The democratization of online investing with affordable stock-trading commissions for all has hit a speed bump.
Buying and selling stocks and ETFs can be economical if you have a small account because it costs as little as $4.95 to trade online, and no more than $10 in almost all cases. The problem is the account fees that brokers may apply to small registered and non-registered accounts with less than $5,000 to $25,000 in them.
These fees are referred to as inactivity fees, maintenance fees or administration fees. Their purpose is to discourage modest-sized accounts that people set up and forget about or use so infrequently they generate little or nothing in commissions.
Investors with small accounts should expect to pay between $25 and $30 a quarter in fees unless they meet certain conditions, or be charged $100 annually. The main reason to invest yourself with an online broker is to save on fees. But, if you have a $10,000 account and pay $100 a year in fees, you're essentially giving up a percentage point's worth of returns in exchange for precisely nothing.
Many investors only learn of these fees after they've already been dinged. Check out this story from a Globe reader: He and his wife recently gave their daughter an online brokerage account funded with $1,000 as a graduation gift . Last month, the family learned the broker had been charging quarterly account-maintenance fees that, along with interest, amounted to 17 per cent of the value of the account.
Another investor reported a run-in with these fees when they made a big withdrawal from a brokerage account that left only a small balance. In another case, someone had a long-standing account that was rarely used. Maintenance fees didn't exist when the account was set up, but they kicked in recently and began adding up.
A common thread in these cases: The brokers involved were asked to waive the fees and refused. Prevention is a better way to deal with these fees than trying to negotiate them away after the fact.
Much as they prefer big accounts, brokers don't want to close the door completely on small clients because they can become much more lucrative down the road. That's why virtually all brokers offer at least a few ways to avoid account fees. Some examples:
Many firms waive fees for the first three or six months when a new account is opened. Credential Direct, Scotia iTrade and TD Direct Investing are examples of brokers that waive fees for up to six months when a new client opens an account.
Brokers often waive fees if assets in all your various accounts at the firm combined reach a certain threshold. TD Direct Investing and Questrade are examples of brokers that broaden this fee exemption beyond a single client's aggregated accounts to all accounts held by members of a household. Through a program called myFamily, Questrade lets clients group assets with someone else (doesn't actually have to be a family member) to reach the $5,000 plateau where account fees no longer apply.
If you make a minimum number of trades per quarter, some brokers will waive your account fees. Qtrade waives its account fee if a client makes eight trades in the preceding 12 months, while National Bank Direct Brokerage requires five trades per year. RBC Direct Investing requires three or more trades per quarter, and Virtual Brokers requires one trade in a quarter. The usual requirement is that these trades be "commissionable," which typically means buying or selling a stock or exchange-traded fund. Some firms count trades across all accounts clients have with them.
RBC waives its fee if you set up a preauthorized contribution plan of at least $100 per month or $300 per quarter, while Credential and TD will waive fees if you make a monthly minimum contribution of $100 or more. These deposits can typically be spread across multiple accounts, say a tax-free savings account and a registered retirement savings plan.
BMO InvestorLine, CIBC Investor's Edge, HSBC InvestDirect and Scotia iTrade are examples of brokers that don't have fees on TFSAs.
CIBC Investor's Edge has no fees for registered education saving plans.
Some brokers apply a single fee to all types of accounts – non-registered, TFSAs and various registered retirement accounts. Others use a system where they charge an annual administration fee for small registered retirement accounts and a separate inactivity or maintenance fee on small unregistered accounts. Often, these firms waive fees on the non-registered account if you also have a registered retirement savings plan or registered retirement income fund.
Account-maintenance fees are particularly relevant to young adults who are just starting out as online investors. Two firms that welcome young investors are Questrade and Virtual Brokers, both of which have a comparatively low $5,000 threshold for waiving fees on registered and non-registered accounts. Both firms also waive fees for clients 25 and younger.
Two other brokers who try to do right by young investors are Qtrade, which waives its account fee for investors between the ages of 18 and 30 if they set up a regular contribution plan of at least $50 a month, and Desjardins Online Brokerage, where account fees don't apply to clients between the ages of 18 and 30.
Whichever way you choose to avoid maintenance fees, make sure it's both sensible and sustainable. Doing a few trades a quarter can end up costing you more than the fee itself. If a firm waives fees at $10,000, you'll want to deposit more than that to cover yourself in case your account value falls in the future.
Here's something to add to your list of financial house-keeping tasks for either year end, or the start of 2018: Go through all your online investing accounts to see if you're being charged any administration, maintenance or inactivity fees. If so, see if you qualify for any fee exemptions. If not, either close the account or add more money.
At a time of subdued investment returns, blowing $100 a year in fees on a small investment account is a big waste of money.