Summary: Wealthsimple or Interactive Brokers?
In our last article, we compared two of Canada’s leading low-cost investment platforms: Wealthsimple Trade and Questrade. Both platforms are great low-cost options, with Wealthsimple Trade scoring better on ease of use and technological innovation and Questrade offering greater capabilities that may be desirable to a more experienced investor.
In this article, we are going to consider another low-cost option that is lesser known north of the border: Interactive Brokers Canada.
Wealthsimple Refresher
Wealthsimple is an online robo-advisor service founded in Canada in 2014. Robo-advisors use technology to determine which mix of stocks and bonds is right for you based on your age, investment experience, and risk tolerance (more on robo-advisors here). With this information, Wealthsimple builds and invests your money in an investment portfolio of index-tracking exchange-traded funds (ETFs). The company launched its Wealthsimple Trade product in 2019. This innovative platform was the first in Canada to allow retail investors to buy and sell stocks with zero commissions (to see how commissions stack up at different brokerages, click here). Its low cost model and intuitive platform make it a great choice for investors that are comfortable with technology and mobile phones.
Wealthsimple has experienced significant growth and now manages over $35 billion in assets under management. One notable feature that has contributed to its popularity among retail investors is the ability to purchase fractional shares. This option allows investors to buy portions of shares in desired companies, enabling them to start investing with smaller amounts of capital, rather than needing to purchase whole shares.
How Does Wealthsimple Make Money With No Commissions?
The primary way that the brokerage earns revenue is by charging a 1.5% fee on Canadian Dollar to US Dollar conversions. Because users can only open Canadian Dollar denominated accounts at this time, Wealthsimple is able to charge its currency conversion fee every time a user buys a US listed stock, sells a US listed stock, or receives dividends in US Dollars. In each of these instances, Wealthsimple automatically converts the currency to Canadian Dollars with its attached markup before settling the transaction.
In addition to currency conversion, it is widely expected that Wealthsimple Trade will add paid services in the future. The company has not announced what these services will be, but margin investing, news services, and additional research and analytical tools are likely candidates to be included on the platform.
I’ve Heard About Other Brokerages Selling my Trades. Does Wealthsimple do That?
The rise of Robinhood, a popular mobile brokerage in the United States, has put the widely-misunderstood practice known as “payment for order flow” under much scrutiny. We’ve heard many people claim that Robinhood sells customers’ trades to hedge funds, and while this is technically correct, it is a misrepresentation. Wealthsimple does not practice payment for order flow.
What is Payment For Order Flow?
When a standard buy or sell order is issued, the order is routed by your broker to the exchange where it is paired with seller/buyer. Payment for order flow introduces a ‘market maker’ in place of the exchange. Market makers are large institutions with sophisticated trading technology that ‘make markets’ by filling buy and sell orders. If you have looked at stock prices, you may have noticed different prices for ‘bid’ and ‘ask’. The bid price is the highest price in the market that a buyer is willing to offer, while the ask price is the lowest price that a seller is willing to offer. The spread in between these two, known as the ‘bid-ask spread’ is primarily a function of the number of buyers and sellers trading a particular stock, or the ‘liquidity of stock’. If there are relatively few buyers and sellers, then it is more costly to transact in that stock because orders will take longer to fill and because disrupting the supply-demand balance for the shares with a large order will cause the share price to move, thereby creating a disadvantageous price for the trader.
The bid-ask spread allows market makers to earn pennies on each transaction. Whereas an exchange-routed buy order must be paired with a willing seller, a market maker will fill incoming orders without finding a contra-party. Rather, it will seek to simultaneously fill both buy and sell orders in the same stock. If stock A has a bid price of $49.90 (price available to immediately sell) and an ask price of $50.00 (price available to immediately buy), then a market maker will fill buy orders by selling at $50.00 while simultaneously filling sell orders at $49.90. In doing this, the market maker is able to capture the $0.10 spread on each share. Market makers such as Citadel Securities and Two Sigma Securities may pay a small fee to brokers in exchange for order flow.
This trading expertise is why financial institutions that act as market makers also often have separate quantitative hedge fund arms that seek to use the firm’s technological and quantitative trading expertise for profit.
A Powerful Investment Platform: Interactive Brokers
Unlike Wealthsimple, Interactive Brokers is not an exciting newcomer to the industry, as they originated in the 90s as a pioneer of electronic trading. Today, Interactive Brokers Group is publicly traded on the NASDAQ with a current market value of over US$50 billion. The company services a wide range of clients that includes retail investors, hedge funds, and other institutional investors.
The high-end tools and services demanded by these large and sophisticated clients are also extended to retail investors, giving users the opportunity to utilize professional-quality tools in their personal investing. Powerful charting, insightful portfolio analytics and IB’s dedicated desktop platform, Trader Workstation, make it a better choice for experienced investors looking to take their portfolio to the next level.
Interactive Brokers also offers a much wider variety of financial securities. Interactive Brokers users are able to trade bonds, options, foreign equities, and forex products that are all unavailable through Wealthsimple Trade. Furthermore, users may open ‘margin accounts’ in which you may make investments with money borrowed from Interactive Brokers (margin). Margin accounts also offer the ability to ‘short’ stocks, which is when an investor borrows shares to sell in a stock they do not own in hopes the price will fall and they will be able to buy the shares back at a lower price. As a more recent development, Interactive Brokers introduced ‘IBKR Lite’ for commision-free trading on US-listed stocks and ETFs (unfortunately, this is only available for US residents!).
In contrast to Wealthsimple Trade, Interactive Brokers charges a currency conversion markup of just 0.20%, making it a far more attractive option for investors looking to buy and sell US listed stocks. Users may also open US Dollar denominated accounts, meaning you are able to convert CAD to USD once and settle subsequent transactions in US Dollars. This compares very favourably to Wealthsimple Trade, on which the 1.5% fee is incurred on both purchase and sale. If you want to avoid these fees, you can pay $10/month for a Wealthsimple Plus account, which provides USD accounts, allowing you to avoid this high-fee in exchange for a lower monthly fee.
Interactive Brokers also grades well on its commission for equities and options trades. For Canadian stocks and ETFs, tiered pricing starts at $0.008 CAD per share for the first 300,000 shares, decreasing with higher volumes, with a minimum charge of $1 CAD per order and a maximum of 0.5% of the trade value. Fixed pricing is $0.01 CAD per share, also with a $1 CAD minimum per order. For U.S. stocks and ETFs, the fixed rate is $0.005 USD per share with a $1 USD minimum per order. Options trading fees range from $1 to $1.25 CAD per contract, while futures contracts have variable, typically lower, fees per contract.
Conclusion: Wealthsimple or Interactive Brokers?
Both Wealthsimple Trade and Interactive Brokers are good options for Canadian Investors. Both are low-cost options with Wealthsimple offering lower commissions on equity trades and Interactive Brokers charging a lower commission on CAD-USD conversion.
In ease of use and user-experience, Wealthsimple Trade undoubtedly comes out ahead, and investors looking to build a simple portfolio of Canadian listed stocks and ETFs will enjoy the broker’s minimal cost structure and a best-in-class mobile app.
Experienced investors looking to take their portfolio to the next level could benefit from Interactive Broker’s more comprehensive offerings. The brokerage gives users access to many tools and services that allow them to run their personal investments like a professional hedge fund, while its low CAD-USD conversion fee makes it a very strong choice for investors looking to buy and sell US listed stocks.
