Canadian Capitalist » Discount Brokers

TD Waterhouse and US Dollar Dividends in RRSP Accounts

Canadian Capitalist — Thu, 17 Nov 2011 03:46:06 +0000

TD Waterhouse used to be a leader at offering innovative features at least among bank-owned brokerages. They were the first to offer wash trading as a way around avoiding forced currency conversion charges in RRSP accounts. They were also the first to lower trading commissions to $9.99 for clients with accounts above a certain threshold. But recently, TD Waterhouse has gotten complacent. While RBC Direct and BMO InvestorLine have introduced the ability to separate US Dollar holdings in RRSP accounts, TD Waterhouse has not follow suit. As a result, TD Waterhouse has now slipped to the bottom half of the pack in the Globe and Mail’s Annual Discount Broker Rankings put together by Rob Carrick.

One could argue that separate US Dollar RRSP accounts are less of an issue at TD Waterhouse because a client can take advantage of automatic wash trading these days and completely avoid currency conversion from US dollars to Canadian dollars and back when selling and buying US dollar denominated securities. However, there still remains the issue of forced conversion of US dollar dividends received in RRSP accounts. For instance, an investor owning a US stock that pays a 4% dividend is losing 8 basis points or so (assuming currency conversion costs 2%). If the investor turns around and buys another US stock and converts currency at the retail rate, it will cost her another 8 basis points for a total of 16 basis points. The same investor could have avoided the currency conversions entirely if she had transferred her account to a competitor offering US Dollar RRSP accounts.

It is possible that TD Waterhouse is saddled with legacy systems that make it difficult to offer completely segregated US Dollar RRSP accounts. But they should try and offer clients a way to avoid forced conversions of US dollar dividends into Canadian dollars. They can do so by either waiving the retail markup on foreign exchange conversions for US dollar dividends or allowing clients to wash US dollar dividends into the TD US Money Market Account (TDB166). Otherwise, current TD Waterhouse clients might be tempted to take their business to more nimble competitors.

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Scotia iTrade’s Commission-Free ETFs: A good deal for some investors

Canadian Capitalist — Mon, 19 Sep 2011 23:19:42 +0000

Canadian Couch Potato broke the news last week that Scotia iTrade became the first discount broker in Canada to offer commission-free trading on some exchange-traded funds. Out of the 200 or so ETFs available on the TSX, Scotia iTrade will not charge commissions on forty-six ETFs: 31 from Claymore, 8 from iShares and 7 from Horizons. There is refreshingly little fine print on the deal: the trades must be placed online or via telephone and ETF must be held for a minimum of one business day.

The list of Claymore ETFs sans commissions is so extensive that an investor can assemble a portfolio composed of broadly-diversified asset classes from the ETFs in it. For example, one could assemble a portfolio similar to the Sleepy Portfolio out of the Claymore 1-5 Year Laddered Govt. Bond ETF (TSX: CLF), Horizons S&P/TSX 60 Index ETF (TSX: HXT), Claymore US Fundamental Index ETF (TSX: CLU.C), Claymore International Fundamental Index ETF (TSX: CIE), Claymore Broad Emerging Markets ETF (TSX: CWO) and perhaps a smidgen of Claymore Global Real Estate ETF(TSX: CGR).

Claymore and Scotia iTrade deserve a pat on the back for this innovation. However, investors should carefully calculate for themselves whether switching to iTrade (if necessary) and picking products from the commission-free ETF list will result in lower costs overall. Trading commissions, after all, are only one component of investing costs. Investors should also consider Mangement Expense Ratios, turnover, tracking errors, bid-ask spreads and the tax implications of switching investments in a taxable account.

