Fees for low/no activity

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pickmepickme
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Fees for low/no activity

Post by pickmepickme »

I know that most brokerages charge fees if you don't trade enough and your balance is under a certain threshold, but I wonder why they don't also charge a fee to those with a larger balance. If, like me, that second person only trades a couple of times a year, and therefore only gives the bank about $20, has all of their money in stocks that they're holding for the very long term, do they make money from them some other way?

:roll:
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Re: Fees for low/no activity

Post by queerasmoi »

pickmepickme wrote:I know that most brokerages charge fees if you don't trade enough and your balance is under a certain threshold, but I wonder why they don't also charge a fee to those with a larger balance. If, like me, that second person only trades a couple of times a year, and therefore only gives the bank about $20, has all of their money in stocks that they're holding for the very long term, do they make money from them some other way?

:roll:
It's a reasonable question. I'm a moderately small investor at Questrade and all I buy are ETFs now (commission-free). They maybe see me put in a sell commission once or twice a year if ever for rebalancing. Maybe they make extra money off me from securities lending? Teensy amounts of interest from the $20 of distribution cash I have not yet reinvested?

Or maybe their willingness to keep your assets fee-free is just a "loss leader". They know that on the whole, their customers are not mostly smart buy-and-hold investors. The more frequent traders massively subsidize the small buy-and-hold minority. Look at Questrade's "Online Trading Academy". By getting more people excited about trading, they make more money in trades.
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Re: Fees for low/no activity

Post by Bylo Selhi »

My understanding is that
1. Brokerages can lend securities to short sellers—for a fee, of course. They can make money off your otherwise idle assets even without explicit fees.
2. As QAM says, there are powerful pressures in the investing industry to "don't just stand there, do something" with your money. The financial media aids and abets in this scheme by publishing the sort of stuff that gets posted in the Financial Pornography thread. Few can resist, especially when markets are in a bubble (or in a panic.)
3. Even if you're disciplined to buy and hold now, brokers know that eventually you (or your heirs) will succumb to 2.
4. Few investors hold only stocks. Most also hold bonds, mutual funds, etc. that generate lucrative hidden fees. The brokerage can't make money off that stuff if your account is somewhere else.
5. The brokerage divisions of the big banks like to accumulate assets in order to gain prestige and bragging rights. It's even possible that the bank branch associated with your brokerage account may earn internal credits from HQ for these assets even if they're not particularly profitable assets.
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Re: Fees for low/no activity

Post by Insomniac »

They must be making a fair bit of money from all the uninvested cash sitting in client's accounts that they pay no interest on...
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Re: Fees for low/no activity

Post by Bylo Selhi »

Insomniac wrote:They must be making a fair bit of money from all the uninvested cash sitting in client's accounts that they pay no interest on...
I wouldn't call that making "fair" but your point is nevertheless well-taken ;)

When you have a million clients, each with an average of only $100 cash idling in their accounts the broker makes $1M/year off every 1% of interest that they don't pay.

Also they still make money, albeit a teeny bit less than "fair" ;), even after paying some clients on some accounts what they euphemistically call "interest" (currently a grand 0.025%—i.e. 2.5 bp—at TDDI.) When you have a million clients, each with an average of $100 cash in their accounts paying 0.025% interest it "costs" TDDI a mere $25k/year to claim that those accounts are "interest-bearing" (or using TDDI's spin "competitive interest rates to help you reach your investing goals.")
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Re: Fees for low/no activity

Post by queerasmoi »

And brokerages can make more than the tiny prevailing interest rates on idle cash by lending it out to their own margin investors. Which is pretty safe for the broker as it's secured by the assets they're borrowing against.
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Re: Fees for low/no activity

Post by AltaRed »

Bylo Selhi wrote:5. The brokerage divisions of the big banks like to accumulate assets in order to gain prestige and bragging rights. It's even possible that the bank branch associated with your brokerage account may earn internal credits from HQ for these assets even if they're not particularly profitable assets.
Or to encourage you to 'come to their corporate entity' for other services. Example: I eventually migrated all my chequing to BNS from CIBC because I have iTrade brokerage accounts and it is 'easier' to do 'everything' in house. The fact I pay no fees (but a minimum deposit) to have no-fee chequing illustrates the point. iTrade makes little from me because all my CAD cash is either in DYN500 or their Cash Optimizer account at 0.65% (and USD making 0.35%). They do make in the order of $20-50/yr in commissions. I suspect they also get paid by corporations to send out mailings of prospectuses and such too.
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Re: Fees for low/no activity

Post by queerasmoi »

AltaRed wrote:iTrade makes little from me because all my CAD cash is either in DYN500 or their Cash Optimizer account at 0.65% (and USD making 0.35%).
You don't think they can make money on your cash when they are paying you only 0.65% on it?

