I love competition. It lowers costs for consumers, requires companies to innovate, and ensures consumers get a good product at a fair price.
Since Questrade and other online discount brokers stormed on the brokerage scene nearly two decades ago, we have seen a steady drop in the cost of commissions and a steady increase in the quality of services and tools offered by discount brokerages.
In 2006, Questrade dropped commissions to as low as $4.95 per trade. Absolutely amazing considering many other brokerages were charging ten times that! Then, in 2013, Questrade began offering no commissions on the purchase of ETFs. This was a game changer for passive index investors!
Virtual Brokers basically copied Questrade with no commissions on ETF purchases, but are somewhat notorious for questionable customer service and they charge higher commissions on other trades. Other brokerages offered commission-free ETF transactions on a very limited number of ETFs (think Scotia iTrade and QTrade).
However, Questrade does charge ECN fees for transactions that take liquidity out of the market. This means you are charged an exchange fee for any transaction that does not equal a round lot—some multiple of 100 shares/units. The ECN fees are tiny, but do amount to a very small commission of sorts when making small purchases.
Well, in summer 2017, National Bank Direct has really come out to challenge Questrade and Virtual Brokers. National now offers commission-free ETF purchases and sales on all ETFs listed on Canadian or U.S. stock exchanges—with a small catch. Each transaction must include at least 100 units.
Who Can Benefit
Considering that most ETFs in Canada trade at a price ranging from $20 - $50 per unit, this means you could eliminate all commissions and ECN fees if you are an aggressive saver, or a retiree living off your ETF portfolio.
If you are still in those accumulation years, to benefit from National Bank Direct’s ETF program, you should be saving at least $2,500 a month. This means you could make a 100% commission free purchase of ETFs every month or two. ETF sales—for rebalancing purposes or withdrawals—shouldn’t be an issue because they would almost always include more than 100 units in the transaction.
This free commission offer can also be effective for investors who are using a Dual Momentum investment strategy. The Dual Momentum strategy calls for periodic turnover of your entire portfolio; you would make transactions to sell your entire holding of one ETF and buy a different ETF once or twice per year (on average). That transaction is bound to include more than 100 units.
Other National Bank Direct Considerations
National Bank might be the best place for you to open a self-directed family RESP account—especially if you are a lower income family. RESP contributions are often made in lump-sums and your contributions get topped up by government programs, so the 100-unit transaction minimum shouldn’t be a problem.
National Bank is possibly the only self-directed discount brokerage in Canada that is eligible to get funding from every federal and provincial education grant program available. This includes the Canada Education Savings Grant, the Additional Canada Education Savings Grant, Canada Learning Bond, the Saskatchewan Advantage Grant for Education Savings (suspended as of 2018), and the BC Training and Education Savings Grant. Check the list here.
While not quite competitive with Interactive Brokers, National Bank Direct has really stepped up their game with margin pricing as well. This, combined with the commission-free ETF transactions, can be a nice option for more aggressive investors employing margin.
National Bank Direct currently charges the bank prime rate for margin amounts in excess of $100,000. As of January 2018 that’s just 3.45% interest which is completely tax deductible off your income. That translates to a net interest rate in the range of 2% for many people: less than the current rate of inflation.
Aside from Interactive Brokers, which is cheaper still, the only other brokerage I’m aware of that charges interest rates this low is RBC Direct for their Royal Circle members (investors with combined account values over $250,000).
Is It Worth Switching
While the National Bank Direct pricing package is very compelling (we all love FREE), I don’t think it is the best option for most people. The benefit of no commissions can easily be eroded if you have cash sitting in your accounts for months at a time while you try to save up enough money to purchase 100 units of more.
The National Bank Direct offer will be most attractive to retirees who will always be making transactions involving over 100 ETF units without thinking about it. It may also attract some very aggressive savers who are also higher earning individuals and can easily make regular purchases involving more than 100 ETF units. That means people saving $5,000 a month or more—a very small portion of the Canadian population.
It’s a smart offer on the part of National Bank Direct because it means they will be attracting a higher net-worth client who is probably familiar with self-directed investing and requires less customer service work.
Personally, I will keep my registered accounts with Questrade for the time being. My trading is very minimal—even with my trend strategy. I currently spend less than $50 a year on trading commissions. For that price I get instant price quotes, great customer service, and a platform that I’m familiar with and is incredibly easy to understand and use. Questrade gives me nothing to complain about!
I’m not saying that National Bank Direct won’t give me the same experience, but I’m just not sure it’s worth switching from a service I’m very happy with for the potential of saving less than $50 per year in trading costs. However, if Questrade ever fails me in a big way, or if their current commission structure changes for the worse, it’s nice to know there’s another competitive option out there.
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