http://www.tdameritrade.com/upto500

and runs through 7/15/2011. The fine print is as follows

Offer valid for one new Individual, Joint or IRA TD Ameritrade account opened by 07/15/11 and funded within 30 days of account opening with $2,000 or more. To receive $100 bonus, account must be funded with $25,000-$99,999 within 30 days of initial minimum funding. To receive $250 bonus, account must be funded with $100,000-$249,999 within 30 days of initial minimum funding. To receive $500 bonus, account must be funded with $250,000 or more within 30 days of initial minimum funding. If you open a new TD Ameritrade retirement account, cash awards are valid within your IRA only and non-transferable to another existing TD Ameritrade account. Please consult a legal or tax advisor for the most recent change to the U.S. tax code and for rollover eligibility rules. Offer is not transferable and not valid with internal transfers, Amerivest-related accounts, TD Ameritrade Institutional accounts, current TD Ameritrade accounts or with other offers. Qualified commission-free Internet equity or option orders must execute within 60 days of meeting minimum funding requirements. Contract, exercise, and assignment fees still apply. Limit one offer per account type. Account must remain open with minimum required funding for 12 months or TD Ameritrade may charge the account for the cost of the cash awarded to the account. TD Ameritrade reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. Please allow 3-5 business days for any cash deposits to post to account.

Taxes related to TD Ameritrade offers are your responsibility. Retail values totaling $600 or more during the calendar year will be included in your consolidated Form 1099.

Since I already have an existing account with TD Ameritrade, I wanted to check if I can qualify. This is the reply to my inquiry

Yes, you can use that promotion if you open another account.  Please let us know if you need further assistance.  We really appreciate your business.

I opened a new account online. The account application and the credit of bonus went through very smoothly and quickly. The following is the timeline:

• 5/30/11 (Memorial Day) : Submitted application online.
• 5/31/11 : Faxed in signature form and asset transfer request in the morning. Later that day, received an acknowledgment that the asset transfer request was received.
• 6/3/11 : Assets were transferred into the account. The new account was credited with the new account bonus as well as 100 free trades.

From start to receiving the bonus, it took 4 business days. Now I just need to keep the assets there for the next 365 days.

Related posts picked by plugin:

• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)
• January 12, 2009 — Higher new fees at Tradeking (1)

I spoke to customer service when the rates were first revised and they agreed to grandfather me to the more-friendly rate schedule. This more-friendly rate schedule is still available at their sister brokerage Investrade.com.  The current rate is as follows:

Anyway, I started taking advantage of their low margin rates but in the first quarter, I was hit with a substitute dividend payment in an ETF I was holding in that account. This is the definition of a substitute payment from Fidelity:

Substitute Payments
Substitute payments are payments received in lieu of dividends, interest, or other payments. They may be generated, for example, where a security has been lent to a third party (such as a broker) over a dividend record date. When an investor has a debit balance in a margin account, securities in the account are often eligible to be lent. If the shares are lent over a record date, the investor should receive a substitute payment equal to the amount of the dividend. Although the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) introduced lower federal tax rates for qualified dividend income, substitute payments are not taxed as qualified dividends but are instead taxed as ordinary income. Substitute payments in lieu of dividends and tax exempt interest are reportable in Box 8 of Form 1099-MISC.

So basically, with a substitute dividend payment, you get taxed at the full income tax rate instead of the preferential (15% for most tax payers) qualified dividend tax rate (if the dividend was originally qualified).

The negative consequence of this could be huge. For an ETF like VEA, I could get a year-end dividend in the range of a few thousand dollars. If it gets disqualified, my additional taxes could run into several hundred dollars.

There are a few ways to avoid this

1. Move the assets to a brokerage that “gross-up” the dividends to compensate for the additional taxes you have to pay. I only know of two brokerages that have this voluntary program — Fidelity and TD Ameritrade. As far as I know, VBS (Vanguard) and WellsTrade do not offer this. eOption also does not offer this. Edit: Schwab also offers this voluntary “gross-up” program.
2. Move the assets to the cash position. Some brokerages let you specify the “account type ” of each asset, whether it is “cash” or “margin”. eOption offers this and I moved the assets that potentially produce qualified dividends to “cash”. I left the non-dividend producing assets in “margin”. I don’t believe VBS lets you do this though; all the assets in each account must be the same “type” in VBS.
3. Do not keep a debit balance. If we read Fidelity’s definition carefully, it says that if “an investor has a debit balance in a margin account, securities in the account are often eligible to be lent”. So technically if there is no margin balance, no shares should be loaned out. Personally, I do not regard this method as a fail-safe method. When you sign on the dotted line for a margin account, you are already giving permission to the broker to lend out your shares. It could be possible that the broker will refrain, as far as possible, from lending out your shares in this scenario, but I think there is no guarantee that this would never happen.

