Canada has not seen a bank failure since Security Home Mortgage Corporation, a Calgary-based company, went bankrupt in 1996, putting $42 million in bank deposits at risk. Two decades later we have another mortgage company, Home Capital Group, teetering on the brink of bankruptcy. Deposits at Home Capital were expected to fall to $192 million this week, down 90 percent from the roughly $2 billion it held at the end of March. To stay afloat the embattled company took out a $2 billion lifeline (at a punitive interest rate) and suspended its dividend.
It truly is a run on the bank, and clients of Home Capital, which includes subsidiaries Home Trust and Oaken Financial, are concerned about their deposits. Should they be? Perhaps not. Home Trust is a member of Canada Deposit Insurance Corporation (CDIC), which handled the Security Home Mortgage Corporation collapse in 1996 and restored client deposits within three weeks.
Related: How safe are your bank deposits?
But clients aren’t taking any chances. As Rob Carrick pointed out on Twitter, even GIC deposits are being redeemed early:
Am surprised at the number of people who say they’re considering paying a penalty to redeem CDIC-protected GICs from alt banks, trusts etc.
— Rob Carrick (@rcarrick) May 8, 2017
Readers of this blog have also voiced their concern over money tied up at Home Trust, with one reader writing to us by email:
“My mom currently holds some GIC’s with Home Trust (Home Capital). Given their current financial situation we are wondering if it would be prudent to redeem them early. We are aware that they are CDIC insured however no one has been able to advise us that if the worst case scenario happens to Home Capital would the GIC funds be tied up until CDIC sorts things out.”
We want our readers to make informed decisions about their money. With all the hysteria surrounding Home Capital and its viability, I reached out to CDIC and asked how their coverage works and what is protected in the event of a bank failure. Here’s what they had to say:
The Canada Deposit Insurance Corporation (CDIC) is the federal Crown corporation that protects the savings of Canadians in the event their bank fails. If you have eligible deposits held in Canadian dollars at a CDIC member institution, you are automatically protected. Some 80 financial institutions across Canada are members of the CDIC, including banks, federally regulated credit unions, as well as loan and trust companies and associations governed by the Cooperative Credit Associations Act that take deposits.
How it CDIC works
CDIC automatically protects eligible deposits to a maximum of $100,000, including principal and interest, in each of seven deposit categories such as RRSPs, TFSAs, joint and trust accounts. Joint accounts are treated as one account, rather than separately for each depositor. Trusts are the opposite, where each beneficiary is eligible for up to $100,000 separately, provided certain disclosure rules are met. Eligible deposits include savings and chequing accounts and term deposits like GICs with a term to maturity of five years or less.
What’s not protected
But some things are not protected. What’s not covered includes securities and investments, like foreign currency or U.S. dollar accounts, stocks and bonds, mutual funds, and term deposits longer than five years.
How CDIC protects deposits if a bank fails
CDIC has a number of tools to assist or resolve a failing member institution. Which tool is used would depend on the circumstances of a particular situation. The size and complexity of the bank, its franchise value, as well as the current availability of any private sector buyer or other options, would be key considerations in deciding which tool to use.
The tools that CDIC could use include:
Liquidation and reimbursement of insured deposits:
In certain cases, a failed bank is closed and insured deposits are reimbursed to depositors. The assets of the failed bank are distributed to the bank’s depositors and other creditors through a court-supervised liquidation process.
In liquidation, the failed bank ceases to operate, all contracts are terminated and its critical financial services are no longer available, including access to accounts. CDIC automatically and rapidly reimburses insured deposits up to $100,000 (including interest) per insurance category. Depositors do not have to file a claim.
- CDIC would aim to reimburse chequing and savings accounts, joint accounts and mortgage tax accounts within three business days.
- Deposits in valid trusts are protected to $100,000 per beneficiary. CDIC would contact broker-trustees to inform them of its process to reimburse insured deposits. CDIC would remit payment to broker-trustees within seven business days of receiving wire transfer/payment information. Payment would be based on CDIC calculations and deposit information at the failed institution.
- CDIC would hold registered deposits in RRSPs, RRIFs and TFSAs while it works with the Canada Revenue Agency to ensure they remain tax-sheltered. CDIC would contact these depositors directly to inform them of next steps.
This is a tool that would likely only be used in the case of small to medium-size banks, not domestic systemically important banks (D-SIBs).
Forced sale:
When a buyer exists, CDIC can take control of a failing bank for a short period of time to complete its sale, merger or restructuring. The sale would ensure that critical banking operations continue and insured deposits are protected. With the approval of the government, a forced sale would be used when shareholder consent of the transaction is not expected or the time to obtain consent would take too long.
Bridge bank:
A bridge bank is a tool that is available when an institution fails and there is no buyer or private-sector solution on the horizon. It is meant to “bridge” the gap between when an institution fails and when a buyer or private-sector solution can be found. CDIC can use this tool to transfer all or part of the failing bank’s business to a bridge bank, which is temporarily owned by CDIC.
