Discount Brokers

TD Direct Investing Disappoints on US Dollar RRSPs

July 22, 2013

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It is more than 3 years now since RBC Direct became the first big bank discount broker to offer a US Dollar RRSP. The next year, BMO InvestorLine followed suit and allowed clients to segregate the US dollar investments in their RRSPs. While TD Waterhouse (now called TD Direct Investing) reacted to these moves by implementing an auto wash feature, it is disappointing to note that the broker still does not offer a true US Dollar RRSP account. It is doubly disappointing because TD Direct’s customer service representatives had been hinting to clients that a US Dollar RRSP is in the works and expect it to launch in the first half of 2013.

It is easy to quantify the cost of sticking with TD Direct Investing when some of the competition offer true US Dollar RRSP accounts. The automatic washing helps in saving on currency conversion charges when selling a security denominated in US dollars and buying another USD security even on different days. But, due to the lack of a true US Dollar RRSP, US dollar dividends received by a TD Direct Investor are forcibly converted to Canadian dollars and charged a fee of approximately 1.9 percent.

Let’s quantify the hit to an investor due to the lack of a true US Dollar RRSP. Take John, a self-directed investor, who holds $100,000 worth of Vanguard Total Stock Market ETF (VTI) and $100,000 worth of Vanguard FTSE Developed Markets ETF (VEA) in a TDDI RRSP account. John receives about $5,000 worth of dividends in US dollars from these two holdings and since the currency is being converted at 1.9 percent, staying with TD Direct is costing John $95 per year compared to RBC Direct and BMO InvestorLine.

What TD Direct Investing Customers can do

Clients of TD Direct Investing should quantify their cost of staying (1.9 percent of total US dollar dividends received in registered accounts) and determine whether it is worth their time and effort to switch to a broker that does offer US Dollar RRSP such as RBC Direct Investing or BMO InvestorLine (as an added bonus Norbert Gambits at these two brokers are fully automatic even in non-registered accounts). Clients may well decide that they are willing to bear the cost for the convenience of having all their accounts in one place.

Double Dipping on Currency Conversions in US Dollar RRSP DRiPs

October 10, 2012

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Many investors sign up for synthetic Dividend Reinvestment Plans (DRiPs) at discount brokers to save on trading commissions. With a synthetic DRiP, an investor can reinvest dividend payments in whole shares and have the leftover amount deposited as cash in their account. Let’s take an example. Investor John owns 1000 shares of ABC Corp. (ABC), which pays a quarterly dividend of $1.25. ABC Corp. is currently trading at $100. Since John had signed up for a synthetic DRiP on ABC Corp., his broker purchased 12 shares of ABC Corp. with a recent quarterly dividend payment of $1,250 and deposited another $50 into John’s account. This arrangement is beneficial from John’s point of view because he was able to increase his investment in ABC Corp. without paying a trading commission.

While DRiPs are usually a good thing, investors need to pay attention to the hidden costs they are incurring when they sign up for synthetic DRiPs on US Dollar stocks or Exchange-Traded Funds (ETFs) held in registered accounts such as RRSPs and TFSAs at discount brokers that do not segregate US Dollar and Canadian Dollar holdings (TD Waterhouse would be an example). Investors are probably aware that US Dollar dividends are converted to Canadian dollars at a rate that is typically 1.5 percent higher than the spot rate. But if you had signed up for a synthetic DRiP, the Canadian dollar dividends are again converted to US Dollars at a rate that is 1.5 percent higher than the spot rate and used to purchase whole shares of a stock or ETF. In effect, investors who are DRiPping US Dollar stocks or ETFs in registered accounts could be paying as much as 3 percent in foreign currency conversion charges.

A recent post on Canadian Money Forum provides an estimate of the hit from DRiPing US Dollar stocks in a RRSP account. Client received US$325 worth of US Dollar dividends out of which US$219 was DRiPped into shares and C$96.50 was deposited as cash. An exchange rate of 0.9645 for the converting US dollars to Canadian dollars. If no currency conversion charges were applied on the DRiPs, client would expect to receive $102 as a cash deposit. Instead he received $6 less. In other words, it cost C$6 to DRiP US$219 worth of shares or 2.8 percent.

What you can do about it

Fortunately, discount brokerage clients who are hit with double currency conversions on US Dollar DRiPs in registered accounts have a few options. If your broker allows segregation of US and Canadian dollar holdings, make sure your US Dollar denominated holdings are held in the US side of the account. If your broker does not offer segregated accounts, take a long hard look at whether synthetic DRiPping is worth the additional currency conversion charge. The break-even point for converting currency with the Norbert Gambit and then purchasing shares yourself is $2,000 (assuming 1.5 percent currency conversion charge, 2 trading commissions for the Norbert Gambit and 1 trading commission for the buy order). Therefore, a rough thumb rule would be that it’s better to reinvest on your own if you receive more than $2,000 worth of dividends. If you would really really like to implement synthetic DRiPs but the costs bother you, consider moving your accounts to a broker that does segregate holdings in registered accounts.

It is likely that clients at all discount brokers, even those that currently offer segregated USD registered accounts, charged double currency conversion fees on US stock DRiPs in the past. I hope that clients would raise this issue with their brokers and demand why currency was converted twice in synthetic DRiPs and what the brokers are going to do about it.

RBC Direct Investing Simplifies Administration Fees

May 1, 2012

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If you are a DIY investor who holds a brokerage account, the reality is that your portfolio is split between many accounts – his and hers RRSPs, his and hers TFSAs, joint or his and hers CAD and USD investment accounts and if you have kids, perhaps a few more RESP accounts. Typically, discount brokers will charge an annual administration fee if the market value of any of these accounts is below a certain value. TD Waterhouse, for example, charges an administration fee of $100 if the market value of a self-directed RRSP account is less than $25,000. In other words, even if you have a large balance in one of the accounts, you may be dinged (note that you should try and get any admin fees waived whenever possible) with a fee for the smaller accounts.

RBC Direct Investing (read review) deserves a pat in the back for taking the initiative to simplify the account maintenance fee structure. Starting this month, RBC Direct will waive all account administration or maintenance fees as long as clients have a balance of $15,000 across all accounts. If the client’s combined assets across all accounts are less than $15,000, a total fee of $25 per quarter split across all accounts with apply.

RBC Direct is also offering ways for clients to avoid administration fees altogether even if their account balances do not add up to $15,000 such as: signing up for pre-authorized contributions that total $100 per month or making three or more trades across all accounts.

The simplified administration fee structure instituted by RBC Direct Investing will help small investors avoid some annoying fees. One hopes that TD Waterhouse and BMO InvestorLine among others will follow RBC Direct Investing’s lead and simplify their respective fee structures as well.