Note: FWIW, my experience is that method 3 seems to be true. Until the eOption experience, I have never received a substitute payment with the many margin accounts I have had over the years. The reason could be simply because I have never kept a margin balance except at eOption.

Reference

[1] http://www.fool.com/personal-finance/taxes/2003/12/05/dividend-tax-breaks-at-risk.aspx

Related posts picked by plugin:

• March 27, 2010 — Reducing income during retirement to qualify for healthcare subsidy (1)
• July 30, 2009 — Squeezing out more tax efficiency from my portfolio (1)
• July 22, 2008 — Running out of tax-deferred space (2)
• April 22, 2008 — Specific share identification mutual fund redemption at Vanguard (1)
• January 31, 2008 — Tax harvesting from 529 plan? (0)

• 02/2008 : Introduced 100 free trades for PMA package with $25k or more.
• 08/2008 : Eliminated the respectable money market sweep funds and replaced them with a crappy bank account sweep.
• 12/2008 : Eliminated RMMXX, a relatively high yield MMF at that time, for purchase.
• 01/2009 : Close out fee increased from $50 to $75.
• 03/2010 : Close out fee to increase to $95.

In addition, Wells Fargo has been “cracking down” on people who did not actively use the checking account of the PMA package. These accounts are marked as “dormant” and quite a few people reported having to jump through some hoops to re-activate them again.

With the talk of additional tax on big banks, I won’t be surprised to see another round of fee increase on the horizon. The money for the taxes has to come from somewhere.

Wells Trade did have some good points. Their reps are quite friendly and helpful, and the trading system, while nothing fancy, generally works. They also introduce a good online feature, which is the capability to track and specify specific tax lots for trading, very helpful for a taxable account.

Anyway, because of my upcoming Roth conversion, I am done with Wells Trade. I will be contributing $75 to them for the free trades they have given me over the past three years or so when I close out my accounts later this month. Good luck to all those sticking with Wells Trade.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)
• January 12, 2009 — Higher new fees at Tradeking (1)

eOption.com (affiliated with placetrade and investrade) (see important update below)

• BC + 1.5% = 3.5% for up to $50,000
• BC + 0.75% = 2.75% for $50,000 to $99,999
• BC + 0.0% = 2.0% for $100,000 to $249,999
• BC – 0.5% = 1.5% for $250,000 to $499,999
• BC – 1.0% = 1.0% for $500,000 and above
• Interest @ 2.75% for $80k a month = $183.33, after tax = $100.83
• Interest @ 2% for $100k a month = $166.67, after tax = $91.67
• Trading fees : $3 per ticket
• ACH transfer limit = $50,000 a day

Just2trade

• BC + 0.75% = 2.75% for up to $100,000 (confirmed with them that there is a typo on their margin rates page)
• BC + 0.5% = 2.50% for $100,000 to $250,000
• Interest @2.75% for $80k a month = $183.33, after tax = $100.83
• Interest @2.50% for $100k a month = $208.33, after tax = $114.58
• Trading fees : $2.50 per ticket

Interactive Brokers

• BM + 1.5% = 1.65% for up to $100,000
• BM + 1% = 1.15% for $100,000 to $1,000,000
• BM = Feds fund rate = 0.15%
• Interest @1.65% for $80k a month = $110.00, after tax = $60.5 + $10 monthly fee
• Interest @1.15% for $100k a month = $95.83, after tax = $52.71 + $10 monthly fee
• Minimum fee $10 a month
• Trading fees : 0.005 per share, minimum $1
• 2nd withdrawal in the month : $1 by ACH, $4 by check, $10 by wire

Options House

• BC + 2.25% = 4.45% for up to $50,000
• BC + 1.45% = 3.45% for $50,000 to $499,999
• BC + 0.45% = 2.45% for over $500,000
• Interest @ 3.45% for $80k a month = $230, after tax = $126.5
• Trading fees = $2.95 per ticket

WellsTrade (Wells Fargo) (called 4/28/09 10.10am)

• WFI, Wells Fargo base rate = 4.00%
• WFI + 3% = 7% for up to $10k
• WFI + 2.75% = 6.75% for $10k to $25k
• WFI + 2.25% = 6.25% for $25k to $50k
• WFI + 1.75% = 5.75% for $50k to $100k
• WFI + 1.25% = 5.25% for $100k to $250k
• Trading fees : up to 100 free trades a year

Note: BC is the broker call rate, currently 2%. The “after tax” number reflects a 45% combined federal and state marginal income tax bracket.

Comments

The absolute lowest rates are from Interactive Brokers but they want to charge you a minimum of $10 in trade fees a month. If your trade fees do not add up to $10, they will deduct $10 anyway.

The next best rates are from eOption.com — at BC = 2% for amounts from $100k to $250k. This rate is lower than the interest rates from leading savings accounts, and is also cheaper than a HELOC loan.

I included the margin schedule at WellsTrade for comparison only because I have an account there. Their rates are not at all competitive.

