High interest savings accounts on the rise

(September 2007) With the markets in turmoil, many clients are looking for new, less risky places to put their money. According to Toronto-based consultancy firm Investor Economics, the high interest savings account (HISA) is turning out to be the destination of choice for risk-averse investors.

A recent Insight report from the firm focuses on the rise of HISA’s over the last few years, to the detriment of money market funds. The report says that in the past several years, 29 different premium savings accounts have popped up, with deposits totalling $74 billion in 2006 — up from $14 billion five years ago.

Of that huge number, $27 million is in tiered savings accounts, which pay interest on an escalating scale. According to Insight, these types of accounts are growing faster than the more traditional HISA, and could become even more popular with the introduction of newer, more accessible accounts. PC Financial introduced the Interest Plus account, a premium offering with a minimum initial investment of just $1,000, as opposed to the usual $5,000.

Still, with most of the assets in tiered accounts held by TD, RBC, and CIBC, competition remains sparse.

It’s a different story in the HISA category, with 20 banks offering a premium account at varying interest rates interest. Rates can start as low as 2.4% on the AMEX Investment Savings account and climb to 4.5% with ICICI Bank’s HiSave savings account.

Even with all that competition, most of the assets are with three companies: ING Direct, Scotiabank and BMO. Together, these institutions represent 70% of the HISA assets in Canada, despite their interest rates being among the lowest (currently 3.75%, 3.25% and 2.6% respectively).

Investor Economics found that within the HISA category, more than 70% of accounts had less than $5,000 while just 3.4% had more than $60,000. “It seems likely that most account holders are not actively using these accounts for investment savings, but rather as current banking accounts while trying to make decent interest on money used for day-to-day expenses,” the report says.

The explosion of premium savings accounts has been good news for alternative banks, but core institutions that made billions in the money market have had to shift gears as more traditional short-term savings outlets have suffered.

The Insight report reveals that money market funds have fallen at an annual rate of 7% over the past four years, with the segment’s total share of the savings market declining to 6% in 2006, down from 10% in 2002.

“The data suggests a reversal of the last decade’s disintermediation trend, which saw vast amounts of money leave deposits and flow into money market funds,” says Investor Economics.

The reason for money market declines, explains the report, is due to a couple of factors. When interest rates declined more than a decade ago, money markets had an advantage as the impact of the rate changes had a more long-term effect on the product. Today, interest rates are relatively stable, wiping out money market’s advantage.

Another big reason for the drop in the money market segment is that the banks failed to advertise their product properly, instead choosing to focus on long-term investments. When they realized that people were turning to premium savings accounts, the banks decided to open up their own HISAs, instead of pushing the money market segment. “Banks were slow to counter the competitive challenge from the alternative bank premium savings products,” says the report.

While premium savings accounts are clearly growing, distribution challenges still plague the market. Generally, people who want to open a HISA have to head to a bank branch or go online, but more and more financial advisors and brokers are getting in on the action. Seven institutions have already created advisor-friendly products that come complete with trailer fees.

The report says offerings from Altamira, Manulife and Dundee have already made “significant inroads” in the premium account space. “(These) are currently among the fastest growing sponsors in this area,” Insight reveals.

Dundee has taken things a step further by offering their HISA in an F-class, removing the trailer compensation embedded in it’s A-Series. That way the account can be offered in fee-based brokerage platforms.

If advisors can capitalize on the desire for premium savings accounts, the outcome could be lucrative. “Cash management is becoming increasingly important in an advisor’s book of business,” says the report.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(09/05/07)

Bryan Borzykowski