Unless you’re new to our site, you’re probably familiar with what a mortgage broker is and why you would want to work with one. A mortgage broker is a mortgage professional who helps you shop around and secure the best mortgage rate and mortgage product for you, independently from a bank.
Now, have you ever heard of a GIC broker? Much like mortgage brokers, GIC brokers (or deposit brokers) also shop around to get you the best interest rate. Yet whereas a mortgage broker attempts to find the lowest rate for your loan so you can borrow money, a GIC broker tries to find the highest rate for your deposit product so you can save more!
How GIC Brokers Operate
GIC brokers work with multiple financial institutions, such as banks. The banks are eager to borrow money to fund their own activities, such as making loans to consumers. In order to attract these needed funds, the banks pay interest on deposits. And the way banks make money is by earning a spread on the money they borrow and the money they lend out. For example, if they’re paying you 2.00% on your GIC and they’re earning 4.00% on a mortgage, the bank is making a 2.00% spread.
When banks deal with individuals, they don’t tend to offer their best rates on GICs. Why? Because most people don’t have a huge amount of money to invest. This is where a GIC broker can come in handy.
GIC brokers deal with many clients. As such, they’re able to deal in large volumes with the banks that issue GICs. This provides the broker with greater bargaining power than an individual. Whereas one person might go to bank and want to invest something like $2,000 in a GIC, a broker might be able to invest $100,000 because it’s pooling many individuals’ money. The more you have to invest, the better the interest rate the banks will offer.
In addition, by offering a large sum of money to a bank, the broker cuts down on the bank’s administrative costs. Rather than dealing with many different individuals, the bank only has to deal with the GIC broker.
Consumers don’t pay the GIC broker. Rather, the broker is paid a commission by the financial institution that is offering the GICs it gets clients to invest in.
Spreading Your Risk
If you have a substantial amount of cash, a GIC broker won’t be helpful just in getting you the best rate: they also can ensure that all of your money is guaranteed with GIC insurance. When you only buy GICs through one financial institution, you’re only protected up to a certain amount. But if you invest at multiple institutions, more of your cash is guaranteed.
For example, if you have $500,000 and you wanted to invest it at a bank in Ontario, only your first $100,000 would be protected by CDIC or the Deposit Insurance Corporation of Ontario (depending on which institution you invest with). Here’s where a GIC broker can help. By spreading your money around and investing $100,000 at 5 different GIC-issuing banks, all of your savings can be protected. This way, if any bank happens to go bust, you won’t lose any money.
A Note of Caution
Even though you’re dealing with a GIC broker and not the bank directly, you still should be making out your cheque/cheques to the financial institution (s) that is issuing the GICs. Do not write any cheques to the broker itself. They are merely supposed to be arranging (‘brokering’) your investment with the bank. It’s a major red flag if the GIC broker asks that you make the cheque out to them.
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