For example, John, a passive investor with $10,000 in the iShares S&P TSX ETF (TSX: XIU) and making 6 transactions per year in a RRSP account can lower overall investment costs by switching to Claymore Canadian Fundamental Index ETF (TSX: CRQ) in a Scotia iTrade account (I admit that this example is a bit contrived because the investor will be better off investing in the TD Canadian Index e-Series instead). The investor was earlier paying $17 in XIU MER and $180 in trading commissions at $30 per trade for a total of $197. After switching to iTrade and CRQ, John will be paying almost $100 less in total costs. The commissions are free and CRQ’s charges 0.71% in MERs, so the total cost after switching to iTrade drops to $71.

The experience of Jane, another investor with $100,000 allocated to XIU and making the same six transactions per year is much different. Jane is paying $170 in XIU’s MER but just $60 in trading commissions for a total of $230. Moving accounts to Scotia iTrade and switching to CRQ is more expensive for Jane because she will now be paying $710 in CRQ fees.

Personally, I find one very interesting ETF in the list — the Horizons US Dollar Currency ETF (DLR). With trading commissions eliminated on this ETF, converting currency from CAD to USD or vice-versa should become even cheaper at Scotia iTrade. Eliminating commissions on a trade an investor is going to make anyway is obviously a good thing. For all other trades, the analysis gets a lot more complicated and the benefits a lot murkier.

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BMO InvestorLine to allow U.S. Dollar Registered Accounts

Canadian Capitalist — Mon, 22 Aug 2011 03:58:35 +0000

BMO InvestorLine (read review here) will soon allow clients to segregate their Canadian and US Dollar holdings in registered accounts including RRSPs and TFSAs. The ability to hold US dollars will not, however, be available to RESP accounts. According to client service representatives I spoke with recently, BMO InvestorLine will be rolling out the new feature in the second week of September 2011. Competing discount brokers that offer US Dollar registered accounts are RBC Direct Investing, QTrade and Questrade.

It appears that the BMO InvestorLine registered accounts will work just like RBC Direct Investing’s Dual Currency accounts work today. The US dollar side of the registered account will be available to new and existing clients automatically. However, existing clients will have to phone the broker to transfer current holdings they wish to hold in the US dollar side. BMO InvestorLine will not charge an extra admin fee or extra trading commissions for US Dollar registered accounts.

The ability to keep CAD and USD holdings separately is good news for BMO InvestorLine clients. They can completely avoid forced currency conversion when buying and selling US Dollar securities in registered accounts. By converting currency with the Norbert Gambit they can save on steep conversion charges. And best of all, US dollar dividends will not be converted into CAD for holdings in the USD side of registered accounts.

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Instant Norbert Gambit for All TD Waterhouse Investment Accounts

Canadian Capitalist — Wed, 27 Jul 2011 04:01:38 +0000

The Norbert Gambit is an excellent method for converting currency cheaply at discount brokers but some clients of TD Waterhouse have found gambitting with stocks in an investment account involves delays. A friend of mine purchased RIM on the TSX and hoped to sell RIMM on NASDAQ only to be told be TDW that he has to wait for the initial buy to settle (3 days) and a further 2 days before the journaled shares showed up in the US Dollar side of the account. My friend turned out to be lucky – RIM gained 10 percent during the wait but seeing how often RIM trades down these days, the story could have turned out differently. Now, thanks to the efforts of a Canadian Money Forum member who wishes to remain anonymous, all TD Waterhouse clients can implement instant gambits in their investment accounts. The member was also kind enough to put together the following post on how TD Waterhouse clients can make gambitting work for them.

TD Waterhouse representatives say they are ready now to execute the sell sides of instant stock gambitting pairs for all clients with every size of non-registered account [Note: Gambits can be done in TD Waterhouse RRSP accounts without the assistance of a representative].

Gambit trades are more complicated for a TDW licensed representative to handle than other kinds of trades. It’s helpful, therefore, for a client to understand the steps that are involved, not only from the client’s side of things but also from the broker’s.

