Complicated logistics of GIC ladders

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Complicated logistics of GIC ladders

Post by Benchwarmer » 14 Oct 2013 21:25

My planned portfolio is structured as 1/3 each in stocks, FI & cash. I debated with myself about the cash portion, but settled on it because the best protection against high inflation is probably cash, such as 90 day t-bills or hisa. In order to keep it simple, each are kept separate, with no re-balancing.

The purpose of the portfolio is to generate discretionary income in my retirement (my necessities are covered by my work pension, CPP & OAS). Likely a 1% withdrawal rate, to start in 9 years. I will retire earlier than that, but I expect to work part-time so as not to draw on the portfolio too early.

I already have the stock & cash portions set up, but I am debating how best to approach the FI.

My original intention was to create a 5-year GIC ladder, but I am having second thoughts because of the complicated logistics. I am still working, so I could end up with a bunch of ladders, each with their own series of 1 to 5 year GICs. I read Shakespeare's Wiki (thanks!), and it stated that there is little difference between a running bond ladder & an equivalent duration high-quality bond ETF. I am tempted to just purchased a low-MER 5-year treasury bond ETF, and once a year add to it. For all practical purposes my brokerage commission will be zero.

The FI portion will be held in non-registered, RRSP & TFSA containers. I understand that it may not make sense to hold a bond ETF non-registered due to tax implications, but I don't yet fully understand the issue, other than over-paying tax as income (100%), and getting capital loss in return (50%).

I do not have an account with a broker that offers a wide selection of GICs. I could open an account with a deposit broker, but that may add an additional layer of risk. I tried opening a CIBC InvestorsEdge discount brokerage account many years ago, but they insisted that I go through a local branch adviser, who tried to turn it from a discount brokerage account to a full commission one. That experience soured me on wanting to do business with the big bank discount brokerages.

I am wondering what you would do in my situation?

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Re: Complicated logistics of GIC ladders

Post by Shakespeare » 14 Oct 2013 21:33

The advantage of a GIC ladder over a bond ETF right now is better rates. For that you sacrifice liquidity and some measure of convenience.
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Re: Complicated logistics of GIC ladders

Post by ockham » 14 Oct 2013 22:55

Benchwarmer wrote:
I already have the stock & cash portions set up, but I am debating how best to approach the FI.

My original intention was to create a 5-year GIC ladder, but I am having second thoughts because of the complicated logistics. I am still working, so I could end up with a bunch of ladders, each with their own series of 1 to 5 year GICs.
I don't understand what you mean by "complicated logistics". Please say more. Are you referring to the fact that you will be accumulating funds on an ongoing basis for contribution?? Or are you referring to the fact that you don't have a single brokerage account through which to make your contributions and purchases??

I have, basically, 4 ladders, one with maturity in January, another with maturity in August, and two with maturity scattered. This outcome wasn't exactly planned, and it's not as simple, surely, as a single ladder with the same maturity dates. But it falls well short of "complicated". It also has its psychological compensations in a rising interest rate environment. I replace a maturing rung on one ladder serene in the knowledge that a rung on another ladder will be maturing soon. What's not to like?

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Re: Complicated logistics of GIC ladders

Post by Benchwarmer » 14 Oct 2013 23:22

ockham wrote:I don't understand what you mean by "complicated logistics". Please say more. Are you referring to the fact that you will be accumulating funds on an ongoing basis for contribution?? Or are you referring to the fact that you don't have a single brokerage account through which to make your contributions and purchases??
It is complicated because of the number of factors involved:

- In order to get the best possible GIC rates, when a GIC matures I may have to shift the money to another institution. For example, had I set up a ladder last year, the 1 year one maturing today would see a transfer from Peoples Trust to Home Trust. The difference is significant (2.6% vs 3.15%).

- The transfer is not too bad if it is non-registered (but still takes effort), but a transfer in an RRSP or TFSA account would be even more burdensome.