Also I believe DYN500 pays a 0.25% trailer so they do get to capture that too.
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Re: Fees for low/no activity

Post by Bylo Selhi »

AltaRed wrote:Or to encourage you to 'come to their corporate entity' for other services.
When RBCDI offered a 1%+transfer fees bribe to switch over I faxed them a couple of TDW statements to confirm eligibility. The accounts contained only stocks, index ETFs and RRBs, none of which generated any overt income for RBCDI (that I could see.) Nevertheless they agreed. The stocks and ETFs were DRIPed so no brokerage fees from those. I may have spent 2x $10 to buy more XSB with the RRB interest payments during the ensuing year. I don't recall any other activity. Then when someone posted here about TDW's account repatriation campaign, I asked TDW if they wanted me back and they agreed to transfer the same stuff back on the same 1%+transfer fees basis. Maybe the hidden fees are so well hidden that I can't see them but I still can't understand why either brokerage were willing to pay 1% for those accounts :evil: (I'd like to think I got one [percent] over on two big-5 banks.)
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Re: Fees for low/no activity

Post by pickmepickme »

Some very good possible explanations. Thanks all!

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Re: Fees for low/no activity

Post by AltaRed »

queerasmoi wrote:
AltaRed wrote:iTrade makes little from me because all my CAD cash is either in DYN500 or their Cash Optimizer account at 0.65% (and USD making 0.35%).
You don't think they can make money on your cash when they are paying you only 0.65% on it?

Also I believe DYN500 pays a 0.25% trailer so they do get to capture that too.
I don't pretend to know how they risk manage cash on deposit but they can't commit too much of it on cash that liquid (T+0). Perhaps a portion of it for several weeks on the premise that only so much is likely to be withdrawn on a given day, or in a given week or month.

True there is a trailer fee on DYN500 so they get something on that but again that has to be risk managed for cash that is T+1 in liquidity. We would have to know the AUM on a daily basis for DYN500 and its sisters to know how much they might be able to commit to more than 30 day loans. That said, they could be caught in a 4Q08/1Q09 situation where many of us used cash like that to buy equities cheap.
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Re: Fees for low/no activity

Post by IdOp »

Not sure if I have this right, but about securities lending, is that even possible in a cash account on paid-up securities that are "segregated"? (Probably how a long-term buy-and-holder would hold 'em.)
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Re: Fees for low/no activity

Post by adrian2 »

IdOp wrote:Not sure if I have this right, but about securities lending, is that even possible in a cash account on paid-up securities that are "segregated"?
You have that 100% right.

And speaking from memories eons ago, when I did short Nortel in a TDW account, there was no fee paid to the broker for the privilege of being allowed to short it. The only "fee equivalent" was the obligation to hold cash covering the marked to market short value in a non interest bearing sub-account.
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Re: Fees for low/no activity

Post by Bylo Selhi »

adrian2 wrote:The only "fee equivalent" was the obligation to hold cash covering the marked to market short value in a non interest bearing sub-account.
Which is why I said, "Brokerages can lend securities to short sellers—for a fee, of course. They can make money off your otherwise idle assets even without explicit fees."
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Re: Fees for low/no activity

Post by SQRT »

Bylo Selhi wrote:My understanding is that
1. Brokerages can lend securities to short sellers—for a fee, of course. They can make money off your otherwise idle assets even without explicit fees.
.
They can only lend securities that have been pledged against drawn margin loans.
I agree this is a good question. I often wonder how they make money on me. Only a few trades a year at $10 a pop (most of these would be FX gambits) even though we have relatively large balances. No significant cash balances either Dr or Cr. No other fees of any kind. President's club account (as if that meant anything to me).
I agree the whole industry is geared toward encouraging you to trade while at the same time admitting it is futile. Go figure.
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Re: Fees for low/no activity

Post by skepticus »

Bylo Selhi wrote:My understanding is that
1. Brokerages can lend securities to short sellers—for a fee, of course. They can make money off your otherwise idle assets even without explicit fees.
FYI--Mutual Fund companies can lend out funds. Here’s an excerpt from a letter that I received last month from Phillips, Hager and North about its Dividend Income Fund:
“We are pleased to announce that [our parent company] RBC Global Asset Management Inc has initiated the process that will allow the Fund to participate in securities lending as of Feb. 15, 2015.