I also looked at some other brokerages like Fidelity, VBS (Vanguard), TD Ameritrade, Scottrade, Firstrade, Tradeking, Etrade, Charles Schwab, Options Express, Sogotrade, MB Trading. Their rates are all higher.

Other resource(s)

[1] List from Broker Reviews.

Update 8/03/2009

eOption increased their margin rates as of 8/1/09. The new schedule is as follows (BR, base rate is 5%):

• BR = 5.0% for up to $50,000
• BR – 0.5% = 4.5% for $50,000 to $99,999
• BR – 1.0% = 4.0% for $100,000 to $249,999
• BR – 1.5% = 3.5% for $250,000 to $499,999
• BR – 2.0% = 3.0% for $500,000 to $999,999
• BR – 2.5% = 2.5% for $1,000,000 and above

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• February 26, 2009 — Tradeking releases my shares (1)
• January 12, 2009 — Higher new fees at Tradeking (1)

First of all, Tradeking has significantly increased its margin interest rates. Tradeking used to have quite competitive margin interest rates but no more. The following is an email from Tradeking sent earlier this month and their current margin interest rates:

Debit Balance                   Rate
$0 – $49,999                   6.5%     (Broker Call + 4.5%)
$50,000 – $249,999        5.5%     (Broker Call + 3.5%)
$250,000 +                      4.5%     (Broker Call + 2.5%)

If I remember correctly, their old margin interest rate schedule was

Debit Balance                   Rate
Any balance                    (Broker Call + 1.0%)

For comparison, the current margin interest rates at Just2Trade.com are just

Debit Balance                   Rate
under $10,000                 2.75%     (Broker Call + 0.75%)
$10,000 – $249,999        2.50%     (Broker Call + 0.50%)
$250,000 – $499,999      2.25%     (Broker Call + 0.25%)
$500,000 +                      1.50%     (Broker Call – 0.50%)

The second change is that Tradeking has quietly added annual maintenance fees to its check writing products (there was no notification email from Tradeking about this). The base “Gold” checking product now has an annual fee of $50 while “Platinum” check writing has an annual fee of $75. Check writing used to be offered free.

I do not track the other fees. Those might be changed as well.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

The link to this annoucement is

https://invmnt.wellsfargo.com/whatsnew_wellstrade.html

Keywords : Wells Fargo PMA, Wellstrade.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

Basically the issues started after I indicated my intention to transfer my business elsewhere. Tradeking started a lock-down on my account, restricted my account and then told me that any money that I transferred by ACH to them cannot be returned for 60 business days.

60 business days! That’s a minimum of 12 weeks or almost 3 months. I wouldn’t have ACH my money to any broker if I knew that my money is going to be stuck for 3 months!

Anyway, Tradeking sent me an email that pointed me to the following link:

http://content.tradeking.com/wiki/display/tkservice/Funds+Availability

[Link to screenshot]

The link states

ACH Deposits
- 5 business days to clear for trading
- 60 business days from date of deposit to release funds from the account – return funds via ACH only

From the wording in the email, it is intended to inform me that the ACH holding policy of 60 business days had been in place for a while. It’s my fault that I did not see it.

After I checked carefully, I noticed that the page in question was modified on 12/08/08 (see bottom of the page: 12/08/2008 Version 003) AFTER my issues with Tradeking started. I then hunted for the previous version. The previous version, which is still in Google’s cache currently (cache date Nov 24, 2008 12:44:48 GMT), stated a ACH holding time of 10 business days.

ACH Deposits
5 business days to clear for trading.
Allow 10 business days from date of deposit to release funds from the account – return funds via ACH only.

To see this, type

site:content.tradeking.com ACH availability

into Google’s search box, and then click for the cache version in the first search result.

You can also access it via this DIRECT LINK. Note that since this is in Google’s cache, it will be overwritten in the next cache update and you might not be able to view it a few weeks after the date of this post. So I have kept a screenshot HERE.

I understand that Tradeking can probably change the terms and conditions at any time they like (most likely covered in the client signup agreement), but in this case, I don’t think that this is a fair or reasonable business practice, especially it appears that the modification were made to discriminate against me.

I also don’t consider it a reputable business practice to change the terms and conditions without advance notification to all other investors. I am now really getting concerned with the integrity of this brokerage firm.

For investors who already have an account with Tradeking, I urge you to consider carefully before you ACH new money to Tradeking. You might not be able to see your money again before waiting for 3 months. You probably might also want to evaluate if you want to continue using them.

By the way, the ACH holding time stated at the point of the ACH transfer page is still showing a 10-day holding period:

They should change this to 60 business days to avoid misleading investors.

