The cost of investing has dropped dramatically since the advent of online discount brokerages, but there are a couple of transactions where Joe Retail stills get clobbered. One of these is currency exchange fees: charging clients 1.5% or more to convert Canadian dollars to US dollars—and the same to change them back—is a disgrace. Investors who use US-listed ETFs need to find ways to avoid foreign exchange fees or they risk giving back everything they save on the lower management fees.
As a client of Scotia iTrade, I had an opportunity to test-drive their US-Friendly RRSP program this month as I made some changes in my portfolio. I used to hold three separate ETFs for my international equities, but when the Vanguard Total International Stock (VXUS) was launched earlier this year, it made sense for me to merge them into a single fund when I next rebalanced. So I was in a position to sell three US-listed ETFs and buy another, and these four trades would have cost me hundreds of dollars in foreign exchange fees at the usual rate.
However, Scotia iTrade’s US-Friendly RRSP offered a solution. For a flat fee of $30 per quarter, the program allows you to buy and sell US securities without paying the usual retail spread on the currency conversion. To sign up, all I did was fill out a simple one-page form with my name, account number, and signature and fax it to iTrade. The next day, everything was in place.
I sold the ETFs on July 7 and July 11 and then bought VXUS on July 13. When the trades settled, the confirmation notices disclosed the exchange rate I got on each transaction. To see how these stacked up against the actual market rates, I went to the Bank of Canada, where you can look up the exchange rate for any day in the past. The site gives the high and low for the day, so I compared both of these and calculated the average of the two figures. Here are the results:
| iTrade | Daily High | Difference | |
| July 7 | 1.0379 | 1.0450 | 0.71% |
| July 11 | 1.0320 | 1.0353 | 0.33% |
| July 13 | 1.0411 | 1.0441 | 0.30% |
| iTrade | Daily Low | Difference | |
| July 7 | 1.0379 | 1.0369 | -0.10% |
| July 11 | 1.0320 | 1.0314 | -0.06% |
| July 13 | 1.0411 | 1.0372 | -0.39% |
| iTrade | Average | Difference | |
| July 7 | 1.0379 | 1.0410 | 0.31% |
| July 11 | 1.0320 | 1.0334 | 0.14% |
| July 13 | 1.0411 | 1.0407 | -0.05% |
As you can see, the rate I got from iTrade was always better than the lowest rate of the day, but considerably worse than the daily high. Compared to the average value for the day, the spread actually worked in my favour once, and averaged 0.13% for the three days. Considering that iTrade’s normal retail spread is 1.65% (according to the MoneySmarts discount brokerage comparison), that seems like a good deal. It works out to $13 for every $10,000 exchanged, as opposed to $165 at the normal rate.
Of course, enrolling in the US-Friendly RRSP also cost me another $30, and the privilege runs out at the end of the third quarter. I’ll wait until September to cancel it, in case I decide to add more money to my US or international positions. Next year, when it comes time to rebalance again, I’ll sign up for another quarter, make the trades, and cancel again. Scotia iTrade’s program isn’t perfect, but sure beats what most brokerages offer.
{ 25 comments… read them below or add one }
I’ve been using Questrade for a number of years as it’s foreign exchange spreads are relatively cheap — something like 0.5% for registered accounts, and 1.5% for cash accounts. Have you considered them instead of iTrade? I’m always curious as to why one chooses one discount broker over another.
@Raman: I could live with 0.5%, I suppose, but 1.5% is not cheap at all.
In my case, I just chose iTrade because I do my banking at Scotia and it’s the most convenient. In general, I think that as long as you’re paying $9.99 for trades, your choice of brokerages doesn’t make a huge difference.
For me, the deal breaker with Questrade is that they charge a $9.95 commission for mutual fund trades.
The non-registered currency exchange fee at Questrade is actually 1.25%. A bit better than most, but still too high. I don’t have any money in non-registered accounts, so I’m fine with the 0.5% exchange fee in their registered accounts.
Dan, I think you’re right that a $10 trade commission cost is perfectly acceptable. As long as you can save on the currency exchange fees using various methods, you should be fine with most, if not all brokerages.
Dan,
Could you be so kind to disclose what your potato looks like (a breakdown of your asset allocation in terms of holdings and %s).
MUCH THANKS!
@Matt: I used to have a pretty complicated ETF portfolio, but every year at rebalancing time I have simplified it. I now use the Complete Couch Potato, except that I use an equal split of CLF and CBO instead of XBB. I may well merge these two at some point, too. As I have matured as an investor, I have come to appreciate the value of simplicity. I don’t think anyone needs more than about six well-chosen funds until they have a very large portfolio.
