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Questrade Has the Lowest Annual Fee RRSP Brokerage Account with No Minimum Balance: Or Does It?

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At first glance, it appears that Questrade is the best choice for an RRSP brokerage account for someone with a very small amount of money to invest who insists on having a self-directed account within which they can purchase stocks and ETFs. Is it?

The Minimum Balance for a No Annual Fee RRSP Brokerage Account at the Big Banks

Four of the big bank brokerages (BMO InvestorLine, CIBC Investor’s Edge, Scotia iTrade, and TD Waterhouse) offer no-annual-fee RRSP accounts if you have a balance of $25,000. Note: if the value of your stocks drops you might end up below that amount and you could incur an unexpected fee. Protect yourself with a bit of extra investment if you can.

TD Waterhouse also offers a simplified RSP where you cannot hold stocks but you can hold a large variety of other investments for $25/year.

Sometimes these bank brokerage annual fees are negotiable. If you have other business with the bank such as a mortgage or a high balance bank account, you may be able to ask them to waive the fees on your RRSP account. This rebate depends on the discretion of the bank and brokerage, though, so I will ignore it for the purpose of this evaluation.

The Minimum Balance for a No Annual Fee RRSP Brokerage Account at the Independents

Some other independent online brokerages also require a fairly large minimum balance or you will have to pay an annual fee. Credential Direct, Disnat, Qtrade and Virtual Brokers require $15,000 for a RRSP account. That’s $10,000 less than all but 1 of the big bank brokerages. [This minimum was still correct in February 2014.]

The Minimum Balance for a No Annual Fee RRSP Brokerage Account at Questrade

Questrade, however, at the time of writing in February 2013, and as of this update in February 2014, does not charge a fee to open an RRSP or require a minimum balance in the RRSP. Sounds great, right?

The Questrade Inactivity Fee Pseudo-Minimum-Balance Fee

Beware of the fine print! Questrade actually does have an annual fee unless you have a minimum balance of $5000 or you are actively trading or you are 25 years of age or under.
If you are 25 years of age or under they have no minimum balance, no fee and no inactivity fee.

If you have a minimum balance of $5000 they have no inactivity fee.

If you are deemed inactive and have less than $5000 in your account, they charge an inactivity fee. They define “active” as one commissionable trade per quarter. The inactivity fee is $19.95 per quarter plus taxes. That’s $90.17 per year depending how you round it, at 13% HST.

Still, that’s no big deal, right? Or is it?

First, remember most big bank brokerages only charge $100 a year or less for a small account.

Second, it depends on your investment plans. Many investors only buy stocks occasionally and hold them until some investing goal is reached. For this type of investor it may not be natural to make a trade each quarter. Instead, they may make 5 trades in a month when the stock market is down (buying of course!) and then nothing for a year as the stock market is climbing.

To make a reasonable comparison to the other brokerages it would probably be more fair to say that Questrade has a minimum required balance of $5000. Still, this is the lowest minimum balance I have found so far, bar one.

Calculating the Break Even Point for Investing in a GIC or in a Dividend Paying Blue Chip Stock

Here’s another way of analyzing the situation and why I consider the minimum balance to be $3000-5000 for Questrade.

In each of the following scenarios, I compare the costs of investing the available RRSP monies in a GIC or in shares of a single company. If it bothers you to see a single stock, you could substitute it mentally for a single ETF that pays a dividend of 5.101% annually. The example is meant to keep trading costs to a minimum and to keep the yield to a reasonably achievable value. No capital gains are included in the review, although presumably you are investing in the stock hoping to get capital gains. I didn’t factor in the potential capital gain because I also didn’t factor in a potential capital loss. This scenario best exemplifies a buy-and-hold situation, rather than an aggressive trading situation.

