globeandmail.com

Saving on fees with your online broker

Saturday, September 11, 2010

There are degrees of paying less: Here are seven tips for cheaper do-it-yourself investing

ROB CARRICK

rcarrick@globeandmail.com

Do you have some trading opportunities in mind after you switch to an online broker from an investment adviser?

What a coincidence - so does your new online brokerage firm. It'll be looking for ways to trade the fees and commissions you paid your adviser for a whole new set of charges.

Using an online broker is all about paying less as an investor and therefore keeping more of your returns for yourself. But there are degrees of paying less and they can amount to hundreds of dollars per year or more.

To help make sure you're paying as little as possible to manage your portfolio, let's look at seven tips for cheaper do-it-yourself investing.

FIND A LOW-COST BROKERAGE

A few years ago, most online brokerage customers paid a minimum of somewhere around $29 to trade stocks and the only way around that was to be a frequent trader. Today, you can get as low as $4.95 per online trade, and $10 trades are quite accessible.

The $4.95 deal comes from a small independent firm called Questrade that doesn't offer the range of tools and research of larger firms. If you want to see where Questrade ranks on an overall basis against the rest of the field, check out my most recent ranking of online brokers at tgam.ca/brokers. (Note: Expect a new ranking in early November.)

Many brokers now offer trades of just a shade below $10 to clients who have $100,000 in assets with the firm. An exception is Scotia iTrade, which charges $9.99 if you have $50,000 or more.

If you want a high-ranked firm and have a small account, consider Credential Direct, Qtrade Investor and Scotia iTrade, all of which charge $19-$20. As always, check the fine print. All three firms charge more for trades of 1,000 shares and up, and Qtrade charges an additional $4 for limit orders (more on that to come) of 1,000 shares or less.

A side benefit of qualifying for sub-$10 commissions is that you'll virtually always pay a flat rate, no matter how many shares you trade.

AGGREGATE YOUR ACCOUNTS

Online brokers are in many cases quite flexible in allowing clients to qualify for the low commission rates available to large accounts. At TD Waterhouse, for example, you'll pay $9.99 if your household assets with the firm add up to $100,000 or more.

The point of offers like this is to get clients to consolidate all their business with a single firm, and that makes sense for the customer, too. Record keeping is simplified, and you pay less to trade. Important note: you generally have to request that your broker consider your household assets to qualify for trading discounts. Don't expect this to happen automatically.

LOOK FOR TRANSFER-IN DEALS

The down side of consolidating your accounts is that investment firms may charge as much as $135 in transfer out fees (look up "Other Fees" in the fees and commissions page on your firm's website). Rather than taking the hit, ask your new brokerage firm to cover the fee.

Paying transfer fees for new clients is a common promotion at some online brokerage firms, which often make this offer at busy times like registered retirement savings plan season. If you have a sizeable account, don't wait for a deal on transfer fees to be announced. Call up a broker you want to move to and ask if they will pay your transfer fee.

AVOID OPENING SMALL

ACCOUNTS

A good rule is to wait until you've built up your RRSP account before transferring it to an online broker. Almost all firms charge annual RRSP administration fees of $50 to $100 for small accounts, which usually means balances below $15,000 to $25,000, depending on the firm.

Avoiding small accounts will also insulate you from account inactivity fees, which may be charged either quarterly or annually on accounts with balances below $5,000 to $10,000.

USE LIMIT ORDERS

With a limit order, you specify the maximum you're willing to pay when submitting a buy order, and the minimum you'll accept when selling. In a very few cases, limit orders will cost you more. But it's a better value than going for a market order, where your buy or sell order is executed at the going market price.

Just recently, I've received complaints from readers about the prices at which their market buy orders were filled. The pattern is this: A market buy order is submitted and executed at a price that's noticeably higher than where the stock was trading before the order went through, and after the order was filled.

Did these investors ran into a temporary price surge, or were they played for chumps by their brokerage firms? It's hard to say, so let's just agree that limit orders are the way to protect yourself from wonky trade executions.

Note that limit orders can be set at the current asking price for a stock (the "ask" in stock trading jargon), at the price where a stock has most recently traded , or at a lower price if you're out to do some bargain hunting. The lower your price limit, the less likely your order will be executed.

USE BROKER DIVIDEND REINVESTMENT PLANS (DRIPS)

DRIPs pool the dividends you receive from a stock and then use them to buy new shares at no cost. They're a very efficient way to build your portfolio and they're available at no cost from most online brokers.

To get a DRIP started, just call up your brokerage firm and explain which stocks you want to include (exchange-traded funds are often eligible, too).

You'll need to own enough shares to generate the dividends required to buy at least one share. Unlike traditional DRIPs, which you arrange directly with the companies that issued your shares, you can't buy fractional shares.

USE CLAYMORE INVESTMENTS' PACC AND DRIP PLANS

Claymore is the second-largest provider of exchange-traded funds in Canada and it has come up with two great ideas to build its market share. The no-cost pre-authorized cash contribution plan allows you to make regular purchases of Claymore products without being charged brokerage commissions. The no-fee DRIP uses your dividends from Claymore and uses them to buy new shares.

The PACC plan can be a huge cost saver for investors with small accounts who want to make regular contributions to their account. They'll have to pay commissions on their initial investments in the Claymore funds they want, but after that each purchase comes at no cost.

Here's Claymore's list of online brokerage firms that offer the PACC plan: CIBC Investor's Edge, HSBC InvestDirect, Questrade, Qtrade, Scotia iTrade and TD Waterhouse. The DRIP is widely offered, with the notable exception of RBC Direct Investing.

Follow me on Facebook. I'm at Rob Carrick - Personal Finance

******

DIY Fee Traps

Do-it-yourself investors using online brokerages benefit from low fees and commissions, but they still have to watch out for miscellaneous costs that can undermine their gains. Here are some situations to watch out for, and some suggestions on how to work around them:
You have... You typically pay ... Exceptions ...
An account under $50,000 to $100,000commissions of $19 to $29. Questrade charges a minimum of $4.95 to all clients.
A small starter RRSPannual admin fees of $50 to $100.Questrade, Scotia iTrade have no RRSP admin fees.
A small, inactive non-registered accountup to $80 per year.Many firms have no inactivity fees, period.
Your investment plan includes: You typically pay ... Exceptions ...
Regular monthly purchases of an exhange-traded fund$228-$348/year.Claymore ETFs have a no-fee pre-authorized cash contribution plan available at some brokers.
Reinvestment of dividendszero if you have your broker set up a DRIP for your dividend stocks.