Keywords: complain, complaints, sucks, issues, problems, cash balance, ACH, wire, review, overview, shady.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

Because Tradeking has an ACH limitation of $10,000 per transaction, I had to split up my transfers into chunks of this size or smaller to have my money transferred. Tradeking happily accepted the money without complaints. According to their website, all incoming ACH transfers are subject to a 10-day hold before withdrawal:

After several rounds of ACH transfers, I found that trying to keep track of which ACH has gone through, which has not, and keeping a constant reminder to submit an ACH everyday is too much of a chore. I called their customer service to see if they could initiate a transfer in a larger amount. This was flatly denied, never mind this is what their website says:

Next, I checked to see if they could reimburse my wire transfer since before sign up, their customer told me that this could be arranged in an earlier email:

We would cover the banks wire fee for your first wire, and depending on how much you fund with perhaps future wires as well.

This was also denied.

Frustrated, and deciding not to deal with a company that says one thing in their statements but in reality does another, I decided to take my business elsewhere. I wrote out two checks from my account and starting withdrawing my money by ACH, back to the financial institution which originally funded the Tradeking account.

All this went OK for a while until the day when I called to ask about and then requested to DTC out a position I have with Tradeking (DTC is an electronic transfer of shares from one broker to another). In the same phone call, I indicated my intention to move my business out from Tradeking. BIG MISTAKE.

From that point onwards, Tradeking essentially placed a lock-down on my account. They cancelled my ACH withdrawal requests without any notice. The online ACH withdrawal requests would be marked “processed” but money was never transferred. They then told me that they are going to put a 60-day hold on any withdrawals from my account and would freeze my DTC transfer out. The stated reason was “risk management” but I suspect the main reason is that this is one of those brokers which would drag its feet and give hell to any clients trying to transfer their assets out to another firm.

My account is flagged as restricted.

I am stuck with a sizeable cash balance being held hostage at Tradeking. While being stuck at Tradeking, they will earn a miserable 0.05% APY (see below) whereas I could have easily gotten at least 3.5% from one of the many online savings accounts. Obviously, Tradeking will gain from this freeze on my cash balance at my expense because kick-backs / 12b-1 / rebate arrangements from the cash sweep firm back to the brokerage firm are fairly common.

Crappy Sweep Account Yield of 0.05% APY at Tradeking

I have already tried a few times to get Tradeking to at least return my cash balance but without success.

My only choice now seems to be to wait out the 60 days and then DTC out the position. I am wary however, because I don’t know what other tricks Tradeking will throw at me when I re-submit the transfer out request 60 days later.

If you are planning to sign up with Tradeking or even already have an account with them, I urge you to re-consider carefully because you might have to go through a lot of hassle getting your money back. When you ACH your money in, at the point of transfer, you are told that there is a 10-day hold before you can withdraw it. But if they do not like you in future, they will conveniently cite some “risk management” reason and hold your money hostage for a long time.

In my opinion, Tradeking should not mislead investors by stating a 10-day hold for ACH transfers. They should state clearly that there is a 60-day hold on ACH deposits before it can be withdrawn. At least investors would be able to decide for themselves beforehand if they want to ACH their money to Tradeking and do business with such a broker. If this 60-day hold statement was there, I wouldn’t touch Tradeking with a 10-foot pole.

Weblinks: [1] [2]

Keywords: complain, complaints, sucks, issues, problems, cash balance, ACH, wire, review, overview, shady.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

These two brokers are very similar. They both clear through Legent Clearing and both offer the MaxIt tax manager system, which allows you to specify a certain tax strategy (“Minimum Tax”, “First-In First-Out”, “Last-In First-Out”, “Maximum Gain” or “Average Cost”) for every security trade. This system is great when you want to sell only specific tax lots to minimize on taxes.

In terms of commission costs, Just2Trade wins hands down. Their stock / ETF trading commission is only half that of TradeKing ($2.50 versus $4.95) and their margin interest rates is also at least 0.25% lower than TradeKing.

Margin interest rate is also lower at Just2Trade (by at least 0.25%). Current margin interest rate for amounts less than $10,000 is 3.50% at Just2Trade while is it 3.75% at TradeKing. For a margin balance between $10,000 to $250,000, Just2Trade’s margin interest rate drops to 3.5%. The margin interest rate at TradeKing is fixed at 3.75% for all balances.

At Just2Trade, you can also trade mutual funds cheaply for $2.50 per transaction. At TradeKing, the fee is 6 times more, at $14.95.

I also tested their customer service with questions and requests using email, and both replied quickly (in 2 hours or less on a business day). However, unlike Ameritrade’s customer service, which you sometimes can get a break on certain fees or free trades, I found TradeKing’s customer service to be basically useless when you try to request for some concessions. They can only reply with a canned message that repeats their company policy. I have yet to try asking for any concessions from Just2Trade.

Looking beyond the fees, each broker has a severe shortcoming. For TradeKing, it is their online-ACH transfer limitation of $10,000 each day. I called them, and tried to reason with them to let me transfer in a larger sum of money for investment, but they were very stubborn about it and it was a no-go. In my opinion, their $10,000 transfer limit per day is way out-dated, as most brokers typically have $100,000 ACH transfer limit a day.

