Foreign Exchange Fees
Reading a review of Qtrade at Money Smarts, I was struck by the description of the foreign exchange fees as “pretty good”. They may compare favourably to foreign exchange fees at other discount brokerages, but compared to a reasonable fee, they are horrendous.
For amounts over $25,000, Qtrade charges 0.96%. This is $240 on $25,000. What is there to justify such a high cost? I can understand the need to recover costs when handling actual cash. It costs money to pay employees to give out cash, and you have to take on currency risk for days to hold onto cash. However, these costs don’t apply to electronic transactions.
A simple fee of $10 plus 0.1% for electronic conversions among major currencies would leave plenty of profit margin for banks and brokerages. This corresponds to $35 on $25,000. I understand that businesses seek profits and will charge what the market will bear, but it is time that investors demanded more reasonable foreign exchange fees.
For amounts over $25,000, Qtrade charges 0.96%. This is $240 on $25,000. What is there to justify such a high cost? I can understand the need to recover costs when handling actual cash. It costs money to pay employees to give out cash, and you have to take on currency risk for days to hold onto cash. However, these costs don’t apply to electronic transactions.
A simple fee of $10 plus 0.1% for electronic conversions among major currencies would leave plenty of profit margin for banks and brokerages. This corresponds to $35 on $25,000. I understand that businesses seek profits and will charge what the market will bear, but it is time that investors demanded more reasonable foreign exchange fees.
And how exactly do you plan to "demand more reasonable foreign exchange fees"?
ReplyDeleteYou simply don't use the service and point that out to them.
DeleteRepeatedly. : )
Delete@AnatoliN: I can do little as a one customer. But as Big Cajun Man and Bet Crooks point out, we can all do our part by finding ways around expensive currency conversions and registering our displeasure when possible.
DeleteI just changed the wording on the article to indicate that the 'pretty good' rating is only relative to other brokers.
ReplyDeleteThe reality is that all the brokers make a lot of their money on foreign exchange fees which are comparable to mutual fund fees, except that they are even more hidden.
My statement applies to the vast majority of investors who don't know about/don't care about/won't do anything about them group of investors who take whatever forex fee is offered. For those people getting shafted with a 1% fee is a better deal than at most brokerages.
There are very few people who will get into doing gambits etc to save on forex.
The funny thing is that when I emailed Qtrade to ask about their forex fees - the rep said that they don't charge forex fees and 'there is just a difference in the buy and sell rate'. :)
Whatever....
@Mike: I agree with you that Qtrade looks better than most other brokers on forex fees. The story about the rep who says they don't charge forex fees is funny. Maybe I'll start a bank that never charges interest on loans. I'll only charge service fees and convenience fees.
DeleteAnd you'll be sharia-compatible too, giving you a bigger market!
DeleteI can accept it as part of their business model. If they didn't make a profit here, they would raise fees somewhere else. In fact this works to my advantage because others are making the brokerage profitable through these fees, while I can mostly avoid them (at Questrade I do exchanges for $5 + 0.20%).
ReplyDelete@Value Indexer: I think banks seek the maximum fees they can get. If it were possible to extract more fees in other places, they'd already be doing it. If regulations or market conditions atually make a particular bank service unprofitable, then banks would add new fees (or drop the service). Other wise, I think they're already extracting the highest fees they can get.
DeleteMichael is right. Like any business, they want to maximize their profits.
ReplyDeleteHaving low trading commissions, no annual fees and high forex fees is a good business model because it seems that most investors only focus on the first two items with respect to costs.
I have to admit that when I first started using a discount brokerage, that's what I looked at. I had no idea about forex fees.
I think the brokerages hide this pretty well, which isn't so good. I added a bit to a Questrade account this week and since it was a relatively small amount (and the markets were down) I just took their exchange rate to make the trade immediately.
ReplyDeleteThe next day I got a margin call email since I had a negative cash balance and this was for a registered account. The amount I was short by was 1% of the trade value so it looks like the exchange rate moved by more than expected (unlikely) or the trade was allowed even though I wouldn't have enough cash after the full currency exchange fee.
A similar thing happened with TD last month. Fortunately it's easy enough to put in a bit of cash without going over our contribution limits because I have been focused on other accounts.
@Value Indexer: Back when I tried to make money picking my own stocks I used to account for every cost in my return calculations. It was amazing how many little charges came up here and there for currency exchanges or interest on a temporary short position.
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