Financial advisors should encourage clients to maintain diversified portfolios rather than flocking to guaranteed investments that are paying extremely low rates of interest, according to Larry Moser, regional sales manager at BMO Bank of Montreal.

“We’ve seen since 2008 that a lot of people are moving towards more protective products and guaranteed investments,” Moser said in a virtual roundtable discussion on Wednesday. “If you go to the safest, shortest guaranteed investment certificates, that these days are paying between 1% and 1.5%, I don’t think you’re doing yourself justice in terms of accumulating the net worth that you need to have a comfortable retirement.”

Moser noted that for clients who are earning a 1% return, it will take 72 years to double their investment. He said clients would be much better off with a balanced portfolio of fixed income investments and equities that could easily earn an annual return of 6%.

“Take a look at the investments in their RRSP to make sure they’re not shorting themselves of potential returns down the line,” Moser said.

For clients who are highly risk averse and insist on sticking to guaranteed products, he suggested using structured products, such as market-linked GICs.

“You get 100% principal protection on your investment, yet you have the potential to get market returns based on whatever vehicle the index is linked to,” he explained.

For clients who are willing to stomach some risk, Moser said it’s a good time to consider borrowing to invest, since interest rates are so low. He said investors could borrow money at a rate of 3% to 3.5%, and invest it in a balanced portfolio to earn about 6% over the long term, while writing off the interest payments on the borrowed funds.

“That is a great way to increase your financial net worth and save for retirement,” he said. But he admitted that this strategy is certainly not suitable for everyone. “It has to do with each individual’s risk tolerance and comfort level.”

Advisors should also ensure clients are taking full advantage of tax-free savings accounts, Moser said. Research by BMO show that while most Canadians believe it’s a good idea to use these saving vehicles, only about one-third have actually opened a TFSA.

Furthermore, many Canadians remain unclear on the types of investments TFSAs can hold. Moser said the name ‘savings account’ is somewhat misleading, causing Canadians to believe that they could only use it to hold cash. Remind clients that TFSAs can be used to hold a variety of different securities.

IE