For Just2Trade, they do not have a $10,000 ACH transfer limitation per day; their disadvantage is in their cumbersome trading system. Specifically, it does not allow you to change the order once it is submitted. To change the order, the only way is to cancel it and re-submit. This means that if you want to change the price of a limit order, you have to first cancel it, and then re-key and submit all the order information again. This is a big swithc off for me.

In the end, I am inclined to stay with Tradeking for the moment. But if Just2Trade can update their traking system to include order modifications (customer service said that this improvement is in the pipeline), I would probably say good bye to TradeKing and move everything over to Just2Trade in a heart beat.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

However, recently, I received an email from Wells Fargo:

02-AUG-08

Our records indicate that your Bill Pay fee account XXX-XXXYYYY has been closed.  A Wells Fargo fee account is required for your Bill Pay service.  To select a new account for automatic payments, go to the Payee Details screen for each payee and select a new Default Payment Account in the Payment Details section.  If this is the only account linked to your Bill Pay service, please contact us at 1-800-956-4442.

This is not good. I log-on to my account online and true enough, my checking account is on longer listed. If the checking account is closed, then it would mean that my access to the free trade program would be terminated.

I called up Wells Fargo. The first CSR told me that my account is not closed but is “dormant” and she can fix it for me. I then asked her for the reason and she says that it is because there is no activity. I said there is one transaction in April, and her reply was that she can only look back to June. Anyway, she then requested to place me on hold. About two minutes later, she came back and told me that I need to re-activate the account “at a local branch”. I press her to see if she can do anything and she says that there is absolutely nothing she can do for me to reactivate through the phone. I was disappointed, because I hate to visit a branch and perhaps have to listen to some sales pitch while they re-activate the account.

I decided to call Wells Fargo again, hopefully I can get a more helpful CSR. This time, a gentleman answered the phone. I explained that I have a “closed” account and requested that he re-activated it. He put me on hold for a minute or so and told me that he cannot re-activate it but I can re-activate it myself by using making a purchase with using a pin-based transaction on the check card. I asked him if using the check card at an ATM machine would work. He said yes. I thanked him for his time.

Later that same day (8/2/08), I used the check card and successfully pulled out $20 from a Wells Fargo ATM machine. I also deposited a small check through the ATM to “increase the activity”. I checked online but the account is still not listed. Perhaps it will come back on the next business day.

8/4/08 Monday (next business day) morning: my checking account is still not listed. I will wait for tomorrow and see if it comes back, and update this post.

8/5/08 Tuesday: account is still not activated. Called Wells Fargo again. This time the CSR is more helpful. She agreed to send in a request to activate the account but it will take 3 to 5 business days. I asked her what caused an account to be flagged as dormant. She told me that any account without any “physical” activity for one year would be flagged as dormant. Physical activity means that you have to perform the transaction through the teller; pin-based (e.g. through the ATM) or electronic transactions (e.g. ACH transfers) DO NOT count. Oh well, looks like a trip to the bank is unavoidable if I want to get it re-activated quickly. This also means that to avoid future hassles, I should visit the branch and perform a transaction with the teller at least once a year.

8/6/08 Wednesday: My checking account has been re-activated. To see the checking account online again, I do need to choose “Add Accounts” under the  “Account Services” tab to add the account again. You can only add it back if the account is no longer flagged as dormant. Anyway, I am not sure which action caused the account to be re-activated again: whether it was my transactions last Saturday or the request I made through the CSR on the phone yesterday. I do need to think of a way to prevent it from being flagged as dormant in future.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

Many investors are aware that when they sell a mutual fund or stock with a gain, they have to pay capital gains taxes for it. On the other hand, if they sell with a loss, they can claim a tax loss on it, as long as the transaction does not run foul of the wash sale rule. Fairmark has an extensive section “Capital Gains and Losses 101” that covers this in detail.

Unless an investor is selling the entire holding, it is usually best to identify specifically which shares are being sold. However, the identification part is somewhat confusing. The following paragraph from Fairmark explains why this is so:

The traditional way to specify the shares you’re selling is in the form of an instruction to your broker:

Sell 50 shares XYZ from the lot purchased on March 12, 2005.

This makes it sound like the broker has to do something special — possibly locate those specific shares, or at least make a record of some kind indicating what shares you sold. Some brokers will tell you “we don’t offer that service.” But in reality the only thing the broker has to do, besides executing the sale transaction in the normal way, is send you a written confirmation that you specified shares from the lot purchased on March 12, 2005.

This post is a review of my experience with specific share identification mutual fund redemption with Vanguard.

The Process

Prior to the day of redemption, I created a list of the tax lots I wanted to sell. These are basically the tax lots which have the highest cost basis and which will give me the maximum capital gain loss which I can claim on my tax return next year.