- I expect to be accumulating funds on an ongoing basis for 9 more years. I will end up with 10 series of ladders, each with 5 GICs, for a total of 50. Eventually I will need to re-invest 10 of them per year, with possible transfer between institutions.

- In 9 years time, I will be in a withdrawal mode. I will then have to decide which ones to roll-over with compounding interest, which with annual interest, and possibly which to collapse.

There are probably other complications I haven't considered. It would be so much simpler using a 5-year bond ETF, but as Shakespeare pointed out above, I will lose the higher rate advantage.

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Re: Complicated logistics of GIC ladders

Post by Shakespeare » 14 Oct 2013 23:28

Just pick one institution and stay there.
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Re: Complicated logistics of GIC ladders

Post by Benchwarmer » 14 Oct 2013 23:37

Shakespeare wrote:Just pick one institution and stay there.
There seems to be a pattern of an institution being initially competitive, then becoming not. For example ING was once very competitive, now it is not at all (in fact, it seems that all their promotions are aimed at new money). Same with Canadian Tire Bank. And then there's Ally, which has become so uncompetitive after being sold that it is essentially offering rates of the Big 5 banks.

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Re: Complicated logistics of GIC ladders

Post by Shakespeare » 14 Oct 2013 23:48

Pick a discount brokerage with a reasonable GIC selection and put everything there. Anything else is too complicated.

You don't have to run 77 different accounts. So don't.
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Re: Complicated logistics of GIC ladders

Post by AltaRed » 15 Oct 2013 00:01

Shakespeare wrote:Pick a discount brokerage with a reasonable GIC selection and put everything there. Anything else is too complicated.

You don't have to run 77 different accounts. So don't.
I agree. I wouldn't have my GIC ladder in more than one discount brokerage account. Even if that GIC ladder was $1miillion in size. Places like RBC DI and BMO IL have a wide selection of issuers, allowing one to have as many as 10 to 20 or even more GICs in one 5 year GIC ladder.

Example 1 for $1 million. Divide it into 20 GICs of $50k each. Set it up to have a 5 yr GIC mature every quarter.
Example 2 for $1 million. Divide it into 10 GICs of $100k each. Set it up to have a 5 yr GIC mature every 6 months.

Discount brokerage GIC rates usually are the highest going, or occasionally a miss of 25-30bp due to one off promotions by another institution like Peoples Trust or Home Trust. Forget about those one off promotions. They are a PITA and add little to the outcome.
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Re: Complicated logistics of GIC ladders

Post by like_to_retire » 15 Oct 2013 10:36

Shakespeare wrote:Pick a discount brokerage with a reasonable GIC selection and put everything there. Anything else is too complicated.....
Exactly. The discount brokers offer a decent selection of GIC's from other institutions.

For example I'm with TDWaterhouse and they handle :Manulife Bank, Home Trust Company, TD Mortgage, AGF Trust, HSBC Bank, BMO, BNS, RBC, Equitable Trust, Canadian Tire Bank, TD Bank, Canadian Western Bank, TD Pacific, Canada Trust. I understand from reading posts here that other brokers may offer more selection than TDW, but all the brokers offer a variety.

This allows you to have a very large ladder while keeping the maximum at each company below $100K.

Once you retire, (or five years before if feel you will require all the income that's thrown off), start switching from compound to semi-annual pay.

I have both non-registered and registered ladders. There's no complication.
benchwarmer wrote: I could open an account with a deposit broker, but that may add an additional layer of risk.
I don't really understand that statement. If you're going to DIY your investments, you need a discount broker. The account is opened at a local branch. That's the way it's done. Just don't listen to the local branch drivel. Just open the discount account and you're done with the local branch.

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Re: Complicated logistics of GIC ladders

Post by Benchwarmer » 15 Oct 2013 10:54

Thank you for your replies. It sounds like the route to go is with a discount broker & not a deposit one. Do you carry out all of your GIC transactions on-line?

With RBC DI, you cannot directly transfer with your non-RBC checking account. Is that also the case with other discount brokers (e.g. BMO IL)?