Here are some hints:

TD Waterhouse clients should expect to pay the full agent-handled commission for the gambit sell side. [Note: Trades placed over the phone are charged a minimum commission of $43. If you’d rather wait for the trades to settle and pay WebBroker commissions, you can still gambit with DLR/DLR.U.]
Gambitting clients should prepare but not send the opening buy order, which will be an online order.
Next, contact a licensed representative by phone & make sure he or she understands what you want to do. Because more general representatives than before are now handling gambit trades, some representatives are fairly new at this practice, so a gambit client should be prepared to wait patiently if a rep needs to check with his team manager.
Client should send the buy order only when the agent confirms that he’s ready to do the sell order in the opposite currency.
As soon as the buy is filled, the agent will enter the sell order out of the opposite currency account. Initially, his system will block this order, just as investor’s online TDW trading platform will block it. However, the representative will be able to override this block and force the order.
At the same time, the representative will be sending a special manual journal request to the credit department alerting them that this trade, unusual though it may look, is nevertheless bona fide because the stock has indeed been purchased and is awaiting journal.
Notice that *NO* trades are ever placed through a short account. The gambit sell is executed upon a margin or cash account, not a short account. The result will be a virtual “short,” but it is not a real short in the technical sense of the industry. It does not get entered into the broker’s short records.
If there is sufficient margin in the margin account where the stock has been sold, investor may carry on to immediately purchase other securities. However, if gambit stock has been sold out of a cash account, the proceeds may not be used or withdrawn until the journalling of the stock has been accomplished, which will not be until 3-5 days later.
My own approach has always been to prepare everything & then contact a licensed representative. If i observe that trouble might develop for one reason or another, then i am always prepared to cheerfully abort the attempt. This is the reason for having the buy order ready but not sending it in until the agent is lined up. A gambit halted early like this is harmless, because no positions have been initiated. Investor should try later on the same day or else on the next day, with a different agent.

It’s important to keep in mind that, for the first time, TD Waterhouse is offering gambit sell trades to all customers on a goodwill basis. Retaining that goodwill is important. As easily and quickly as it has opened the sluice gates, the big green could close down all gambitting permanently, if it finds that staff are having to spend too much time dealing with individual clients.

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TD Waterhouse Disallows RRSP Swap Transactions

Canadian Capitalist — Wed, 13 Jul 2011 02:08:15 +0000

It turns out some discount brokers are indeed discontinuing all swap transactions in RRSP accounts even though Budget 2011 proposed penalizing only those swaps that result in an “advantage”. As Preet Banerjee explained in this column in Globe & Mail, a RRSP swap transaction is one where an asset inside a RRSP (say a Canadian stock) is exchanged for an asset that is of more or less equal value held in another account (say a GIC held in a taxable account).

Unfortunately, TD Waterhouse has informed clients that as of July 1, 2011, it will be disallowing all asset exchanges with RRSP accounts, whether legitimate or not. It is a bit puzzling why TD Waterhouse chose to impose a draconian interpretation of the clampdown on RRSP swaps proposed in the Federal Budget. After all, the Budget is not prohibiting swaps entirely. The Budget is merely proposing to penalize those swaps that are intended to “unduly exploit the tax attributes of an RRSP” and slap a 100% tax on the advantage. TD Waterhouse and other brokerages could take the view that clients who are doing a swap will be doing so at their own risk. After all, that’s how every other transaction made through a discount broker is treated. If a client overcontributes to a RRSP and incurs a penalty, it is the client’s fault, not the discount broker’s. Why should RRSP swaps be any different?

Here’s the announcement from TD Waterhouse:

According to proposed legislation contained in the 2011 Federal Budget announcement, asset exchanges such as “swaps” to registered plans have been discontinued, effective July 1, 2011. As a result, TD Waterhouse has discontinued swap transactions. A “swap” is a transaction in which cash or securities are exchanged between either a registered and a non-registered account, or two registered accounts belonging to the same taxpayer.

