Good morning newbie RIPvestors!
Today I want to answer to a question from our reader Mr Dip (which is not the same person of Mr DIP, guest poster from the past) on a recent post:
By the way, what would be the minimum you’d recommend someone start investing with on IB (considering their 10$/m fees for under 100k)?
Any value? 1k? 5k? 10k? Or wait until one has like 50k? At which point would be best and why?
Thanks so much.
I wanted to articulate a slightly longer answer than a simple comment (but I promise it will be a quickie!) so here I am.
I don’t have a quick answer, let’s explore the thing together.
For those who don’t know, Interactive Brokers is the broker I recommend and use since almost 3 years. I wrote an extensive user manual (IB 101) on this blog few months ago.
The elephant in the room is of course the IB 10 USD monthly fee if you don’t have at least 100k USD balance on your account.
Note: I’ll use USD as a reference currency for this article, but mind that at the time of writing (August 2018) USD and CHF are dancing around 1:1.
I’d divide wealth spectrum in zones:
1) <12k USD
if you have less than 12k USD to invest, I would not recommend you to invest using IB.
Your annual IB yearly custody fee would be 120 USD, which is 1% or more of your portfolio value. It’s definitely too much. Consider it as an extra fee on top of your ETFs TER. It’s roughly how much banks charge for their managed funds.
If you have less than 12k to invest I’d recommend other alternatives like:
- Other brokers: some of them don’t charge a custody fee (but higher trade fees). Take a look at the MustachianPost collection of Swiss brokers alternative.
- Roboadvisor: Truewealth, Swissquote, SaxoSelect… Roboadvisor advisory fees are in the 0.5-1% range (on top of ETFs’ TER). I don’t like them, but if you have a small amount and don’t plan to add much more quickly it may be your best option. More information on fintechnews.ch and moneyland.ch.
- Other investment forms or just holding cash: p2p lending (meh), cryptos (no!)…
IB can be an option below 12k if you plan to invest more money soon, climbing up to next zones within few months. I also started with 10k just to try it out, then invested more than 100k a couple of months later 🙂
Another valid use of IB in this low range is day trading.
I strongly advocate against day trading, but if you want to try it out with limited amounts IB is awesome. Smart offer placement among dozens of stock exchanges, lowest spread, “cheap” live market data and an acceptable UI (once you learn how to use it).
In day trading your expenses are driven by trade fees and I bet you’ll never end up paying a custody fee since trade fees are deducted from custody fees.
Btw, if you want to explore day trading with IB (I don’t recommend day trading in general though), try first their paper trading platform, where you can experiment with a virtual portfolio. No real cash needed.
2) 12k – 24k USD
If you’re in this range, your annual custody fee with IB would be 0.5-1% of your portfolio. Now IB is getting as competitive as a roboadvisor with the added control you might want to have over your wealth. As I said in a previous post, don’t be ultra passive with your wealth: always keep an eye open while sleeping 😉
Plus, you get essentially free trades: trade fees are deducted from custody fees up to 10 USD/Mo and you should be able to manage your trades to never cross 10 USD/Mo.
Plus, you get free forex. IB is the best platform for currency conversion. I handle EUR, CHF and USD for my daily expenses and thanks to IB I convert among them almost for free and with a “half pip” spread. Best of the best.
I lean toward suggesting you not to use IB in this range though, but I would not consider it a clear mistake if you do.
0.5-1% extra TER is a lot in the long run, but if the alternative is not investing at all… then swallow it and open your IB account.
3) 24k – 50k USD
In this range your annual IB custody fee is in the 0.25-0.5% of your portfolio. Annoying but acceptable.
I lean toward recommending you to use IB in this range, but if you have other alternatives it’s not a crime to explore them.
4) 50k – 100k USD
You have some serious money and more than half the 100k threshold. Your annual IB custody fee is going to be less than 0.25% of your portfolio and the closer you get to the magic threshold the more exponentially easy it gets to reach it and stop paying custody fees for good.
I strongly recommend you to use IB in this range.
5) >100k USD
You’re losing money if you’re not using IB in this range.
Right now, there’s no superior alternative outside US, and even those in US for taxable accounts are debatable.
I wholeheartedly recommend you to use IB above 100k USD.
