There are plenty of online brokerages to choose from -- how do you pick the best? Which financial products should you be grabbing -- and which shouldn't you touch? How about different kinds of investing you can do?
Globe Investor personal finance columnist Rob Carrick took your questions about online trading.
*Send feedback to OnlineBrokers@globeandmail.com
Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.
11:58 Globe and Mail: Hello, everyone, thanks for joining us. I'm Sonali Verma, an editor at Globe Investor. We'll be starting in a couple of minutes.
12:00 Globe and Mail: We have a lot of questions, so let's get straight to them.
Marianne Ono writes from Toronto:
I currently hold an RRSP with index e-funds, which is a cheap way for me to invest small amounts on a regular basis. However as the money accumulates, I'd like to start shifting lump sums to ETFs, for their low management fees. My question is whether it's generally difficult or expensive to move money between RRSPs in different brokerages. How stiff are the penalties (across the industry)?
12:01 Rob Carrick: Hi Marianne.
Thanks for your question, which gives us a lot of meat for discussion First to your query about moving RRSP accounts. Yes, brokers may charge an account exit fee, and it could be as much as $125 or so at worst. To avoid this fee, here's what you do. Call up the broker you want to move to and ask if it will cover the cost of your transfer. This offer is often made around RRSP season to attract new clients. Note: there are sometimes minimums applied to the size of the account you're transferring over.
Now, let me ask you a question: Why are you planning to move money from your e-funds into ETFs? For those who don't know, TD's e-series of index funds (you can only buy them online through TD Waterhouse or TD Asset Management) are a darned good deal. In fact, they made the list of best investing bargains I published in my Portfolio Strategy column a few months ago (click here to read it: http://tgam.ca/cK). These e-funds have higher fees than ETFs, but not much higher. In fact, they're the next best thing to ETFs. So here's what I suggest you do…check out how much you're going to pay to buy ETFs using the proceeds from your e-funds and then see if that's a fair bargain when viewed against the lower fees you'll get from ETFs. Remember: e-funds may have higher fees, but you can buy and sell them at no cost. With ETFs, you'll typically pay $10 to $29 per transaction, depending on how big your account is
12:05 François Gariépy writes: Hi there -- I would like to know who is the best broker who will give me information about the economy and will suggest a porfolio based on sector's repartition.
12:06 Rob Carrick: Hi Francois. I think the best brokers for giving you information on the economy are BMO InvestorLine, RBC Action Direct and TD Waterhouse. Basically, we're talking here about firms owned by big banks with economics departments that do first-rate research.
Now, you say you want an online broker that suggests a portfolio for clients. You probably know this, but it's worth repeating that online brokers don't provide any personalized advice whatsoever. That said, BMO InvestorLine, Qtrade and RBCDI are among the firms that provide portfolio-building tools where you describe your needs and investor profile, and you're then matched up with a mix of mutual funds or ETFs.
Note: these portfolios are not tied to any particular calls on the best sectors, but rather on your personal investing profile. If you want something more sector-based, check out the online broker Disnat and its Disnat GPS feature.
12:11 Anthony writes: In your discussion, can you address foreign exchange rates. Given the amount of trading Canadians due on the US market, I find the level of disclosure surrounding fx fees to be extremely poor (and that's putting it mildly).
Also, to my knowledge, RRSPs are now allowed to hold USD. I think questrade is the only one who has allowed the users to do this. To be honest, I think the banks are just too greedy to do it (they like the commission both buying and selling). Can you let us know if you are aware if any other brokers are planning to allow US currency in their RRSPs (or what we can do to push them other than comp).
p.s. Do you know if we are allowed by CRA to hold USD in TFSA or RESP accounts?
12:11 Rob Carrick: Hey, Anthony. One of the biggest complaints I hear from investors about online brokers is foreign exchange fees for moving in and out of U.S. dollars. Let's face it, this is a profit centre for brokers. They clip you on the way in, and they do it again on the way out. So it's no surprise that disclosure of forex charges is poor to non-existent.
If you're investing in a regular cash account, brokers do let you hold U.S. dollars without forcing a conversion. But this isn't the case in registered accounts. When you sell a U.S. stock, the proceeds are automatically converted, and the same goes for dividends. Very costly.
You have rightly pointed out that there is no regulatory reason why brokers can't allow clients to hold U.S. dollars in their registered accounts. But so far, the only two firms to offer RRSP accounts where you can hold U.S. dollars are Questrade and, as of recently, Qtrade. TD Waterhouse lets clients use U.S.-dollar money market funds to hold U.S. cash, and that's not a bad substitute.
12:15 Mike writes from Vancouver: Hello Rob, what specifically do you mean when you say "cleanly...place orders for stocks", and how important is this?
12:16 Rob Carrick: Thanks for the question about methodology. As background, Mike is asking about how I rate brokers in the category of "trading," which accounts for 25 per cent of the overall mark out of 100. Here are a few of the things I look at:
-does a broker offer real-time updates of the cash and buying power in an account?
-how clean and easy to use are the trading and order confirmation screens?
