The point: If you’re starting out as an index investor, and are going to be regularly contributing in a self-directed brokerage account, the best discount brokerage for you is TD Direct Investing, but not for any of the reasons most reviewers list.
*UPDATED* This post is out of date, and those just starting out in the investing world would do well to invest with an online company like ShareOwner, WealthSimple, or NestWealth. See this post for reasons why.
So you’re going to pull the trigger and invest in index mutual funds, boring as that may be. You’ve looked around, done some research, and – because you’re just starting out – have chosen to begin your investing life by building a Global Couch Potato portfolio in a self-directed discount brokerage account, as popularized by Dan Bortolotti and +MoneySense Magazine: 20% Canadian equity, 40% US and international equity, and 40% Canadian bonds.
You’ve reviewed your spending plan, and figured out how much you can afford to invest every month, and you want to set it up as a regular contribution because you don’t want your savings to depend on whether you’ve used up your limited supply of willpower that month or not.
Here’s where those of you just starting out might flounder a bit, because – although it’s easy to find thirty different answers to the question “what discount brokerage do I use?” – it’s harder to find one that specifically addresses you, the new investor, hoping to set up an automatic, regular savings plan into a long term index portfolio.
Hypnotized and confused yet?
If you search for “best discount brokerage”, you’ll find a lot of reviews that talk about “$9.95 trades” and “great research tools”. Those features just don’t matter*. The list of necessary features on the discount brokerage wish list is much narrower than for those looking to do research on the next dividend stock they’re going to buy.
Your wish list is heavily slanted towards the cost to invest in, hold, and re-balance a portfolio of index funds, and the minimum purchase requirements for regular investment plans. “Ease of use” doesn’t even make the list, and neither does “research and education” or “personal rate of return tracking”, which are pretty much the only requirements Gail Bebee had in this review for the Globe and Mail.
It’s right at “minimum purchase requirements for regular investment plans” is where we run into our problem. It is nigh on impossible to find an index mutual fund through a discount brokerage that you can purchase in any smaller increments than $100 per month**. At the bank***, no problem. You can split your hundred bucks into four different fund purchases and go merrily on your way. But try to invest less than $500 a month**** directly through a brokerage and you lose the option to invest automatically according to the 20/40/40 split you originally decided to invest in.
If you were originally planning to invest less than $500 per month in this account, you have three choices:
- Increase your contribution to $500 a month. If you recognize that A) your money is finite, B) increasing your savings means you’ve got to decrease your spending somewhere else, and if C) the goal you’re saving towards is important enough to do it, then by all means, save more money. Divvy it up in hundred dollar increments and go merrily on your way.
- Automatically contribute to as many of your funds as you can. Provided you’re planning on investing $100 or more every month, choose one (or more) of your funds to be the target, and plan on splitting it up every time you’ve got enough in it to do so. You’re still investing automatically, you’re regularly investing through market highs and lows, but you’ll have to exercise some discipline in order to make sure you split your money.
- Pool your money in a cash account. This is point two and a half, really, since the logistics are almost identical. You’re still going to have to be disciplined about splitting up your money on a regular basis, you’ll just be dollar cost averaging a little less often.
So how much is it going to cost you?
The short answer is: not much.
Since TD Direct Investing has the cheapest index funds with the lowest purchase minimums, that’s where I’d send you (they don’t pay me to say that). Until you accumulate $25,000, a basic RRSP account will cost you $25 every year, payable one year after you open the account and annually on the anniversary date thereafter. An RESP will cost you $50, and a TFSA won’t cost you anything.
There are no fees to buy, sell, or switch between e-series funds, which means that the annual account administration fee is the only one you’ll ever see on a statement.
The fees you won’t see on a statement will be the management fees, fund costs, and HST or GST, which are helpfully expressed as a annualized percentage of the net money invested in that particular series (e) of that particular fund. They’re the reason you’re index investing in the first place, and – depending on how much you’re contributing regularly and therefore how much of which fund you’re buying – will cost you somewhere in the neighbourhood of 0.44% of your invested savings.
*Okay, fine. They matter. Sort of. But the minimum standards of ease of use and reporting are going to be met by any platform, so they don’t matter in a comparison.
**That would be at TD Direct Investing, using their e-series index funds.
***For the love of all that’s holy, don’t buy index funds at the bank.
****$500/month = $100 to Canadian equity, $100 to US equity, $100 to international equity, and $200 to Canadian bonds.
*****Holy crap, there’s a lot of stars down here.