Portfolio strategy

Online brokers lower cost of U.S. stocks in RRSPs

The Globe and Mail

(Michael McCloskey/iStockphoto)

One of the best arguments for avoiding U.S. stocks is starting to become a non-issue.

No, the U.S. government hasn't figured out a way to address its monster-size deficit and solve all its economic problems. If those are your reasons to forego U.S. content in your portfolio, then the news about U.S.-dollar RRSPs won't mean much.

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But for investors who have thought about capitalizing on our dollar reaching parity with the U.S. buck by purchasing American stocks, the new U.S.-dollar registered accounts coming in mid-May from online broker RBC Direct Investing are huge.

Two small independent firms, Questrade and Qtrade Investor, have for a while offered registered retirement accounts that allow clients to hold U.S. dollars without a forced conversion into Canadian currency. RBC DI's introduction of this feature shows the mainstream is starting to embrace it.

About time, experienced investors have to be saying at this point. Right now, investors are being gouged every which way when they buy or own U.S. stocks or bonds. First, you pay a hefty foreign exchange fee to convert Canadian dollars to U.S. currency to make a purchase. When you sell, the proceeds are automatically converted back to Canadian dollars with yet another fat forex charge.

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Receiving any dividends or bond interest in U.S. dollars? Ka-ching. Every time you receive a payment, it's converted and, thus, reduced in value to the enrichment of your broker.

This currency conversion abuse is mostly eliminated in the U.S.-dollar registered retirement savings plans, registered retirement income funds, locked-in retirement accounts and tax-free savings accounts at RBC DI (notable exception: registered education savings plans).

You'll still have to convert Canadian dollars when buying U.S. assets in your RBC registered accounts, including tax-free savings accounts. But after that, U.S. dollars stay in U.S. dollars.

"The money remains in U.S. cash until you decide to reinvest in another U.S. denominated asset, or you can convert it back to Canadian dollars," said Jason Storsley, president and CEO of RBC DI. "But that's at your discretion. There's no forced conversion."

U.S.-dollar registered accounts at RBC DI will work much like U.S.-dollar cash and margin accounts. If you have a registered account at the firm, you'll automatically receive a U.S.-dollar side added to your account "You don't have to ask, you don't have to apply and you don't have to pay fees on it," Mr. Storsley said.

There's another angle to RBC DI's introduction of U.S.-dollar registered account and it's good news for all do-it-yourself investors.

Over the past year or two, online brokers have experienced a significant shift in their customer base. Joining the speculators, traders and savvy veteran investors are many people with modest to minimal investing experience. For whatever reason, these investors have decided to take their own portfolios in hand rather than using an adviser.

Online brokers know that it's one thing to sign up these people and another entirely to keep them as happy, successful, revenue-generating clients. This explains why brokerage firms are becoming noticeably more customer friendly in some ways. You can see this in all the educational material they're offering -- video tutorials on how to make trades, for example. RBDI itself has introduced a popular new feature called a practice account where you can use the firm's trading apparatus with imaginary money.

U.S.-dollar registered accounts are another customer-friendly move. RBC is foregoing significant revenue by curtailing forced currency conversions and, according to Mr. Storsley, it's helping clients achieve some needed diversification in their accounts.

"A lot of clients haven't taken advantage of diversification because of the cost associated with the forced currency conversion in registered plans," he said. "This gives them an opportunity to diversify their holds and not worry about the cost."

Let's remember that buying U.S. stocks, bonds and exchange-traded funds isn't necessarily an endorsement of the state of the economy south of the border. Some U.S. companies are giants that offer a subtle approach to adding global content to a portfolio. The U.S. market is also rich in health care and tech companies, both areas where Canada's presence is much more limited.

Watch for other bank-owned brokers to follow RBC DI in the months ahead in adding U.S.-dollar registered accounts. BMO InvestorLine said it will introduce this type of account at a future date, while Scotia iTrade is looking into it.



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TD Waterhouse, the largest online broker in the country, said it has no imminent plans to introduce U.S.-dollar registered accounts. "However, we have policies and procedures designed to deliver virtually all the same benefits to clients," spokeswoman Barbara Timmins said in an e-mail.

First, TD Waterhouse will automatically let you sell a U.S. stock or exchange-traded fund and use the proceeds to buy another the same day without charging conversion fees. Second, the firm allows wash trades (you have to call in by phone), where clients draw from a U.S.-dollar money market fund held in a registered account to pay for trades without incurring exchange fees. When selling, your proceeds can go directly into the U.S.-dollar money market fund without conversion.

CIBC Investor's Edge offers a similar work-around to TD for people who want to hold U.S. stocks in a registered account.

Back in January 2008, Questrade became the first Canadian online broker to allow clients to hold U.S. dollars in registered accounts. The firm initially charged a special $5 fee on any day you traded a U.S.-dollar security, but that was recently eliminated for RRSPs (it's still there for RRIFs).

Qtrade Investor, top-ranked in the most recent Globe and Mail online brokerage ranking (read it here: tgam.ca/DCv), offers only U.S.-dollar RRSPs. There's an annual administration fee of $50 (U.S.) per year.

RBC's Mr. Storsley said the strong Canadian dollar has increased buying of U.S. securities by RBC DI clients, although he declined to provide specific numbers. Overall, trade volumes were up 42 per cent year-over-year for the three months ended January 31.

Strong markets help explain this, but so does the continued migration of people to online brokerages and do-it-yourself investing. The DIY approach is by no means for everyone. But with U.S.-dollar RRSP accounts entering the mainstream, it's getting more attractive all the time.



The cost of Buying American

Here's an example of how do-it-yourself investors can get clipped by their online brokers when buying and selling stocks or exchange-trade listed on U.S. exchanges.

When Buying

Your buy order

100 shares of XYZ Corp. of America @ $50/share

Cost of the shares

$5,000 (U.S.)

Cost in Cdn dollars

$5,141 (assumes a wholesale exchange rate just below parity and a conversion fee of 2.5%)

When Receiving Dividends

XYZ Corp. pays you

$5.00 (U.S.) per quarter, based on a 50-cent dividend and your 100 shares

Your broker takes

12.5 cents quarterly, based on a 2.5% conversion fee and near-parity exchange rate

When Selling

(imagine your shares have run up 20 per cent)

Your sell order

100 shares of XYZ @ $60/share

Proceeds from the sale

$6,000 (U.S.)

Proceeds in Cdn dollars

$5,815 (assuming the same wholesale exchange rate near parity and 2.5% conversion fee)

Note: Commissions would add to your costs by $5 to $29 per trade at an online broker.



For some ideas on what U.S. stocks and ETFs to buy, check out this recent Portfolio Strategy column.