-does a broker offer a variety of ways to settle a trade (take money from a bank account, cash in a money market fund, use cash sitting in the account)?
-does a broker offer extra-detailed Level II quotes
-will a broker send you an e-mail to notify you a trade has been filled?
-does a broker make it easy to find a mutual fund symbol and then use it to place a fund trade?
12:19 Andrew Chong writes from Toronto: Let us say that I wasn't planning on doing a lot of trading, e.g. buy-and-hold ETFs. In that case, wouldn't it make sense to just use the most convenient discount broker - the one associated with my regular bank?
12:19 Rob Carrick: Hi Andrew. This is a common misconception. In fact, it helps explains why the bank-owned firms totally dominate the online brokerage business, even though they're not all great operations.
Fact is, you can get money into your account at a wide variety of firms by designating them as a bill payee through your online banking service. Others - Scotia iTrade is an example - allow you to shuttle money between your bank and your brokerage account electronically. All you have to do is send a void cheque.
Bottom line, it's probably simplest to use the broker that is part of your bank's family. But it's still easy to use other firms - firms, I should add, that may have a better service than the one your bank offers.
12:19 [Comment From Kerry:]Thank you for doing this Rob, you're very helpful. What are ECN's and how much do they add to one's overall cost of trading, assuming 2 or 3 trades per month ?
12:23 Rob Carrick: Hi Kerry. If you look at the commission schedules for some firms, you'll find a notation that "ECN and exchange fees" may apply in addition to posted commission rates. These fees are related to the use of certain electronic trading networks and, for the most part, they're absorbed by brokers and not passed on unless you're an active trader who wants a say in which networks are actually used. The actual amounts these fees can add to your transaction can range from a few cents to several dollars -- it really depends on what size trades you're doing. Suggestion: jot down a few prospective trades you might make and then ask any broker you're thinking of dealing with how much ECN fees would add to regular commissions.
12:24 [Comment From Michael: ]ello Rob, and thank you. Why do place so much emphasis on 'research and planning tools' within an online broker when there are so many other outside independent sites a person can use ? Then you can just go to the broker with the lowest fees.
12:29 Rob Carrick: Michael, there's some interesting background behind your question. I've spoken to several online broker executives over the years and a common theme is that clients don't much use many of the research and financial planning tools they offer. I don't think it's because there are good tools elsewhere on the Internet. Rather, it's because people tend to forget about basic portfolio building and focus instead on buying and selling investments. They shouldn't, though. Before you buy the stocks and funds, you need a portfolio blueprint. It's my view that portfolio planning tools are most likely to be used if they're well located on an online broker's website. If you know of great tools on other sites, then you're quite right. You can certainly go to the broker with the lowest fees.
12:30 [Comment From Deni: ]I have been considering using an on-line broker but am confused with the fees schedules. I am not a big time investor so for my non RSP investments I would be starting at maybe 5K. I'd like to break that up into a few various sectors so maybe 3 investments. Should I be considering this at all or should I be sticking with buying mutuals from my finacial advisor or bank. Who would I be considering for an online broker and what should I expect to be paying.
12:37 Rob Carrick: Deni, this is a good question because it highlights how commissions at online brokers differ widely for small and large accounts. First, though, I should point out that the low-cost leader, Questrade, charges a minimum of $4.95 no matter how much money you have in your account, or how often you trade. Most other firms charge $20 to $29 per trade until you have $50,000 to $100,000 in your account (some firms let you aggregate several of your accounts, while others let you aggregate the accounts of family members). Commission costs are key if you trade quite a lot, but less so if you're going to make only a few trades and then hold onto what you buy.
As far as whether you should use an online broker or stay with your advsier and the mutual funds he or she sells, that's a very big question that depends in large part on your preparedness to manage your own money. You can generally save on fees with an online broker, but it's a false economy if you don't know what you're doing.
12:37 [Comment From john: ]My hypothetical question is what if an online brokerage firm goes under, what happen with my investment with the firm? Has that ever happened in Canada?
12:41 Rob Carrick: Hi John. Since the financial crisis began a little more than a year ago, I've been asked this question dozens of times. Good thing, too, because it shows investors are asking the right questions about the firms they do business with. No, I have not heard of an online brokerage firm going bankrupt. Frankly, I think a firm's assets would be bought up by a competitor before bankruptcy was to occurr. But let's say it did. If the firm was a member of the Canadian Investor Protection Fund (CIPF), account assets would be protected for up to $1-million. Note: all the firms in the Globe Investor ranking of online brokers are CIPF members. I wouldn't look twice at a firm that wasn't.
12:41 [Comment From Derek: ]How do you know if recommendations and top stock picks of you online broker are not biased? Do some of these discount brokerages recommend companies to get future business with these firms?
12:47 Rob Carrick: Derek, much of the stock research offered by online brokers comes from investment dealer analysts who can, in theory, be biased in their assessments of a particular company. In large part, these invstment dealers are part of the same corporate families as online brokers themselves. So, for example, CIBC Investor's Edge offers CIBC World Markets reports.
