From manulife finan-cial Corp. targeting high net-worth investors to President’s Choice Financial wooing bargain-hunting clients, it seems that most financial services players are taking advantage of the popularity of high-interest savings accounts.
As parking spots for money awaiting investment or as short-term savings vehicles for special purchases, high-interest savings accounts are attracting attention because, as the name implies, they offer a high rate of return compared with traditional bank accounts. Current rates range from 2.4% to 4.1% at 15 Canadian companies that offer high-interest savings accounts, all of which are members or hold their accounts with members of Canada Deposit Insurance Corp. The fatter rates are made possible by low operating costs and high volume. Firms can attract more assets by offering higher interest rates, which reduces their margin.
“We don’t have to make the same margin on a money market fund as we do on a high-interest savings account,” says Charles Guay, president and CEO of Toronto-based Altamira Investment Services Inc. , which is owned by National Bank of Canada. Altamira’s High Interest Cash Performer carries an interest rate of 3.75%.
Toronto-based E*Trade Canada Securities Corp. introduced its Cash Optimizer Investment Account in November 2006, and E*Trade president Duncan Hannay says volume is key to offering an interest rate of 4.1% — and vice versa.
“As we set out to design this product, we wanted to provide the most compelling value possible to the mass affluent customer to attract additional assets and additional customers,” Hannay says. “And to do that, we knew we needed to have the most compelling rate in the marketplace.”
HISAs often carry other features, including no monthly fees, minimum account balance requirements or term restrictions. But these accounts are as varied as the companies that offer them.
For example, Waterloo, Ont.-based Manulife Bank’s Advantage Account has an interest rate of 3.75%, includes a chequing feature and charges for Interac, ATM use and bill payments.
The Interest Plus savings account at President’s Choice Financial involves no fees, but requires a minimum balance of $1,000 to qualify for the 4% interest rate. PC Financial is a joint venture involving CIBC and Loblaw Cos. Ltd., both based in Toronto.
HISAs are by no means new products. Altamira introduced a HISA in 1992, and Toronto-based ING Direct Canada’s Investment Savings Account, which is widely credited with introducing the product to the Canadian consumer (it currently offers a rate of 3.5%) came along in 1997. But rising short-term rates and the success of the first products have contributed to a recent growth in the number of firms offering HISAs.
“The popularity of the product is largely driven by people’s desire to optimize the return on idle cash,” Hannay says. “I don’t think it matters whether that’s in a banking or a brokered vehicle. As long as there’s the flexibility and the high rate of interest, people are looking to optimize that cash.”
Some firms have found HISAs attract other client assets.
“We know customers are holding cash outside of E*Trade,” Hannay says. “By delivering this solution, we deepen that relationship and get them to consolidate their assets with E*Trade.”
It’s a similar story at Altamira. Altamira’s HISA wasn’t available to advisors until the firm relaunched its High Interest Cash Performer in April 2005 through the brokerage distribution channel, complete with a 0.25% trailer fee. Guay says that once the product was available to advisors, who no longer had to send clients elsewhere to find a parking spot, the account really took off.
Canada’s big banks are also in the HISA business, although in a less visible way.
“Banks use different strategies to bring this product to market. They’re not always using their big umbrella name,” says Guay, who notes that Altamira’s product is managed by a subsidiary of National Bank Financial Ltd. “We decided Altamira was a better-known name than National Bank among investment advisors across Canada. So, for us, it was a matter of having instant recognition.”
The banks that offer comparable accounts under their own names aren’t competing on interest rates. Bank of Montreal’s Premium Rate Savings Account has a 2.6% interest rate, while Bank of Nova Scotia’s Money Master account offers 3%.
These rates check in near the bottom as far as HISAs are concerned, but that is not surprising, says Dan Hallett, president of Windsor, Ont.-based financial services industry watcher Dan Hallett & Associates Inc. Big banks don’t need to use high interest rates to attract money.
@page_break@“Part of it is that their costs are higher because they have a branch network,” Hallett says. “They get a significant amount of business and probably don’t have to offer a higher interest rate to keep customers coming in. If they don’t have to pay higher interest, they won’t.”
With or without the big banks, the industry anticipates growth in the HISA category.
“There is a crying customer need for products of this kind,” Hannay says. “We see that evidence in the research we did before introducing this product, and we’re now seeing it in the number of new customers and assets that have come to us as we’ve rolled it out.”
Growth will depend on how attractive clients find these accounts in relation to other investments. Citing the low returns of money market mutual funds as an instigator of HISA popularity, Hallett cautions that these accounts aren’t immune to a similar dip in rates.
“Part of the appeal is how high the interest actually is, and the difference between that and the alternatives,” Hallett says. “Part of it is whether they’re getting 4% or 2%, and part of it is what else they can do with the money. What other alternatives are there, how attractive are they and how safe are they perceived to be?”
For the near future, competition is expected to increase. Money market funds account for only $50 billion of a liquidity market worth up to $600 billion, according to Guay.
“Even though high-interest savings accounts have been way more popular in the past few years, their market share is still relatively small,” he says. “There is still room for growth.” IE
High-interest savings accounts magnets for cash
- By: Cynthia Innes
- January 3, 2007 October 30, 2019
- 13:13