Author: Mike Holman

Time for the first quarter stock picking contest update.  As usual, I’m in last place.  Yay me!  I shorted gold, which I know will be a brilliant pick eventually – I just don’t know when.  🙂

My specific pick was to short the gold ETF CGL.

What is CGL you ask? It is the Claymore Gold Bullion ETF which trades on the TSX. What does it invest in? Gold – literally. The ETF currently own 14 pounds of the stuff, so it really is a direct play on gold. By shorting it, I will be sending a message to all those crazy gold bugs, that their fun and games are about to end.

Rank	Site	YTD Return (%)
1	The Financial Blogger	12.41
2	Million Dollar Journey	12.16
3	My Traders Journal	11.77
4	Where Does All My Money Go	5.13
5	Beating The Index	3.08
6	Intelligent Speculator	1.66
7	Dividend Growth Investor	1.43
8	The Wild Investor	0.28
9	Money Smarts	-1.17

Mark from the Blunt Bean Counter (an excellent blog) recently wrote about RRSPs and his theory that Canadians consider RRSPs to be holy and try their best to never withdraw from them.

This article stemmed from an excellent TFSA vs RRSP report written by Jamie Golombek of CIBC. Mark recounted a conversation with Golombek where Golombek’s answer to his “holy RRSP” theory was:

You may be surprised to learn that that 80% of all RRSP withdrawals are made by individuals under age 60, generally pre-retirement! Not much of a holy grail!

In Jamie’s report, the full text of that statistic is as follows:

Yet, cash-strapped Canadians seem to be accessing
funds in their RRSPs pre-retirement at an alarming rate.
Recent data shows that of the 1.9 million Canadians
who withdrew $9.3 billion from their RRSPs in 2008 (the
most recent year for which statistics are available), over
80 per cent of such withdrawals were made by individuals
below age 60. This suggests that RRSP funds are being
used well before normal retirement age to supplement
income.

I agree with Mark – I think that most Canadian who have an RRSP, treat that money very seriously and will go to great lengths to avoid withdrawals. The idea that Canadians are withdrawing from their RRSPs at an “alarming rate“, presumably 80% – is quite surprising and one worthy of further analysis, because I don’t think it’s true.

According to Golombek- the statistic “80% of all RRSP withdrawals are made by people under 60 and not retired” is proof that investors do not consider RRSPs to be the savings holy grail and have no problem withdrawing from them, even when faced with large tax penalties.

Even if this is true, it’s not much of an argument for TFSAs. If an investor can’t keep their hands out of the RRSP jar, they most certainly won’t be able to keep it out of the TFSA jar either. The only difference being that you can recontribute TFSA withdrawals at a later date.

What kind of withdrawals are we talking about?

I’m surprised that the 80% figure (% of people who made RRSP withdrawals in 2008 and were under 60 vs. all people who made RRSP withdrawals) isn’t higher. Most people will convert their RRSPs to a RRIF or annuity before taking any money from their retirement savings, so I wouldn’t expect very many RRSP withdrawals at any age to be for retirement income.

Of course, there are a group of retired people (less than 72 years of age), who choose to keep all their money in RRSPs and still make withdrawals, but I don’t believe that is the norm. Most retired people don’t make withdrawals from their RRSPs. If they want to withdraw money, they will convert their RRSP to a RRIF and then make withdrawals.

In other words – very few retired people make RRSP withdrawals, so most RRSP withdrawals should be from people who are not retired. The fact that 80% of those withdrawals are by people under the age of 60 (vs all ages) is practically irrelevant for this discussion.

Golombek’s statement can easily be misconstrued as being “80% of all withdrawals from registered retirement savings (including RRIFs) are for non-retirement purposes“, which is obviously not the case. Withdrawals from RRIFs and other retirement vehicles are not counted as part of the total withdrawals.

What percent of assets are being withdrawn?

The number (1.9 million) of people who did an RRSP withdrawal in 2008, is high and that is a concern. If you assume 20 million Canadians have RRSP accounts (I’m guessing), that is a pretty high percentage (10%) of people dipping into their RRSP each year.

On the other hand – $9.3 billion withdrawn works out to just under $5,000 per person doing the withdrawals. This doesn’t sound all that significant to me and leads me to think that Mark’s theory about people withdrawing assets they shouldn’t have contributed in the first place, is probably correct.

I spent some time looking at the actual data which you can find here (line 17).

I’ve summarized the relevant 2008 data on a table:

[table id=10 /]

If you only consider the 0-59 crowd – 1.5 million Canadians made an RRSP withdrawal in 2008 and the total amount withdrawn was $6.1 billion. The average RRSP withdrawal for that age group was $4,000.  Please note these withdrawal amounts do not include RRSP home buyers plan withdrawals or RRSP Lifelong Learner plan withdrawals since they are not considered taxable income.

