GICs vs. Robo-Advisors: Investing Options for 2020

The old “GICs vs. Robo-Advisors” discussion seems as far fetched as comparing apples with oranges. However, both investing methods share more similarities than most investors might believe. Choosing the best GIC or robo-advisor in Canada can make a tremendous impact on how much and how quickly your investments grow.

GICs vs. Robo-Advisors

Many people making baby-steps into the investing world might ask “What is a GIC?“, and though the financial tool might sound complicated, GICs are quite simple. Think of a GIC as a loan that you issue a bank or credit union. In return, the financial institution rewards you with interest. The duration of how long you lend the money can range from around one month to ten years, depending on the term agreement. Different types of GICs allow you to withdraw your money, but generally, funds placed in a GIC are locked in. Early withdrawal can result in a GIC early withdrawal penalty.

If you’re also asking yourself “what are robo-advisors?”, you’re not alone. The emerging financial technology is still pretty novel, with Canada’s biggest robo-advisor in Canada being merely five years old. Still, robo-advisors currently manage $225B in assets across the world. Robo-advisors allow investors to adjust their investments according to their risk tolerance, yearly income, and financial goals. Robo-advisors allow investors to put their investments on autopilot by letting an algorithm trade for them, instead of a financial advisor.

GICs offer guaranteed interest, whereas robo-advisors can’t guarantee returns. However, though GICs guarantee returns, the interest rate on GIC investments is much lower than that of robo-advisors. Funds in GICs are also locked in for the agreed term. While robo-advisors can’t guarantee returns, investments are accessible at the investor’s liking. Robo-advisors also offer much higher returns in a shorter span but are not insured. Clients of robo-advisors can set their preferred level of risk according to their liking.

When you open a GIC, the investment fully controlled by the bank or credit union that issued the GIC. They hold the money and pay you the interest. Interest on GICs is guaranteed in two ways. One way investments are guaranteed is that they are insured with provincial or CDIC Insurance, meaning if the financial institution goes out of business, your funds are insured. Another way GICs are guaranteed is that the interest promised at the beginning of the term is what you receive at the end of the term. 

When you open an account with a robo-advisor, there are a few different layers. The robo-advisor will work with a brokerage to purchase a variety of different investments on your behalf. The money goes to sellers of those investments, and the investments themselves are held by the brokerage. Robo-advisors invest in several Exchange Fund Transfers (EFTs). 

The Best GIC Providers in Canada for 2019

Below are some of the best GIC rates currently available in Canada. Before opening a GIC, consider the amount of money you are comfortable with the being deposited, and ensure that you will not be needing your money until the GIC term is complete.

motusbank

motusbank offers high-interest rates on GICs starting at 2.80% for the first year. Investments with the online-only financial institution are among the best in Canada. Rates on a 5-year GIC go as high as 3.25%. Opening a GIC with motusbank requires a minimum investment of $100.

motusbank GICs are not available to Canadian citizens living in Quebec.

Oaken Financial

Oaken Financial currently offers one of the best GIC rates in Canada, starting at 2.80% for a one-year fixed term on non-registered investments. Oaken Financial currently offers some of the most competitive and best GIC rates. In Canada, Oaken Financial offers term deposit rates of up to 3.00% on 5-year GIC terms, as well as registered GIC options.

Oaken Financial GICs are available to all Canadian citizens.

Alterna Bank

Alterna Bank currently offers a one-year, non-registered GIC at 2.35%. The online-only bank offers GICs that go up to 5-years in term-deposit length, at a rate of 2.55%. A minimum investment of $500 is required to open an account with Alterna Bank.

Alterna Bank is available to all Canadian citizens

EQ Bank

EQ Bank is an online-only bank account that currently offers several banking products at little to no cost to its clients. EQ currently offers some of the best GIC rates in Canada, starting at 2.65% on their non-registered GIC. GIC rates from the online-only bank go as high as 3.00% for a 5-year non-registered GIC. You can open an account today with a minimum investment of $100.

EQ Bank is not available to Canadian citizens living in Quebec.

The Best Robo-Advisors in Canada

Wealthsimple

Wealthsimple is easily the most well-known and used robo-advisor currently available in Canada. The Toronto-based robo-advisor allows Canadians from all provinces to invest their money and adjust their risk tolerance to their liking. The robo-advisor also allows customers to do their investing through a mobile app and online platform. Wealthsimple has an incredibly easy to use interface.

Wealthsimple requires no minimum investment. Ratehub.ca readers can take advantage of Wealthsimple’s sign-up bonus and have their first $10,000 managed at no charge. Wealthsimple currently manages $1.9B of Canadians’ assets today.

Read Ratehub.ca’s Wealthsimple Review.

Justwealth

Justwealth separates itself from the many robo-advisors in Canada by gearing its services towards investors with specific investing needs. Unlike many robo-advisors, Justwealth offers a financial consultant to each customer that can provide guidance and advice based on the robo-advisor’s investment decisions.

