How to Keep Your Cash Safe: Consider an Online Broker
Among the biggest items of financial news this month, March 2023, has been the collapse of Silicon Valley Bank (SVB) followed by Signature Bank. This has Canadians wondering about the security of their deposits at our banks. Deposits at banks that are members of the Canada Deposit Insurance Corporation (CDIC) are covered up to $100,000 per deposit type: individual, joint, RRSP, RRIF, TFSA, RESP, RDSP, and deposits held in trust. Next month, the FHSA (First Home Savings Account) will be included as a separate category. If you go to the CDIC website, you will find this coverage described in detail, and you can even use their calculator to reassure yourself as to your coverage.
One hundred thousand dollars sounds like a good sum and for many of us, concerns about exceeding insurance coverage are unlikely to become reality. However, if you are saving up for a home and you have amassed a couple of hundred thousand dollars for a down payment, insurance coverage may be a big deal. Or perhaps you are on the other side of a real estate transaction. You have just sold your home and have decided to rent for a while. Other possibilities may be a huge insurance payout, a severance package, or a divorce settlement. Any of these could run into hundreds of thousands of dollars, if not millions. Holding large sums in cash deposits well above the insured threshold could cause anyone concern.
Another irritant, beyond the security concern, is that little to no interest is paid on deposits, even in many so-called savings accounts.
Solution 1: Multiple Account Types at the Same Bank
Let’s suppose you are a married couple with $300,000 that you have contributed to in equal amounts. This is your home down payment fund. You could put $100,000 in a joint account, $100,000 in an individual account in the name of one spouse, and the remaining $100,000 in an account in the name of the other spouse. Problem solved. Having said that, you may still be dealing with the reality of getting next to no interest on your deposits if the money is at one of the big traditional “bricks and mortar” banks.
Of course, if you’ve maximized the joint and individual accounts, then there’s no room to protect your interest anyway, unless you use a different account type, like a TFSA.
Solution 2: Multiple Accounts at Multiple Banks
One way to address this issue is to put your money into savings accounts at several different banks. You could have three accounts (one joint, two individual) at RBC, three more at TD Canada Trust, three more at Scotiabank, etc. For a single person, this may be the only choice if the deposit amount is above $100,000. However, this is cumbersome to set up and a bit of a challenge to manage, despite the convenience of online banking.
As for interest rates, if you are willing to go online, you can get rates in the 2.5% to 3.4% range at several online banks.
Solution 3: A Single Account at an Online Broker
I think that the online broker has the potential to be the best choice. Most online brokers offer the opportunity to buy Guaranteed Investment Certificates (GICs) from several different issuers so if you have the freedom to lock up your money for up to five years, then that can be a viable option. And depending on the brokerage, the GICs are CDIC-insured as well.
Investment Savings Account (ISA)
The online brokerages also provide what are referred to as “investment savings accounts” (ISA). These are bought and sold like mutual funds but are considered deposit accounts and are insured by CDIC. However, when it comes to cash savings, there are limits if you are at one of the big banks’ online brokerages. They will limit you to their in-house product. There is some flexibility, however. If you have greater than $100,000 to put into an ISA, you will almost certainly have the option to buy into a second or third ISA that has the name of the bank’s mortgage or trust division attached to it, each with separate CDIC coverage. In the case of a couple, there might be a need to open a joint and two individual non-registered accounts, if the desire is to get a greater amount of coverage, but it can be done.
Let’s suppose, though, that you go to an independent online broker, not tied to one of the big banks. The broker doesn’t need to defend the deposit product of its parent company; instead, as a broker, it can offer deposit products from any financial institution, which is, frankly, the way a broker should behave.
I don’t know if every independent online broker does this, but the following is an example of how it works at one online firm, Qtrade Investor. If you are looking for CDIC-insured deposits, you could get multiple hundreds of thousands of dollars of coverage in a single account and at rather good interest rates, too. In addition, because Qtrade Investor is for DIYers, you have access to the F-series of the issuers’ ISAs because no advice is provided.
Below is a table of the issuers, the number of ISAs available under their brand, the interest rate as of the date I was researching this information, and the minimum investment amount, if it was available. Even if the issuer does not set a minimum, Qtrade or any other online broker that offers similar arrangements may set their own limit.
Calculating the Amount to Deposit Into Each ISA
Given the table above, let’s imagine you had $1 million that you wanted to leave in cash for up to a year, but that you didn’t want any of the principal or accumulated interest to be left uninsured. If you used 10 ISAs, that means that before any interest has been earned, you’re already at your maximum insured amount. If you select 11 ISAs, then each allotment is at just under $91,000. That means there is room for up to $9,000 in interest to be earned per ISA, which is plenty of room when interest rates are below 5%.
Having decided to divide the $1 million in cash into 11 different ISAs at about $91,000 each, it’s a simple matter to select the five ISAs available from the Bank of Nova Scotia at 4.50%, each with separate CDIC coverage, one from Home Trust at 4.45%, two from Manulife at 4.40%, one from Equitable Bank at 4.35%, and two more from any of the several issuers offering ISAs at 4.30%.
Investors in ISAs should be aware, however, that the funds are not available for withdrawal instantaneously. Like mutual fund transactions and trades on an exchange, there is a settlement date; in the case of ISAs, it is T + 1. This means if you place an order to buy (T = Trade) into one of these ISAs, the order will not be settled until the following business day (+ 1). Similarly, if you want to sell out of the ISA, you will have to wait one business day after placing the order. Note that the orders need to be placed before the market close of 4 pm Eastern Time, or even earlier, to ensure the order is processed before the close of the market.
In addition, since the money is being held at a brokerage account and not at your local bank branch, once settled it will need to be transferred to the bank account that is connected to it so it can be withdrawn or transferred to someone else. However, with a bit of planning, these minor time delays should not be an issue. Furthermore, with the convenience of being able to hold over $2 million (there are 22 ISAs in the table) that is fully insured, the strategy of using an online brokerage account for cash deposits should be seriously considered if/when you have that need.
This is the 190th blog post for Russ Writes, first published on 2023-03-27
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.