Tuesday, November 11, 2008
Beware of fees that will kick your account while it's down


Insult is about to be added to the injury done to your investment portfolios in the past year.

With the value of your account falling, you may find yourself paying higher commissions to trade stocks, as well as miscellaneous fees from which you were previously exempt.

Not convinced on the merits of putting money into the markets right now, with share prices knocked way off their peaks of last summer? Now you have the additional motivation of being able to avoid parasitic fees by reinflating your depleted account.

Let's start our tour of the higher fees ahead for some investors with the annual administration fee that can in some cases be charged on registered retirement savings plan accounts. Lots of firms waive the fee, which can be as high as $125 plus GST, if you have more than $15,000, $25,000 or $50,000 in your account (those are typical thresholds). With the stock markets down about 30 per cent for the year, lots of RRSP accounts are going to fall below those thresholds.

Let's say you're a TD Waterhouse online brokerage client and your account value has fallen just over 25 per cent, to $20,000 from $27,000. All of a sudden you're in line to pay a $100 annual administration fee that TD applies on registered accounts valued at less than $25,000. With $20,000 in your account, paying that $100 would be like having your returns reduced by an additional 0.5 of a percentage point. Like you need that.

Do-it-yourself investors who are active in the stock market will have to keep a close eye on their accounts to see if they're in line to pay higher commissions as a result of their account losses.

In the past year or so, many brokers adopted a pricing strategy that rewards clients who have household assets of at least $50,000 or $100,000 at the firm by charging them online stock trading commissions just below $10 instead of the usual $20 to $29.

RBC Direct Investing explains that client household assets are assessed at month's end and any commission adjustments are made on the 22nd of the following month. So if the value of all your family accounts at RBCDI fell below $100,000 last month, then you have until Nov. 22 to place stock trades costing a flat $9.95. After that, the cost rises to $28.95 for trades of up to 1,000 shares (and 3 cents per share for most larger orders).

Depositing some money into one of your household accounts can put you back onside for cheap trading commissions, and allow you to buy some cheap stocks or mutual funds. Not ready to buy? Then put the money into your account anyway and let it sit in money market funds or Treasury bills.

If you're happy with your main broker but have a scattering of small accounts at other firms, maybe it's time to consolidate your money in one place. That way, you could put yourself above the threshold at which you qualify for sub-$10 stock commissions.

A tip for future months where the stock market falls and your account value does likewise: Where practical, make your trades before month's end to take advantage of lower commissions. It's a little less painless to sell a losing stock for just under $10 as opposed to $29.

People who have small non-registered trading accounts at an online brokerage will also have to keep an eye on their account balances. If your balance falls below a certain level, some brokers will charge a fee.

For instance, BMO InvestorLine charges $15 each quarter on non-registered accounts where the balance is less than $5,000 in all your household accounts. If you have an RRSP account with the firm, the fee is waived. At RBC Direct Investing, clients are in line to pay $20 a quarter if their account balance falls below $10,000 and they don't have a registered plan with the firm.

Some investors set up accounts at online brokers when the markets are going strong and then all but abandon them after sustaining big losses. Here, too, a broker may ding you. At ScotiaMcLeod Direct Investing, for example, there's a $60 annual fee if you have an account with less than $10,000, you haven't placed a stock trade in the past 12 months and you don't have a registered account at the firm.

Fees like these are designed to discourage those pesky small accounts that generate paperwork, but don't bring in any revenue. Unfortunately, with the markets down sharply this year, almost everyone's accounts are getting smaller.


Falling markets, rising fees

Here's a hypothetical example of how the recent plunge in the stock market can affect the stock-trading commissions you pay in an online brokerage account.

Value of your account in August 2008$110,000
Online stock trading commissions you paid*$9.99
The stock markets plunge in September and October and your portfolio loses 25 per cent
Value of your account at the end of October$82,500
Online stock trading commissions you now pay*$29.00
Percentage gain you will need in your portfolio to get back above $100,000 so you can pay lower commissions21.3%

*your broker charges $9.99 flat per trade if you have $100,000 in total household assets with the firm and $29 if you have less.