I forgot to mention that one of the advantages of RBC Direct, Qtrade and Questrade is the “true” US$ RRSP. This means that if you sell a US$ security and want to buy another US$ security (which is what Dan did), the money never gets converted to CDN$, so exchange fees don’t apply.
@Dan – Why do you care about the mutual fund transaction fee at Questrade if you don’t hold any mutual funds?
@Mike: I do use index mutual funds for my two RESP accounts, which I contribute to every month. It’s only my RRSP that is all ETFs.
I agree that the ability to hold US dollars in registered accounts can be a very significant benefit for people who hold US-listed ETFs. I hope that in the coming years all the discount brokerages will eventually offer this service. I actually considered switching to RBC for that reason, but as I understand it, you need to fund the brokerage account with an RBC chequing account, and an RBC US-dollar account. It seemed like a huge hassle to switch my bank accounts for this reason, so I stuck with Scotia. (And, yes, I am sure all of the banks are aware that no one likes to switch their accounts, and they exploit this inertia.)
Agreed – investors shouldn’t have to shop around for features which should be common to all brokerages.
You can fund RBC Direct using bill payment. One of the really annoying things about that place was that their reps will do everything they can to try to get you to set up a chequing account. I even had one tell me that the bill payment won’t work (which it does). Morons.
Good to hear about the index mutual funds – I was afraid you were going to admit to owning some triple-inverse junior gold mining mutual fund.
@Mike: Don’t be ridiculous: my junior gold mining stocks are triple leveraged, not inverse. Don’t you know that gold is the only real asset?
I have a USD account with Scotia that does not allow me to set up bill payments, so I can’t transfer US dollars to a brokerage account. I find it so frustrating that every bank and brokerage has its own idiosyncratic rules, and it’s very difficult to anticipate these. (I didn’t even ask about bill payments when I opened the account, because I took it for granted that they would be allowed.
If you switch to a new brokerage, you may think you’ll be getting improvement, only to find out that your new brokerage has some other irritating quality you didn’t think about. For example, Scotia iTrade does not allow you to make online mutual fund purchases of less than $1,000. If you call them, they will allow you to make smaller purchases over the phone, but they will first tell you that they’re not permitted to. I have to tell them, “You did it for me the last 17 times I called, so give it a try and see if it goes through.” It always does. If they would just allow clients to do this online, I wouldn’t have to waste my time and theirs with the phone calls.
Leave your RESPs with Scotia and move everything else to Questrade. Being able to hold USD in your account is very useful, and their 0.5% fx fee in registered accounts is reasonable.
You can set up PACC with many ETF providers for your RESP to avoid the $10 transaction cost for mutual funds. Monthly contributions are overrated, especially in small accounts. Quarterly or semi-annually would work as well.
Thanks for the feedback on our products and for sharing the benefits of the U.S.-Friendly RRSP account on your blog.
I’d like to take this opportunity to add a convenient way of enrolling and cancelling the U.S.-Friendly RRSP account. In addition to completing the U.S.-Friendly RRSP Enrollment/Cancellation Form, account holders may also change the U.S.-Friendly RRSP service online.
To change the Registered Account service types:
1. Select the “Accounts” tab
2. Click on “Accounts Services”
3. Select the “Add an Account” tab
4. Click on “Enrol Registered Account(s) in the U.S. Friendly RRSP Account Service”
Account holders will then be directed to the enrollment page where they can select one or more accounts to be enrolled in the service at one time. Once completed, the product indicator will appear on the “Complete View: By Accounts” tab.
I also wish to inform you that you can setup electronic fund transfers in US dollars. With our Easy Transfer tool, you can transfer funds to or from your US-dollar denominated bank accounts and any of your Scotia iTRADE accounts. Please note that if you’re transferring money between a US-dollar account and a Canadian account, foreign exchange charges will apply.
Feel free to email me at nabil@scotiaitrade.com with your questions and any feedback.
Looking forward to reading your future posts.
Thanks again,
Nabil
Connect with us @Scotia_iTRADE
@Nabil: Many thanks for stopping by and clarifying these points. I had not realized that you could enrol or cancel the US-Friendly RRSP service online, without filling in the form. There are still a few hidden features on iTrade that I’ve yet to discover.
Re: transferring US dollars from a bank account, the Easy Transfer tool is useful for non-registered accounts. However, if the US dollars will be converted to Canadian dollars (as they must be in an iTrade RRSP) it clearly defeats the purpose.
i am stuck with RBC DI because of my Employer’s relation with them. i would prefer the Scotia solution as it allows conversion either way at a cost of less than 30 basis points. is this understanding correct? with RBC DI i do have USD RRSP but if i do switch in and out (to CAD RRSP) of USD RRSP then i still pay 30-150 basis points (tiered) over whatever their average daily rate is. i am infact waiting to get my balance over $75K so that i get charged the 30 basis points.
