Why are banks blocking cash ETFs?

Big banks are blocking online investors from buying cash ETFs, and one provider is wondering if low-fee index and balanced ETFs could be next.

“I was speaking with an elderly investor who wanted to earn some interest on tens of thousands of dollars of cash that he needs to keep in cash for a few months because he has a use for it,” Myron Genyk, co-founder and chief executive officer of Evermore Capital, told Wealth Professional.

“I told him about Canada’s various high interest cash ETFs, which are a good investment if you have cash that you’d like to do something with, but you need in less than a year. But, he was unable to make the purchase. So, now this investor is weighing his alternatives. Will he put it in a GIC? Or maybe open an investment account with another firm – and move some, or all, of his money?

“This is a big deal because a lot of Canadians want to keep cash on hand and keep it in something liquid that they can easily get in and out of. GICs don’t let you do that. If you cash out your GIC early, you lose all the interest that you accrued over time. Cash ETFs offer a pretty good rate of return. They’re yielding about 3% right now. But banks really prefer to put their clients into term deposits and GICs because they’re a cheap and easy source of capital. They’re cheap because banks pay very little interest on them. They’re easy because banks already have the clients. And it is capital because banks use that money to make more money when they loan it at a higher rate.”

Genyk said banks have two options. They can make their cash deposits and GICS more attractive to clients, which they won’t do since it will cost them more interest. Or they can prohibit clients from accessing cash ETFs, which they now have done, even though they could lose some clients.

Genyk, whose Evermore is a new Canadian asset management company, fears this may be the first domino to fall. Given the new know your product rules, banks have already started limiting the mutual funds their advisors can sell. They’re also expanding their ETF offerings.

“So, I think it is possible that, someday, banks might require their advisors to only use bank-issued ETFs,” he said.

He said there are three reasons why that’s a bad idea for clients. The first is they now may be presented with sub-optimal options since no bank has the best ETF in every category The second is they may face higher fees since banks may not be motivated to offer low-free products “if they’re the only game in town”. Finally limiting competition reduces innovation.

“It stifles the industry’s drive to innovate and create better products”, he said, citing the target-date ETFs that Evermore developed to fill a market gap. “We hope our products will continue to be available on the bank platforms and on their discount brokerage platforms.”

Maintaining the widest array of options is good for both advisors and their clients, he said, as advisors try to provide their clients with the best solutions to meet their financial goals.

“If banks continue down this road, then advisors who work at banks will have fewer options to demonstrate their independence,” said Genyk, “and to show their clients that they’re more than just salespeople, that they really are advisors working in the best interest of their clients.”