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RBC market linked GIC return rate

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Sr. Member
Nov 26, 2004
607 posts
12 upvotes

RBC market linked GIC return rate

Hi, I purchased RBC market linked GIC with participation rate at 50% of market return for 3 years. Is this rate negotiable? say to 80%? I signed the form today and it will be processed this Friday, is it too late to make any change? Thanks in advance.
9 replies
[OP]
Sr. Member
Nov 26, 2004
607 posts
12 upvotes
blainehamilton wrote:
Jun 4th, 2012 10:35 pm
So if its a guaranteed principle, what return do you get if the market goes down over the next 3 years?

zero.

That's right. Given that the highest 3 years non redeemable GIC rate I can get is 1.6x-1.7x%, anything better than that I am happy, the most I will lose is $170.

My question is, can I get better participation rate?

Right now if market return is 10%, I only get 5%.

Obviously I know I can't get 100%, because my investment is guaranteed.
Newbie
User avatar
Mar 25, 2012
59 posts
6 upvotes
ETOBICOKE
blainehamilton wrote:
Jun 4th, 2012 10:35 pm
So if its a guaranteed principle, what return do you get if the market goes down over the next 3 years?

zero.

"principal"... It's "guaranteed principal". :facepalm:
Sr. Member
Aug 17, 2008
826 posts
234 upvotes
This question has come up in the past, and my opinion is always that market linked GIC are good for the banks that manufacture them, and are not good for investors.

First to answer the original question, NO you cannot negotiate the participation rate. The "participation rate" is set based on "market conditions" when the GIC is launched. What does this means? and why is it no good for consumers?

(1) There is zero risk for the bank. They are guaranteed a healthy profit. How? The participation rate is set after factoring the full cost of completely hedging the guarantee with derivatives, an allowance for expenses and overhead, and a profit margin. Once they figure out how low they have to set the participation rate, then the bank will be able to fully hedge any money invested with them.
(2) You have to carefully read exactly how they calculate the return. It's not as simple as the market went up 10% over 3 years, therefore I get X% of the 10%. For example, RBC takes the average value of the last 12 months. Doesn't sound like a big difference, but with a short 3 year term, and high dividends, that averaging, plus the participation factor make it a guaranteed profit for the bank. I've seen other examples in the past where the participation factor seemed higher, but dividends are not included in the return calculated. So no matter what, after you read the fine print, it's not quite as good as the headline marketing materials seem to suggeste.

In general, when there is lots of complexity added to a product, it is almost always designed to confuse the consumer and help the bank. [not the end of the world if you buy one, but I generally do not recommend these things]
[OP]
Sr. Member
Nov 26, 2004
607 posts
12 upvotes
multimut wrote:
Jun 4th, 2012 11:59 pm
This question has come up in the past, and my opinion is always that market linked GIC are good for the banks that manufacture them, and are not good for investors.

First to answer the original question, NO you cannot negotiate the participation rate. The "participation rate" is set based on "market conditions" when the GIC is launched. What does this means? and why is it no good for consumers?

(1) There is zero risk for the bank. They are guaranteed a healthy profit. How? The participation rate is set after factoring the full cost of completely hedging the guarantee with derivatives, an allowance for expenses and overhead, and a profit margin. Once they figure out how low they have to set the participation rate, then the bank will be able to fully hedge any money invested with them.
(2) You have to carefully read exactly how they calculate the return. It's not as simple as the market went up 10% over 3 years, therefore I get X% of the 10%. For example, RBC takes the average value of the last 12 months. Doesn't sound like a big difference, but with a short 3 year term, and high dividends, that averaging, plus the participation factor make it a guaranteed profit for the bank. I've seen other examples in the past where the participation factor seemed higher, but dividends are not included in the return calculated. So no matter what, after you read the fine print, it's not quite as good as the headline marketing materials seem to suggeste.

In general, when there is lots of complexity added to a product, it is almost always designed to confuse the consumer and help the bank. [not the end of the world if you buy one, but I generally do not recommend these things]
Thank you for your answers. I check the market linked GIC calculator from RBC online, the final rate of return is 3% if I bought it 3 years ago. It is still better than 1.7x% if I buy regular GIC. What other product do you recommend that is comparable, I don't have high expectation since I am financially very conservative, I am happy with 3~5% with very little risk.
Deal Addict
Oct 4, 2009
1717 posts
584 upvotes
Montreal
G.H. wrote:
Jun 4th, 2012 10:43 pm
That's right. Given that the highest 3 years non redeemable GIC rate I can get is 1.6x-1.7x%, anything better than that I am happy, the most I will lose is $170.

My question is, can I get better participation rate?

Right now if market return is 10%, I only get 5%.

Obviously I know I can't get 100%, because my investment is guaranteed.

So many things wrong with this post. First off a 2.75% annual interest rate is available on a 3 year GIC at a CDIC insured bank(Peoples Trust). That's a total return of 8.48%. Assuming your math is as bad as I think it is, you are planning to invest 10k in this product so you are actually liable to lose $848 in potential interest.

These products are terrible and pray on uninformed investors. The information advantage enjoyed by those who construct these products over those who buy them is staggering.

Let's start with the basics. Those rates you quote are annual rates. Add the interest rate to your initial investment and then cube it for it's 3 year term. (1+.017)^3= 1.0519
As mentioned above you can do much better than 1.7% if a GIC is what you want.

To roll your own market linked GIC see this thread. http://forums.redflagdeals.com/50k-where-put-1036007/
[OP]
Sr. Member
Nov 26, 2004
607 posts
12 upvotes
S5 wrote:
Jun 5th, 2012 1:20 am
So many things wrong with this post. First off a 2.75% annual interest rate is available on a 3 year GIC at a CDIC insured bank(Peoples Trust). That's a total return of 8.48%. Assuming your math is as bad as I think it is, you are planning to invest 10k in this product so you are actually liable to lose $848 in potential interest.

These products are terrible and pray on uninformed investors. The information advantage enjoyed by those who construct these products over those who buy them is staggering.

Let's start with the basics. Those rates you quote are annual rates. Add the interest rate to your initial investment and then cube it for it's 3 year term. (1+.017)^3= 1.0519
As mentioned above you can do much better than 1.7% if a GIC is what you want.

To roll your own market linked GIC see this thread. http://forums.redflagdeals.com/50k-where-put-1036007/
This prevents me from doing that:
http://f.redflagdeals.com/showthread.php?t=700574
Newbie
Dec 29, 2010
2 posts
Heard them hawking these on the radio today. Guess what it means? It means the market is going to TANK.
Deal Fanatic
Jul 1, 2007
7675 posts
547 upvotes
I am someone who used to sell market linked GICs.

They are not beneficial to long-term investors looking for growth (lose a lot of upside)

They are not beneficial to risk-averse investors (downside risk of making 0 over 5 years)

They are beneficial to the bank (potential to borrow money at only the cost premium for whatever insurance policy or call option or whatever they have protecting them from market-upside).
Money Smarts Blog wrote:
Nov 29th, 2010 11:18 am
I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
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