ROB CARRICK
Thursday,
January 10, 2008
An upstart online brokerage has bested
the bank-owned competition in addressing
one of the biggest complaints investors
have about stock trading.
Questrade Inc. will announce on Monday
that clients can hold U.S. dollars in
their registered retirement accounts.
The industry norm is to allow only
Canadian dollars in registered accounts,
which means costly currency conversion
charges are often unavoidable for
investors who buy and sell shares listed
on U.S. exchanges.
Questrade is one of the smallest online
brokers serving the Canadian market, and
its service for clients falls short of
the industry leaders. But the firm's
move to allow U.S. dollars in registered
accounts will provide it with a notable
advantage over the bank-owned giants in
the online brokerage business.
Investor anger about forced currency
conversion has been growing since the
federal government killed foreign
content restrictions in registered
accounts back in 2005. Lately, the fee
has been an irritant to investors who
are looking at buying U.S. stocks to
take advantage of the Canadian dollar's
strength against the U.S. dollar, and to
diversify away from a Canadian stock
market that has risen for five
consecutive years.
"This is a sore spot among investors,"
said Edward Kholodenko, president and
CEO of Questrade. "We've heard quite a
few complaints, and this is our
response."
Investor anger over currency conversion
fees has prompted a group of investors
to attempt to launch a class-action
lawsuit against Bank of Montreal and
some of its divisions. The Canada
Revenue Agency, which sets rules for
registered retirement savings plans, has
allowed U.S. dollars and other foreign
currencies to be held in these accounts
since 2001. According to Questrade, the
Investment Dealers Association of Canada
officially classified currencies as
allowable assets in registered plans
back in 2006.
The bank-owned firms that dominate the
online brokerage business say they're
unable to allow customers to keep U.S.
dollars in registered accounts because
of limitations in the software they use
to keep track of client accounts.
Questrade is like its competitors in
that it uses software supplied by
outside suppliers, but Mr. Kholodenko
said his firm has developed
modifications that allow for U.S. and
Canadian dollars to both be held in the
same registered account.
Other brokers have an incentive to
maintain the status quo on holding U.S.
dollars in RRSP accounts because of the
revenue they generate through currency
conversion. But it's clear that
Questrade is setting a trend its
competitors will be following.
Doug Coulter, CEO of RBC Direct
Investing, said yesterday that the firm
is working with its data provider and
hopes to have RRSP accounts that can
hold U.S. dollars in 2009. TD Waterhouse
president John See said Canada's largest
online broker is also working on adding
U.S. dollars to RRSP accounts, but
declined to offer a timeline.
Questrade's research shows that
investors are charged currency exchange
fees of up to 1 to 2 per cent for every
buy and sell transaction, which are in
addition to regular stock trading
commissions. "If somebody goes in and
does a $10,000 trade, they'll get hit
with $100 to $200 in currency costs that
they won't even see because they're not
broken out," Mr. Kholodenko said.
The fees apply when Canadian dollars are
converted to U.S. dollars to buy
American stocks, and again when U.S.
stocks are sold and the proceeds are
automatically turned back into Canadian
currency. An increasing number of
brokers are trying to partly shield
clients from this pile-up of currency
conversion costs.
A few offer so-called wash trading,
where clients aren't penalized with
conversion fees when selling U.S. stocks
and then immediately buying more
(drawback: you have to call in to
arrange this). TD Waterhouse is among a
few very brokers that also allow clients
to keep U.S. dollars in U.S.-dollar
money market funds to avoid currency
conversion fees.
These are half-way measures at best in
comparison to what Questrade is
offering. You'll be able to deposit U.S.
dollars into your account, hold them in
cash form and then use them to buy U.S.
stocks. If you want to sell a U.S.
stock, you indicate online that you want
the transaction settled in American
dollars. One small downside: You have to
pay an extra $5 commission for
U.S.-dollar trades in RRSP accounts.
This fee is paid once on a day when you
trade U.S. stocks, not per transaction.
Questrade offers a Spartan service in
comparison to the big bank-owned
brokers, but it's great for fees.
Investors who trade a few hundred shares
at a time pay a minimum commission of
$4.95, while unlimited trades are
possible for a flat rate of $9.95. RRSP
accounts have no fees, and now they
offer U.S.-dollar capability.
Like all serious brokers, Questrade is a
member of the Canadian Investor
Protection Fund, which protects account
assets of up to $1-million in case a
member firm becomes insolvent.
If you're a big trader of U.S. stocks in
your RRSP account, give this firm a
look.
RRSP Q&A
Who is affected?
Investors who invest in U.S.-listed
stocks for their RRSPs.
What's the problem?
Investors cannot hold U.S. dollars in
RRSPs, so Canadian dollars must be
converted into U.S. currency when
purchasing U.S. stocks and U.S. dollars
must be converted back into Canadian
currency after selling U.S. stocks.
Why the restriction?
Brokers say client account software
won't allow it.
What are the costs?
Currency conversion fees can cost up to
1 to 2 per cent of the dollar value of a
trade.
Any solutions?
Some brokers will offer a break to
clients who sell a U.S. stock and
immediately buy another U.S. stock.
Any exceptions?
The online broker Questrade will
announce Monday that its RRSP accounts
can handle U.S. dollars, and other
brokers say they're working toward this.
