Cash is usually king. but with interest rates near zero, holding too much can hurt the performance of your clients’ portfolios.
Clients typically choose to hold a substantial amount of cash for different reasons: they may be ultra-conservative; they may want to sit on the sidelines to avoid market volatility; they may need liquidity to cover short-term and emergency expenses.
Clients also may have access to large amounts of cash through an inheritance or the sale of a property or business.
“In many such instances, clients only hold cash temporarily until they decide how to invest it,” says Nicholas Balkissoon, investment analyst with Meadowbank Asset Management Inc. in Toronto.
When deciding where to invest cash, “you have to weigh the opportunity cost of holding cash with the tax implications and the peace of mind that holding cash provides to some clients,” says Heather Holjevac, financial planner with Holjevac Financial Group in Mississauga, Ont.
“Some clients who choose to hold cash don’t care about losing out on potential market gains,” Holjevac adds, especially in uncertain market conditions. However, unless the cash is held in a TFSA, the income derived from the cash will be subject to taxes at their marginal tax rate.
Holjevac cautions that while holding some cash is prudent, clients who receive regular paycheques need not hold too much. She recommends clients have about six months of cash on hand to cover expenses and to avoid incurring debt.
The most common parking place for cash is a high-interest savings account (HISA), says Prem Malik, investment advisor with Queensbury Securities Inc. in Toronto. He suggests that HISAs remain one of the best options because they offer better rates of return than other options. HISAs also are protected by either the Canadian Deposit Insurance Corp. (CDIC) or provincial deposit insurers.
Smaller banks and credit unions tend to offer the highest interest rates on savings accounts. According to Ratehub.ca, an EQ Bank Savings Plus account pays 1.50%, followed by a MAXA Financial HISA at 1.30%, as of Nov. 30. A Steinbach Credit Union Regular Savings Account and an Oaken Financial Savings Account both pay 1.25%.
HISAs offered by the major banks pay meagre interest rates in comparison. For example, a National Bank HISA pays 0.15%, while HISAs from Bank of Nova Scotia and Royal Bank of Canada pay 0.05%.
Clients could choose to hold GICs. Smaller banks and credit unions offer the best GIC rates for all terms.
According to Ratehub.ca, as of Nov. 30, the highest 90-day rates are 1.50%, offered by Toronto-based EQ Bank, and 1.30%, offered by Toronto-based Oaken Financial. In comparison, Royal Bank and Bank of Nova Scotia both offer 0.15%; and TD Bank and Bank of Montreal both offer 0.10% for 90-day GICs.
Oaken Financial offers the best five-year rate, at 2.00%, while Bank of Montreal offers the lowest, at 0.80%.
Clients investing in GICs can use a laddered approach by investing their cash in GICs with different terms. “This way, a portion of their money will earn higher interest [due to] the longer term,” Malik says, noting that GICs with shorter maturities can be reinvested if that cash is not required.
One relatively new product that’s growing in popularity is high-interest savings ETFs. These ETFs — which invest in diversified pools of HISAs offered by banks — trade on stock exchanges and offer instant liquidity. As well, there are no minimum investment amounts or holding periods.
“High-interest [savings] ETFs are a convenient tool for getting diversified exposure to the savings products offered by different banks compared to investing in a single high-interest savings account,” says Balkissoon.
Clients should be aware that they must pay a commission for both buying and selling an ETF, Balkissoon advises, which will reduce the yield. The yield also will be reduced by management fees charged by ETFs.
According to Morningstar Canada, the Purpose High Interest Savings ETF (PSA) had a year-to-date return of 0.87% as of Nov. 30, while the CI First Asset High Interest Savings ETF (CSAV) returned 0.86% and the Evolve High Interest Savings Account ETF (HISA) returned 0.85%. (These returns are higher than the interest rate offered by HISAs from the large banks.) The management fee charged by CSAV is 14 basis points, and both PSA and HISA charge 15 basis points.
Both Malik and Holjevac typically recommend investing in individual HISAs, a strategy that can provide higher interest rates and greater guarantees.
Balkissoon also points out that high-interest savings ETFs are not insured by the CDIC, putting investors at risk should the market price per share of the ETF be less than the net asset value of the investments on any given day. Although rare, investors would suffer a loss if they sold their ETF holding in that situation.
Money market mutual funds historically have been common parking spots for cash. These products invest in diversified pools of short-term fixed-income securities and also charge a management fee. In addition, they offer less trading flexibility than high-interest ETFs do.
The yields offered by money market funds vary widely, with the Purpose Money Market Fund Series F offering the highest yield, at 1.14% as of Nov. 30, according to Morningstar Canada.