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Re: Complicated logistics of GIC ladders

Post by ockham » 15 Oct 2013 11:23

Benchwarmer wrote: It sounds like the route to go is with a discount broker & not a deposit one. Do you carry out all of your GIC transactions on-line?
I now understand what you meant by "complicated logistics". What you were describing is a logistical nightmare! There lies madness.

Go to one discount brokerage, at most two. Both RBCDI and BMOIL, for example, allow on-line purchase of GICs. Both carry a substantial inventory from a variety of issuers. A 5 yr ladder set up today at RBCDI beats a short term bond ETF by close to 100bps. That will add up. You might be able to add a few bps to that by instead going directly from institution to institution -- but at the cost of driving yourself crazy.

Good luck.

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Re: Complicated logistics of GIC ladders

Post by BRIAN5000 » 15 Oct 2013 11:37

With RBC DI, you cannot directly transfer with your non-RBC checking account. Is that also the case with other discount brokers (e.g. BMO IL)?
With TDW brokerage I can "use bill payment" from BNS to get money to TDW, to go the other way I need to phone and they will send a check or PFT to my chequing account. Others brokerages may be similar.

25-30bp is $208.00 a month on a million not exactly trivial.
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Re: Complicated logistics of GIC ladders

Post by AltaRed » 15 Oct 2013 12:05

Benchwarmer wrote:Do you carry out all of your GIC transactions on-line?

With RBC DI, you cannot directly transfer with your non-RBC checking account. Is that also the case with other discount brokers (e.g. BMO IL)?
In the case of RBC DI and BMO IL, I conduct all of my GIC transactions online. Scotia iTrade has not yet gone to online GIC purchasing (have to phone in to get a verbal description of their offerings) but they keep saying they are working on it.

1) RBC DI appears to be a PITA for those with no RBC bank account to transfer funds OUT, and thus I restrict my RBC DI business to my 'static' RRSP business (no new additions or withdrawals). I have set up Bill Payment methodology to move money to RBC DI from my BNS, CIBC and BMO MyLink chequing accounts, but I see no way to move money out of RBC DI without a RBC chequing account (yet). When it comes time to make withdrawals in 7 years, it will likely have to be by asking them to mail me a cheque (if no changes by then). Or I will transfer my RRSP account elsewhere.
2) BMO IL allows you to set up a MyLink bank chequing account linked to the brokerage account whereby the MyLink account holds the spare cash in the brokerage account and is seamless in terms of moving money out from BMO. I have yet to use the MyLink account for this purpose, but I have set up Bill Payment payees to both my Scotia iTrade and RBC DI brokerage accounts. From Scotia iTrade, I can then transfer money to my primary BNS chequing account. I have moved money from my BNS chequing account to BMO IL using Bill Payment methodology and can do so from my CIBC chequing account as well.
3) Scotia iTrade allows you to set up EFTs to any number of bank accounts you wish with the completion of a form with the transit data for other institutions. I currently have my iTrade account linked directly to CIBC chequing as an example (as well as Scotia accounts) to move money out of iTrade. Bill Payment methodology works to move money to iTrade from CIBC and BMO MyLink chequing accounts for example.

Of those 3 discount brokerage accounts I have, BMO IL probably has the best overall flexibility (online GIC purchasing, good GIC selection, MyLink account to move funds into/out of BMO).

Edited: To add and clarify information
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Re: Complicated logistics of GIC ladders

Post by Benchwarmer » 15 Oct 2013 12:56

AltaRed wrote:Of those 3 discount brokerage accounts I have, BMO IL probably has the best overall flexibility (online GIC purchasing, good GIC selection, MyLink account to move funds into/out of BMO).
Thanks.

