For decades, there were very few options available to Canadian investors. “RRSP season” would roll around and suddenly an advisor or bank employee would reach out to their customers to recommend the latest mutual fund that they could put their money into for the year. The presentation would often include questions about how the children were doing, and some fancy charts that showed a growing nest egg projection. At the end of the meeting, the investor would hand over a cheque, and ignore the fine print that stated they were on the hook for paying annual fees equivalent to 2% to 3% of their total portfolio as long as they were invested in the mutual fund.
A much smaller group of Canadian investors (with sizable portfolios) had access to a more exclusive world of wealth management. These investors would pick up the phone and call their preferred financial institution, giving them instructions like, “Get me 10,000 shares of BMO at $15.60.” Then it was up to the institution to communicate with the professional trader who could try and make sure these shares were purchased on their client’s behalf. You can imagine how expensive these custom-order operations were, and indeed, how wealthy Canadians paid very large commissions for these privileges.
Fortunately, today’s investors have much better options for getting started in the stock market. Canada’s online brokers offer the most flexible combination of investment options and ultra-low fees.
Canada’s discount brokerage revolution
While robo advisors offer a one-stop shop that can instantly turn your investment dollar into a diversified index investment portfolio, they come with a management expense ratio (MER) fee of anywhere from 0.5% to 0.7%. Robo advisors also don’t include the option to buy and sell specific stocks or electronically traded funds (ETFs). On the other hand, Canada’s discount brokerages (also known as online brokers) give users far more flexibility and the lowest-cost options. If you’re new to investing, using one of Canada’s online brokers to keep your money growing — and not while filling someone else’s pockets — is one of the best ways to maximize your chances at financial freedom.
If we want to figure out just how much money the average Canadian investor can save by switching from the mutual fee model of the past, to a more modern discount brokerage platform, we need to compare fees.
Let’s say that Izzy the Investor is a Canadian who has $10,000 to invest each year.
Canada’s mutual fund fees are amongst the highest in the world. Let’s assume an average MER of 2.3%. If Izzy gets talked into the average equity mutual fund in Canada, she is going to pay about $230 per year in various fees for every $10,000 that she has invested.
If Izzy uses a discount brokerage to buy an ETF, however, her $10,000 will be used to purchase a basket of thousands of stocks from around the world. This instantly diversified portfolio can be purchased with three or four clicks, and because online brokers boast a much lower MER for most ETFs, it will cost Izzy only about $25 per year in various fees for every $10,000 that she has invested. Many discount brokerages offer free purchases and/or sales of ETFs, and very low commissions ($5 to $10) to buy or sell a stock. Whereas the mutual fund’s high MER is used to pay Izzy’s financial advisor, as well as pay for all of the offices, advertising, and salaries of the company that would choose the investments inside her mutual fund.
In the long run, this means that if Izzy started investing using an online broker at the age of 20, and invested that same $10,000 every year until retirement at 65 (assuming the same 9% return on her investment in either case), the difference in her final nest egg could be as much as $3 million.
How to compare Canada’s discount brokerages
When you first begin to explore the world of online stock trading and discount brokerages, it can be a bit intimidating. There are various types of fees to be aware of, and the terminology alone can be just enough of an obstacle to justify endless procrastination. But don’t fall into the paralysis-by-analysis trap. Think of it the same way you would if you were comparing products like home insurance and auto insurance. You want the cheapest rate for your needs, right? The same applies to investing fees. Here’s a quick primer on the fees to watch out for when comparing Canada’s online brokerage options:
Account fees: The two most prominent fees to pay attention to are account fees and trading fees. Most Canadian investors will want to eventually open three to four accounts: RRSP, TFSA, Non-registered, and RESP. Make sure to check if there are monthly, quarterly, or annual fees attached to each of these options. All of Canada’s top discount brokerages have either done away with these fees altogether, or dropped them to zero for any account over a specific minimum (usually $15,000 to $25,000).
Trading fees (plus ETF fees): In addition to account fees, online brokers usually charge you a per-transaction fee to buy or sell a stock. Often there are two categories of trading fees. One trading fee applies to “elite” traders who make more than 150 trades per month. The other category is the one 99%+ of investors will fall into. If you’re into low-maintenance index investing (a.k.a “couch potato investing”) you’ll want to pay particular attention to the fees pertaining to buying or selling an ETF as many leading brokerages offer these types of trades for free.
ECN fees: ECN stands for Electronic Communications Networks. Online trading platforms have to pay a per-share fee to access the stock market. Some brokerages opt to pass this fee along to customers, while others do not. For many investors these fees are negligible, but if you’re buying and selling relatively large amounts of shares, then ECN fees can start to add up. Usually ECN fees (if charged at all) come in at around $2 per 500 shares bought or sold, but can vary a bit depending on if “you remove liquidity from the market.” You don’t really need to know what that means, but just be aware that is what is occurring if you’re about to hit “confirm” on a stock purchase and the total commission is a bit higher than you anticipated.
Other fees, including exchange rates and options: Most investors will never have to worry about options trading or currency conversion back and forth. That said, if you want to get into the exotic world of trading options or perhaps want to own some U.S. stocks in your RRSP, then make sure to compare the relevant costs for those transactions.
Find a discount brokerage that prioritizes usability and customer service
Perhaps the most underrated advantage of online brokers is their customer service and platform usability. Never has this been more true than over the last 18 months, as many brokerages stumbled with ever-increasing user numbers. Not getting your answer in a timely fashion, or not being able to reach out to someone to get a mistake corrected immediately can result in a lot of stress and a potentially large loss of money.
Customer service is not as easy to quantify as trading fees, but can be vitally important, especially if you’re just getting started with online investing. Likewise, if a platform is too confusing and intimidating to easily wrap your arms around, you’re much more likely to put off using it, and consequently, you’re much less likely to get your money working for you.
By embracing the responsibility of building your own investment portfolio you will not only save a substantial amount of money; you will also gain a more foundational understanding of just what an investment is, and how your money is being put to use. Making sure that you choose the right Canadian discount brokerage for your preferences will help you feel more comfortable navigating the world of online investing, and ultimately lead to a much larger nest egg.
We're grateful to our friends at MillionDollarJourney.com for lending their investing expertise to the LowestRates.ca audience. MillionDollarJourney.com has been helping Canadians learn how to save money, build an investment portfolio, and become financially independent since 2006.