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How Market-Linked GICs are Offering False Promises

The ProForm Ab Glider is amazing and remarkable and stupendous, and not just because it looks like a wheel-less tricycle crossed with a banana. It's because it promises six-pack abs in just "three minutes a day!"

The ProForm Ab Glider is amazing and remarkable and stupendous, and not just because it looks like a wheel-less tricycle crossed with a banana. It's because it promises six-pack abs in just "three minutes a day!"

You can realize huge benefits with next-to-no work. Ryan Reynolds got his washboard from a shortcut gadget, not twice-a-day cardio workouts and a disciplined diet for years. They remind me of the old adage: if it's too good to be true (well, you know the rest).

They also remind me of the shortcut gadget of the wealth-management industry: the market-linked GIC.

These GICs are pitched as the perfect vehicle for investors who can abide no risk, but are eager to benefit from the potential of a market upswing. They promise a safe, smooth and worry-free investment journey: all of your money back if the market plummets, and a big, beautiful win if the market surges.

They deliver about the same results as a rotating gizmo will on your belly if you don't change your diet.

My organization, ATB Financial, wants our customers to get real results, not gadgets. That's why we stopped offering market-linked GICs to our customers.

This spring, though, you'll see lots of ads for these products and their cousins, principle-protected notes. My bet is the ads will have a best-of-both-worlds vibe.

I could bore you with a technical analysis of why sophisticated investors who manage tens of billions in investments never buy these things. But, in layperson's terms, they're targeted at risk-averse investors who don't realize that they're a great deal for the bank, but a terrible deal for them.

The short version: it's the fine print that gets you.

Ab Rollers should have this disclaimer: "Warning -- washboard abs happen ONLY when you combine strength training to build muscle and follow a disciplined diet to reduce body fat. You may have to follow a regime for years. Depending on your body type, you may need to do regular cardio."

Market-linked GICs should have this disclaimer: "Warning -- you are locking up your money for three years. There are very few periods in history, including the worst financial crises, where a balanced portfolio wouldn't have retained most of its value. This product contains complex fees, backstopped with hedges and options and derivatives. Noteholders may give up 80 to 90 per cent of a market's upside because the lion's share of this product's profits go to the bank. And they are sold at the retail branch level, by well-meaning staff who nevertheless don't fully understand the complexity of the product they're selling."

I don't fault bankers for selling market-linked GICs, any more than I blame the chiseled pitch-people who hawk Ab Rockets and Belly Burners on daytime TV.

But I do blame our industry leaders for embracing the easy buck and shying away from the f-bomb -- fiduciary -- that should be guiding our business and our relationships with clients.

Banks that sell market-linked GICs are basically selling insurance. And how do insurers make their money? By layering profit-prompting conditions onto their products. You're covered for that flood ... unless the water has mud in it. Your car won't cost you anything out-of-pocket to fix ... unless it hails or you're crunched by a blue Nissan.

One only needs to look at the behavior of society's most savvy investors for clues that market-linked GICs are not what they're cracked up to be.

If these products really did offer the best of both worlds -- no downside, with all of the potential upside -- every institutional investor in the world would own billions. They'd be in pension plans and every big provincial investment portfolio. Warren Buffett would build an army of cyborg invest-bots to scour the globe for market-linked GICs to wire back to HQ in Omaha. (I know that sounds far-fetched, but believe me: Warren Buffett can AFFORD an army of invest-bots.)

As The Globe and Mail said about these products in a 2010 editorial: "If you want market-like returns, you have to accept market-like risk. And if you want safety, there are better ways to achieve it."

If you're an investor that really can't abide risk, then don't. Don't settle for zero return. But do buy a regular GIC or blue chip bond that will guarantee you a return that helps you keep pace with inflation.

If you are willing to be patient and keep from touching your money for the long-term, don't pay for insurance you don't need. But do invest in a good global balanced portfolio and keep 100 per cent of the return instead of giving it away to your bank.

If you are skeptical -- a quality I love in investors -- ask the person trying to sell you these products one simple question. "If the market is up 10 per cent, what return will I get?"

The answer (if the advisor actually understands the product) will be enormously complex. It might go something like: "Well, it depends if the market goes up in a straight line or not, as you only get the average return, not the total return. If the market goes up 10 per cent but fluctuates, like it did between 2010 and 2013, you might get close to zero per cent return. If it goes up in a straight line, you might get six or eight per cent. But if it did that, you wouldn't need insurance..."

If you're still not convinced, visit the bank's website and try to find past returns for these products, or disclosure on their embedded fees. I've tried. You can't.

You'd never hire a personal trainer who touts a daily regimen of Krispy Kremes and three minutes of goofy ab crunches. Why settle for the same nonsense in your portfolio?

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