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Re: Complicated logistics of GIC ladders

Post by westinvest » 15 Oct 2013 23:52

AltaRed wrote: 1) RBC DI appears to be a PITA for those with no RBC bank account to transfer funds OUT, and thus I restrict my RBC DI business to my 'static' RRSP business (no new additions or withdrawals). I have set up Bill Payment methodology to move money to RBC DI from my BNS, CIBC and BMO MyLink chequing accounts, but I see no way to move money out of RBC DI without a RBC chequing account (yet). When it comes time to make withdrawals in 7 years, it will likely have to be by asking them to mail me a cheque (if no changes by then). Or I will transfer my RRSP account elsewhere.
Agreed that BMO is the most flexible, I do my primary banking there and use BMOIL for the accounts that have the most activity. I do have accounts at RBCDI as well, legacies from the $2500 bonus days, but once you turn 60 they will happily open a free chequeing account for you, in fact they will open several - I use this as a means of feeding my cross border accounts with no cost.

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Re: Complicated logistics of GIC ladders

Post by Quebec » 17 Oct 2013 21:20

Benchwarmer wrote: I expect to be accumulating funds on an ongoing basis for 9 more years. I will end up with 10 series of ladders, each with 5 GICs, for a total of 50.
No, in a five year ladder there are only five GICs or bonds (unless you want to diversify issuers). Every year one GIC matures and you replace it with a new five year GIC. Additional funds can be added to the new GIC then.

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Re: Complicated logistics of GIC ladders

Post by Park » 19 Oct 2013 23:42

Efficient frontiers graphs of stock/bond allocations commonly show that 100% bonds usually show similar volatility and lower return than 80% bond/20% stock allocations. Similarly, 100% stocks commonly show greater volatility for only modestly increased return, compared to 80% stocks/20% bonds.

Correct me if I wrong, but these graphs assume rebalancing, so that the % stock/% bonds remain constant. And transactions costs and taxes associated with rebalancing are ignored. Also, it is assumed that investors are disciplined: when stocks are going up, stocks will be sold and bonds will be bought. Similarly, in a bear market, bonds will be sold and stocks bought.

Let us assume that costs and taxes aren't prohibitive, and the investor is sufficiently disciplined. If their fixed income is in GICs, it will not be possible to rebalance.

Is the liquidity premium of GICs sufficient to overcome the loss of the rebalancing bonus?

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Re: Complicated logistics of GIC ladders

Post by like_to_retire » 20 Oct 2013 08:57

Park wrote: If their fixed income is in GICs, it will not be possible to rebalance.
Why not, a 10 GIC ladder matures and is available for rebalancing every six months.

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Re: Complicated logistics of GIC ladders

Post by BRIAN5000 » 20 Oct 2013 11:38

Is the liquidity premium of GICs sufficient to overcome the loss of the rebalancing bonus?
I use a 0 to 5 GIC ladder. The Zero part either in HISA or some sort of cashable GIC. At the moment I use Prospera's 2% cashable. (Two, 2 year bought one year apart)
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Re: Complicated logistics of GIC ladders

Post by Descartes » 20 Oct 2013 12:29

Quebec wrote:
Benchwarmer wrote: I expect to be accumulating funds on an ongoing basis for 9 more years. I will end up with 10 series of ladders, each with 5 GICs, for a total of 50.
No, in a five year ladder there are only five GICs or bonds (unless you want to diversify issuers). Every year one GIC matures and you replace it with a new five year GIC. Additional funds can be added to the new GIC then.
I think it has been said before but a five year ladder can have any number of "rungs" in it. The more rungs you have the more responsive your ladder can be to fluctuations in offered rates.. if this is important to you. For example, you can have make a GIC purchase every 6 months to have 10 rungs (and thus GICs/bonds) in your 5 year ladder. It is just a matter of perspective if you want to view this instead as 2 series of 5 year ladders each with 5 rungs in it.
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Re: Complicated logistics of GIC ladders

Post by Benchwarmer » 20 Oct 2013 14:01

Benchwarmer wrote: I expect to be accumulating funds on an ongoing basis for 9 more years. I will end up with 10 series of ladders, each with 5 GICs, for a total of 50.

