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FRIP - The Scottrade version of DRIP (Dividend Reinvestment Plan)

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gaffer
6/13/13 12:53 PM
One gripe against Scottrade has been their lack of DRIP (aside from removing their no commission-free ETFs, but thats another topic).
So they have come up with something called FRIP - Flexible Re-Investment Program, which is very similar to a DRIP.
If you have cash dividend paying stocks, you could set your account up so that these cash dividends get collected into a 'pool' of cash and then used to buy other securities at a set schedule. So unlike a DRIP where it gets re-invested in the same security, you can use it to buy something else, commission-free. But you can't buy fractional shares. So if you have $50.00 in your FRIP pool coming from dividends generated by your other holdings, you cannot have it buy VTI (if VTI is at 84.00). It will skip that date. But once you get more cash dividends in your pool, (say its $100.00 now), it can now to buy 1 share of VTI when the next scheduled 'buy' date comes around (assuming VTI is not more than $100.00).

So it:
-is commission free
-has somewhat flexible auto scheduling: monthly, quarterly
-works on 'most' stocks and ETFs.
-maxes out at 5 stocks/ETFs to reinvest in.
-allows you allocate dividend reinvestments by percentage of funds in your pool (60% to VT, 40% to BND)

No to:
-fractional shares
-mutual fund dividends
-limit orders
-margin orders
-interest earned in the pool
WikiPost
6/13/13 12:53 PM
shadow520
6/13/13 2:25 PM
Thanks for the heads up. I will have to check this out.
mikefxu
6/13/13 3:19 PM
Don't know why you would buy Vanguard (VTI) at anywhere else but Vanguard or TD Ameritrade, where it trades for free...but that wasn't your point I guess. I guess it allows you to buy shares you would normally pay commission on, commission free.
gaffer
6/13/13 7:07 PM
mikefxu said:   

Don't know why you would buy Vanguard (VTI) at anywhere else but Vanguard or TD Ameritrade, where it trades for free...but that wasn't your point I guess. I guess it allows you to buy shares you would normally pay commission on, commission free.



Yeah, VTI was just an example. Maybe an ETF that is available commission free elsewhere was a bad idea. The idea is you could 'FRIP' into something like MSFT, QCOM, JNJ whatever, and accumulate whole shares without having to paying a commission.
EggplantWizard
6/25/13 4:04 AM
While it may be peanuts in the scheme of things, I moved all of my accounts out of scottrade after a longstanding relationship with them and to a mix of vangard, fidelity and interactive brokers. The breaking point was the $75 account termination fee which was imposed a couple of years back with no notice, and no opportunity to avoid it. This fee is moderately high by industry standards, though not completely unreasonable, and of course scottrade had the contractual right to alter their fee structure at any time (Read your agreement) -- my issue is with the dishonest 'screw the customer to make a quick buck' tone that aggressively marketing the absence of a particular fee to attract customers and then establishing one of the highest fees in the discount industry overnight sets.

I never had a specific negative experience with scottrade customer service, but it was more difficult to negotiate certain fees and comissions with them even as a client with investible assets that tend to make this easy at other firms, and although the branch offices were responsive and able to handle inquiries almost immediately, complex inquiries or unusual situations could take unreasonably long periods of time to resolve, and the overall experience was somewhat underwhelming.

Scottrade was attractive to me when I had fewer assets, and was newer to investing in general, and I appreciated the low cost structure, ease of use and low minimums. Years ago their $7 trades were 1/2 or less of what many others were charging. (In my younger days, I was regrettably pursuing a quantitative trading strategy with far too low of a reasonable investible base to make it a reasonable thing to do on a risk adjusted basis, and I managed to exceed market returns through dumb luck. I now use relatively a relatively high turnover automated strategy at IB that's essentially completely passive, but shifts risk exposure (beta, and occasionally some leverage) based on valuation metrics I've devised, and when considering backtesting / monte carlo analysis, I expect modest alpha from that was not worth the effort required to write the f*** software and do all of the analysis, honestly -- but hey! You have to learn to properly account for the opportunity cost of your time at some point).

