Back in March of 2010, the Canadian Foundation for Advancement of Investor Rights issued a report about the dismal state of money market funds. It stated that these short-term vehicles held more than $56 billion despite returns that were frequently zero, and in many cases negative. The report estimated Canadians were forfeiting between $300 million and $500 million in interest by not using comparable products.
In the three years since, money market funds have been hemorrhaging assets: as of February only $29 billion remained. But that’s still an awful lot of cash languishing in these antiquated investment products. There may be some legitimate reasons to still have cash in money market funds—investors may be locked into segregated fund contracts or face deferred sales charges, for example. But surely part of the reason is simply ignorance of the alternatives.
If you’re using money market funds as a place to park cash safely and with maximum liquidity, they’re not the best tool for the job. Investment Savings Accounts (ISAs) are far superior, yet they are still underused by investors and their advisors.
ISAs are not to be confused with conventional high-interest savings accounts offered by online banks. In fact, the term “account” is confusing, because ISAs have FundSERV codes and are bought and sold like money market and mutual funds. That means they can be held alongside other funds and securities in a brokerage account, both registered and taxable. They offer a unique set of advantages:
- They have T+1 settlement, making them just as liquid as money market funds.
- They are CDIC-insured, a claim money market funds cannot make.
- They have no management fees, though they pay a trailer to the dealer.
- Many are available in both A-series and F-series versions, so they’re compatible with any advisor’s business model.
- Their interest rates are in line with those offered by online banks: currently 1.25% for the A Series and 1.50% for the F series.
All the major banks offer ISAs: examples include the RBC Investment Savings Account, the Renaissance High Interest Savings Account (affiliated with CIBC), the Dundee Investment Savings Account (Scotiabank) and the Altamira High-Interest CashPerformer (National Bank). Bank-owned brokerages may offer only their own proprietary products, though rates are generally the same, so there’s no reason to prefer one over the other.
Many ISAs allow deposits in the millions, but any amount over $100,000 is not eligible for CDIC coverage. So for clients who need to have a lot of cash, it’s best to use multiple ISAs. Some of the large banks offer several ISAs associated with different corporate entities: for example, RBC customers may be able to use ISAs from Royal Bank, Royal Bank Mortgage Corporation, Royal Trust Corporation of Canada and the Royal Trust Company. Each one is separately covered by CDIC.