Brokers face the Net threat

Is the advent of Internet trading a broker’s nightmare? Will a proliferation of online transactions, as well as the ongoing growth of discount brokerage, significantly cut into the assets traditionally allocated to a broker? During Investment Executive’s extensive industry survey we found many brokers were keen to share their thoughts on how both issues are changing the industry landscape.

Most of those at large full-service firms say they are unconcerned. ‘I’d say that, of the investing population, 20% should be using discount brokers and e-trading, 10% should be full discretionary, but the rest should be dealing with a bank or a broker/financial planner,’ says a broker at CIBC Wood Gundy Securities Inc.

Equally unconcerned by the newcomers is Grant Rasmussen, vice president and director at Royal Bank Wealth Management Group in Toronto. ‘It’s a very different individual who is traditionally looked after in a full-service environment,’ he says. ‘The demographics are different, the asset levels are different and the [client] requirements are different.’

Advisors appear quickest to dismiss the Internet threat. ‘E-trading is a phase,’ says another Wood Gundy broker. ‘We’ve seen it with discount brokerages – where they’re really big at the beginning and the fear is they would take away from the big brokerages.’

‘Sleep well at night’

The firms are equally upbeat and appear eager to offer services geared to the splintering groups of investors. ‘Ultimately, we feel we can address everyone’s needs through the wealth management platform,’ Rasmussen says. Clients who are confident enough to make their own investment decisions can use Royal Bank’s Action Direct, while others will stay with full-service ‘to sleep well at night, knowing they have a professional taking care of their account.’

Some brokers are concerned about their own firm’s segmentation of the client base to cater to new investors. They aren’t worried about competing for clients, but fear they’ll have to vie for attention and resources within the firm.

Some TD Evergreen Investment Services Inc. brokers expressed concern about internal competition from Toronto Dominion Bank’s discount arm, TD Green Line Investor Services Inc. An Evergreen broker complained that ‘Green Line is making tons of money. They need to focus more on the brokerage firm.’

Another Evergreen broker complained, ‘They don’t advertise us – the public has not heard of Evergreen, only Green Line.’

Despite such concerns, most brokers expressed confidence about the future. ‘There will always be a place for people who need professional money management,’ says a Canaccord Capital Corp. broker. And while rivals such as E*Trade offer low commissions and real-time quotes, computer crashes and security concerns have beleaguered online trading.

There is also the nature of the market itself. ‘We’ll see what happens when we get the next bear market,’ says a Nesbitt Burns Inc. broker. ‘Stuff’s coming down and there is the problem of accountability on the Internet.’ A Wood Gundy broker agreed. ‘When the market goes well, everybody can do e-trading. It’s when they’re bombarded with negative and positive views’ that things get difficult.

Brokers say they must do homework to keep up to speed. ‘We have to get with the program,’ a Canaccord broker told us. ‘There is a phenomenal amount of trading done on the Internet, and commissions will have to go down.’

Others see a trend toward fee-based services. ‘The industry will be less transactional and more oriented toward financial planning,’ says a DS broker. He says advisory relationships will be a selling point.

‘Moving target’

Roberta Wilton, president of the Canadian Securities Institute, says brokers face the challenge of constantly updating their knowledge. The proliferation of data on the Web means ‘you’re a moving target, because your client keeps on learning. You’re constantly having to raise your bar.

‘The pressure is on finding new ways to learn and grow,’ she says, adding that demand for education at the CSI is rising, particularly for upper management courses.

By focusing on advice, full-service brokers believe they will hold their own as the Internet and discount brokers settle in. The challenges may help them in the long run, Wilton says, because the services are ‘bringing in people who may not have come in. Eventually, they may graduate’ to full service.