Are your clients looking for safety, certainty, and a simple way to earn interest in surplus cash? Try recommending term deposits. These products can help investors see how guaranteed returns work before they consider higher risk choices.
In this article, Wealth Professional Canada will shed light on everything you need to know about term deposits. If you’re looking for the latest news on term deposits, simply scroll to the bottom and start browsing.
A term deposit is a cash investment your clients place with a financial institution for a set period. In exchange, the institution agrees to return the original amount at the end of the term, usually with interest.
Terms can range from about 30 days to more than a year. Many institutions use the term Guaranteed Investment Certificate (GIC) for the same type of investment. The approach is similar. Your clients lock in money for a period and receive a guaranteed outcome.
Some Canadian banks use both names in a specific way. Shorter periods, such as terms up to 365 days, might be called term deposits. Longer terms, such as those over one year, might be labelled as GICs. Other institutions use only the GIC name for all of these fixed income products.
Regardless of the label, both term deposits and GICs are secured investments. Your clients get back the amount they invest at the end of the term, as long as they follow the conditions of the product.
For financial advisors, this flexibility allows you to match the term and payout pattern with your clients' goals. It also lets you introduce concepts such as compound interest and interest rate risk without exposing them to capital losses.
In practice, there is little difference between term deposits and GICs from a client experience standpoint. Both are secured investments. These two return the original amount invested at the end of the term. Both can also pay interest at a fixed or variable rate, depending on the product.
The difference lies in how banks and credit unions label them. Some institutions provide both term deposit and GIC products, with overlapping terms from 30 days to over a year. Others prefer to use only the GIC name for the entire range.
As a financial advisor, you can help your clients focus on the structure. Explain that whether it is called a term deposit or a GIC, the basic concept is the same. They commit funds for a period and receive a guaranteed outcome at maturity.
| Tap anywhere to see their similarities and differences! | |
|---|---|
| TERM DEPOSITS | GICs |
| broader category | both terms are used interchangeably in Canada |
| money deposited for a fixed period (term) at a set or formula-based rate | a Canadian term deposit product with guaranteed principal and defined return |
| global or generic term used in many countries | used by Canadian banks and credit unions |
| usually very safe, but depends on product and jurisdiction | principal is guaranteed by the issuer if held to maturity |
| deposit insurance depends on country's system | usually CDIC- or provincial-insured if issued by a covered institution, up to limits |
| typical range is 30 days up to more than a year (can be longer) | typical range is also 30 days up to more than a year (can be longer) |
| interest is paid at maturity, annually, semi-annually, or monthly | similar options; depends on the specific GIC contract |
Do you have clients who are just getting started with GICs and term deposits? Share this beginner-friendly guide on how to start investing in Canada!
Redeemable term deposits allow your clients to withdraw funds before the maturity date. However, conditions often apply. For instance, there could be a waiting period before redemption is allowed. Some products only permit redemption on an anniversary date, such as once per year.
Your clients might also receive a lower interest rate if they redeem early. Instead of the full posted rate, the institution can apply a reduced rate called an early redemption rate to the period the funds were invested.
Fully cashable term deposits go further. They can allow your clients to redeem at any time during the term with no penalties, while still receiving the interest earned up to that point. This high level of flexibility usually comes with a trade-off. Fully cashable products tend to offer lower interest rates than non-redeemable alternatives.
Non-redeemable term deposits do not allow early withdrawals. Your clients must leave the money in place until the maturity date to receive their principal and full interest. In exchange for this commitment, these products often offer higher rates than redeemable or cashable options.
For financial advisors, your clients' choice must be based on the purpose of the funds. Savings that support emergencies and near-term spending often belong to cashable or redeemable structures.
Funds for known future dates, such as a house purchase in several years, might fit non-redeemable term deposits with longer maturities.
