Category: Canada

Brokerage firms in Canada – Questrade Review

(June 19, 2012: A good chunk of this article is out-dated and will not be updated. Specifically they have changed their trading platform to emulate Interactive Broker’s TWS and apparently have increased their margin interest rates. The security concerns remain prevalent, although they do now ask a “security question” before logging in.)

(Article updated January 4, 2011 to update margin rates and put in a current rate of interest.)

(Readers may also be interested in reading A Questrade Failure [January 4, 2011], and Watch out for Questrade – Check those statements [February 16, 2011].)

I reviewed Interactive Brokers previously; I use them for my non-registered investments. For my RRSP and TFSA, and for TSX-traded debentures, I use Questrade.

Questrade

I transferred in my RRSP to Questrade in early 2008 from BMO Investorline. The primary attracting feature was the ability to retain US dollars in the account and not having to incur currency exchange fees whenever you transacted in US securities. Just as an example, ignoring commissions, if you bought USD$1000 of something, and then sold it the next day, you would probably pay around $40 of implied currency conversion charges at BMO Investorline. With Questrade, this is nothing, assuming you had the US currency in the account to begin with.

If you bought USD$10,000 of something and sold it the next day, your typical currency conversion charges (going from CAD to USD and USD to CAD) would be around $400 – with Questrade, it is nothing. For anybody transacting in US dollar securities in their RSP, it is an essential feature.

The RSP transfer took about a month. It also took them another couple months to refund the RSP transfer fee, but they explained this up-front.

The web-based interface for Questrade is very simple – it is missing a basic feature of “how much will this entire transaction cost” whenever previewing an order, but other than this, it is OK. The problem is mitigated by using a desktop calculator. They provide a better platform for active traders, but I have never used it and probably never will. They provide three separate logins for account information and trading, but once you’ve bookmarked them, it is surprisingly easy to get detailed access to your information. In particular, their clearing is performed via the Pension Financial Corporation, and the historical account information they provide through this interface is comprehensive. I can easily see how people that are not as “in-tune” with web navigation would find this system very confusing.

Costs at Questrade are very cheap – basically a trade costs $1 per 100 shares, minimum of $5, maximum of $10. They are also the cheapest Canadian broker to trade TSX-traded debentures – basically the standard commission charges (as if you were trading stocks) applies – so it would be about $10/trade. Most other brokerages charge around $40 per trade, plus $1.50 per $1000 par value – which could make trades very expensive. Questrade does not charge any inactivity fees or any other “garbage” fees, but something people should be aware of are fees for taking liquidity away from the market (i.e. buying at the ask, or selling at the bid) which would amount to material sums if you are dealing with penny stocks.

Questrade’s margin rates currently (as of January 4, 2011) are 4.5% for Canadian dollars, which is prime plus 1.5%. They generally are in line with other “big name” brokerages (e.g. BMO Investorline is at 4.25% or prime plus 1.25%), but both do not come close to Interactive Brokers.

I have no problems with Questrade customer support – they have an online web-chat interface and sometimes it takes awhile to get a customer support agent, but once you do get on with them, they are fairly responsive. I suspect most of the people that have complained about Questrade (and there are a lot of financial forums that have supremely negative reviews on them) didn’t have a clue what they were doing (e.g. dealing with Canadian vs. US dollar securities, or wondering why their shares got sold out when they had a margin call).

Deposits and withdrawals are simple – provide the EFT information, and a few button clicks is what it takes to fund accounts or withdraw funds from accounts. The withdraws typically take three business days to process, and I have always received my funds promptly.

For a simple buy-and-hold investor, Questrade seems to be a decent and low-cost provider. They aren’t going to win any awards for any of the other ancillary services brokerages provide (research, fancy interface, hand-holding customers), but if you don’t care about those, they serve the job very adequately for RRSP and TFSA accounts. I have no idea how they are for active traders.

Questrade’s inadequate security

The reason why I can’t give a blanket endorsement of Questrade is security – they do not offer any sort of guarantee (e.g. BMO Investorline’s Online Security Guarantee) against hackers, and unlike Interactive Brokers, if somebody managed to rip off your username and password, they can do a lot of financial damage to your account. This is my biggest concern with Questrade, and it is a sufficiently high concern that I wish they would offer some sort of guarantee against hacked accounts, and/or provide an account authentication system that is similar to Interactive Brokers. In addition, Questrade is privately held and as a result, one has no idea how financially solvent they are. Although Canadian investors are protected through CIPF, you do not want to have to reclaim your assets through this mechanism.