Securities lending occurs when a fund kends securities held in the protfolio to a third party, such as an investment dealer, for a fee. The third-party borrower must provide high-grade,pre-appproved collateral of at least 102% of the loan’s value and agrees to return an equal number of the same securities at a later date. It should be noted that the fund may recall the securities at any time.

The Fund, not RBC GAM will earn fees for engaging in these transactions and any income earned will increase the Fund’s return.

However, there are certain risks....If the third party fails to fulfill its obligations, the Fund may suffer a loss in certain circumstances,

PH&N says other funds now participate in securities lending.
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Re: Fees for low/no activity

Post by Bylo Selhi »

skepticus wrote:Mutual Fund companies can lend out funds.
This is now common practice. What's not so common are fundcos that credit the fees they get for lending their clients' securities back to the funds rather than pocket the revenue for themselves. PH&N and Vanguard are two that do this. Demonstrating yet again that the less you pay (in MERs) the more you tend to get back (in fund returns.)

Securities lending: What makes Vanguard different?
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Re: Fees for low/no activity

Post by skepticus »

Thanks for the link Bylo. Most informative.

I'm wondering if my online brokerage loaned some of my funds when they were being transferred from a fund company to the brokerage. They had left the fundco on a certain date, but for five weeks they weren't listed in my brokerage account. It was only after I phoned the brokerage that the funds quickly turned up. I asked for a paper trail, but the representative said no. He mentioned the refusal was for "regulatory reasons" but didn't state which regulations.

Perhaps, the above was just a matter of slow processing.But without access to the paperwork I'll never know for sure.

To relate this episode to the "low/no activity" topic of this thread...if my brokerage was merely guilty of sluggish processing, the cause might be my minimal trading activity. i.e. I'm not an important customer.

I'm going to post more after the rest of the transfer has been completed. It's been an almost 5-month fiasco (still ongoing). But some people here will find the story instructive.
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Re: Fees for low/no activity

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Bylo Selhi wrote:What's not so common are fundcos that credit the fees they get for lending their clients' securities back to the funds rather than pocket the revenue for themselves.
Any support for the allegation? I would have thought it's mandatory that any income earned by the funds would benefit the funds, not the management company.
How can a fundco, essentially, steal from the funds they manage?
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Re: Fees for low/no activity

Post by brucecohen »

adrian2 wrote: Any support for the allegation? I would have thought it's mandatory that any income earned by the funds would benefit the funds, not the management company.
How can a fundco, essentially, steal from the funds they manage?
From WSJ: When Funds Lend Stock, Who Gains?
Mr. Adams says the gap in the amount of money investors ultimately collect for their lending largess is determined primarily by who acts as the middleman. More income for a lending agent that is related to the fund manager means less income for the fund's investors.

When funds engage in securities lending, the borrower gives them collateral in return. A securities lending agent helps the cash and investments change hands. Funds can act as their own "internal" lending agent, can hire an independent third party or can use an agent affiliated with the firm that also manages the funds.

Mr. Adams and his colleagues found that when a fund uses an agent that is part of the same company that runs the fund, the returns to investors from securities lending are 70% lower than at funds that use other lending agents.
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Re: Fees for low/no activity

Post by adrian2 »

So it's a matter of degree; the earned money belongs to the fund, but there are some commissions to pay third parties. Quite similar to using their own agent to buy or sell securities and paying much larger commissions than you and I.

As always, caveat emptor!
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Re: Fees for low/no activity

Post by newguy »

These amounts are available in the financial reports. It won't say how much you're getting ripped off but maybe someone knows better how to read them.
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Re: Fees for low/no activity

Post by skepticus »

These posts have been a revelation. Does anyone know how widespread this lending is?
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Re: Fees for low/no activity

Post by Bylo Selhi »

adrian2 wrote:So it's a matter of degree; the earned money belongs to the fund, but there are some commissions to pay third parties. Quite similar to using their own agent to buy or sell securities and paying much larger commissions than you and I.
Of course. I infer that those like PH&N and Vanguard who explicitly say they pass on lending revenue to their funds' unitholders do so and that those who don't say so allow some of that revenue leak away to the fundco's shareholders. IOW why would a fundco put the interests of unitholders ahead of shareholders without taking credit for it?
As always, caveat emptor!
And/or call me a cynic (who became one the hard way.)
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Re: Fees for low/no activity

Post by SQRT »

One more reason (as if we needed one) not to buy fund products.
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