What is the real cost of investment?

Self-directed investing vs investing with an advisor

Self-directed investing offers many benefits that can be different than those available when working with an investment advisor. It gives you the liberty to choose your own investment strategy based on a self-assessment of key factors, such as risk tolerance, time horizons, and financial goals and constraints. Additionally, there is a plethora of information available online to help educate and guide you through your self-directed investing journey.

Working with an investment advisor or financial planner can be more expensive than self-directed investing but can provide advice when needed. An investment advisor will either charge the client a commission for the buying and selling of securities or will charge an asset under management fee (AUM) for managing your fees. Nevertheless, it is ok to seek advice as both approaches can complement one another. 

It is important to remember that, even if you choose the self-directed investment path, there could be charges linked to transaction costs and administration fees depending on the online broker. That said, an advisor can advise their clients, but online brokers can provide articles, webinars, and tools free of charge to help their clients. This gives self-directed investors easy access to a store of reliable and up-to-date investment information that can help guide investment decisions without providing advice.

Commissions and choosing the right broker 

Transaction costs will typically be lower for self-directed investors when compared to the fees linked to working with a financial advisor or planner. However, many online brokers will charge self-directed investors a commission for each trade they initiate. 

• It is important to monitor commission fees when choosing a broker. Many online brokers charge a fixed rate commission that can be as high as $9.99 per trade. 
• Commission fees can add up very quickly, particularly if you are trading regularly. The lower the commission, the more of your hard-earned money can be put towards growing your investments rather than paying brokerage or transaction costs.

Investment vehicles can have different fees

Deciding on the kind of investments that are right for you is important. Factors like your financial goals, risk tolerance, and investment horizon should help guide your choice of investment vehicles. 

While some brokerage firms charge a commission and others do not, it is always important to keep in mind that different types of investment products carry different kinds of fees and costs. Moreover, watch for any other fees or charges that may be linked to the purchase of a specific investment product. Remember that not all investment vehicles require a minimum investment or involve significant transaction fees, and different types of investment products carry different kinds of fees and costs. Consider conversion, exchange and interest rates when investing and when calculating a security's return on investment (ROI).

Exchange traded funds (ETFs) – Self-directed investors buying Canadian and U.S. ETFs pay a $0 commission if the transaction is carried out on the NBDB trading platform. When buying exchange traded funds it is important to find out the management expense ratio (MER), which is the amount being directed to manage the asset. Remember that Passive ETFs typically have lower management fees than Active ETFs. It is also critical to take a look at an ETF's Prospectus (external website), which provides buyers with important information about a fund's fees, expenses, investment objectives, and strategies.

Stocks and REITs – Real Estate Investment Trusts are traded like regular stocks. No additional fees apply, but if your broker charges a commission, you will incur the cost of making the trade.

Bonds – If you buy a new issue bond, the fees linked to the purchase of the bond are included in the sale price. Most buyers typically hold the security until maturity. In which case, the transaction will incur no additional fees. When buying previously owned or traded bonds on the secondary bond market, the commission is indicated as a distinct amount from the bond price. As with a new issue bond, if the new buyer holds the bond until maturity, they will not have to pay any additional fees.

GICs – There are no fees associated with buying guaranteed investment certificates. 

Other fees and costs to consider 

We tend to focus on commissions, but there are also other costs and fees that self-directed investors should be aware of before making a transaction. Investors who tend to buy and hold, or who don't trade often, are typically less affected by commissions, bid/ask spreads, and currency conversions than day traders. Nevertheless, self-directed investors have some control over how much they pay out in fees.

Bid/Ask spread – When you look up a security, a market price and a bid and ask price appear in the quote. The Bid, or the price at which buyers are ready to buy it, and the Ask, or the price at which sellers are prepared to sell a security. The Bid (purchase price) is always lower than the Ask (sale price). The term “bid-ask spread” is typically used to identify the difference between these two prices.

An investor who buys a stock and then resells it immediately would incur a loss equivalent to the bid-ask spread – even if they weren’t paying a dime in commission.