One quick point about Questrade’s non-registered currency exchange fee of 1.25%.
This is negotiable if you’re converting larger sums. For example, I asked them to reduce it when I converted 18K from CAD to USD…the agent put a note on the FX for 0.70%.
While I agree that the US-Friendly RRSP offers better rates than converting both ways at 1.65%, it is ridiculous that Scotia iTrade is even charging a currency conversion fee because all Dan is doing here is selling one USD security and buying another. With a USD RRSP offered by brokers such as RBC Direct Investing or wash trading offered by TD Waterhouse, Dan would be paying $0 in currency conversions when selling and buying USD securities.
Charging 1.65% each way is just highway robbery, in my opinion.
Calculating the conversion fee you paid based on the Bank of Canada posted exchange rate isn’t quite accurate, since even large institutions cannot get that exact rate because forex is traded with ask/bid spreads. You actually want to calculate what iTrade charges you above the average ask or bid price (as appropriate for the type of transaction) available to banks on that day. You can find these rates on a variety of sites like OANDA.
As far as brokers go, once you add up all the little advantages ($4.95 trades, 0.5% conversion in registered accounts, dividends staying in USD rather than getting converted), choosing a cheaper broker can start to make a difference, particularly if you’re the type of person who makes regular monthly investments, since for small investments Norbert’s Gambit doesn’t really make sense.
It pays to do some reading about the broker you choose too… for instance, TD Waterhouse does its absolute best to hide any information about how to do wash transactions (or how to set up automatic washing now for some transactions) from clients.
@Calgary64: You raise a good point. The RBC DI solution might be better, because you can avoid currency conversion fees altogether. However, this assumes that you have a source of income in US dollars, and that you can move these US dollars in and out of your brokerage account. Otherwise, as you say, at some point you do have to convert your Canadian dollars and pay the spread, whether you pay it to your bank or to your brokerage.
@Erick: Another great reminder that all investors should call and ask for a better rate when converting large sums. It can easily save you a few hundred bucks.
@CC: You’re right that when switching funds, a wash trade would definitely have been better, as it would have been free. However, I also added some new money at the same time. If you’re making new purchases, the iTrade arrangement is actually preferable.
@Chris: True enough, though the institutional bid-ask spreads on currencies are very small, and I was just trying to get an estimate of how good iTrade’s rates were. A few basis points in either direction wouldn’t make a big difference.
It’s true that all of the frictional costs of trading can add up to a significant drag. I agree it makes sense to do your research, but unfortunately, it’s very hard, because as you say, a lot of the information isn’t disclosed, so it’s hard to compare them. There are always surprises.
For anyone with an RBC DI account, you can do a Norbert’s Gambit entirely online. There is a good write-up on it here:
http://www.christinanorman.com/2010/10/using-rbc-direct-investing-for-norberts.html
I did it recently using RIM (probably the most liquid stock to use) and it worked well. I figure it only cost me the two commission fees.
A few here have indicated that when converting large sums, the fx rate is negotiable. How large of sums are we talking about here (5k, 10k, 25k, etc)?
I have very recently opened accounts with both TD Waterhouse and Questrade; but am thinking of consolidating with the latter as I understand they have improved a lot in last few months with respect to service and online experience.
Would this be a good move, or is it too early to say?
@Michael: I would definitely call for a better rate at $10,000.
@Be’en: I would stick with both brokerages for a couple of months and see which one you like best. There’s really no consensus on customer service: you’ll hear vastly different opinions from different people.
I highly recommend RBC Direct Investing. The fact that you can buy and sell in a US denominated account with no currency charge is invaluable to me. I transfer funds in to my RRSP account when rates are favourable, then I never worry about currency transaction fees again. I buy and sell in US dollars without a worry.
Did I hear right?!
On Sept 07, 2011, BMO investorline now offers a US denominated RRSP account.
NOTICE:
You can now hold USD in most registered accounts
We are pleased to announce that you can now settle your trades in Canadian and US dollar in most registered accounts*, including RSPs and TFSAs.
No registration is required – you can start settling trades in US dollar today.
http://www.bmoinvestorline.com/FAQs/FAQ_US_Dollar.html
Hey Dan, quick question for you, and I have a guess at the answer. If you hold a fund that holds US equities or bonds and it is hedged to C$. What happens when the US dollar goes up?
I’m guessing you forgo the US dollar apprecation?
@Dale: Yes, you’re correct. If you use currency hedging, you don’t benefit from a rising US dollar, just as you don’t suffer losses from a falling US dollar.
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