Scenario 1:
You have $1000 to Invest.
You reserve $67.62 to pay for three inactive quarters the first year.
You reserve $4.95 to pay for the purchase trade.
From the $927.43 balance, you buy 20 shares of BCE at $44.50 with a yield of 5.101%.
You are left with $37.43 in your account.
You earn $45.40 in dividends on the 20 shares (assuming you bought early enough to get all 4 quarterly dividends).
At the end of the year you have $82.83 left in your account in cash.
Your second year inactivity fees will be $90.17. Your second year dividends will be $45.50.
Within three years you will end up having to sell some shares to pay the inactivity fees.

Conclusion: Investing $1000 or less will probably cost you money.

Scenario 2:
You have $2000 to invest.
You reserve $67.62 to pay for three inactive quarters the first year.
You reserve $4.95 to pay for the purchase trade.
From the $1927.43 balance, you buy 43 shares of BCE at $44.50 with a yield of 5.101%.
You are left with $13.93 in your account.
You earn $97.61 in dividends on the shares (assuming you bought early enough to get all 4 quarterly dividends).
At the end of the year you have $111.54 left in your account in cash.
Your second year inactivity fees will be $90.17. Your second year dividends will be $97.61.
You will make a slight profit each year of $7.44 based on (dividends-inactivity fee).

However!
You could invest the $2000 in a 1.45%/year GIC at DUCA and earn $29/year.

Conclusion: Investing $2000 or less is not a great way to make money and may make less money than leaving the investment in a GIC. (Yes, the stock could make a capital gain. It could also make a capital loss.)

Scenario 3:
You have $3000 to invest.
You reserve $67.62 to pay for three inactive quarters the first year.
You reserve $4.95 to pay for the purchase trade.
From the $2927.43 balance, you buy 65 shares of BCE at $44.50 with a yield of 5.101%.
You are left with $34.93 in your account.
You earn $147.55 in dividends on the shares (assuming you bought early enough to get all 4 quarterly dividends).
At the end of the year you have $182.48 left in your account in cash.
Your second year inactivity fees will be $90.17. Your second year dividends will be $147.55.
You will make a profit each year of $57.38 based on (dividends-inactivity fee).
This is almost twice what you could earn on a 1.45%/year GIC at DUCA.

Conclusion: Investing $3000 or more is worth it providing the risk of a capital loss is small enough.

Avoiding the Inactivity Fee at Questrade by Playing the Game

The inactivity fee for Questrade accounts with balances of less than $5000 is $19.95 plus taxes a quarter. A single trade at Questrade costs $4.95. So depending on how a stock is doing (capital gains vs capital loss) it might be cheaper to sell 1 share and buy back 1 share for a fee of $9.90 rather than pay the $19.95 inactivity fee. This seems like a ludicrous game, but it is one way to save money. You could save a tiny bit more by selling the 1 share in 1 quarter and buying it back in another quarter, to offset 2 x $19/95 by paying 2 x 4.95.

RBC Direct Investing’s Better Deal: The No Minimum Balance, No Inactivity Fee RRSP Brokerage Account

RBC Direct Investing actually has a better plan than Questrade for the type of buy-and-hold investor described in my above scenarios. They do not require a minimum balance to open an RRSP account. And they do not charge an annual fee or an inactivity fee provided you are on an automatic contribution plan to the account. For more details please see: RBC Direct Investing Has a No Annual Fee RRSP Brokerage Account with No Minimum Balance !

Sources of Information

  • Credential Direct RRSP account fee 2014 Feb: http://www.credentialdirect.com/why-credential-direct/top-reasons.aspx
  • Disnat RRSP account fee 2014 Feb: https://www.disnat.com/en/forms/D220.pdf
  • RBC http://www.rbcdirectinvesting.com/commissions-fees-schedule.html#fees
  • Questrade http://www.questrade.com/trading/registered_accounts_rrsp.aspx
  • Qtrade RRSP account fee 2014 Feb: https://www.qtrade.ca/investor/en/aboutus/services/fees.jsp#fees
  • Virtual Brokers RRSP account fee 2014 Feb: https://www.virtualbrokers.com/contents.aspx?page_id=12

Related Reading

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When Commissions Clash With Customer Service at Banks and Financial Institutions

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Overheard at the Bank Branch: “I Don’t Handle GICs.”

