With recent market turmoil rattling inves-tors, high-interest savings accounts have been quietly stealing the spotlight from money market mutual funds as a favourite short-term parking spot for cash.
However, with most HISAs offering similar rates and many of the same features, the pressure is on financial services firms to differentiate their accounts.
A recent twist comes on a HISA from Toronto-based B2B Trust, a subsidiary of Laurentian Bank of Canada of Montreal. B2B’s HISA provides investors with a rate of interest that’s linked to the prime rate.
This guarantees investors that while the interest rate on the account may fluctuate, it will never fall below a level equal to the prime rate minus a specific differential amount.
The differential amount in place until Dec. 31 is 1.75%. This means that with the current prime rate of 4%, the interest rate paid on B2B’s HISA will be greater than or equal to 2.25%. B2B launched the account with a rate of 3.1%. The differential rate is reset annually on Dec. 31.
“The guaranteed threshold will move up and down as the prime moves up and down,” says Judy Chu, senior manager of product development with B2B. “What it lends to both the client and the advisor is that it gives them a really high degree of transparency on where rates will move on this product.”
Many other features on B2B’s new account are similar to most competing products. B2B’s HISA has no account fees or service fees, for instance, and it is eligible for both registered and non-registered accounts. Interest is calculated daily and paid monthly.
The B2B HISA also provides financial advisors access so they can manage the account for clients. B2B launched the product after experiencing high demand for a retail HISA that it already offers.
“Advisors wanted an account that they could access,” says Susi McCord, B2B’s vice president of marketing, “so they could look at a client’s full portfolio.”
A number of other high-interest accounts are advisor-targeted, including those offered by Manulife Financial Corp. and Dundee Bank of Canada, both based in Toronto, while Toronto-based ING Direct and Vancouver-based Citizens Bank of Canada target consumers directly. Accounts sold by advisors commonly feature an annualized trailer fee of about 25 basis points.
These HISAs are growing in demand among clients, who are increasingly seek help with the management of all their assets.
“Generally, individuals like to be able to give their financial advisor [access to everything] if they can,” says mutual fund analyst Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. , “especially where it’s a natural extension of the business they’re already doing with their advisor.”
Other factors that can differ among HISAs include minimum account balance requirements, chequing features and withdrawal fees.
As whipsawed investors have cashed out of money market funds — as well as equity investments of all sorts — assets held in HISAs have swelled.
In September, for instance, investors redeemed $2.5 billion from money market funds, according to the Toronto-based Investment Funds Institute of Canada. At the same time, the value of assets in Dundee Bank’s investment savings account soared to $3.4 billion, a 62% increase from $2.1 billion in September 2007, says Fay Freiman, Dundee Bank’s vice president of marketing.
This phenomenon has been partially driven by market volatility, says Freiman: “The accounts offer safety and security during times when clients are looking for that.”
The return paid on an HISAs is often higher than the returns on some money market funds and some short-term GICs.
“Depending on the GIC products these days, “ Chu says, “they may not be paying a terribly attractive rate, and they have term restrictions.”
And most HISAs provide inves-tors with unrestricted access, allowing them to transfer cash to and from the accounts as they see fit.
This sets the accounts apart from GICs, says Chu. She expects investors to increasingly replace GICs with HISAs in the cash component of their investment portfolios.
Another positive feature of HISAs for fearful clients: deposits in these types of accounts are covered by the Canada Deposit Insurance Corp. Assets held in money market mutual funds are not covered.
“In theory,” says Hallett, “the guarantee that comes with the [high-interest] savings account is more secure.” IE
Growing interest in high-interest savings accounts
Given the rocky markets, HISAs may take a bigger role in management of clients’ cash
- By: Megan Harman
- November 11, 2008 October 30, 2019
- 09:42