An alternative to Standard Chartered new brokerage fees

Talk of the town

The buzz term today is the new brokerage fees imposed by Standard Chartered bank for online trading. Standard Chartered used to be the saviour for retail investors, charging 0.20% brokerage fee for any trade for the Singapore market, without any minimum commission.

A $1,000 purchase only costs me around $2 in commission. Comparing it to other brokerages, I would have needed to pay at least $25, which is the minimum commission. But, the music has stopped right now.

As of 1st August 2016, all new trades will be subject to a $10 minimum commission (unless you are a priority banking client, with at least $200,000 in holdings with the bank). The information below is taken from their website.

What are the implications?

Although the $10 minimum commission is much less than $25 levied by other brokerages, it is still very bad news for us.  A $1,000 purchase with $10 commission equates to 1%. In the long run, this erodes the returns of our investment. A 10% investment becomes 9%, and a 1% return becomes 0%.

In a 10 years span, a compounded annual return of 10% turns $10,000 into $25,937 but only $23,674 with 9%. Lengthen the investment period to 30 years, and the difference becomes even greater at $174,494 compared to $132,677.

This is a simple diagram (source: link) that I stumbled upon, and it is illustrative enough for me to use it here.

The point I am trying to make here is clear: expenses eat into returns. We have to keep expenses low.

Are there any alternatives?

In short, there are alternatives, but they don't work as well.

Alternative #1

The first option is simply to bear with it, and cut down on the number of trades. Instead of making 12 trades in a year, I could limit to making only 2 trades only.

Suppose each trade is worth $1,000, 12 trades would have cost me $120, making a 1% expense ratio. However, I could make only 2 trades, costing me $20, giving me an expense ratio of 0.17% ($20/ $1,200 = 0.17%).

Of course, this is a simplified example. Standard Chartered will levy the higher of $10 or 0.20% for each trade. In this case, my fees would be $24, making me expense ratio 0.20%. Interesting, this is also the commission rate prior to the changes.

This brings to a key question, how many trades should we now conduct? Well, it depends. But, the simple answer is that each trade you make has to be at least $5,000 ($5,000 x 0.2% = $10). If initially, you would make a trade of $1,000 each month, then now, you could wait to make one trade of $5,000 after 5 months.

But, what if you invest only $500 each month, or any amount that is small? In that case, wouldn't you have to wait 10 months to make one trade? This is almost equivalent to one trade yearly. Dollar cost averaging would not be so effective in this case. Luckily, we have Alternative #2.

Alternative #2

If you only have a little to invest each month, then the POSB Invest Saver would be a viable option. Simply taken from their website, they charge 1% for each trade for the Nikko AM STI ETF, and 0.5% for the ABF Singapore Bond Index Fund.

If you were to invest $500 a month into the Nikko AM STI ETF, the POSB Invest Saver would charge $5 each month, while Standard Chartered would cost $10. Bring the amount lower to $250 a month, and POSB would charge $2.50 while Standard Chartered remains the same.

The point is simple, when you have more money to invest each month, go for Standard Chartered. When you have lesser, POSB Invest Saver makes more sense. Or, you could also wait and accumulate a lump sum to pay a lower expense ratio. This table would be a useful guide.

Investment each month	$250	$500	$1,000	$5,000	$10,000
Commission (SC)	$10	$10	$10	$10	$20
Commission (POSB)	$2.50	$5	$10	$50	$100
Commission (others)	$25	$25	$25	$25	$25
Best choice	POSB	POSB	POSB/SC	SC	SC

Conclusion

In summary, the changes by Standard Chartered bank has forced us to think of other ways to minimise our expense ratio. In my own case, I would probably still stick to Standard Chartered, but I would accumulate more and invest a lump sum instead.

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