There was $631 billion of RRSP assets in 2008, which means that the $6.1 billion in withdrawals represents just under 1.0% of those assets. If you assume that half (just a guess) of the $631 billion in RRSP assets were owned by people 59 or younger ($315.5 billion), then $6.1 billion in withdrawals is only 2.0% of those assets.

If people under 60 are collectively withdrawing 2% of their RRSP assets each year – that is not great news, but it certainly isn’t “alarming“.

Keep in mind there are a lot of reasons for withdrawing from an RRSP which are legitimate (at least compared to withdrawing for a vacation):

• Divorce
• Death of spouse
• Job loss

Conclusion

I agree with Mark that RRSPs do enjoy a psychological and tax “moat” which prevents people from dipping into their RRSP.  This moat might give RRSPs an advantage over TFSAs for some people, even if the math indicates otherwise.

While I think Golombek created a great report comparing TFSAs and RRSPs, he is incorrect when he says that RRSP accounts are not considered a holy grail by the average investor.

The numbers suggest that non-retirement RRSP withdrawals are not very significant in terms of assets (only 2% of assets are withdrawn each year) and the majority of RRSP investors do not dip into their RRSPs to fund their pre-retirement lifestyle.

When deciding between a TFSA or RRSP, it’s important to keep in mind the psychological factors as well. If you are in a situation where investing in a TFSA is preferable to a RRSP, obviously the TFSA is a better choice – but only if you can keep the money inside the TFSA and out of your lifestyle.

 

Today we are going to look at Interactive Brokers (IB) – a very interesting Canadian discount brokerage.  Most brokerages offer a full suite of accounts – open, RRSP, TFSA etc, but not IB.  The only type of account you can have at IB is an open, non-registered account.

So why bother with them?  Keep reading – there are plenty of good reasons.

Overall impressions

IB is a trader’s brokerage. They have the cheapest trading commissions and the best foreign exchange rates.

They only offer non-registered accounts, so they are not a good brokerage for most Canadians who want to have all their accounts in one place.
The $10,000 account opening minimum is fairly high as well, although oddly enough, if you are 21 or less, the minimum is only $3,000.  The $10 minimum monthly trading fee means that it is not appropriate for non-active investors.

Online trading commissions

• Cdn stocks – $0.01 per share, $1 Cdn minimum, max is 0.5% of trade value.
• US stocks -$0.005 per share, $1 US minimum, max is 0.5% of trade value.
• Minimum trading activity of $10 per month ($3 if 21 years of age or less) or the difference is charged to your account.

If you would like to compare all the different Canadian discount brokerages, check out the Canadian discount brokerage comparison.

Phone trading commissions

• $30 + the online commission charge.

Annual account fees

• Minimum $10 trading fee/month.

Foreign exchange fees

• $2.50 if under $25,000.  This is a super bargain.
• $2.50 + 0.01% if over $25,000.  Also a bargain.

Mutual funds

• None

Free real-time quotes

• No

Minimum to open account

• $10,000 USD or $3,000 if you are under 21.

Dividend Reinvestment Plans

• No

Margin rates

• Libor + 1.5%, if balance is less than $110,000.
• Libor + 1.0%, balance between $110,000 and $1,100,000

Phone number and automated voice shortcuts

• 1-877-745-4222
• To get to a representative quickly, press 1 at the prompts.

Some opinions on Interactive Brokers

I asked a few IB clients what their opinion of IB was:

One person who is a professional trader sent me this review:

Background: I had an account with them for the past 8 years mostly trading futures.

1) Trading platform:

Pro:

Universal Account – Only reason I signed up with IB. Able to trade futures, options, stocks, bond, Forex, etc, under one account.

• Able to change your base currency with ease from CAD to USD or visa versa.
• Support many 3rd party charting service thru API. Also you can implement your own trading strategies if you can program.
• Offer paper trading account to practice
• Great for currency conversion
• Decent margin account.
• Trading platform is very much “a la carte”. You can customize almost anything.
• Able to trade any almost any exchanges worldwide without hefty fees like TDWH. Most diverse one out there.
• Uses password and key fob type security code for login. Good security feature.
• Pretty good smart routing logic in place. Decent fills.
• Realtime margin updates.
• Literally offers 24hr trading
• Forex trading is ECN is based. It means that the interbank compete for prices in a centralized place, thus the lower spread (pips). IB offers one of the tightest Forex spread in the industry especially the major pairs. IB does not trade against you, not like many bucketshop type Forex brokers. Many Forex traders do not understand this.
• Good redundancy servers in place. You can choose from US based or abroad. If trading Asian markets, good idea to trade thru the HK server.
• Offers good variety of order types. Both native and simulated orders are offered. Native = exchange created order types and they are kept at the exchange , Simulated = broker created order types and they are kept at the server.
• Offers mobile trading. Maybe I’m old, but I don’t quite gets this idea. Pretty gimmicky and it is geared towards trader/investor wannabies imho.

