Account Opening Form

How To Open a Self-Directed Brokerage Account

Opening a self-directed brokerage account is an essential step toward taking control of your finances.  This forms an integral component of the Execution phase of the Fee-Only Financial Planning Process.  A self-directed brokerage account allows you to buy and sell stocks, ETFs and other securities.

In order to open an account, you will need some information accessible before you begin, as it will be required as part of the process:

  • Government-issued Photo ID
    • Driver’s License or Passport
  • Current account information if you will be transferring funds into your new account
    • Account #s for each account (RRSP, TFSA, etc.)
    • Institution name and address

The below walkthrough is specifically for our recommended brokerage Questrade, but the steps will be similar for any self-directed brokerage.  This process should take you about 30 minutes to complete but can be done in phases.

Note: We only recommend that you open an account if you will be transferring $5,000 or more.  When you have $5,000 or more, you will not be charged fees for inactivity in your accounts.

Self-Directed Brokerage Account Opening Steps:

  1. Go to questrade.com

  2. Click on “Open An Account” in the top right portion of the landing page

  3. Select the accounts that you wish to open.

Our recommendation is to open an Individual Margin, RRSP, and TFSA account.  These are the 3 basic account types that are appropriate for all Canadians.

Select the Self-Directed account options, not the Questwealth options. Questwealth accounts charge management fees for pre-packaged portfolios.  We have covered elsewhere how management fees negatively impact your portfolio

Questrade Account Opening Selection Screen

On the right-hand side of the screen, you will have the opportunity to enter an offer code.

If you enter the code “uajekubi” you will receive a $50 trade commission rebate.  This is offered as part of the Questrade affiliate program. To understand more, please read our affiliate policy.

  1. Create a user ID and enter your basic personal information

The name that you enter on this screen must match the government issued photo id that you will upload as part of the account opening process.

  1. Build Your Profile

Next, you will expand on the personal information provided in the previous step.

The questions that you answer in the next steps are standard procedure when opening an account with a financial institution.  These questions help to prevent money laundering and sanctions avoidance.  This is a good thing.  You can refer to the Questrade Privacy Policy if you have any questions or concerns.

You will have to enter information in 4 different categories:

      • Personal Information
      • Employment Information
      • Financial Information
      • Citizenship Information

Questrade Build Your Profile Screen

  1. Account Opening Questions and Documents.

For this next step, you have to complete some paperwork and answer questions for each account that you are opening.

From the account summary screen, click on an account to complete the setup.

Questrade Account Setup Selection Screen

There are a separate set of questions for each account, as well as paperwork that must be signed and submitted prior to being able to open your account.  It is during this step where you must upload the copy of your photo-id to the website.

Questrade Account Questions and Documents

  1. Fund your account

Now it’s time to put some of that hard-earned money of yours into your new account.

You have a few options at your disposal.

Questrade Account Funding Options

If you are transferring an RRSP or TFSA to your new accounts, you must use the ‘Transfer account to Questrade’ option.  Any other form of funding would result in a contribution to your account, which may put you over your contribution limits for either your RRSP or TFSA.

When transferring accounts, they can only be transferred into the same type of account (i.e. RRSP into an RRSP).

For a limited time, if you are transferring an account of $25,000 or more, you may be eligible to have your transfer fees that are charged by your current institution (the transfer out) covered up to $150 by Questrade.

If you are transferring your account, you will have 3 options available to you. 

      • Transfer in-kind
      • Transfer in cash
      • Partial

Transferring in cash means that your stock/ETF positions will be liquidated by your current institution and converted to cash.  This can have some unintended consequences, such as incurring brokerage trade commissions, or tax bills for realized gains (or losses) in your non-registered accounts.

Transferring in-kind means that you are moving your stocks and ETFs over while keeping your adjusted cost base/book values intact for tax purposes.  This is the recommended option.

A partial transfer would be for only a portion of your account, as opposed to the full value.  A cash transfer is appropriate if you are holding securities, such as mutual funds, which are unable to be held in your brokerage account.

Account transfers can take up to a month or more, depending on the financial institution.

Minimum initial funding in order to buy stocks or ETFs is $1,000 per account.

 

And that’s it!

Once your accounts are funded, you are now able to trade stocks, ETFs and other securities.

We have prepared a guide on how to execute a stock or ETF trade  for your reference.

Was this guide helpful?  Are there other guides that you would find useful? Let us know in the comments.


