Investment Structure of GICs vs. Robo-Advisors
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 10 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 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, real estate and mutual funds. Over time, the robo-advisor will buy and sell investments automatically to keep your portfolio balanced in line with your preferences.
GICs vs. Robo-Advisors: Providers
When you open a GIC, the investment is 100% run by the bank or credit union that sold you the GICs. They hold the money and pay interest.Investments with GICs are guaranteed in two ways, with CDIC Insurance and what is promised by the bank.
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.
GICs vs. Robo-Advisors: 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. You can learn more about the fee structure varying robo-advisors in Canada are charging and compare robo-advisor fees such as average ETF, MER, and other fees side by side on our robo-advisor section.
GICs vs. Robo-Advisors: 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 today. 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.
GICs vs. Robo-Advisors: 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. Additionally, GICs are insured by the CDIC.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.
GICs vs. Robo-Advisors: 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.
GICs vs. Robo-Advisors: Deposit Insurance in Canada
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 your share for share.
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Check out our robo-advisor comparison table to find the best Canadian robo-advisor for your savings goals