CIBC IE has nothing to gain from this relationship, other than providing a service that makes clients happy. That said, you do have to be aware of potential bias in stock research from big investment firms. I don't think this is as much of a problem as it was several years ago, but we do have to be realistic. If an investment dealer does business with a particulary company, it's tough for the dealer's analysts to slag that company in a report.
Want a quick way around this issue of bias? Look for stock research from independent sources such as Morningstar and Standard & Poor's. These firms are strictly in the analysis business and have nothing to gain or lose by being tough on a stock. More and more brokers are offering unbiased research, by the way.
12:47 [Comment From Brian: ]Hi, I currently use RBC Direct Investing, however they, like most other Canadian online brokers, do not allow you to invest in other international stock exchanges. The only firm that allows you to do so is HSBC (and, amongst other options, transact in foreign currency as well as short stocks). I am tentative at this moment to open up an account there since I have rarely heard of any news (positive or negative) from using their online broker. Could you offer some insight into them, as well as to whether all the other Canadian online brokers will offer international market access? Thanks.
12:52 Rob Carrick:
Hi Brian. Offering access to international markets is not a big deal to Canadian investors, so it only has a minor impact on my ranking. I heard a top guy at a big brokerage firm say a year or two that it was looking at adding online access to global markets, but nothing has materialized. Likewise, the old E*Trade Canada never followed its U.S. parent's move into global trading. Brokers are sizing up demand for global access and taking a pass. That said, some investors do want to be able trade directly on exchanges outside North America. For them, HSBC InvestDirect is the only game in town. HSBC is a huge global bank, but you wouldn't know it by InvestDirect. This firm is way behind the leaders in terms of the service it provides. Suggestion: use InvestDirect for global markets and have other assets at a better-ranked firm.
12:52 [Comment From Dwayne: ]If you're looking to create a basket of stocks (12-15) and will make only 2 or 3 trades a month what online brokers have the best rates.
12:55 Rob Carrick: Hi Dwayne. Without knowing how much you have in your account, I'd have to go with Questrade. The minimum commission there is $4.95 and costs top out at $9.95, with ECN and exchange fees possibly adding a little to that. As mentioned earlier in this discussion, most other firms range from $10 to $29, depending on how big your account is. If you figure on making 50 trades a year, take at look at CIBC Investor's Edge -- you can pre-pay $395 annually for 50 trades.
12:59 [Comment From Paul: ]Which online brockerage house has the best bond prices? ie. smallest spreads
12:59 [Comment From Bill: ]When buying bonds at a discount broker, how much must the trade be for, to avoid getting hit badly on the spread or commission?
1:03 Rob Carrick: OK, Paul and Bill. Here's the deal. Online brokers are rotten when it comes to bonds. It's almost as if they're trying to make back some of the commission money they're losing out on for stocks.
For those who don't know, the price you pay for bonds includes an invisible markup applied by the broker. You might be able to negotiate this markup down with a full-service broker, but this is unlikely with an online broker. Are any online firms better than others? Not as far as I've noticed. I will at least credit TD Waterhouse and a few others for at least having the decency to show the buy and sell prices for bonds so clients can see the markups plainly.
Bill, I think large bond purchases may get you a little break on commissions. Not sure of the threshold, but six figues would certainly be a help.
1:03 [Comment From Ian: ]Can we trade stocks within TSFA accounts? What happens if we have capital losses in these accounts?
1:05 Rob Carrick: Hi Ian. For sure, you can trade stocks in a tax-free savings account. In fact, I'm hearing these days from happy investors who bought stocks in their TFSA back in January and February and have seen major price gains since then. And what happens if your TFSA stocks fall in value? Unfortunately, you can't apply the losses against your capital gains, as you can in an unregistered type of account.
1:05 [Comment From SAM K.: ]Hello Rob, and thank you for doing this Q&A. I was wondering where you recommend I go to get more information and general advice both on Investing and Finance. Are there courses or institutions I should look up?
1:11 Rob Carrick: Hi Sam. Good on 'ya for asking about how to learn more about investing. A lot of people are signing up for online brokerage accounts these days it's a cinch that a good number of them could use some educational assistance. Three good websites:
-our very own Globe Investor has lots of educational material on it, as well as extensive coverage of what's happening on the markets
-the Investor Education Fund, a non-profit offshoot of the Ontario Securities Commission, has tonnes of info that is tailored to investors all levels of knowledge
-also try Investopedia
1:19 Globe and Mail: Thank you, everyone, for having joined us today. Special thanks to you, Rob! That was really enlightening.
1:19 Rob Carrick: Thanks, everyone. One of the more interesting stories of the past year of stock market ups and downs has been the strong, sustained interest in online brokers. Is it a passing fad, or a game-changing trend? I'll be watching. Meanwhile, I welcome comments from both newcomers and veterans on what's good and bad about their firms.
1:20 Globe and Mail: And don't miss our discussion on DIY investing tomorrow with personal finance writer Gail Bebee. See you then!
Our Online Investing series:
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