I then created the following message (which is a variant of the message, as suggested by seugene, from reference [1])

Subject: Specific Identification Sale of Mutual Fund

Dear Vanguard,

This is to inform you that for the following trade(s) placed today in my taxable joint account, I want to use the specific share identification method for capital gains calculation.

(A) Vanguard Total Stock Market Index Admiral Fund VTSAX, redeeming XXX.YYY shares from the following lots:

1) MM/DD/YY XX.YYY shares
2) MM/DD/YY XX.YYY shares

I understand that I am responsible for tracking my cost basis.

Please acknowledge that you have received this message.

Thank you.

Dated MM/DD/YYYY.

On the day of the redemption, I sent the above message via a secure email to Vanguard and then placed the sale of the specified number of shares online as per usual.

A few days later, I received the following confirmation:

Dear indexfundfan:

Thank you for your e-mail regarding your desire to use the specific share identification method (as defined in the Internal Revenue Code) for purposes of determining your cost basis. I am responding on behalf of your Flagship representative, XXX.

We acknowledge receiving your specifications, identifying the particular shares purchased on several dates to be redeemed from your Vanguard Total Stock Market Index Admiral Fund in the account #XXX. To assist you in making an adequate identification of such shares, we are confirming your specifications as outlined below in accordance with federal regulation section 1.1012-1(c)(3) of the Internal Revenue Code.

You are redeeming XXX.YYY shares from the following lots purchased on the following dates:

1) MM/DD/YY XX.YYY shares
2) MM/DD/YY XX.YYY shares

In the event you were using a different method to determine cost basis (for example, average cost method), you may need written consent from the Internal Revenue Service (IRS) to change to the specific share identification method. Consult your tax adviser if you have any questions concerning tax reporting methods or for additional assistance.

Please be advised that Vanguard’s recordkeeping systems support the average cost basis method of basis determination, not the specific share identification method. Therefore, it is your responsibility to keep sufficient records to support your basis determination under the method you have chosen, including but not limited to tracking the cost and related gain or loss of shares [exchanged, redeemed] for purposes of reporting that information to the IRS.

Additionally, since you are using the specific share identification method for tax reporting, any average cost basis statement that you may receive from Vanguard for this fund and account should be disregarded.

I have forwarded a copy of this e-mail to your representative. If you have any further questions, you may contact your Flagship Representative at 1-800-XXX, extension XXX. If your representative is unavailable at the time of your call, the next available trained representative will be happy to assist you. If you prefer, you may ask to be transferred to his voice mail. He will promptly return your call.

Flagship’s business hours are Monday to Friday from 8 a.m. to 10 p.m. and Saturdays from 9 a.m. to 4 p.m. Eastern time. You may also feel free to visit our website at www.vanguard.com, 24 hours a day, 7 days a week.

Sincerely,

XXX
Registered Representative
Vanguard Flagship Services

I printed a copy of the above to PDF and save it together with the secure email I had sent out a few days earlier.

That’s it. I now have a written confirmation that the brokerage had received my instructions to redeem specific shares of my mutual fund.

PS. The Fairmark article linked above has a brief section discussing the “legality” of whether an email confirmation (versus a paper confirmation) is sufficient. For my personal records, I am inclined to think that the secure email is sufficient, but another person’s situation could be different.

Reference

[1] Boglehead forum discussion.

Related posts picked by plugin:

• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• April 27, 2007 — Sogoinvest did not classify qualified dividends (4)
• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• March 27, 2010 — Reducing income during retirement to qualify for healthcare subsidy (1)
• January 15, 2010 — Adios to Wells Trade (7)

Prior to conversion

My VEIEX holding is in the taxable account with Vanguard. From the prospectus, it is stated that:

If you convert your conventional shares to ETF Shares through Vanguard Brokerage, all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard.

I was especially curious about the “100% tax-free” part because it implies that VBS must be supporting some kind of fractional share tracking. I sent Vanguard a secure email, asking specifically if VBS supports the trading of partial ETF shares. The following is their reply:

With regard to your question, depending on the conversion rate of the fund, it could be possible for you to end up with fractional shares of an ETF. In order to sell fractional shares in your brokerage account, you would need to sell your entire whole share position in the given security. Any remaining fractional shares will automatically be sold on the settlement date of the transaction, which is normally three business days after the trade date. For example, if you own 500.346 shares of XYZ Inc., you would simply enter an order to sell 500 shares of XYZ. When the trade settles three business days later, the fractional shares are automatically liquidated and no additional commissions are charged.

I think their reply is reasonable: VBS does not support the trading of partial shares; but if you sell the entire holding, the partial shares will be liquidated automatically without any additional charge.

Note: I asked the same question on the Bogleheads forum and received answers from jeffarvon and stan1 even before Vanguard replied.

The conversion

I called up Vanguard Flagship service on a Wednesday morning and told the rep what I wanted to do. He first made sure that I already have a VBS account and then transferred me to the VBS department. The VBS rep confirmed the following:

• No fees for the conversion for Flagship clients.
• The conversion is completely tax free. Vanguard will exchange fractional shares if necessary.