When buying a small quantity of stock or when you are planning to hold stock for an extended period, the added cost of the bid/ask spread may not appear too significant. However, for investors like day traders, who might be trading large volumes of different stocks within short time frames of minutes or hours, the cost of the bid/ask spread can have a significant impact on the profits they may see from their trades by the end of the day. The size of the spread could be as low as one cent between the buyers and sellers when there is a high trading volume, and the stock is liquid. In that case, the investor can quickly buy or sell a large number of shares with a small impact on the share price. In the case of low volume stocks that are illiquid, the spread will increase and can be a few pennies to even a few dollars if the share price is high and illiquid with very low volume. 

Suppose an investor currently holds 1000 shares of ABC company and wants to sell them and the difference between the current bid/ask spread is 1 cent. Assuming no commissions, the 1 cent difference ends up costing the investor $10.00. Now suppose we have the same example, but the spread is 10 cents, the difference ends up costing the investor $100.00.

Currency conversion – If you've ever taken a trip to the U.S., you’ve likely exchanged Canadian currency for U.S. dollars. You may have also noticed the difference in rates when buying U.S. dollars and selling them back to your local bank. In addition to the fluctuating exchange rate, the spread between the bank’s buy and sell rate means that you pay them a fee every time you move money in either direction. 

The same applies when you buy and sell U.S. stock using your Canadian dollar account. To avoid the costs of conversion, investors can use registered or non-registered U.S. dollar accounts to make trades and receive dividends from U.S. securities. Another option is to convert a lump sum of money when exchange rates are favourable and then purchase U.S. securities using a U.S. dollar brokerage account.

Canadian ETFs of U.S. stocks – Another alternative for investors is to purchase Canadian ETFs that invest in the U.S. market. This allows investors to pay in Canadian dollars and avoid the costs of conversion, which are wrapped into the value of the ETF. Since larger amounts are being converted, usually in the millions of dollars, the ETF benefits from lower institutional exchange rates. Additionally, since a single ETF holds a pool of different assets, a self-directed investor benefits from owning a security that has geographic diversified holdings. 

Administration fees and inactivity fees – Some direct brokers will charge their clients administration fees, which are usually based on the value of the brokerage account. If the value of the account is below a specific amount or the account holder isn't making a minimum number of trades per quarter, they may be charged an inactivity fee. If the investor lowers the amount available to invest or puts the account into a debit position, they are required to add funds to the account or sell off investments to cover the debit.

Knowing what kind of administrative or inactivity fees you may be subject to is important. Some online brokers might reduce fees depending on the age of the client (for example, as part of a young investor discount),  profession, or part of an exclusive offer.

How much money do I need to start investing?

In principle, there is no required minimum amount to start investing. Obviously, investors with pre-existing large portfolios may not have this concern, but you can still create a dynamic portfolio if you are starting out or if you don't have a significant amount to invest. In the case of most online brokers, investors must purchase at least one full share or unit of the stock, ETF, or REIT. 

When the price of a single share or unit is in the hundreds of dollars, it can be challenging. Nevertheless, ETFs can be a great option. Not only are there thousands to choose from on the Canadian and U.S. markets, but they are also available at a wide range of different unit prices. Given the fact that a single ETF holds a pool of underlying securities, they are a cost-effective way for a new investor to achieve instant diversification even if they own just a few units.

Additionally, for those starting their investment journey with smaller amounts of money, buying one $50 ETF with an additional $10 commission can quickly eat up whatever investment fund they have available. That's why finding a broker with a low or zero commission can make such a big difference. 

Other options such as mutual funds may have lower fees but usually involve a minimum initial purchase amount of $500 or $1000, and some online brokers may insist on a higher minimum. Similarly, in the case of bonds and GICs, online brokers will usually specify minimum purchase amounts which can be in the thousands of dollars. This can pose difficulties for investors who are just getting started. An alternative could be to buy a unit in a bond-focused ETF. Since these funds involve partial ownership in a basket of different bonds, this purchase would not be subject to the same minimum requirements as a regular bond purchase.

Whether you are starting your investment journey or have been at it for a while, it is important to regularly assess your investment strategy, as well as the cost of your investment. As our priorities change, so do our investment goals. It is always important to remember that investing has different costs depending on the type of broker you use and the different types of investment vehicles you choose. Investing always carries risks, but regardless of budget or financial goals, there is no minimum to start investing. The more your investments grow, the larger your potential returns.