Please note that you can continue to make in-kind contributions to your RRSP and swap assets between RRSPs held by you.

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Beware of hidden foreign currency conversions

Canadian Capitalist — Tue, 25 Jan 2011 03:36:36 +0000

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.

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Scotia iTrade Offers a US-Friendly RRSP

Canadian Capitalist — Wed, 19 Jan 2011 02:57:15 +0000

Scotia iTrade announced today that it will start offering an US-Friendly RRSP account for a flat fee of $30 per quarter per RRSP, TFSA or RESP account. The US-Friendly account will not be an US-Dollar RRSP account like the one offered by RBC Direct Investing. The account will still be denominated in Canadian dollars but instead of charging account holders the retail exchange rate, iTrade will charge a preferential Scotia Capital Inc. (SCI) mid-market rate.

Advantages

I called Scotia iTrade today to get a handle on how much US-Friendly account holders can save on foreign currency transactions. A client purchasing $10,000 (US) worth of US-dollar securities in a regular account will be charged $10,089 in Canadian dollars. Another client making the same transaction in a US-Friendly RRSP account will be charged the SCI rate of $9,924. On a $10,000 (US) transaction, the US-Friendly account holder would have saved $165 in hidden foreign exchange fees.

The US-Friendly account holders can avoid automatic foreign currency conversions on US dollar buys and sells transacted on the same day because both trades will be converted at the same exchange rate. An investor selling and buying US securities in a regular Scotia iTrade RRSP account would have lost $330 in (needlessly) converting US dollars into Canadian dollars and back into US dollars again. Note that a few other brokers such as TD Waterhouse already wash US dollar trades in RRSP accounts.

Disadvantages

You have to weigh the benefits of getting a preferential exchange rate against the quarterly fee of $30 per registered account. You still have the option of having a regular, no-fee, registered account.

US dollar dividends received in a US-Friendly account will still be converted to Canadian dollars at the retail exchange rate.

All cash conversions from CAD into USD or vice-versa will continue to be converted at the retail exchange rate. The preferential rate will only apply for US dollar trades.

Bottom Line

Despite the quarterly fee, Scotia iTrade clients who tend to purchase a lot of US-Dollar securities in their registered accounts will see savings with a US-Friendly RRSP. As someone with accounts at TD Waterhouse, I don’t see a compelling reason to switch. I can obtain all the advantages of the US-Friendly account at TD Waterhouse when I exchange currencies with the “Norbert Gambit” and the disadvantages remain the same. Now, if only Scotia iTrade had decided to offer a US-Friendly, US-Dollar RRSP account, I might have been sorely tempted to switch!

Also check out coverage of the US-Friendly RRSP by The Wealthy Boomer and Money Smarts Blog.

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2010 Globe and Mail Discount Broker Rankings

Canadian Capitalist — Thu, 11 Nov 2010 02:40:15 +0000

Qtrade once again finished first in the Globe and Mail’s annual ranking of online discount brokers. This is the fifth year running that Qtrade is walking away with the top honours. Rob Carrick, who assembles the annual ranking, writes that Qtrade’s consistent winning record can be attributed to its habit of quickly matching any new feature introduced by a competitor. Case in point? Qtrade quickly matched TD Waterhouse in lowering trading commissions for many clients. RBC Direct Investing (review), BMO InvestorLine (review), TD Waterhouse (review) and Credential Direct (review) round out the top five.

Some interesting tidbits from the Globe and Mail rankings:

This year’s ranking also included a table (not available in the online version) on how much each broker charges for a foreign exchange transaction. TD Waterhouse charged the lowest by a wide margin. Disnat, Scotia iTrade and Scotia McLeod Direct charged the highest.
The difference between the lowest and highest after a foreign exchange conversion was as much as $88 on a $2,500 (USD) trade. The most investors would have paid for the equity trade is $29 (US). That suggests that investors who convert currencies frequently should look for a broker that provides the best rates, not the one with the lowest trading commissions.
It is surprising to me that Questrade consistently scores high in the customer satisfaction category. There must be a lot of satisfied Questraders out there.
There is one new broker in the survey (Virtual Brokers) and no dropouts from last year’s survey. But Rob Carrick notes that Scotia McLeod Direct will be merged with Scotia iTrade in the months ahead.