Every financial product has strengths and weaknesses. Term deposits are no exception. Let’s first explore their advantages:
1) capital protection and security
2) predictable interest and easier planning
3) higher rates than standard savings accounts
Here is a brief discussion for each benefit:
Term deposits provide security. Your clients know their principal will be returned at maturity, so long as the institution honours the terms and the deposit is within any applicable insurance limits.
Many products also qualify for deposit insurance, either through the national insurer or provincial credit union programs.
Interest is known in advance for fixed rate term deposits. This makes planning easier. Your clients can see how much interest they will earn over the term and how it fits into their goals.
Compared with savings accounts, term deposits frequently offer higher rates, especially for longer terms and non-redeemable structures. Your clients will be rewarded for giving up some liquidity.
Now, we go over term deposits' drawbacks:
Let’s dive into them one by one:
Potential returns are lower than what your clients might earn from long-term exposure to assets such as stocks or equity funds. Remember, the safer the investment, the more limited the growth prospects over time.
Term deposits also tie up money for the term. While redeemable or cashable versions exist, they often have conditions or lower rates. This can limit flexibility if your clients' situation changes unexpectedly.
Finally, interest income is taxed less favourably in non-registered accounts compared with some other forms of investment income. Without the use of registered accounts, this can reduce net results.
Now that you know the pros and cons of term deposits, you might want to explore how to increase returns with term deposits, particularly through GICs:
Top-performing financial advisors can help clients make the most out of term deposits as a foundation for their investment strategy.
The answer often depends on what your clients are trying to achieve and when they will need the funds. Term deposits can offer attractive features for specific time frames and purposes.
Compared with a chequing account, term deposits almost always provide a much higher rate of return. In many cases, they also offer better rates than a regular savings account. This makes them suitable for money that does not need to sit in day-to-day banking.
If your clients are building an emergency fund, a term deposit can help them earn more interest while still protecting their capital. Short-term, redeemable, or fully cashable products can let them access money quickly when life events occur.
For goals within the next few years, such as a vacation or a car purchase, term deposits can be very useful. Your clients get a guaranteed interest rate and the comfort of knowing the funds will be there when needed. Market-based investments might deliver higher potential returns, but they also carry the risk of a drop in value just when your clients want to use the money.
However, there are some trade-offs. The safety of a term deposit usually means lower potential returns than riskier assets over longer periods. For long-term goals where your clients can tolerate market ups and downs, term deposits alone might not provide enough growth.
Another factor is liquidity. High-interest savings accounts (HISAs) generally offer easier access to funds than term deposits. Your clients can withdraw money at any time without worrying about early redemption conditions. In return, the rate might be lower and can change at any point.
Your role as a financial advisor is to balance these elements. For short- and medium-term goals where capital protection and timing certainty are critical, term deposits are often worth considering.
Term deposits can be a good starting point for your clients' investing journey in Canada. They combine simplicity, security, and predictable returns in a way that many new investors appreciate.
At the same time, it is vital to present term deposits as part of a wider strategy rather than the only answer. The safety they provide comes with limits on growth and flexibility. Tax treatment also needs attention, especially outside registered accounts.
When you explain these points in clear language, your clients will feel more assured. They can see how term deposits support their goals and where other investments might be needed.
If used wisely, term deposits can help your clients move step by step toward their financial objectives, whether they are short- or medium-term.
CIBC predicts lower rates will shift investments from term deposits to dividend-paying stocks like REITs and Utilities
They expect somewhere around US$160 billion
Misappropriation of client funds accounted for most of the penalty
Household net worth increased by $548.2bn in Q1 2024, driven by strong equity and housing markets
Study reveals insights into client-advisor relationships and financial goals
Mutual funds and equities led the financial services sector's gains in February
RBC discovers Canadians' mid-life financial goals and how they plan to reach them
As a leading financial institution, Royal Bank of Canada also offers mutual funds. Are these mutual funds from RBC a viable investment? Read on to know more
GDP data shows that the finance and insurance sector contracted for the second time in three months
