It is my objective to write positive things in this blog and to ignore the negative as much as possible but a significant hidden trap I encountered at my broker BMO Investorline bears writing about.
When placing a trade in an RRSP or a LIRA for a security traded on a US exchange, the BMO Investorline online web page first gives an Equity Order Review screen before the final purchase is submitted on entry of the password. My graphic shows a screen capture of such a real screen in which I set up a potentially real order in one of my accounts. Note the use of the word "estimated" in reference to the US order value and the final Total order value in Canadian funds. What does "estimated" mean in this context? Part of the meaning is that, as it says right on the screen below, the current market price is only indicative and may change on such orders placed at market price, between the time of order entry and the moment when the order hits the market. That's ok, stated and understood. Then there is the estimated Canadian dollar price, which depends on the exchange rate and one could presume as well that the rate could change in the time it takes to commit the order. However, there is nothing on the website, and I checked by phoning a BMOIL representative, that gives an accurate explanation of what "estimated" really means. It turns out that the meaning of "estimated" is significantly different, and negatively so, for the investor.
The reality of "estimated" is as follows:
- the C$ to US$ exchange rate is not a buy rate for a US equity purchase nor a sell rate for a US equity sale, it is a mid-market rate;
- the actual exchange rate applied to any purchase or sale is the buy or sell rate at the close of markets each day.
What are the negative effects?
- an investor can never know exactly how much a purchase will cost or a sale will bring, making it impossible to quickly make a series of investments that will leave an account with a target cash balance. Isn't it a fundamental consumer right to know what something will cost before making a transaction? There's the double problem of the mid-market rate and the delayed rate. In this case BMOIL does even disclose the basis on which the ultimate price will be based.
- all purchases will be systematically under-estimated, that is, will cost more in Canadian dollars, and all sales will be over-estimated, i.e. bring less in after conversion. This happens because the mid-market exchange rate is an average of the buy and the sell rate so it will always be high for one (sales) and low for the other. The effect is significant since the spread between buy and sell rates is over 1.8% for me at BMOIL, thus over 0.9% on each trade.
- as a result of these two factors, a couple of my accounts ended up in minus balance, a rather nasty surprise. The ironic twist to the story is that registered accounts are not, according to the BMOIL rep I spoke to, allowed to go into negative balance. During the live real-time trading that didn't show up, as evidently the automated "you are not allowed to do that trade because your account will be over-drawn" piece of software, also relies on the estimated order value. The rep also assured me I wouldn't have to pay interest on the negative balance..... good thing they record those voice conversations with clients, huh? Hmmm, think I will leave that negative balance there till next year when I do my next re-balancing.
- the estimated mid-market rates on my purchases or sales varied with each trade; obviously therefore, that number is being updated constantly as markets change. The mid-market is an artificial computed rate between the buy and the sell, which are the only real rates. If BMOIL can supply in real time with each trade the mid-market rate, it must also have available the buy and the sell rates in real time. Why cannot it therefore apply this rate to the trade? I believe BMOIL is acting as principal in these foreign exchange transactions with clients, which leaves even less excuse for it not giving an instantaneous, committed exchange rate.
- the main source of this whole problem is BMOIL's decision to allow only Canadian dollar cash within any registered account and to force all US transactions to go through the buy and sell of foreign exchange (on which it makes money!). There is no requirement for this at all, certainly no legal restriction since the lifting of foreign content limits a few years ago. One wonders what the practical restrictions are too. My regular open BMOIL account has a Canadian and a US dollar side and I can settle trades within an account, or make online, real time transfers between the two sides, which of course again confirms that the buy and sell rates are readily available.
I suppose I should have noticed before since I have bought and sold US equities previously in RRSP and LIRA accounts and I suppose one should always on principle be wary and questioning of the way things work to avoid nasty surprises. However, the almost total lack of disclosure and the appreciable negative consequences resulting from a poorly designed trading tool leave me frustrated and annoyed to say the least. We'll see how BMOIL responds after I send them a letter of complaint.