Friday, December 25, 2015

Choose your Discount Broker Wisely

The Globe and Mail recently published their 17th annual ranking of online brokers.  Twelve brokers including all the major banks plus other members of the Canadian Investor Protection Fund (CIPF) are ranked based on the following criteria:

  1. Client Experience/Website User Interface
  2. Cost
  3. Account Reporting and Maintenance
  4. Research and Tools
  5. Innovation
Comparing the Globe and Mail rankings over the past three years, the trend has been for the three largest independent (non-bank) brokers, Virtual Brokers, QTrade and Questrade, to consistently lead the pack, driven mostly by their lower trade costs and user-friendly web interfaces.  Being smaller companies with less overhead, they are also more nimble and able to quickly implement a constant stream of innovation in terms of new tools and offerings.


When we first selected a discount broker over 10 years ago, our portfolio was relatively small and we felt comfortable in choosing the independent broker e-Trade, which at the time was offering the cheapest trade commission fee on the market at $9.99 as opposed to $29.99.  Since then, e-Trade has been taken over by Scotiabank, was rebranded as iTrade, and is no longer the leading choice when it comes to ranking discount brokers.  In the past three years, Scotia iTrade has ranked somewhere in the middle of the pack with a consistent B rating–not the best, but not the worst either.


This year we decided that we should at least investigate the pros and cons of moving to a higher ranked broker.  Regardless of the excellent track records of the top three independent brokers, now that our investment portfolio (which is also our retirement income nest egg) has grown beyond the $1-millon protection limit that the Canadian Investors Protection Fund (CIPF) provides, we are no longer comfortable going with a smaller broker. It feels so much more secure and comforting to know that our retirement savings are being managed by a discount broker that is owned by one of the blue-chip Canadian banks.  While the chance of these three smaller discount brokers going under is probably slim, the chance of the banks doing so is likely closer to none. 

So that left us to compare the rankings and offerings of the brokers from the five major banks.  In terms of progress, TD Direct Investing has made the biggest and steadiest improvements over the past three years, moving from a last place C-ranking shared with constant cellar-dweller CIBC, to leading the bank-backed brokers with a B+ ranking by the end of 2015.  Scotiabank iTrade lost marks for its fees, which are now amongst the highest of all the brokers by charging $24.99 per trade for portfolios under $50,000 and higher commissions on most ETFs.  But since our holdings exceeded that minimum and we did not own any ETFs, these extra fees did not apply to us and did not influence our decision.

Where we found iTrade the most insufficient was in their lack of support for US registered accounts, which would allow us to trade in US stocks and be paid dividends in US currency, thus eliminating the fees and fluctuation of currency exchange. While most of the other banks and independent discount brokers have offered US accounts for RRSPs, RRIFs and TFSAs for several years now, iTrade so far has shown no intention of providing a comparable product.  This deficiency was annoying enough to prompt us to seriously look into what would be involved in moving to a new discount broker. 

It became quickly apparent that the pain involved in moving brokers, in terms of cost, time and aggravation, significantly outweighed the benefits.  First there are the transfer-out fees charged by the current broker, which typically cost $150 per account.  We have 8 accounts with iTrade (2 RRIFs, 1 Spousal RRSP, 2 TFSAs, 2 LIRAs and a non-registered account) for a total of $1200.  I read that it may be possible to negotiate with the new discount broker to cover these fees but there have been numerous horror stories of brokers reneging on the agreement after the fact, or stalling for many months before finally coughing up the reimbursement.  Then we considered the onerously long forms that we had to fill out to create our iTrade accounts in the first place and dreaded the prospect of potentially having to repeat that process with a new broker.  

Another concern for us would be the time period during which portions of our portfolio would be in limbo.  Typically the transfer takes 5-10 business days but there have cases where significantly longer delays occurred  or not all funds transferred properly.  Once our funds are properly transferred, we would need to link the new broker accounts back to our bank account, which would cause a further delay.  We depend on the regular flow of dividends to cover our expenses and monthly RRIF payments and might not have access to them during the transfer period.  We could use our emergency funds to temporarily cover our expenses while waiting for accounts to settle with the new broker, but I'm not sure what would happen to our monthly RRIF payment if the cash from the RRIF account was not available when the payment comes due?

We considered the fact that we would lose all investment history of past purchases, sales, capital gains and losses that we have accumulated for over 10 years.  We would also lose all of the Dividend Reinvestment Programs (DRIPs) that were set up with the old broker and would need to reapply to have them reinstated with the new broker, assuming that new broker supports the same DRIPs.  Not all brokers have the same DRIP coverage.  

 Scotia iTrade actually has excellent DRIP support, offering broker DRIPs on more Canadian and US stocks than most if not all of the other brokers.  Its Web interface also allows you to request to enroll in or withdraw from a DRIP for a stock within an account or across all accounts that hold that stock, without the need to contact customer support.  For those corporations that do not offer a discounted DRIP for their stock, iTrade offers the Dividend Purchase Plan (DPP), which reinvests cash dividends commission-free.


 Although it did not score the highest for innovation and has not increased in ranking for the past 3 years, Scotiabank iTrade has added a few new features that are useful, such as the calculation of "Realized Gains and Losses" within an account, which helps calculate annual capital gains and losses for tax reporting purposes, and "Income Details" for an account, which provides historic and projected annual and monthly distributions from equity or fixed income holdings that pay a distribution.  The Income Details view also splits out distributions paid out in cash versus those that will be reinvested in DRIP or DDP programs.  iTrade is also holding surveys to poll client interest in potential future improvements, including a few that I really hope they implement.

What we learned from this exercise of comparing discount brokers and investigating what it would take to move brokers is that you need to choose your broker wisely based on the factors that are important to you, because it is a painful, costly and non-trivial process to move between discount brokers later.
But keep in mind that things change and these competitors will continuously try to one-up each other.  So unless a much more pressing impetus arises in the future, for now we are sticking with Scotiabank iTrade as our discount broker, but will continue to lobby for them to finally start supporting US currency registered accounts.

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