Investment Trader Terminal

The Case Against Active Portfolio Management

 

Being active is for the gym, not your portfolio.

“When did you get so clever?”
“When I realized I wasn’t as clever as I thought.” 
― John Connolly, The Infernals

Hubris.  The fatal flaw.  And a common trait of the average actively managed fund manager.

“I will be different!” … is what I envision them saying, as they march onward in the quest for alpha.

Each and every day, throngs of asset management employees spend hours poring over reams of data, performing endless analysis and searching for the golden nugget of information that will give them an edge over their competition.  And unfortunately, each and every day, the majority fail.

They fail.

Day after day.

Month after month.

Year after year.

This isn’t up for debate, it has been empirically proven.

The investment management industry attempts to sell you on their superior expertise to maximize your investment gains. 

We have all seen ads similar to this one:

Advertisement from investment firm that claims outperformance

However, they are really spending a lot of money on marketing in vain.

There are 2 factors to consider with respect to their performance.

INVESTMENT RETURNS

The most critical aspect of measuring a mutual fund’s returns is their performance against its benchmark

For example, if you wanted to buy a mutual fund that invested in Canadian stocks, that mutual fund would likely be benchmarked against the S&P/TSX Composite Index.  The actively managed mutual fund would then invest in an attempt to outperform that index.  It would do this in 2 primary ways:

  • Only investing in certain stocks while avoiding others, some examples may include

    • investing in banks but not oil & gas;
    • investing specific bank stocks instead of all bank stocks
  • Timing the market by investing more or less in an attempt to avoid losses and capitalize on upward momentum gains.

There are other ways that certain funds may be able to achieve gains (e.g. options, hedging, etc.), but not all are appropriate for the average mutual fund.

SPIVA scorecards track the performance of mutual funds against their respective benchmarks.  Below is a summary of some of their most recent findings.

Summary table which shows that the vast majority of mutual funds don't beat their benchmark index

Simply put another way, the best performing sample only saw 37% of mutual funds beat their index.

Funds are often judged based on quartiles.  This means that for a given class of funds, such as US Large Cap funds, they are measured against their competition in the group via a ranking from top to bottom.  The top-performing 25% of funds would be in the top quartile and the bottom 25% in the bottom.  Because they are grouped together in this manner, many fund managers aim to simply not be an outlier amongst their peers.  Why do you ask? How do you think a fund manager’s year-end performance review with their boss would be if they were in the bottom quartile for a given year?

This is what gives rise to the concept of closet indexers.  What this means is that supposedly actively managed funds are in fact aiming to mimic their respective benchmark so that they can avoid appearing in the bottom quartile of their group.  This is relatively easy to do by investing in the entire, or close to it, benchmark.  For example:  If the TSX was made up of 1/3 Financials, 1/3 Oil & Gas and 1/3 Mining companies, the active manager could invest in 2 or 3 companies for each segment of equal weights. 1/3 of the assets invested each of Financials, Oil & Gas and Mining, and you have likely just avoided the bottom quartile.  This would not yield outperformance but would rather perform similarly to that of the entire TSX (in this simplified example).

INVESTMENT EXPENSES

The other key consideration with active management is expenses.  Active management costs more.  It costs more in a few ways:

  • Higher Management Fees or MERs for mutual funds
  • Higher trading costs due to trading in and out of stocks.
  • Tax bills for realized gains

The cost argument is always best approached by comparison.  If you simply bought an index fund that tracked the TSX, you would pay less in management fees than an actively managed fund.  For example, TD offers many mutual funds, but I have included an example below of their cheapest TSX Index Fund and an actively managed fund which intends to outperform the TSX.  Below is a summary of their MERs and relative performance (data source 1 and 2).

Comparison of TD Mutual Funds

To be clear, TD is used in this example, but this is something that you would likely find at nearly any mutual fund vendor with respect to expenses on the actively managed side. That said, the e-series offering from TD is one of the lowest cost options of its kind.

Now, consider how many of these actively managed funds may be closet indexers in conjunction with the higher prices that they charge for management…  That sounds like a recipe for underperformance, not their promise of outperformance.

If you choose to invest with a portfolio manager who would be purchasing individual stocks, instead of a mutual fund, this is where the trade costs add up.  Every time that the asset manager switches into and out of a stock, they have to pay a commission to the brokerage that houses your account.  This means, that through being active in an attempt to outperform, there can be substantial fees related to stock trading.