It looks like I can simplify things in 2 ways. First as Quebec suggested, add money as I renew a GIC. This reduces my scenario from 50 GICs to always 5, a much more manageable number even if I chase rates by constantly switching institutions.

The other is to use a discount broker, which completely eliminates having to jump around, but having to settle for slightly lower rates.

I looked into BMOIL, and was quite surprise that they need a mandatory credit check in order to open a cash investment account. I can understand this for margin. It seems to be part of an increasing trend of corporations requiring users to disclose more personal information in order to access services.

I notice that the Account Link Service only provides 2 free on-line transfers per month. Does the additional fee apply to transfers into the account?

[Edit] What does this mean: Estate Account Certificate - handling fee - $50.00 per security?

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Re: Complicated logistics of GIC ladders

Post by Benchwarmer » 03 Nov 2013 03:08

Benchwarmer wrote:What does this mean: Estate Account Certificate - handling fee - $50.00 per security?
Answering my own question - an estate account certificate for a stock is permission given by the executor to the broker to sell a stock. I currently have approximately 40 stocks in my portfolio, so if they are held with BMOIL (which they are not), it would cost my estate $2,000 to liquidate them.

What is not clear is if my portfolio has 40 GICs with BMOIL, would it also cost $2,000 to liquidate them after I pass away?

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Re: Complicated logistics of GIC ladders

Post by AltaRed » 03 Nov 2013 10:54

It is not clear to me why one would need an estate account certificate for each asset (equity or bond or GIC) in a brokerage account. Surely ONE certificate per account would suffice. Perhaps ask BMOIL and enlighten us? Even if that fee applied to each asset, if each asset was worth at least $10k, that represents 0.4% cost. My average size of my holdings is considerably more than that.
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Re: Complicated logistics of GIC ladders

Post by Norbert Schlenker » 03 Nov 2013 11:17

Benchwarmer wrote:
Benchwarmer wrote:What does this mean: Estate Account Certificate - handling fee - $50.00 per security?
Answering my own question - an estate account certificate for a stock is permission given by the executor to the broker to sell a stock.
Did you get this directly from BMOIL? My understanding of fees with names like these is completely different. AFAIK this fee is imposed when depositing a stock certificate registered to the name of a deceased person into an estate account at the broker (prime example: emptying a safe deposit box). As one can imagine, dealing with such certificates comes with its own headaches.
I currently have approximately 40 stocks in my portfolio, so if they are held with BMOIL (which they are not), it would cost my estate $2,000 to liquidate them.
Per the above, I don't think so. An account of a deceased individual holding a bunch of securities in street name, which is the usual case, will AFAIK either be retitled in "Estate of the Late ..." or a new account with that titling will be created and the positions and cash poured over from the old account.
I notice that the Account Link Service only provides 2 free on-line transfers per month. Does the additional fee apply to transfers into the account?
I don't think so but I've never tried it so cannot be sure. I tend to move money in chunks between BMOIL and a BMO chequing account, where this per transaction nonsense doesn't apply.
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Re: Complicated logistics of GIC ladders

Post by Benchwarmer » 03 Nov 2013 13:16

Norbert Schlenker wrote:
Benchwarmer wrote:
Benchwarmer wrote:What does this mean: Estate Account Certificate - handling fee - $50.00 per security?
Answering my own question - an estate account certificate for a stock is permission given by the executor to the broker to sell a stock.
Did you get this directly from BMOIL? My understanding of fees with names like these is completely different. AFAIK this fee is imposed when depositing a stock certificate registered to the name of a deceased person into an estate account at the broker (prime example: emptying a safe deposit box). As one can imagine, dealing with such certificates comes with its own headaches.
I believe you are correct, the terms 'certificate' and 'security' are used interchangeably when it comes to estate account certificates. In BMOIL it is $50 per security, in iTrade it is $50 per certificate, so it probably refers to stock certificates registered in the owner's name. I won't bother following up on this.

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