The only issues worth considering is account safety. Things like “what happen if my broker fails?”, “Is my account insured?”, “does SIPC apply to my account?” and so on.
Maybe it’s worth opening a second account with a different broker once your investments reach a certain amount (500k?) but that’s outside the scope of this financial quickie!
In conclusion: I think the acceptability threshold is at around 24k USD. But I’d not ask you any question if yours is in the 12k-50k range.
Have a nice day 🙂
Since I can’t find a valid image for this post, here you have the cutest cat ever!
For smaller amounts another viable option are some kind of proxy companies, which provide access to IB, but with their own pricing scheme. Generally individual trades costs more, but there might not be minimum yearly spends, or it is much lower then 120USD. (example: CM-Equity, but they are not present in all eu countries).
Second alternative, which I’m now considering for spreading the risk, is Degiro. I’m still researching it, but looks like a good alternative to IB.
Good point, didn’t know about that.
Thanks Suncell!
What about DEGIRO? You have no recurring fees and certain ETFs are commission free (with some rules).
I don’t have experiences with it, but it seems to be a valid solution for small investments (according to many).
Hy MrRIP
Thank you very much for this post. Unfortantly or not, i just opend an Account at IB, and i just invested 12k, it should be 20k at the end of the year and +/- 35k at the end of 2019. Is it worth now to change to Cornèr Trade? And maybe later open an Account at IB? If yes, should i sell and buy new ones or transfer my depot? I think… im taking the easy way hear and try to stay with IB. 🙂 Even if i pay more fees at the beginning, i mean i just took the BIG STEP in starting investing and saving money so…it is at least i started so i will pay the high fees this and next year ?
What is your opinion?
Hi Ricardo,
As I said 12k is borderline and I would not have opened an account in your situation.
But…
1) you already opened it and invested. It would be costly and inefficient to close it now.
2) You plan to grow to 20k by end of 2018 which is not bad, and planning to grow even more next year and enter the “ok zone”.
I’d recommend you to stay with IB now.
Hi MrRIP,
Thank you for your response. Well, one more reason to keep saving and reach the goal of at least 24k! 🙂 Unfortnatly i’m not as frugalist ( saving 25% of Netto salary) and i just started investing… so that goal will maybe help the way i spend money
Good luck and keep up with the good work! 🙂
Great post and thank you so much for taking the time to respond in detail. I highly appreciate it. I am close to the threshold you talk about (24k) to be able to invest, if I don’t count in the 6-month emergency fund. If I count it, I still have to wait until the end of the year. Either way, I guess it’s fine. Maybe Mr. Dip enters during a month that fits his name! (I know I know, just kidding!)
Haha yeah, let’s hope for the dip (but do not count on it)
Hi,
Thanks for the helpful post. I have a basic question.
Does the 100 KUSD figure refer to the minimum balance that you must maintain in your IB account (which may or may not be invested into stocks, ETFs, etc.) or does it refer to the amount which you must have invested at any point of time in stocks, ETFs, etc.?
For e.g. I may have 60 KUSD in my IB account sitting in cash but only 45 KUSD invested in stocks, ETFs, etc.
Or, I may have 110 KUSD sitting in my IB account in cash and 0 KUSD invested in stocks, ETFs, etc.
In each of the above cases, will the 10 USD/m charge apply?
Thanks and keep up the great work.
Hy Sirob, welcome to retire in progress 🙂
It says “Accounts whose Net Liquidation Value >= USD 100,000”, which means it doesn’t matter if you invest the money or keep cash or a mix of both 🙂
I use Charles Schwab and IB. I would recommend everyone use Schwab and then also IB once they can fund IB > $100k to avoid the fees.
I also heard nice things about CS. I don’t have any direct experience though.
Thanks for this post Mr Rip. I have 30k to invest. Should I invest all at once, or bit by bit? (eg. 10k per month).
Furthermore, I’ll be investing 2.5k each month as part of my salary. Thanks!
Thanks Duk,
I’m not a big fan of DCA, so I’d say go for it all at once. In the end, you’re going to add 2.5k per month so this 30k is not a huge relative amount.
I’d think me on that if you had a lump sum of at least 5 years worth on monthly investing budget (150k in your case).
