How’s the parking at your online brokerage firm?
Online brokers are virtual – you can transact by phone, but they’re at their best and cheapest when you research, buy and sell investments online. You’ll still need parking, though. If there’s cash building up in your account, you’ll want to stow it somewhere that combines safety with at least a sniff of a decent interest rate.
Recent trends in the online brokerage business suggest it’s time to add the treatment of cash-type investments to the list of things investors pay attention to when comparing brokers. At two firms, RBC Direct Investing and TD Direct Investing, the choice of products for holding cash has been limited in a way that serves the best interest of the firm over clients.
We can debate the merits of holding significant cash in an investment account, but the reality is that there’s a lot of cash out there right now. Cash deposits combined with money sitting in investment savings accounts adds up to between 14 per cent and 15 per cent of total assets at online brokerages, a spring, 2018, report from the data analysis firm Strategic Insight shows.
For very short periods of time, days or a couple of weeks, there’s little point in trying to find a reasonable return on your cash unless the amount involved is significant. But with as much as 15 cents of every $1 held at online brokerages in cash, it seems clear that many investors are feeling cautious and keeping cash in hand indefinitely.
The most popular option for holding cash is an investment savings account that you invest in the same way as you would a mutual fund, at no cost to buy or sell. Investment savings accounts are what money market funds were before their fees started to overwhelm returns – the most practical way for the typical investor to park cash and earn at least a trace of interest. These accounts all have fund codes like other mutual funds and are listed on Fundserv, the platform for trading mutual funds.
But there’s also an exchange-traded fund that performs the same function – the Purpose High Interest Savings ETF (PSA-TSX). The management expense ratio for this fund is 0.11 per cent, and the yield as of late this week was 1.9 per cent.
The PSA advantage is a higher yield than investment savings accounts – most offer 1.35 per cent these days. On the other hand, you’ll have to pay brokerage commissions to buy and sell PSA, unless you have a broker that waives some or all ETF commissions. Questrade and Virtual Brokers charge nothing to buy ETFs, but a commission applies when you sell. At National Bank Direct Brokerage, you can buy and sell ETFs at no cost as long as you trade a minimum of 100 shares.
Investors have gravitated to PSA to the extent that it has attracted a pretty decent $668-million in assets. But if you’re a client of RBC Direct or TD Direct, you can’t buy it. Both firms will not process orders for this ETF.
“We determined PSA-TSX to be equivalent to a short-term savings product,” an RBC spokesperson wrote in an e-mail response to questions. “We do not offer third-party short-term savings products.”
Like TD, RBC has a policy of offering clients just one product for parking cash. That would be the in-house offering – the RBC Investment Savings Account for RBC Direct Investing and the TD Investment Savings Account for TD Direct.
A TD spokesperson said in an e-mail that the firm doesn’t offer PSA at this time. An e-mail from TD to a reader that was forwarded to me offers a bit more information. TD said it has “made a business decision to not offer the Purpose ETF on its platform.” Purpose Investments Inc. declined to comment on the situation.
One other broker with special treatment for PSA is BMO InvestorLine, which requires clients to place trades for this fund on the telephone rather than online. Commissions are set at the online flat rate of $9.95, rather than the minimum $43 cost that normally applies to transactions handled on the phone through a live representative.
Online brokers are supposed to be the well-stocked discount department store of investing – everything you want, under one roof. The reason why two bank-owned brokers have taken PSA off the shelf has to do with the benefits of gathering money in an in-house investment savings account. A foundation of profitable banking is using money taken in via deposits and lending it out at higher rates than depositors are paid.
Right now, investors holding large amounts of cash for extended periods are disadvantaged by the policy at RBC and TD of not offering third-party saving products. With $10,000 in your account for a year, PSA at today’s 1.9 per cent yield would pay you $190, while an investment savings account at 1.35 per cent would pay $135. Even after $20 in total buy and sell commissions, you’re ahead with PSA.
While RBC and TD do offer 1.35 per cent on their investment savings accounts, which is what most others paid in late July, don’t think of this parity as being permanent. There may be times where investment savings accounts from the banks trail the best competitors. If this happens, RBC and TD clients would be unable to move money to a better-yielding product within their investment account.
Think of investment savings accounts as a cousin of the high-interest-rate savings account you use as part of your banking, repackaged to fit within investment accounts. In both cases, deposits are eligible for coverage by Canada Deposit Insurance Corp. Note: Holdings in PSA are not covered by CDIC.
The firms I cover in my annual online brokerage ranking all offer investment savings accounts, with minimum upfront purchases of $1,000 in most cases (RBC has a $500 minimum) and subsequent minimums as low as zero to $100. You order them using your broker’s mutual fund trading screen.
Two other brokers of note on savings accounts for investors are BMO InvestorLine and Questrade. BMO requires clients to buy the BMO High Interest Savings Account for amounts up to $100,000, which is the limit for CDIC protection. Amounts exceeding that level can go into third-party products.
Questrade charges $9.95 for all online purchases and sales of mutual funds, including investment savings accounts. An offsetting benefit to clients is that Questrade rebates the commissions that investment firms pay it for selling these accounts. Questrade says this typically means a rebate of 0.25 of a percentage point per year for investment savings accounts.
Securities regulators have proposed rules that would largely prevent online brokers from collecting such commissions. The impact on investment savings accounts is unknown at this point, but it’s possible that returns could rise if a commission isn’t paid to online brokers. It’s also possible that some brokers could introduce a charge for buying and selling these products to replace the commission.