The reader might wonder why I am concerned about an issue that has not materialized for me – I am very cognizant of potential risks. I do not want to have to suffer through a security incident before taking measures that will protect me. I do not believe Questrade takes security seriously enough beyond the typical lip service of telling its customers to “run a firewall and a virus scanner” and as a result, some of its customers will have their accounts compromised. Although I am very computer-savvy and it is unlikely that a phishing scam will get my username and password, it could happen and I want a form of protection beyond a username/password combination to make sure that my account is protected. Questrade does not offer this.

Until they provide better provisions with respect to account security and provide some more transparency on their own financial solvency, I only will give them a tepid recommendation. The only reason why I use them is they support RRSP/TFSAs well and they allow inexpensive trades on TSX-traded debentures. If they beefed up their security, I would rate them much more highly than present. I just don’t get that warm and fuzzy secure feeling that I do with Interactive Brokers.

Unlike practically all other financial blogs out there, I won’t insult you (the reader) by offering some referral scheme, which they do offer – I do these reviews without remuneration.

Canadian dollar at parity to US Dollar

For the first time in about two years, and a rare event in a generation, the Canadian dollar is worth the same as a US dollar. The following is a three-year chart of the Canadian Dollar vs. the US Dollar:

This can probably be explained by a few factors:

1. Rate differentials: The Bank of Canada is expected to have a higher interest rate than the US Federal Reserve, thus moving carry trade dollars into the Canadian currency;
2. Commodities: Canada is seen internationally as being concentrated with commodity markets. Thus, more demand for Canadian dollars due to high exports of more expensive commodities;
3. Fiscal factors: The Canadian government is less of a fiscal basket case than the US government, thus inspiring confidence in Canadian bonds, thus giving the currency higher value.

The question is whether this trend will continue or whether there will be some sort of regression of the mean (the Canadian dollar traditionally has been around 80 cents US throughout its lifetime). I truly don’t know.

With a strengthened dollar, consumers win because their dollars have higher purchasing power. Prices in Canada are always higher than in the United States, so a cross-border shopping trip will probably have more value realized.

Also, investors should probably take a look at currency concentration and perhaps consider diversifying into US equities if they are primarily concentrated in Canadian currency.

Why are so many Canadian finance writers anonymous?

I have an inherent distrust of writers on the internet that choose to remain anonymous. Quoting James Hymas, who shares my sentiment on the issue:

I consider it highly important in this wonderful world of looney-tunes in which we live that somebody making a claim get hurt – either directly in the pocketbook, or (as in the case of academics) in reputation – if they make a mistake.

This is an important principle of accountability. People that are unable to attach their own true identities with their opinions should be viewed with much skepticism.

The people that I have linked to the sidebar of this site are people that have their real names associated with them. I have found so few people that are willing to stick their necks out with their real name that it is rather disappointing.

Brokerage firms in Canada – Interactive Brokers Review

The choice of brokerage firm for individuals is not that relevant of a decision unless if you are a very active trader (and hence want to reduce your commissions or want fancy charting packages to give you a better read of your tea leaves). Ultimately, most brokerages provide the same core services, with some nuances to distinguish them.

I personally use two brokerages: Interactive Brokers and Questrade. In the past I also used BMO Investorline for my RRSP, but eventually migrated that to Questrade strictly on the basis of transaction costs.

Interactive Brokers

I have used Interactive Brokers since they were allowed to open in Canada in 2002. They are the best brokerage firm available to retail investors, bar none. They have automated practically every aspect of the service they deliver. You can also trade any electronically-traded product on the planet for an extremely low commission – if you make liquidity-providing trades (i.e. you don’t buy at the ask or sell at the bid) you can trade Canadian stocks at roughly 50 cents for 100 shares, and US stocks for roughly 30 cents per 100 shares. They have four “killer features” which I consider significant in my decision to stick with them:

a. You can trade nearly any financial product on the planet through their system, in any currency, and it is all seamlessly integrated. The only product which they do not trade for some strange reason are TSX-traded corporate debentures. Once you enter in your trade, they have an automated executed system which will route your order to the best available location. They support order types of any imaginable variety – including “conditional” orders and time-based orders. Their trading software, TWS, is very, very powerful.

