BMO Investorline and Foreign Exchange Trades in Registered Accounts

Little did I know when making this post complaining about BMO's policies regarding foreign exchange rates when buying and/or selling US securities in a registered account that much has already happened.

First, there was the $100 million dollar class action lawsuit launched back in August 2006 against BMO claiming that BMO has illegally forced customers to change foreign currency from Canadian dollars into US dollars or vice versa in registered accounts since June 2001 when the tax laws changed and began allowing foreign currency to be held in such accounts. You can register with the lawyers Paliare Rolland to be kept informed of the case's progress. Or you can sit back and keep an eye out for news, or just wait - I'm betting years - for a letter from BMO or the lawyer, saying the case has been settled for x amount and here is what you get.

The second development is the internal memo issued by BMO and reported by the Toronto Star in April this year to allow clients who trade in and out of US dollars on the same to take a single exchange rate for both the buy and the sell and thus avoid the buy-sell spread and/or any fees for the conversion. There is also a lower fee structure - down to 75 basis points (0.75%) or 70 basis points for all you folks who have trades over $30million. There isn't any notice or warning on the website about this situation, so BMO clients be aware - you must phone and ask for the single rate out of and into US dollars.

Maybe someday the big bank brokerages will manage to convince their software supplier to make the necessary changes to the program they all use in common to manage registered accounts. Apparently the bottleneck is the software and the supplier just won't change it (no it isn't Microsoft). Those of you at all familiar with the world of IT will not laugh and scorn but will quote the old saying, "God could not have created the world in seven days if he had had an installed base." Some who have had similar experience with the bugs that follow on new versions of software might just wisely note, "be careful of what you wish for, you just might get it."

Canada vs UK Tax Comparison Updated for 2007 and 2008

Back in March I posted a comparison of various personal tax rates for Ontario Canada and the UK using 2006 rates. Here's an update based on the 2007 rates.


This chart shows the rates for 2008-09. Not much change , the UK is still lower for every level of employment income except for a narrow sliver at around $75,000 taxable income where the top UK rate of 40% is a tiny bit higher than the Canadian 39.41% rate. Woohoo!

This time I've coloured cells green where one country or the other has better / lower rates. I've made a correction on the dividend tax for the UK - there is actually no exemption, the 10% rate applies as soon as tax kicks in up to the start of the highest band where it becomes 32.5%. This correction changes the advantage such that Canada generally comes out ahead with respect to dividends for almost every income level. With virtually everything else, the UK is better and usually by quite a bit, a seen by the content of the green cells. With respect to capital gains, though the rate is lower in Canada in low to middle income brackets, the availability of an annual exemption of almost Cdn$20,000 probably means the effective tax rate for a large proportion of UK investors is zero. For example, if a £100,000 portfolio has net 10% of £10,000 gains in a year, the £9200 exemption would mean almost no tax to pay. Adding the availability of tax-exempt ISA accounts in which up to £7000 can be placed annually, it is likely that all but the rich won't pay any capital gains tax in the UK.

A lot of UK interest income would likely be effectively tax-exempt within ISAs too, though not dividends because the tax is deducted before payment is made to the investor and it is not recoverable / claimable. The comparative Canadian RRSP account temporarily shelters interest, dividends and capital gains from tax of course. However, when I came to the point in my career/life where I could start saving larger amounts for retirement, my RRSP was maxed out so I had to put most of the annual savings into a non-registered taxable account. I really have been paying tax on those investments. Were I a UK taxpayer, my savings could have been absorbed by an ISA.

The conclusion I reached in March still holds - the UK is the clearly superior country when it comes to personal taxes.

Source for UK tax information: UK DirectGov website.
Source for Canadian tax rate: TaxTips website.

Why Management Expense Ratio is So Important

One tenth of one percent (0.1%) seems like a trivial number not worth bothering about when it comes to the expenses charged by fund companies to manage our money in mutual funds or Exchange Traded Funds (ETFs), doesn't it? The expense ratio (ER or MER) is the amount levied by the management company as a percentage of net assets in the fund. It is not in any way dependent on the investing success or performance of the managers (see the Wikipedia post on mutual funds for details).

Another way to look at the ER is that it is a reduction in the net return available to fundholders. Managers must make up their percentage fee and better in order to make money for you and me. For example, if the fund is $100, the ER is 1% or $1 per year, in order to gain 6% net, the fund must go up by 7%/$7. Alternatively, the same net gain can be achieved with a lower investment gain and a lower fee. Or, to put it yet another way, with same investment gain, as I am illustrating in this post, and a lower fee, the net gain is higher. In the case especially of passive index funds whose aim is to replicate the gains (and the losses when they occur) of an index such as the S&P 500 or the TSX, there shouldn't be a lot to pick from between various ETFs or funds. Therefore, the lower the expense ratio, the more of the index gain is left for the investor. Since the MER is a known, predictable expense, the opportunity to lower it is pretty well a guaranteed, risk-free return. In short, the lower MER, the better, other things being equal (and they aren't always but interestingly those funds with lower MERs tend to be better in those other things too).

So how much does it matter? I've created a simple table in the accompanying graphic to show the numbers and the results are dramatic. The table shows percentages which are to be understood as the difference in rates of return - i.e. the effect of extra or less MER. Thus the table shows what an ETF/fund that charged 0.1%, 0.2%, 0.5%, 1.0% or 2.0% more would have produced. For example, the Vanguard FTSE All World ex US (VEU) has an MER of 0.25% while the iSharesMSCI EAFE (EFA) has an MER of 0.35%. They are not exactly the same index but the effect of difference of 0.1% in MER will amount to $201.91 after 20 years for every $10,000 invested, as shown in light blue cells of the graph. Multiply by the size of your portfolio to see the total amount.

$201.91 is a relatively small difference but the other columns show how significant the compounding effect can be for long periods and bigger MERs. The 2.0% column is of special interest to Canadians who pay the highest fund expense fees, which are high by something approaching 2% in my view. The moral of the story is to pay close attention to MER - the lower the better.

Online Sources - Mortgage, Annuity, Retirement

Just discovered a couple of interesting websites that may useful to others:
- https://www.cannex.com/canada/english/ in reality oriented to institutions and professionals but it has some free, constantly updated tables for mortgages, annuities, bank deposit accounts, RRIFs, GICs
- http://www.ifid.ca/ the Individual Finance and Decisions Center supports research into quantitative wealth and risk management for individuals, especially retirement topics, annuities and the like; much of the material is technical/mathematical but it has reprints from general press articles based on the research; one paper titled Can Buckets Bail-Out a Poor Sequence of Investment Returns? under the Personal Finance Articles compares the results for a retiree whose portfolio is invested in a balanced fund vs another who holds a combination of cash and equities, but they use different withdrawal strategies.
- http://www.soa.org/ the Society of Actuaries website has a free downloadable software package at http://www.soa.org/ccm/content/areas-of-practice/retirement-pension/research/retirement-probability-analyzer-software/

that allows you to estimate whether you will run out money in retirement using various assumptions about age of death, interest rates, investment in annuities vs stocks, bonds