Con:

• Pretty awkward and not intuitive. Take some time to get used to. Steep learning curve to get the system setup to the way you like it.
• No registered accounts.
• It has its share of technical issues like any other brokerages. Usually exchange specific.
• Programmed in Java, so it gets bloated and takes up fair amount of computer resources when running full with all the functions.
• Too frequent upgrades without proper debugging (yes, you will be the guinea pig). Don’t ever upgrade to the newest version when released. Stay back a couple of releases behind.
• Charting is improved from years ago, but still not up to par to the professional industry standard. Many use 3rd party charting services.
• Need to pay for the market data subscriptions. This could get expensive if you are trading various markets.
• No more direct single click entry for the futures trading (DOM trading) due to the infringement of the trademark lawsuit last year.
• Need to be aware of how IB processes the margin calls. IB has its own computerized algorithm, but the actual functionality is iffy at best. This could give you some headache if you are highly leveraged and do not understand the IB liquidation process.
• The platform must be shut off at least once every 24hrs. So you need to re-login. Pain in the butt for the automated traders.
• Depends on the security system you have, there will be daily withdrawal limit from your account. ex. Having no security device, you can only withdraw 50K USD max per day with 100K USD max withdrawal in 5 business days.

2) Customer Service:

Pro:

• Able to connect in various ways – email, live chat, phone, trouble tickets, etc. You can always find someone 24hrs a day.

Con:

• They will not hold onto your hands.
• Inconsistent customer service. Some are knowledgeable, some are outright ignorant, and some just don’t have any clue. Just like life. I wouldn’t bet my hard earned dollar on them when you really need their expertise.
• God forbid you don’t any major trading issues. Most will take some time to get resolved and some will never get resolved. The CS will always try to blame you, your computer, your modem/router, your ISP, and then the exchange before admitting their software or the server problem. Most newbie trader will believe what CS is saying is true since they wouldn’t know any better.
• Customer service are available only during the market hours (+/- ~1hr) for Canada. Outside of that, you need to contact US office or even oversea customer service (e.g. HK) when the market is closed. At times there are long waits and sometimes hard to understand their them.
• If you have an urgent trade issue, then you are out of luck for a while. You need to mitigate the problem on your own based on what you think the problem might be.

3) Research Reports and tools

I don’t use theirs. Within your account, you can subscribe to the Reuters Fundamental Data package for $5 USD or Reuters News Feed for $5 USD. Their News Feed is just horrible. It also has real-time market scanner with limited functions.

4) My Background – Worked for a trading firm and now an independent fulltime trader for over 10 years.

5) Misc info:

• Monthly activity fee of $10 USD.
• Basic US Stock & Commodity data fee is $10/month, but waived if you do $30 USD worth of trades.
• TSE Data Feed for $6 USD
• You do not need the data feed to trade.
• Trading stocks are $0.01 per share for CAN stocks and $0.005 for US stocks with $1 minimum/order. Also, there’s a maximum per order of 0.5% of trade value. So if you do big sizes, better to go with per ticket pricing with other brokers.
• I believe it provides the cheapest option pricing in Canada. No more than $0.75 USD for US options and $1.50 CDN for CAN options (per contract). No reason to trade options with other brokers.
• Offers volume pricing for the active traders.
• $10,000 minimum for account opening.
• I believe you cannot day trade stocks with under $25,000 with the IB account due to US Pattern Day Trader Rule (since IB is US company). You need to confirm this though.
• I believe you need an income of $50K+/year to open up the future trading account.
• Interest paid/debit:   ex. For CAD account balance between $11,000 – $110,000 = Paid Interest of [CAD LIBOR – 0.5%]
  For CAD debit under $110,000 = Charged Interest of [CAD LIBOR + 1.5%]
• Just to be aware that Timber Hill (TH) is a market maker and it is a subsidiary of IB. It is also one of the major option player in the market.
• Under the regulation, IB and TH are suppose to work at arms length. I’m not saying they are colluding, but good to be aware of this relationship. You do not want to deal with a broker where he is trading against you.