Similar to a forced sale, the transfer would ensure that critical banking operations continue and insured deposits are protected. As owner, CDIC would likely appoint to the bridge bank a new board of directors and chief executive officer to handle the restructuring and to stabilize the bank. Once stable, the bridge bank would be sold to the private sector.
Financial assistance:
CDIC can provide financial assistance to its members, including loans, guarantees, deposits, or loss-sharing agreements or by acquiring shares. CDIC can provide this assistance on a stand-alone basis, to assist in a private transaction, or in combination with any of its other resolution tools.
Bail-in framework:
In 2016, Parliament introduced a bail-in regime to Canada’s bank resolution toolkit. Bail-in is an important tool that would allow CDIC, as the resolution authority for Canada’s D-SIBs, to ensure failing institutions remain open for Canadians, which helps protect our economy.
Bail-in allows authorities to recapitalize a large Canadian bank by converting certain long-term debt to common shares while the institution remains open and operating. In the unlikely event of a failure, this would ensure losses are covered by the bank’s shareholders and certain investors, not taxpayers or depositors.
50 years of deposit protection
Since its creation by Parliament in 1967, CDIC has handled 43 failures, affecting more than 2 million depositors. No one has lost a single dollar under CDIC protection.
Many people know they should invest for the future but for one reason or another the investing can gets kicked down the road. Maybe they’re living paycheque to paycheque and can’t free up enough cash to invest, or they simply don’t have time to make an appointment with an advisor to draw up an investment plan, or maybe they think they are investing in high interest savings and GICs, but avoid the stock market because it’s scary, too risky, and only for the financially savvy.
Or,
Time to put the excuses to rest. You need to start investing now so that your future self won’t have to work until age 75 or move in with his or her children in retirement. Savings accounts or GICs won’t cut it either, because the ravages of inflation will eat away at your savings and leave you poorer every year.
Sure, you can start investing the traditional way – by visiting a bank branch where a salesperson disguised as an advisor will undoubtedly set you up with a portfolio of expensive mutual funds that make the bank richer but won’t do much for you.
But, hey, at least you started the process, right? (Seriously, though, starting up automatic monthly contributions is a great first step. Even if you’re invested in mutual funds with a high MER, it’s better than doing nothing.)
The Easy Way To Start Investing Today
The good news is that you no longer have to go down that path to start investing. The investment landscape has changed for the better in the last few years thanks to online portfolio managers called robo-advisors.
That’s right. There’s a brain-dead easy way to start investing today. You can open an account with a robo-advisor online in literally five to 10 minutes.
Just fill out a risk questionnaire that asks about your financial goals, time horizon, risk tolerance, past investment experience and level of investment knowledge. From this, you will be assigned a risk score and portfolio.
There are no account minimums and generally your first $5,000 or $10,000 is managed for free. At $25,000 invested you’d pay somewhere around $125 (or 0.50 percent).
Robo-advisors use something called Modern Portfolio Theory to construct a low-cost portfolio of index ETFs that track the stock market as a whole.
What’s the brain-dead easy part? Everything is automated, from rebalancing to dividend reinvestment, even tax efficiency.
Wealthsimple, Canada’s leading robo-advisor, calls it investing on autopilot. That’s exactly what most investors should be doing – focusing on what really matters, making regular contributions and increasing those contributions over time as your budget allows.
Related: Nest Wealth robo-advisor comparison
Here’s the thing. A robo-advisor is a smart solution not just for young Canadians, but also for investors at any age and stage that can benefit from a low-cost and hands-off approach to investing.
I know the DIY investing crowd is sceptical of the robo-advisor movement because it adds another layer of costs to something that “anyone can figure out on their own”.
But my years of experience working with clients across Canada suggest that most people aren’t cut out for do-it-yourself investing. They’re nervous about managing their own portfolio and want some guidance, however they’re also savvy enough to be aware of the pitfalls of going to a bank advisor and getting sold a basket of crappy mutual funds that isn’t in their best interest.
Let me tell you that paying somewhere around 0.75 percent all-in for an automated and managed portfolio is so worth it – especially when compared to what you’d get at the bank or from firms like Edward Jones and Investors Group.
So, for the Boomers out there who want their kids to start investing, but watch as their eyes glaze over when they hear you talk about P/E ratios and ex-dividend dates; I have a brain-dead easy solution for them – a robo-advisor.
You’ll thank me 10 minutes later after they’ve opened up and funded their account right from their smart-phone.
The alternative is a generation of investors that either continue to get fleeced by the big banks and their expensive mutual funds, or one that keeps their money in low-interest savings accounts and GICs while inflation slowly eats away at its future buying power.
Robo-advisors are a blessing for this generation of investors – a triple threat that:
- Saves investors money by avoiding high-priced mutual funds and sticks with low-cost, broadly diversified ETFs;
- Removes human error and judgement by sticking to a pre-determined asset allocation and automatically rebalancing the portfolio whenever it drifts away from that allocation;
- Uses passive investing strategies to capture market returns minus a very small fee, rather than relying on active strategies that attempt to beat the market (but rarely do).