A minimum investment of $5,000 is required to open an account with Justwealth.

• Minimum investment: $5,000
• Commission Rate: 0.4% – 0.5%
• MER: 20%

Questwealth Portfolios

Questwealth Portfolios is fairly new to the robo-investor space, but Questrade, its owner, is no rookie to the world of investing. While Questrade specializes in providing investors with an award-winning self-directed trading platform, Questwealth Portfolio users a team of experts to monitor your investments with their robo-advisors.

• Minimum investment: $1,000.
• Commission rate: 0.20% – 0.25%
• MER: 0.19%

Investment Structure of GICs vs. Robo-Advisors

When you invest in a GIC, you’re depositing your money with a financial institution. The bank keeps your money for a fixed term of anywhere from 30 days to 10 years and pays a fixed amount of interest when the term is up. It’s similar to a savings account, except you can’t withdraw your money before the term is up. 

When you open an account with a robo-advisor, it will purchase a portfolio of investments on your behalf based on your objectives and risk tolerance. The portfolio will primarily consist of exchange-traded funds or ETFs. Robo-advisors could also purchase other kinds of investments on your behalf, like stocks, bonds, real estate and mutual funds. Over time, the robo-advisor will buy and sell investments automatically to keep your portfolio balanced in line with your preferences.

GICs vs. Robo-Advisors: Providers

When you open a GIC, the investment is 100% run by the bank or credit union that sold you the GICs. They hold the money and pay interest. Investments with GICs are guaranteed in two ways, with CDIC Insurance and what is promised by the bank.

When you open an account with a robo-advisor, there are a few different layers. The robo-advisor will work with a brokerage to purchase a variety of different investments on your behalf. The money goes to sellers of those investments, and the investments themselves are held by the brokerage.

GICs vs. Robo-Advisors: Fees

There are no fees on GICs. Banks and credit unions make money on GICs by using your deposits to fund their lending activities. They charge a higher rate of interest on money they lend out and keep the difference when they have to pay you back. 

Robo-advisors charge fees that are typically in the neighbourhood of 0.5% of the value of your account per year. The fees cover the work they do to manage your portfolio, and the hope is that your return on investment will greatly outweigh the fees. You can learn more about the fee structure varying robo-advisors in Canada are charging and compare robo-advisor fees such as average ETF, MER, and other fees side by side on our robo-advisor section.

GICs vs. Robo-Advisors: Terms

When you buy a GIC, you’re locked in for the term. That means your money could be inaccessible for a month, a year, or five years. You will usually get a higher GIC rate when you lock in for a longer term. Because GICs pay a fixed interest rate for a fixed term, you’ll know on the day you sign up what it will be worth at maturity. When you invest with a robo-advisor you can typically cash out any time you want, but your portfolio’s value will change from day today. Most people who have made money with these kinds of investments have stayed invested over the long term and resisted the urge to cash out.

GICs vs. Robo-Advisors: Risks 

GICs are virtually risk-free. There are checks and balances throughout the system that ensure there’s no way to lose money on a GIC investment. It would take a complete economic collapse for a Canadian to lose money on a GIC. Additionally, GICs are insured by the CDIC. Robo-advisors are the opposite. It’s your own responsibility to do due diligence on all of your investments, and the value of your investments can change dramatically and without warning.

GICs vs. Robo-Advisors: Returns

GIC rates are advertised up front. Currently, the best 1-year GIC rate in Canada is 3.00%. That means that if you invest $1,000, you’ll withdraw $1,030 on this date next year. Relative to other investments, GICs pay slightly more than high-interest savings accounts and fall short of riskier investments like the kind you’ll get with robo-advisors.

Robo-advisors invest your money in a portfolio of investments with no guarantees. You could make money, or lose money, and chances are your portfolio will have a mix of money makers and money losers. However, over the long haul, you have a chance to earn much more with these kinds of investments than you do with GICs. And as with most things in life, the higher the risk you take on, the higher the potential reward.

GICs vs. Robo-Advisors: Deposit Insurance in Canada

When you buy a GIC from most major Canadian banks, it will be protected by Canadian Deposit Insurance Corporation (CDIC) insurance. If the bank fails, the CDIC will make sure you don’t lose any money. Up to $100,000 in deposits are covered per bank.

When you invest with a robo-advisor, there’s no one to protect you if one of your investments fails. It’s extremely unlikely, but it is possible for your portfolio to become completely worthless. There is one layer of protection, however, which is insurance provided by the Canadian Investment Protection Fund (CIPF). If the brokerage that holds your investments fails, the CIPF will work to make sure your investments are returned to your share for share.

Want to learn more about robo-advisors?

Check out our robo-advisor comparison table to find the best Canadian robo-advisor for your savings goals