Yesterday, while waiting at the bank branch I overheard a conversation between two staff. Frankly the one Advisor was so loud the entire branch had to hear him whether they wanted to or not. Anyway, what caught my ear was he was basically refusing to see a client as requested by the Receptionist because “I don’t handle GICs. I don’t believe in them. I can’t get behind them.”

After feeling a bit sorry for the Receptionist, who wasn’t asking his religion but was just asking if he was available to meet with a customer, I wondered why he was pontificating so loudly. A peek as I passed his door later confirmed he had an audience. A new hire was being trained. So likely he was bragging and trying to score himself some points.

He lost big points with me. Which is too bad for him because we actually have quite a lot of money to invest and could have involved him if we’d wanted to. He may have also lost a few other customers who heard him dissing a Receptionist to make himself sound more important.

Why Would a Bank Advisor Not Want to Handle GICs?

The answer to those of us who are cynical is painfully obvious. There is no direct financial benefit to an Advisor for selling a GIC to a bank customer. The bank makes money on GICs. And some financial institutions and brokers make money on selling GICs offered by other financial institutions because there is a referral commission. However, for an Advisor at a bank branch there is (usually) no direct personal compensation for selling a GIC from that bank.

What Does the Bank Advisor Want to Sell to Customers?

There is, however, a big personal incentive for selling a mutual fund. Bank advisors earn personal commissions for selling mutual funds. The commission is part of the “trailer fee” paid by the mutual fund each year. Many bank advisors earn part of the trailing commission on a mutual fund for as long as the customer owns the fund. They even make the commission if the fund loses money, which is more than the customer does.

Lack of Fiduciary Interest and Bad Customer Service Combined

The problem with this difference in compensation is that the Advisor now is in a position where he or she makes more personal income if he or she recommends one product instead of another. This means that they may be tempted to recommend a product not because it is the best fit for the customer but because it is the most lucrative for them.

This is a horrible situation. It gets worse when the customer genuinely needs financial advice.

Case Scenarios for Guaranteed Income Certificates (GICs)

Saving for a Short Term Goal with No Income and No Way to Regain a Loss

Imagine an elderly person comes into the bank wishing to invest $5000 for one year. She just inherited the money from her sister. They need all of it next year (14 months from now) to pay for an electric scooter and a ramp into their home that they have been saving diligently to buy. Her husband is getting his hip replaced in three years but the doctors have warned them he will be wheelchair bound soon and for months after the surgery.

This person wants her money to be completely safe. She needs it. She just wants to earn a few dollars more than if she left it in her chequing account which pays no interest at all. She has banked here for forty years and has no personal computer, nor the interest or aptitude to get one.

What do you think she should invest her $5000 in?

There really aren’t many options that suit her needs. The obvious one is a GIC. It won’t make much interest, but even 1.7% is better than nothing. (If you don’t think $85 is important, you are not old, infirm and living on a very small income. Many people are.)

With the high probability of interest rate hikes, a bond fund could lose money in the short term. A money market fund probably pays less right now than a GIC and it carries a (small) risk of loss.

What do you think this Advisor is going to recommend she invest the money in?

Saving for Education Which Starts Next Year

Here’s another possible scenario. A person walks in with $5000 to contribute to their only child’s RESP. The child is starting his last year of high school in the fall and plans to start university in just over one year. Although the parents contributed $100 a year to the RESP each year till now, they have never had a chance to save more. They just got a bonus from work and decided to put it in the RESP to get the 20% matching CESG ($1000!) for their child.

Should this person’s money be invested in equities? Probably not. This family is looking for the 20% grant, not for a potentially huge capital gain. And a mutual fund with a high MER isn’t a great choice for them either.

A GIC may be boring and very low paying but it’s easily understood, easily managed, and safe. A bank advisor should be at least presenting it as a sound choice to the client.

Further Reading

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What do you think of a bank Advisor that won’t talk about GICs when clients ask for investment advice? Do you think the compensation structure for Advisors needs to be changed so they receive the same amount no matter which product the client purchases? Please share your opinions with a comment.