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How customers get nickel-and-dimed
The Gazette, Monday, January 21, 2008
Paul Delean

Canadian investors who have owned U.S. stocks for the past few years know all about currency risk.

They've taken a pounding as the loonie gained value rapidly against the U.S. dollar, significantly reducing the exchange value of their U.S. holdings.

Adding insult to injury was the fact Canadian financial institutions insisted on tacking on a currency conversion fee every time they made a trade or received a dividend in U.S. dollars in their RRSPs, automatically transferring the funds into Canadian dollars and taking a small, undeclared cut - typically one or two per cent - for themselves. On a $5,000 trade, that totalled $50 to $100, over and above the commission.

While it used to be a government requirement that institutions switch foreign funds into Canadian currency in registered accounts, that hasn't been the case since 2001.
Banks and brokerages, facing class-action lawsuits on the issue, insisted they didn't have the software capability to maintain separate currencies in RRSP accounts. But one aggressive discounter has started singing a different tune.

Toronto-based Questrade Inc., which is licensed in Quebec, broke new ground last week by allowing Canadians to make online securities trades and accumulate cash balances in U.S. dollars in their RRSPs, separately or in combination with Canadian funds. It even pays interest on minimum cash balances in both currencies, though at different rates.

"The bank-owned brokerages probably would like it to be business as usual, because it's been a great source of revenue for a lot of them, but clients have been voicing their concerns for quite a while. Many were irate about (the automatic currency conversions)," Questrade president Edward Kholodenko said.

"The solution was by no means easy, and we had to work out a lot of proprietary programming, but it's nice to be taking a leadership role in this."
Investment analyst Warren MacKenzie of Second Opinion Investor Services called the initiative "a really good move, long overdue."

"They're to be commended for doing it. All the banks should be doing this. The only reason they're not is that it's a way to get fees that are not very transparent. But they'll probably be forced to do it when word gets out."

At least two discount brokerages say they're working on it. Disnat claims it's been "on our radar for some time" and expects to have something in place this year. TD Waterhouse is "focused on delivering such a product," but with no firm deadline, a spokesman said. TD and Disnat already allow customers to get around currency charges if they buy and sell in U.S.-denominated securities the same day, and TD also lets them use a U.S. money-market fund to park money for or from U.S. stock trades.

Questrade, which last year let investors put gold bullion in their RRSPs, isn't nickel-and-diming customers elsewhere to make up what it's losing in automatic currency conversion fees.

Its RRSPs have no set-up charge (for amounts over $1,000), and no annual administration or inactivity fees. Online trading commissions are the lowest in Canada, ranging from $9.95 to a low of $4.95, and until March 1, it will pay up to $150 toward the transfer costs of moving RRSP assets worth at least $10,000 from another institution.

Questrade's system still has a few wrinkles. U.S. dividends, for example, still get converted automatically - "for the moment," Khodolenko said.

"We're not set up yet for dividends, but we will be."

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