Investing doesn’t have to be scary or complicated. You can start investing today with a brain-dead easy solution. These four robo-advisors have even sweetened their offer for Boomer & Echo readers:
- Wealthsimple is offering Boomer & Echo readers their first $10,000 of investments with no management fees for one year. Sign-up today to add this offer to your account.
- Boomer & Echo readers can try Nest Wealth free for 3 months.
- Modern Advisor let’s you use $1,000 of their money for a 30-days risk-free trial to test out its platform. Get a $50 bonus if you decide to open an account.
- JustWealth is offering Boomer & Echo readers 50% off of the Justwealth Investment Management Fee for a period of 6 months when they open a new account.
Finally, check out the Auto Invest calculator to compare the cost of all the robo-advisors for your particular situation to see which is the best fit for you.
Time to start investing!
“We really ought to teach financial literacy in school.” That’s the default answer from financial experts when we hear another story about Canadians who are up to their eyeballs in debt. It’s not that I disagree – I’d love to see a broad curriculum of age-appropriate financial topics all throughout school.
The problem lies in the execution. Teachers aren’t equipped to write the course material, let alone deliver the concepts in meaningful and engaging ways for children aged 6-17. So we’re left with two options; outsource the entire financial literacy course – from creation to delivery – to the government or not-for-profit sector, or else seek out resources from the financial services industry. Talk about letting the fox in the hen house!
I take issue with the way banks and investment firms try to shoe-horn their way into the financial literacy curriculum when a good portion of the content should be about educating Canadians on how to become savvy customers of bank products.
The Ontario government will make financial literacy part of its grade 10 curriculum starting in 2018. Maclean’s had an interesting discussion on the subject of financial literacy, with one article suggesting these programs don’t work and can even be harmful when financial literacy is offered as a substitute for action on poverty.
Canada’s financial literacy leader Jane Rooney fired back, saying the programs do work if done right:
“That’s why FCAC supports the delivery of programs over many years, at strategic times in people’s lives, and in a variety of contexts—for example, at home between parents and children, in schools, colleges and universities, in the workplace, at financial institutions, and in many other community settings.”
I agree with Ms. Rooney, but the biggest challenge is how to implement these programs at critical stages in our lives, who should be delivering the programming, and whether or not it should be mandatory.
This Week’s Recap:
On Monday I explained how an investor lost nearly half a million dollars due to his advisor’s risky investment strategy.
On Wednesday Marie looked at buying back pensionable years of service after an absence from the workforce.
And on Friday I shared a story from 70 years ago – how an ad manager from Merrill Lynch brought Wall Street to Main Street by demystifying the stock and bond market through education advertisements.
Weekend Reading:
You’ve hopefully filed your personal tax return by now. Jamie Golombek explains what happens if you get audited.
A blast from the past for Toronto residents: These classified ads show how much it cost to rent and buy a home there in 1975.
This Debt Free in 30 podcast featured Squawkfox blogger Kerry Taylor, Wealthing Like Rabbits author Robert Brown, and budget travel expert Barry Choi.
A nice (or gruesome, depending on your view) visual look at the downfall of Home Capital – Canada’s largest alternative mortgage lender.
Some see this as an isolated incident, but stay tuned: Home Capital’s crisis may puncture Canada’s housing bubble yet.
A Wealth of Common Sense blogger Ben Carlson explains why baby boomers won’t destroy the stock market in retirement.
Millionaire Teacher Andrew Hallam was featured in this CNBC segment explaining how he became a millionaire at 36 on a teacher’s salary:
Andrew Hallam also chatted with Millennial money expert Jessica Moorhouse in her latest podcast and got her excited about low-cost passive investments.
Now that CRM2 has been fully implemented, Steadyhand’s Tom Bradley is disappointed that many investment companies did the absolute bare minimum of reporting on investor returns and disclosing fees.
Dan Bortolotti explains FOMO – or the fear of missing out – as it relates to investing:
“If you’re a Couch Potato investor, you’re going to have a FOMO crisis of your own at some point. It won’t be easy, but you’ll need to shake off that nagging feeling that there’s something better out there. I’d start by taking stock-picking stories with a heaping tablespoon of salt.”
Michael James enjoyed the behavioural finance book, Nudge, and shared some of the authors’ smart takes on the decisions we make.
Peter Nowak explains why artificially intelligent voice assistants like the Amazon Echo and Google Assistant are poised to change how we interact with our homes.
A solid argument from the Harvard Business Review on why you really need to stop using public wi-fi.
Finally, here’s how online shopping makes suckers of us all. This article shines a light on the exotic and highly technical strategies used online to extract the most money from customers.
“Our ability to know the price of anything, anytime, anywhere, has given us, the consumers, so much power that retailers—in a desperate effort to regain the upper hand, or at least avoid extinction—are now staring back through the screen. They are comparison shopping us.”
Truly frightening.
Have a great weekend, everyone!