front. Currently, the best 1-year GIC rate in Canada is 3.00%. That means that if you invest $1,000, you’ll withdraw $1,030 on this date next year. Relative to other investments, GICs pay slightly more than high interest savings accounts, and fall short of riskier investments like the kind you’ll get with robo-advisors.

Robo-advisors invest your money in a portfolio of investments with no guarantees. You could make money, or lose money, and chances are your portfolio will have a mix of money makers and money losers. However, over the long haul, you have a chance to earn much more with these kinds of investments than you do with GICs. And as with most things in life, the higher the risk you take on, the higher the potential reward.

How you’re protected

When you buy a GIC from most major Canadian banks, it will be protected by Canadian Deposit Insurance Corporation (CDIC) insurance. If the bank fails, the CDIC will make sure you don’t lose any money. Up to $100,000 in deposits are covered per bank.

When you invest with a robo-advisor, there’s no one to protect you if one of your investments fails. It’s extremely unlikely, but it is possible for your portfolio to become completely worthless. There is one layer of protection, however, which is insurance provided by the Canadian Investment Protection Fund (CIPF). If the brokerage that holds your investments fails, the CIPF will work to make sure your investments are returned to you share for share.