Image: Man using trading terminal from Shutterstock
UPDATE: This article has been updated to reflect prices as of July 27, 2016.
What’s the best discount broker to use?
It’s a question I often get asked, particularly by people who are new to investing. Unfortunately, answering this question can be complicated because each broker has his or her own unique way of charging fees. This means that different brokers will cost more depending on how the individual uses the account.
In this article, I will investigate this question from the point of view of an average Canadian who implements a portfolio of ETFs, such as MoneyGeek’s model portfolios. In particular, I will look into three popular Canadian brokers - Questrade, Interactive Brokers, and Virtual Brokers - to see which one of the three would end up being the least expensive, taking earnings into consideration.
Before we go on, I must disclose that I receive affiliate income from Questrade. I believe I’ve been objective in my analysis, but please feel free to question the specifics using the comments below.
Assumptions About The Average Canadian Investor
Let’s first determine the specific needs and habits of an “average Canadian”, as that will determine how much each broker ends up costing. The following list spells out the exact assumptions I used in my analysis.
The average Canadian:
- Owns $50,000 in financial assets (i.e. stocks, bonds, GICs, etc). I think this is reasonable because the average Canadian family had roughly $80,000 in financial assets they controlled in 2005, while roughly 30% of Canadians were one person households, implying that the average household had 1.7 adults. $80,000 divided by 1.7 is $47,000 per adult.
- Has 2 registered savings accounts (RSPs). RSPs include TFSAs and RRSPs. With $50,000 in financial assets, the average Canadian won’t max out both their TFSA and RRSP contributions, provided that the earn a normal level of income.
- Will purchase ETFs twelve times a year, and sell ETFs twice a year. This fits the description of someone who makes a monthly contribution to buy one ETF a month. Selling ETFs is likely a rarer occurrence for the average Canadian because they’ll only do that to either rebalance the portfolio, or to withdraw money. I will also assume that each trade (i.e. buy or sell) consists of 200 units.
- Will purchase stocks 4 times a year and sell stocks once a year. I’m assuming that the average Canadian who mostly follows an ETF portfolio still has one or two stocks on the side. I will also assume that each trade consists of 200 shares.
- Will exchange $5,000 worth of currencies twice per year, from CAD to USD or vice versa. A Canadian who wants to buy U.S. listed ETFs or stocks would need to make this exchange.
- Won’t trade more exotic investments like options, futures, etc.
With these assumptions in mind, let’s go through each broker and see how much they would cost the average Canadian. Note that Virtual Brokers has different commissions structures, so I chose to use the "Classic" commission structure for comparison. While the "Commission-Free" structure might look cheaper at first glance, you can only qualify for that structure if you pay for a monthly trading platform, the cheapest of which seems to cost $35/month.
|Questrade (CAD)||Interactive Brokers (USD)||Virtual Brokers (CAD)|
|RSP Fees||0||0||0 to 120|
|Total||55 CAD||244 USD||61 to 181 CAD|
The above table shows the costs for each broker. Let’s go through each row.
Out of the three brokers, trading stocks cost the most with Virtual Brokers. This wasn't the case up until recently, when they used to charge just 1 cent per share for each trade. However, they have since changed commission structures to court more active traders.
Questrade's trading costs are half that of Virtual Brokers. Although they advertise that each trade costs 1 cent per share, the minimum commission for each trade is $4.95, while the maximum commission is $9.95. That means a trade would only cost 1 cent per share if you buy between 495 and 995 shares. Since we’re assuming an average trade size of 200 shares, the average trade costs $4.95, rounded to $5.
Finally, Interactive Brokers has a minimum of $1 per trade, and they charge 1 cent per share otherwise.
The costs for ETF trades are low for Questrade and Virtual Brokers because they both offer free ETF purchases. Selling ETFs costs the same as for stocks for Questrade, while Virtual Brokers allows you to sell ETFs for free. In calculating the total fees for trading, I’ve assumed that one of two ETFs sold each year belongs to this list. Interactive Brokers doesn’t offer free ETF trades, so their costs are much higher.
The biggest drawback of Interactive Brokers is their inactivity fee. If you pay less than 10 USD in trading fees each month, they will charge the remainder as an inactivity fee. For example, if you incurred $2 in trading fees in a month, they will charge you $10 - $2 = $8 USD that month. Furthermore, they will charge this amount per account. However, they will waive the inactivity fee if you have over $100,000 USD in the account. Without the inactivity fees, the cost per year would go down to $42 USD per year.
In calculating foreign exchange fees, I assumed that the user can take advantage of Norbert’s gambit. If the user can’t take advantage of Norbert’s gambit, the cost of exchanging money would be much higher for both Questrade and Virtual Brokers, as they charge 2% and 0.75% respectively on a round trip. On $5,000 worth of transactions, the round trip would cost $100 and $35 respectively. By comparison, using Norbert’s gambit generally costs ETF sales commission + 0.2% of the exchanged amount with each round trip.
Lastly, whereas it costs nothing to register an RSP account with either Questrade or Interactive Brokers, it can cost substantially more if you want to hold U.S. dollar denominated investments with Virtual Brokers. While an RSP account that can only hold Canadian dollar investments costs nothing, an account that can hold U.S. dollar investments costs $15 per quarter, which equates to $60 per year.
Which One Should You Choose?
From the average Canadian’s perspective, it’s obvious that Interactive Brokers would end up costing the most. Note that this would not be the case for a richer Canadian who has more than $100,000 USD in a single account who also prefers to trade stocks instead of ETFs. For these individuals, Interactive Brokers may end up costing the least out of all the options we’ve looked at.
But if you’re an average Canadian, I believe Questrade comes out to be the cheapest. Under Virtual Broker's old commission structure, determining which broker was cheapest wasn't so straightforward. But with the commissions changes, I believe Questrade is currently the cheapest out of all the major discount brokerage firms that offer registered accounts.