I was also told that I can enter the cost basis of the tax lots into the system at VBS after the conversion. The tax lots can be broken into fractional share if necessary. I told the rep to go ahead with the conversion.

On Wednesday night, I noticed my VEIEX holding was zeroed out. Under the “Transaction History” tab, an entry with transction type “Conversion from” was added. The mouse-over balloon shows the information on the conversion prices (for VEIEX and VWO) and the number of shares of VWO I would get. At this point, the VWO shares have not been deposited into my VBS account.

On Thursday night, the correct number of VWO shares were deposited into my VBS account.

After the conversion

What that is left for me to do after the conversion is to enter in the tax lot information. I had already prepared this information before hand and calculated the equivalent number of VWO shares for each tax lot in a spreadsheet.

To enter the cost basis, I clicked on the “Cost Basis” link under the VBS account, and then followed by the “Enter cost” link. This takes me to the following page:

By default, only five lines for data entry are available but more lines can be added by using the “save and insert more lines” link. I successfully entered in 32 tax lots. After I submitted the information, it took one business day for the data to be updated.

Overall, the conversion process was done without any hiccups. The most painful part was actually for me to get information of the 32 tax lots and then enter them into the system.

Related posts picked by plugin:

• February 6, 2008 — ETF transfer from Vanguard to WellsTrade (8)
• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• August 7, 2009 — Muni ETFs with in-cash creations (0)

Anyway, in this post, I wanted to get two things off my chest before I close the chapter on Sogoinvest.

1. After one year, Sogoinvest still did not get the qualified dividends right. In April 2007, I complained to them that some of my dividends were incorrectly classified. I never received a satisfactory reply, other than the canned “we will look into it”. This same thing happened for the 1099-DIV form I received this year. All dividends were classified as “unqualified”. This time round, I did not even bother contacting them.

2. On Apr 4, 2008, just after I have completed my tax return, Sogoinvest sent out an email informing me that they have revised the 2007 1099-DIV and 1099 Summary forms. This correction is certainly very late in the tax season, coming just about 10 days before the tax deadline. By this time, many people would have already filed their returns, and these people would have to spend the time and possibly additional money to file an amendment. What is Sogoinvest thinking? Fortunately for me, the changes are minor and I have not sent out the tax return by that date.

In closing, I am certainly glad that I would not have to deal with Sogoinvest from now on.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

Today, DaveTH posted an alert on the Boglehead’s forum:

Wells Fargo seems to have a real problem with paying decent returns on idle cash. Last July they switched from good money market cash sweep accounts to a pathetic replacement that pays next to nothing.

Many people dealt with the change by manually buying shares of 3rd-party money market funds such as the Vanguard Prime MM and the Russell Institutional MM.

Until Jan 31st that strategy worked fine because it did not eat up a free trade. Well as of Jan 31 most purchases of 3rd-party MM funds will cost you a free trade. Even worse, they retroactively went back and decremented my remaining free trades for MM trades I made in 2007!

So, it appears that this ‘trick’ is over. I think to get a MMF now, we need to revert to using Well’s Fargo’s WFGXX (currently 2.56%) or STGXX (currently 2.86%) or Pioneer’s Cash Reserve PMTXX (currently 3.39%). These are still listed as NTFs and they each requires a $1k minimum investment.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

I was pleasantly surprised by the speed at which this was accomplished. I faxed in the request to WellsTrade on the morning of 2/04/2008 Monday. This evening (2/06/2008 Wednesday), I noticed that the shares have already been deposited into my WellsTrade account. All done in a matter of two business days!

Kudos to both WellsTrade and Vanguard for not dragging their feet in this matter!

PS. Vanguard does not charge any fee for out-going transfers.

Related posts picked by plugin:

• April 18, 2008 — Review of VEIEX to VWO ETF conversion at VBS (4)
• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• August 7, 2009 — Muni ETFs with in-cash creations (0)

At 13:17, I received an online notification email informing me that my order was filled. I was surprised because as far as I know, Wells Trade does *not* support before- and after-hours trading.

I checked the order status and the trading history. The following are what I saw:

Apparently, my order was filled in the after-hours trading at around 13:13. I know that sometimes day orders continued to be filled a few minutes after the closing bell, but I have never heard that a day order would still be filled 13 minutes after the closing bell. It seems like something strange is going on here.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

I responded by manually buying into WFGXX (Wells Fargo Government MMF), which is listed as an NTF (no-transaction-fee) mutual fund. This fund has an expense ratio of 0.64%, with a current 7-day yield of 3.87%. This is definitely better than the 1.01% APY from the default cash sweep option.

Recently, I became aware that there is another option. According to this post from FWF, Wellstrade also offers the RMMXX (Frank Russell Institutional) MMF for no transaction fee. This MMF has an expense ratio of 0.15% and a current 7-day yield of 5.05%. This yield is an improvement of almost 1.2% from WFGXX. A buy or sale transaction also does not appear to count towards using one of the free trades (see the messages that follow from the FWF link).

