A recent note from a reader prompts me to reprise the topic of forced foreign currency conversions in registered accounts such as RRSPs, TFSAs and RESPs at many discount brokers. The self-directed registered accounts offered by most discount brokers are denominated in Canadian dollars. When an investor purchases a stock or ETF that is trading on the US exchanges, the broker charges a mark up when converting Canadian dollars into US dollars or vice-versa.

Let’s take a concrete example. If the CAD and USD are trading at par, an investor buying $10,000 (US) worth of Johnson & Johnson (NYSE: JNJ) would pay $10,150 in Canadian dollars because the mark-up on foreign exchange conversions is typically 1.5%.

Fast forward a few months and our investor is frustrated with the flat-lining performance of JNJ. She wants to sell the dog and buy another stock, say Disney (NYSE: DIS). The dollar is still at par and our investor assumes that when she completes her two transactions she will own $10,000 (US) worth of DIS. Sadly, she is mistaken. Our investor holds JNJ in her RRSP account and her broker doesn’t offer a way to save on foreign currency conversions. When she sells $10,000 (US) worth of JNJ, the broker will first convert USD into CAD and our investor is left with proceeds of $9,850 (CAD). And when she turns around and buys DIS, the broker will convert CAD back into USD and our investor will now have just $9,702 worth of DIS shares. She has lost 3% of her investment in needlessly converting USD into CAD into USD.

Fortunately, some brokers provide their clients a way to avoid these expensive and hidden foreign exchange conversions. TD Waterhouse’s wash trading allows investors to park proceeds of US dollar trades into the TD US$ Money Market Account. RBC Direct Investing, Questrade and QTrade offer ways to settle US stock trades in US dollars. Scotia iTrade now offers a US-friendly RRSP. Even BMO InvestorLine sort of allows wash trading for clients jumping through some hoops. Clients who have accounts at the few holdouts should demand that their broker offer a way to avoid punishing foreign exchange conversions. If the brokers fails to heed their demands, they should vote with their wallet and move their accounts to a broker who doesn’t penalize buying and selling on the US exchanges.

This article has 21 comments

  1. The brokerages prey on the ignorant and the uninitiated. Hidden foreign exchange fees have become a pet peeve of mine.

  2. @Michael: Thanks. I’ve updated the post to point out that BMOIL sort of offers wash trading

    @Slacker: Agree. It’s scandalous that forced conversions could cost as much as 3% to 4% of the trade. Some discount brokers are fleecing their customers.

  3. Great article. Most investors aren’t even aware of the charges.

    “Vote with your feet!”

  4. @CC, let’s pretend I hold $10,000 USD worth of VTI in my RSP. If I wanted to sell all of my position, can I use Norbert’s Gambit to minimize currency conversion fees? Or does the gambit only work if I want to buy a USD-denominated security with Canadian dollars? I’m at Scotia iTrade and am very frustrated with currency exchange fees, which I believe are among the worst of any online broker in Canada. I can’t quite stomach the idea of paying $30 a quarter for their new USD friendly account but I suppose I should run the numbers to see. Still, Norbert’s Gambit, if possible, seems the way to go.

  5. @Money Smarts Blog: It annoys me endlessly when I hear from investors singed by these hidden and forced foreign exchange conversions. It is unconscionable that a simple buy and sell could cost 3% to 4% of the total trade.

    @DM: The Norbert Gambit works when you want to convert one currency into another for a very low cost. In your example, if I wanted to sell $10,000 worth of VTI and buy $10,000 worth of XIU, I’d sell VTI, buy RIMM, journal over to the Canadian account, sell TSX:RIM and buy XIU with the proceeds. Of course, this only works if you have a USD-denominated RSP or a RSP that allows wash trading.

    I’m not clear on two questions as far as Scotia iTrade is concerned. 1) Can you sign up for a US-friendly RSP account for just one quarter? and 2) Does iTrade offer wash trading in their regular RSP account? I’ll check with them and report back.

    Depending on the size of your account at iTrade and your RRSP holdings, I’d weigh the cost of the US-Friendly RSP against how much I’m paying in currency conversions. Let’s say you have a RSP account with about $100,000 in it. $120 per year will easily pay for itself as long as you convert just $7,300 from CAD into USD. If you tend to contribute say $10,000 to your RSP every year and buy VTI, VEA and VWO with it, you’ll be saving money with a iTrade US-Friendly account.

  6. @CC, thanks for the reply. I can confirm that iTrade will wash trades in RSP accounts. You have to call in the day following the trade to request it though. I may give the gambit a shot.

  7. I know many people who have kept foreign diversification to a minimum in large part because of the currency conversion fees.

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  9. Great post and excellent example.

  10. Interactive Brokers (Canada) charges US$2.50 commission for forex trades up to US$125,000.

    http://www.interactivebrokers.ca

  11. I just looked into Questrade… I didn’t realize they charge only 50 pips for USD conversions! That’s pretty impressive, on top of already offering integrated USD RRSPs and $4.95 trades. That’s too compelling for me not to switch from TD Waterhouse….

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  14. A minor note, but it took me by surprise.

    When you receive distributions from a US$ etf (like VTI), the distribution at TD Waterhouse can be set up to “drip” in an RRSP account.

    But… they take the distribution, buy as many whole shares as they can and any money left over gets converted automatically back to Canadian (unless you called ahead to wash the trade… but that’s a lot of keeping track and timing each month or quarter).

    It’s a small, but extra cost over my investing life that I’d rather not have. We must agitate for a $US RRSP!!

  15. Just checked with CIBC… they don’t offer wash trades but they do ‘fx netting’, which essentially is a preferential rate if you buy and sell on the same day. The trader I spoke to said that they basically charge you on the buy, not the sell, so instead of 3% it’s 1.5%. Better, but not great…

  16. I am currently switching some of my hedged ETFs to unhedged USD ETFs.
    I was able to use Norbit’s Gambit in my unregistered and RRSP accounts (with RBC DI). Using NG, I exchanged my funds at a rate of 1.009 today.
    Unfortunately, the RESP accounts at RBC don’t allow for a USD cash holding and the purchases required use of the RBC Forex conversion. These purchases went through at a conversion rate of 0.984.
    That’s quite a rough shave on the currency conversion…
    I phoned the trade desk to confirm the rate and was told that the rate was correct– “the computer forces the conversion to go through at this rate.” Ouch. Suffer the children…

  17. Update: The settlement of the trades in my RESP accounts now appears to be going through at a rate of 1.00569. Much better than the initial conversion that was showing- significantly closer to where the rate was floating at the time. I am much happier now– RBC DI is in my good books again!

  18. Sorry, the above rate should be read as the inverse, i.e. 1/1.00569 or .994342 or about a 1.5% commission to Royal Bank on the currency conversion. Still a significant shave when compared to Norbit’s Gambit– easy money for the House.

  19. Apparently the TDW RRSP now allows for an automatic wash of trades. I’ve put a post up on Canadian Money forum http://www.canadianmoneyforum.com/showthread.php?t=7245

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