Discount Brokers

Beware of hidden foreign currency conversions

January 24, 2011

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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.

Scotia iTrade Offers a US-Friendly RRSP

January 18, 2011

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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.

2010 Globe and Mail Discount Broker Rankings

November 10, 2010

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[Remembrance Day 2010]

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.