AndrewF had this to say:

I’m mulling creating an account there. For what it’s worth, the main reason I’d look at them over questrade for a non-registered account is their margin rates. They are the only broker in Canada not charging on the order of prime+3% for margin. They are, last I checked, effectively charging prime-0.5%, which is a darned good rate, by any measure. People implementing the SM would have a hard time getting a HELOC at that rate.

Mode3sour had this to say:

Low margin charges are why I went with them.

Interesting thing about IB is they seem to want to prevent inexperienced traders from joining. You have to fill a trader profile that meets their minimum required income and trading experience to join (I had to fudge some of the numbers) and the minimum initial deposit is $10k

Trading platform/interface
1) I use their basic web trader and mobile trader. Web trader seems overly complicated at first but it’s fully customizable and purpose-built for experienced traders. No fluff, no marketing schemes, no pretty images or ads, no asset allocation pie chart wizards or hand-holding. If you don’t like a part of their platform, you can access your account on many 3rd party platforms or program your own.

The mobile trader is contrarily simple and has just what a casual trader needs; quotes/charts, orders, trades, portfolio, account, scanners, alerts and an IB market brief. I started using mobile trader to make a quick trade on the go, but now I’ll even use it over the web trader. (I’m not a day trader) Web trader is fine as well, but I was scratching my head for quite awhile just to make a simple trade.
Customer Service

2) Never had to talk to anyone yet. Everything has been smooth and everything can be self managed online which I like

Research reports and tools

3) Haven’t really used it. I like their daily market brief and scanner on the mobile app.

Type of investor

4) I only make a few trades a month. I think IB targets the day trader crowd, however I like their rock bottom fees and monthly minimum scheme as I can trade more without being held back by the cost. I can dollar cost average my trades at no additional charge because the monthly minimum is $10. Their FOREX and margin rates are also rock bottom, which is good for a beginner if you can live without a beginner friendly platform. I think that if you’re going to trade, you should know how to use a serious platform anyways
Other

5) You get a wallet sized card with pin number for additional security. This is required for changes to account management but you can turn it off for the trading platforms. Their account signup is fast and hassle free. To link a bank account they deposit and withdraw some random change and you simply confirm the amount. No fax machine required as you sign everything digitally, no accredited ID required even though mine is listed as stolen on my credit. Almost too easy..
Conclusion
Downsides: No TFSA, no RRSP, $10/month min
Upsides: Raw customizable platform, rock bottom fees

Larry81 had this to say:

I joined couple years ago when i discovered trading
Trading platform/interface

1) The active trader platform is simply amazing

Customer Service

2) Never had any issue with their customer service, they even helped me setup the account
Research reports and tools

3) Didnt use them
Type of investor

4) Was active when i was using IB

Other

5) If you are an active investor trading in an unregistered account, you should seriously consider IB.

Frugal Trader (yes, that guy) had this to say

Very powerful platform, very quick, built for traders. As you mentioned, great currency exchange, great margin rates and very low comissions (but can add up on higher volume trades). Downside is that they do not include data feeds, so you’ll need access to a different discount broker for real time data feeds.

Cannon Fodder had this to say:

Trading platform/interface

1) I used IB to implement my SM starting about September 2008. I found the interface to be non-intuitive. Many times I sold when I wanted to buy or vice versa. But, as time went by, I became more comfortable with it. The prime reason I chose it was the margin interest rates are incredibly low. My intention all along was to use margin to jumpstart the SM especially because the market was going down at the time. Little did I know how low it would go.
Trading platform/interface
2) I would say the customer service is civil yet basic. Don’t expect a lot of handholding. I’ve contacted them on the phone and through their message feature.
Research reports and tools
3) I haven’t used their tools but it is a nice feature that they have both an ipod/iphone app and a blackberry app. I’m always able to log in.
Type of investor
4) For the most part I’m not terribly active anymore. I have my base of blue chip dividend payers and the rest of my money is shorting either HNU or HND (Horizon BetaPros 2x leveraged NatGas ETF). Total trades are probably 50 times a year but that’s because I don’t sell or buy my entire position in one fell swoop. Their pricing is a bit of a disadvantage because I’m dealing with positions far higher than 1,000 shares. But, the margin costs mitigate the trading commissions. When I’m active with my iTrade account I get access to more advanced tools which supplement my trades on IB. But, I’ve moved away from being a swing trader so I don’t need the perspective like I used to.
Other
5) I don’t have the security card anymore – they’ve given me an electronic token which creates a new code each time I log in.

I think there is a lot of power available with IB. I’d only recommend it if you want to use margin AND you are pretty comfortable with a more advanced interface.

OSC had this to say:

One distinctive IB feature is the trading platform API, which allows any programmer to implement his own trading algorithm and take human weaknesses out of trading. This also allows one to trade while sleeping or when in vacation.