Weighing the pros and cons of the online brokers

How do you choose an online broker? One way is to consult the many surveys and rankings that have been done. Another is to consult friends and acquaintances. Through handling Globe Investor's Me and My Money, a weekly profile of seasoned investors, I've developed a fairly good database of savvy folks.

Canvassing a few turned up some interesting findings. The most prominent theme was dissatisfaction with not being able to hold U.S. dollars in registered accounts (to avoid the hefty currency-conversion fees charged by many brokers on U.S. security transactions).

"I have been with BMO InvestorLine since I was a kid," says Fred Penney, 44, an engineer who blogs on his investing approach at etf2x.com. "My greatest dislike is that I can't hold U.S. dollars in my RRSP."

A number of the respondents said they switched, or were thinking of switching, to Questrade Inc. chiefly because it allows U.S. dollars in registered plans (the low commissions are an attraction, too). But change seems to be in the air. RBC Direct Investing now allows U.S. dollars. And Mr. Penney reports: "InvestorLine reps have advised me that some time in 2011 they will allow U.S. dollars in RRSP accounts."

Another major takeaway appeared to be the importance of looking at the whole package - not just the offering from the online broker but also the services provided by the parent bank, in the cases of bank-owned brokerages.

What follows are responses from four of the interviewees. Two underscore how investors weigh the whole package - investing and banking services together - when selecting or staying with an online broker. The other two stressed costs and special features.

Currency a non issue

Sacha Peter has had a non-registered account at Interactive Brokers since 2002. "They are the best brokerage firm available to retail investors, bar none," declares Mr. Peter, founder and managing director of Divestor Investments Inc.

"You can trade nearly any financial product on the planet through their system, in any currency," continues Mr. Peter, who also blogs at divestor.com. And the transactions are all done at extremely low commissions.

Besides this feature, Mr. Peter cites three others:

- There are extra security precautions. "Once your account gets above a particular balance, Interactive Brokers will mail you a digital device in the mail, which is required to authenticate your login whenever you access your account."

- Mr. Peter is amused when he hears other traders complain about currency conversion fees for trading U.S. stocks - which are embedded in the bid-ask spread charged for exchanging U.S. and Canadian dollars and amount to about 1 per cent of a security's value on a purchase or sale. "With Interactive Brokers, the spread is the market rate," says Mr. Peter. That's about 1/100th of a per cent.

-Margin rates are very low: "For those who want to borrow money, you can do so at rates nearly impossible to get elsewhere."

A disadvantage: Although there is ample documentation to read, the interface is not easy to learn and "nobody is going to hold your hand." Two more challenges are an inactivity fee of $10 a month (reduced by commissions incurred for the month) and no registered accounts.

Integrated services

Susan Brunner was an early adopter of direct investing. She opened an account in 1986 with a discount broker now known as TD Waterhouse, transferring her stock certificates from a full-service broker.

"I started off with telephone trading and then moved to online trading, first with a dial-up system and then later with the World Wide Web," says Ms. Brunner, who is now retired and blogs at spbrunner.blogspot.com. She is still a loyal client.

"Over the years, they have been improving their services and website," she continues. "The site has been getting more and more reports and features. One current feature I really like is the weekly video interviews done usually by Patricia Lovett-Reid."

Ms. Brunner had also invested and banked through another banker but switched everything to TD in 1997. One reason was that the monthly fees then charged for telephone and online investing were lower at TD. Another reason arose over the way she was treated when she asked for a car loan.

At TD Bank, the loan officer told her she should get a line of credit at 1 per cent plus prime - not a car loan. At the other bank, the "information taker" said the car loan would have an interest rate of 11 per cent.

When Ms. Brunner told the "information taker" she had obtained a line of credit at a better rate from TD Bank, she replied that Ms. Brunner had not asked for a line of credit. That answer did not go over well, and Ms. Brunner transferred her business to the bank that had taken the time to talk with her about her financial situation.

Volume discounts

Jeff Pierce began using TD Ameritrade in 1998 when he was living in the U.S., and he still uses it even after a move to Canada several years ago. Not being able to trade Canadian stocks when TD Ameritrade closes for American holidays is one irritant for Mr. Pierce, a full-time trader of stocks who can be found online at zentrader.ca.

Otherwise, he is quite happy with his long-time broker. Being an active trader, he receives volume discounts on trading commissions. But he also receives an additional break for being a long-time customer.

Another plus is software "where I can create trading strategies, back-test them, and run various screeners to locate stocks based on certain parameters," he says. "I've basically created my entire trading system around this software," which also provides handy watch-list and price-alert features, he says.

Lower fees

"I have used TD Waterhouse since 2002 for almost all my investing activities," says Brad Ferris, president of the consulting firm Triage Capital Management Inc. and an investment blogger at nurseb911.com. "The easiest explanation for why I chose them would be for the security, ease of use, and long-standing relationship I have with the bank."

"Having all our accounts with TD has given us an advantage that other banks couldn't offer: mainly a very competitive interest rate on our mortgage and a better interest rate on debt. I've found that our key contact at TD had a lot of flexibility because of all our accounts being with them."

Furthermore, Mr. Ferris likes the lower transaction fees for TD Waterhouse accounts above $100,000 (recently changed to $50,000). "TD also gives me access to their e-Series index funds, which I use for the majority of my wife's investments," he adds. What he doesn't like is the "poor" and expensive fixed-income interface.