Hi MrRIP,
thank you so much for your post. I am very interested in opening an IB account for my monthly savings but I basically start from scratch because I just moved to CH.
Have you thought about investing from an Italian broker which might be cheaper? Of course, you would need to convert CHF into EUR but that might be still cheaper via TransferWise.
The reason why I ask is that I still have broker accounts in Germany, and I wonder if I should convert CHF into EUR and invest via this German broker.
The conversion fee is 6€ per 2000CHF which would be my monthly investment.
Regards,
frey
“investing from an Italian broker which might be cheaper”… Cheaper than IB? LOL, is that a joke? 😀
Do your math but I suspect it’s very hard for your German broker to be cheaper than IB. Is that Degiro? Anyway, maybe it makes sense for you for the first months, before your investments reach the threshold I’ve explained in this article. Considering the currency conversion too I think you’ll hit the break-even line pretty soon.
In Germany some brokers are very cheap for some ETFs. You only need to pay the exchange fee (2€) but not the courtage.
That means if I invest 2000€/mo I have this 2€ fee + 6€ Transferwise fee =8€ but may I’m missing something…
” Anyway, maybe it makes sense for you for the first months, before your investments reach the threshold”
Why should I start with another broker? I would need still then be at 0 CHF at IB which does not bring me closer to the 100k.
Thanks for your quick response 🙂
8/2000 = 0.4%, not bad but even trading IE domiciled ETFs the overall fee on IB is between 0.03 and 0.07%. An order of magnitude smaller.
Trading US domiciled ETFs is another order of magnitude smaller. In February I bought $89k of VOO and paid $1.31 fee, i.e. 0.0014%. It’s 1/300th of your fee 🙂
I’d say while your volumes are low (and if you don’t trade much) it may make sense to use your German broker, but in the long run you’ll want to reconsider your choice.
Ok thanks for your previous insights!
Thanks for this Mr Rip. I have 25k to invest, but should I invest the whole sum at once and then 1k per month (which is what I’ll be investing), or should I take other approach such as DCA (eg. Divide the 25k by 12 months and invest the 1k + 2083 / month?)
Thanks.
It shouldn’t make much of a difference.
Here are the facts:
– investing lump sum has greater expected returns
– investing DCA reduces volatility
Where do you want to place yourself in the risk/reward spectrum?
Definitely on the greater expected returns since I won’t be touching this money any time soon.
So investing with IB only makes sense if you start with a lump sum portfolio of at least 25k, it is not suitable for dollar cost averaging 1k/month. This means it is rather a good broker for market timing or taking more risk now which is definitely not a good option.
it’s an amazing broker if you have enough wealth, i.e. 100k to not pay custody fees.
One can even drop 100k and keep it liquid in IB while DCA-ing 1k per month for a decade.
My threshold of 25k is meant to show you that even at that investment amount it performs pretty well compared to many brokers.
If you want to implement a DCA strategy 1k per month from scratch, it means 2 years of slight inefficiency before becoming the best option. Maybe it’s not a bad idea anyway.
Great post.
Two questions though:
1. iShares vs Vanguard? Do you prefer a company over other, and if yes, why? Or it’s all just about who has the smaller TER and hidden fees?
If you were to choose between an ETF like VWCE (TER 0.22%), IWDA + EMIM (TER ~0.20%), or VFEA + VGVF (TER 0.13%), which one would you chose and why? They all have different facets, AUM and TERs, though they track very similarly.
Thanks.
Hi Plebeu, welcome to my blog 🙂
My answers:
1) I have a slight preference for Vanguard (https://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/), but it’s not a strong one. In general I find that Vanguard US domiciled ETFs are better, while EU (IE or LU) domiciled ETFs are more or less comparable, with iShares closing the gap. I don’t think it’s a big issue though. If you’re blocked by this issue you’re doing it right. A lost +2% day in the market would take 30 years of ETF quality difference at this level of optimization
2) So you’re going to invest in EU domiciled funds. I’d go with iShares. Both VFEA and VHVE AUM are minuscule (few M$). But sincerely, it’s not a huge deal.
Grüezi Mr Rip,
Is still in 2024 for a swiss resident IB the best option over 24k in your opinion?
Thanks!