One issue in general with using MMFs in the above fashion for non-margin or IRA accounts is that since MMF trades typically settle on the next business day, I cannot purchase a stock or ETF on any day I want. I always need to plan ahead by liquidating the MMF one business day before the planned purchase. This could sometimes be inconvenient. However, the interesting thing is that unlike MMF sales, the proceeds from a stock or ETF sale is available immediately to purchase another stock or ETF.

With the above in mind, I think my new strategy will be to keep most of the cash balance in RMMXX. I will however keep a small portion in a very short term bond ETF, like SHV (iShares Lehman Short Treasury Bond ETF). This ETF can be liquidated whenever needed to allow me to purchase a stock / ETF on any day I want. The income distributions from SHV will be reinvested into RMMXX once a month. The minimum initial and subsequent investment for RMMXX appears to be just $1.

One possible issue is the trading cost associated with this short-term ETF. It appears however that the impact on any trading spread of this ETF is very small. Currently, the spread is only one cent out of ~$110, giving a spread of less than 1 basis point (0.01%). With a spread this small, I would not worry about it. However, nevertheless, there is a disadvantage; and that is it will use up one of the free trades.

Oh, well, you have to give up something.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

Recently, I learnt that TD Ameritrade is offering $7 (instead of $9.99) trades for new clients if they sign up though a promotional link. The link,

http://www.tdameritrade.com/7

is still active at the time of writing. It does however state an expiry date of September 30, 2007.

I wondered if I could get onto this deal, so I sent them a secure mail last week telling them that I have been a long time as well as an Apex client. I requested that they put me into the $7-commission plan, otherwise I might have to consider another “alternative trading platform”. (Note: When I sent in the email, it was already past the September 30 deadline).

I received a reply the next day:

This is a new account offer valid with funding a new account with new funds. I would be willing to make an exception for you. If you make an additional deposit to your account of at least two thousand dollars then I would be glad to extend this offer to you.

I am quite pleased with the reply. I made a $2000 deposit and here’s the confirmation email:

Your commission schedule has been reduced to $7 for Internet equity trading per our agreement. We look forward to continuing doing business with you in the future.

So for those using TD Ameritrade, I guess it does not harm to just send in an email to ask for the $7-commission plan. The worst that could happen is that you get rejected; on the other hand, you might get lucky and receive the 30% off your trading commission.

PS. One additional comment: even though TD Ameritrade may not have the lowest online trade commission, it has always been quite generous with its account bonuses and responsive to their clients’ requests. And their online ACH system remains one of the fastest around : a request submitted during business hours gets executed the next business day.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

It is now official. As of August 15, Vanguard updated their website to reflect the introduction of a new class of “Voyager Select” clients. And at the same time, Vanguard also modified the requirements for the Voyager and Flagship clients.

In general, most would be happy with the new changes although there some losers with the changes — the three most significant are the following:

• Flagship now requires $1m in Vanguard mutual funds or Vanguard ETFs. Previously only $500k was required; the other $500k could be in non-Vanguard mutual funds, ETFs or stocks.
• To qualify for the Vanguard Advantage Account would now require Voyager Select status (>$500k). Previously, only $250k was needed.
• To get a free financial plan from a CFP, Voyager Select status is now needed. Previously, only $250k was required.

Below is a summary of the changes:

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)

It looks like Fidelity will be rolling out a new checking account soon (rumored to be August 1, 2007). This account will be very similar to Charles Schwab’s checking account, with no minimum balance, free checks and ATM rebates. The link to Fidelity’s myCash account states the following features:

• 3.50% APY, higher than most checking accounts
• Free ATM refunds⁴-if you pay a fee, we’ll pay you back
• No account minimum balance or nuisance fees
• Free state-of-the-art online Fidelity BillPay^®
• No annual fee Fidelity Investment Rewards Visa Signature^® credit card lets you earn points that can be redeemed for cash into a mySmart Cash Account^SM at a 1.5% rate.²
• Free ATM/debit card
• Automatic and on-demand transfers between a mySmart Cash Account and a bank (EFT) or brokerage account
• Self-funded overdraft protection — link to other Fidelity brokerage accounts to automatically prevent bounced checks and cash shortfalls automatically
• Free automatic investing option schedules cash transfers from your bank to a Fidelity brokerage account to purchase mutual funds.

Additional reference: LINK to the FWF discussion.

Related posts picked by plugin:

• June 4, 2011 — TD Ameritrade New Account Bonus (0)
• January 26, 2011 — Substitute Dividend Payments in Margin Accounts (0)
• January 15, 2010 — Adios to Wells Trade (7)
• May 9, 2009 — Brokers With Lowest Margin Interest Rates (5)
• February 26, 2009 — Tradeking releases my shares (1)