The additional contemplation of active stock trading is taxes.  Every time that you trade a stock in a non-registered account (i.e. outside of a TFSA or RRSP) you realize a gain or loss.  This could mean that you are stuck with a surprise tax bill at year end because of all the active trading that you are doing.  This means that the money owing in taxes cannot be reinvested and compounded for your benefit, but instead will be sent to our good friends in Ottawa.

If you go back and look at the advertisement shown above, you will note that it doesn’t indicate whether the returns are before or after fees.  How do you think the return figures might change if you factored in 1, 3, 5 or more years of fees into the equation?

 

THE BRASS TACKS

Asset managers would like to sell you on their superior intellect and clever ability to pick individual stocks that are winners.  History has told us otherwise.  Index investing guarantees you the effective market return at a lower cost.

Think of it this way:

You are writing an exam and have 2 potential study methods.

Study Plan A gives you a 20% chance of being average or better and an 80% chance of being below average and the material will cost $600.

Study Plan B gives you a 100% chance of being average and costs $100.

Study Plan B would be a no-brainer.

So I will leave you with one final question:

Who’s clever now?


Desk with phone notebook and plants

A Novel Beginning

You’re probably thinking, “Great.  Another financial services firm”.

You are probably not alone.

If that were the case I would completely understand.  There are literally thousands of organizations out there that address some component of the financial services market.

The problem is that most of them don’t care about you.

The average fund manager cares about their performance relative to their benchmark and the amount of their assets under management (AUM).

The average financial advisor cares about their commissions and their management fees charged on assets under management.

The typical bank wants to direct you to products that they sell, not the best available products, or products that are best suited for you.

The fee-only financial planning approach works in stark contrast to these conflicts of interest.

How The Fee-Only Financial Planning Journey Began

The unfortunate realities of the typical advisor model played out for me recently.  My Mother invited me to join her at a meeting with her financial advisor, as she wanted to make sure she was on the right track.  She recently retired from a career as a teacher and was transitioning from the accumulation phase of her life into the drawdown phase.  The plan that was set out for her to follow was a logical one.  The options presented were very reasonable from an approach and strategy standpoint. 

When it came time for execution, this is where the reasonability went off the proverbial cliff.  This came to light as I asked 3 critical questions:

  1. What is the fee structure of this financial plan/arrangement?
  2. What product options do we have within the financial plan framework?
  3. Is there a more cost-effective way to implement this financial plan?

With respect to the fee structure, the advisor was going to be investing in a balanced fund charging 2% of AUM.  In addition, the advisor would be taking a 1% of AUM management fee on top of the costs of the funds.  In total, this plan would cost 3% of AUM each and every year.  Something to keep in mind is that we could substitute AUM with life savings in any sentence in this article.  What this ultimately means is that the investments would have to return 3% just to break-even!  As you know, interest rates are very low in the current environment and earning 3% is not a given.  How do you think you would do in the 100-metre dash if you started from 130 meters away?  Why would you want to put your life savings in the same situation?

When it came to product options, we did have some to choose from.  Segregated funds, mutual funds and annuities were all provided as options.  Each of these options has their own merit and can provide value to certain individuals depending on their situation.  However, I asked if there was a way to move to a lower cost ETF based approach.  The advisor’s response was, “I am not licensed to sell ETFs”.  So, now you only get to choose from products that they have agreed to sell? 

These investment products undoubtedly have a commission being paid to the advisor from the fund company, because for every client an advisor can direct to them, it means that the fund company will now get paid each and every year that you invest with them.  For 1% of my life savings, I would expect that an advisor could bring all appropriate options to the table for me.

Lastly, I asked if they would be open to moving to a flat fee-based model as opposed to the percentage of AUM model that they were currently utilizing.  They declined to entertain the idea. That’s their prerogative as a business person, but it was worth a shot. 

At the end of the day, this is a classic example of an expensive advisor using expensive products because it suits them best, not their client.  Luckily, it’s your prerogative to explore other options!

Harsh Reality of Working With a Typical Financial Advisor

My mother and I inevitably left their office following the meeting. We had some discussion and she quickly realized how much money had been paid to this advisor over the years. Literally 3% of her hard earned money was given away every year.

It was this day that drove me to launch Novel Financial.  I wanted to be able to provide quality financial planning advice to all Canadians at a cost that was commensurate with the service being provided.  Thanks to this meeting, it turned out that on this day Novel had inadvertently also found its first fee-only financial planning client.

Your best interests are our best interests.  That’s Novel.

Learn more about the Fee-Only Financial Planning Advantage.


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