Just note that while you can trade securities in far-off exchanges (e.g. out in Asia or Europe) doesn’t mean you should be!

b. Currency exchange. I am kind of amused at discussion forums asking where you can get the best rates to converting currency – most brokerages charge a 2% spread. With Interactive Brokers, the spread is the market, which is usually around 0.0001 for the CAD-USD pair. For people that do cross-currency transactions, this amounts to substantial cost savings.

c. Security. Once your account gets above a particular balance, IB will mail you a digital device in the mail, which is required to authenticate your login whenever you try to access your account. This is an ironclad way of security, even if somebody compromises your username and password, they still cannot compromise your account until they have the physical device. I generally feel that my money in Interactive Brokers is absolutely secure. Also, they are publicly traded, so you could judge whether they will be going into a financial meltdown (like E-Trade did) – but they are managed quite conservatively and survived 2008 very well.

d. Very inexpensive margin rates. For those that want to borrow money, you can do so at rates that are nearly impossible to get elsewhere. For example, right now you can borrow Canadian dollars at 1.768%. If you borrow more than $120,000, your rate is 1.268%. If you borrow more than $1,100,000, your rate is 0.768%. These are variable with the bank rate, so after July, this will likely increase. Credit available with Interactive Brokers is such that if you intend on borrowing money, it becomes a very simple procedure to dump securities into Interactive Brokers and withdraw the cash, which creates a self-secured tax-deductible loan vehicle.

Contrast this with the purchase of real estate, and getting an HELOC – the HELOC will have a higher rate, guaranteed.

The only trick with using margin, however, is making sure that the collateral (the assets backing up the loan) don’t lose value!

There is no point in borrowing money elsewhere when Interactive Brokers makes it so cheap. It brings up the real possibility of leveraging up in various fixed income securities and doing what every other bank on the planet is doing – which is made possible by Interactive Brokers – again, just make sure the assets you invest in don’t lose value.

The disadvantages of Interactive Brokers, however, are significant for most financially unsophisticated individuals – you have to know exactly what you are doing, otherwise you will likely make an errant trade and lose money. The TWS is not an easy-to-learn piece of software and nobody is going to be there to hold your hand, although there is ample documentation to read if you wish to self-educate. Other disadvantages is they do not do RRSPs or TFSAs (or anything else registered) – it takes them too much paperwork and compliance costs so they will not offer them. They do not offer TSX-traded debentures, which is something readers of this site will know that I have dabbled with. Finally, they do have ‘inactivity’ fees, where you will be charged a minimum of $10 a month minus the amount of commissions that month. So if you only rack up $3 of commissions for the month, they will dock you another $7. This is a minor amount, but for people with small accounts, Interactive Brokers is definitely not for them.

Customer support is done through a ticket creation system – one of their reps will look at it and give an appropriate response. It is rare that support will be needed, but all of the times I’ve had to send an inquiry, the response time was very prompt. For people that like talking on the phone for support, however, I doubt they will find Interactive Brokers adequate at all – they don’t hold the hands of their customers.

Getting money in and out of the account is easily performed through EFT. For larger quantities of money, they also support wire transfers.

In summary, Interactive Brokers is a very powerful brokerage – If Interactive Brokers offered RSP/TFSA accounts and offered TSX-traded debentures, I would be using them for everything. I would not recommend them for everybody, however.

I did this review without remuneration.

Canadian Fiscal Monitor January 2010

This is about nine days late, but the Ministry of Finance released the fiscal results for the 10 months ended January 2010.

Of particular note is a massive increase in corporate income tax collections – up a whopping 74% for the month of January 2010, from January 2009. Although month-to-month results will be quite volatile in this category, for the 10 months from April 2008 to January 2009 and April 2009 to January 2010, corporate tax collections are still down 23%. This will inevitably be better in the 2010-2011 fiscal year.

The spending side of the ledger continues to be very high, with 12% growth for the 10 months to date.