I wouldn’t read too much into a broker’s rank and instead pick one that offers most of the features I am looking for. For instance, I’ve held accounts at RBC Direct Investing and TD Waterhouse and like the latter best. Others might find RBC Direct Investing’s US Dollar RRSP, lower cost D-series funds and online GICs more appealing. Pick one that you think will work for you. If it does not work out as you had hoped, you can always transfer your account to another broker at a later date.

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RBC Direct Investing joins the price war

Canadian Capitalist — Mon, 08 Nov 2010 03:59:53 +0000

RBC Direct Investing announced last week that as of December 22, 2010, it will start charging clients who hold between $50,000 and $100,000 a flat commission of $9.95 per equity trade. Clients living at the same address can combine their account values to qualify for the lower rate. If you are a client at one of the brokers that have recently lowered their trading commissions, you should note that all qualifying accounts may not automatically receive the lower rate. You may have to call your broker and advise them of the accounts that qualify for the lower commission.

Here are other brokers that have recently lowered their trading commissions:

TD Waterhouse: $9.99 for household accounts totaling $50,000 or more.
BMO InvestorLine: $9.95 for accounts with trading authority totaling $50,000 or more.
CIBC InvestorsEdge: $9.95 for clients with CIBC balances of $50,000 to $100,000. $6.95 for balance of $100,000 or more.
Scotia iTrade: $9.99 for more than $50,000 in iTrade accounts.
QTrade: $9.95 for household accounts totaling $50,000 or more.

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Price War Among Discount Brokers

Canadian Capitalist — Wed, 03 Nov 2010 04:34:52 +0000

Just last month, TD Waterhouse announced that as of November 4, 2010, it will start charging clients who hold between $50,000 and $100,000 in household assets a flat trading commission of $9.99. Clients with less than $50,000 in assets will continue to pay $29 for most stocks. The previous threshold for the lower commissions was $100,000 in household assets.

It may be a coincidence but CIBC Investor’s Edge, which used to be one of the discount brokers that still charged $29 for all clients announced that it will begin charging just $6.95 per trade for clients that have $100,000 or more in business with CIBC. Clients with total balances between $50,000 and $100,000 will be charged $9.95 per trade. The total balance is calculated by adding deposits, investments, loans and mortgages held by all occupants of a household with CIBC or its affiliates. The new pricing plan goes into effect January 1, 2011.

Today, BMO InvestorLine joined the bandwagon and announced that beginning December 1, 2010 it will the threshold for qualifying for the flat rate commission of $9.95 from $100,000 to $50,000. Clients can combine assets in all BMO InvestorLine accounts over which they have trading authority.

It has been more than 3 years since the last round of discount broker price wars. At that time, TD Waterhouse first announced a low flat rate commission for clients with $100,000 or more in assets. RBC Direct Investing and BMO InvestorLine quickly followed suit.

The latest price war is encouraging because it will reduce the cost of buying and selling stocks for even more self-directed investors. Hopefully, retail investors will not fall into the trap of trading more simply because commissions are lower. It would also be interesting to see if we’ll see competition in other areas between discount brokers. For far too long, discount brokers have been getting away with pocketing trailer fees that are supposed to compensate for financial advice. Since self-directed investors receive no advice, it is only fair that most of the trailer fees be rebated back. We would also like to see more brokers follow RBC Direct Investing’s lead and offer US dollar RRSP accounts.

Update (Nov. 5, 2010): RBC Direct extends $9.95 pricing to clients who hold between $50,000 and $100,000 in household assets.

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