These days, when you consider overall fee structure, value and the ability for services to scale in an appropriate way with your level of net worth, Fidelity and Schwab both offer high levels of customer service with similar commissions and lower overall fees in most area, Vanguard offers a host of lower cost options (absolutely no commission) for the bogleheads / buy and hold inclined set, and Interactive Brokers has absolutely rock bottom rates on almost everything, if you are capable of dealing with their atrocious customer service. Which provider is most appropriate for you probably depends on your net worth and it's balance between tax deferred and taxable accounts, as well as the strategies you intend to pursue.

I realize that this is a little bit off topic for the FRIP post, but I just see this as another too little too late gimmick from Scottrade, where their competition has been offering free dividend reinvestment for years (or in the case of IB, a variable commission structure so low that it becomes essentially irrelevant).

Obviously, the cost itself is immaterial, but scottrade made its zero fee structure to try their accounts a major part of their marketing efforts in the early days of online trading, and there has been a slow but steady decline in service offerings, even for high-ish net worth clients. They used to easily hand out special pricing on comissions, in particular with regard to options in order to be more competitive with other online brokers [option rates are very high still at scottrade], but I am seeing what I perceive to be a deterioration of customer service in their culture, a reduction in most service offerings (though this FRIP thing would have been nice years ago).

Overall, they seem to be targeting the novice investor with limited capital to invest these days, and given my past experience with other firms who have followed this pattern, I would expect additional deterioration in customer service and addition of fees.

The company overall seems to have a poor sense of strategy. I've seen it shift from focusing on cost and customer service, to attempting to provide a trading platform comparable to IB's (with pitiful results, Scottrader Pro), to pushing it's commission free mutual funds (Which were quite poor overall with very high expense ratios, so it was nothing to shed tears over when they closed up shop), to essentially competing with sharebuilder around 7-8 years too late for it to be an innovative concept with this FRIP bs.

I strongly suggest that you find a company that believes in delivering low, stable cost structures over the long run, and has a clearer idea of where it should be going strategically to simultaneously improve your wealth and its AUM.
gaffer
6/26/13 11:08 AM
EggplantWizard said:   

The breaking point was the $75 account termination fee which was imposed a couple of years back with no notice, and no opportunity to avoid it.




Just have the securities transferred out to your new brokerage, but still keep the account open at Scottrade. They don't have inactivity fees, so this could have saved you the $75.00. But I do understand your gripe was how they imposed it, and not really the cost of it.

I think someone on FWF mentioned you can even use Scottrade to pull securities from Brokerage A (Scottrade will reimburse you up to $100.00 that the other side charges you), then have Brokerage B pull the securities that are now at Scottrade.
davidangkor
7/3/13 10:26 AM
I'm concerned about the following text in Scottrade's Terms of Use, "The FRIP does not qualify for the tax benefits of a traditional dividend reinvestent program under the IRS and securities purchased through the FRIP do not qualify for the same tax benefits as those purchased through a DRIP." Am I misreading something because this doesn't sound like such a sweet deal.
lessonexpress
9/14/13 1:33 PM
I agree with David and reading this makes me a bit dubious of diving into the program. I have googled
everything there is to know about this program and for some reason the tax issue that David just pointed out aren't adequately covered or explained I have a Roth IRA so I'm wondering if the tax implications would even matter. I just don't want a headache at tax time. If anyone could shed some light on the tax implications of those using the FRIP program in a Roth IRA as far as tax concerns. So far the fact that FRIP does not hold the same tax benefits of a traditional DRIP is my main concern to figure out what this will mean for people using FRIP; specifically in my case held inside a ROTH IRA.
Maverick915
9/14/13 2:02 PM
An IRA is an IRA. No tax consequences for dividend reinvestment in an IRA.
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