Discounters: Robust expansion

According to the Retail Brokerage and Distribution Report, Winter 2014, published by Investor Economics, a Toronto-based division of U.S.-based research firm Asset International Inc., total AUA among Canadian discount brokerages stood at $292 billion as of Dec. 31, 2013, up from $180 billion as of Dec. 31, 2007 – a compound annual growth rate (CAGR) of 8.4% over that six-year span. In contrast, AUA at Canadian full-service brokerages were $918 billion as of Dec. 31, 2013, up from $720 billion as of Dec. 31, 2007, a CAGR of 4.1%.

Although the full-service advice channel is in no danger of losing its place as the primary destination for Canadian investors – particularly those who are looking for tailored advice – the trends boosting the flow of AUA toward the discount channel are likely to continue, says Grant: “It’s only going to accelerate, to tell you the truth.”

The discount channel’s increasing appeal is a reflection of the level of comfort that many Canadians feel in conducting financial transactions online. Younger Canadians, many of whom have lived their lives online, are inclined to seek out investment products and services online as well. On the other hand, the baby-boomer cohort, which is entering their retirement years, find themselves wanting to take greater control of their financial affairs.

“[Boomers] have more time on their hands, and they want to stay connected to the markets and the business world in general,” Grant says. “They’ll start to manage a portion of their portfolio on their own, even if they don’t move their entire financial wealth [over to a discount brokerage].”

In addition, technology on self-directed platforms has continued to improve, and clients are provided with ever greater levels of support. Self-directed brokerages now offer clients services such as detailed account performance and analysis tools, research and educational material, mobile applications and the capability to communicate with the firm and share ideas with other clients through social media, among other things.

Two years ago, Bank of Montreal‘s discount-brokerage arm, BMO InvestorLine, launched adviceDirect, an online service that offers clients some personalized advice, including features such as asset-allocation advice and portfolio monitoring, for a set percentage fee on AUA. This firm remains the only discount brokerage to offer such a service.

“The online brokerage world has become much more robust,” says Julie Barker-Merz, president and head of wealth direct investing with BMO InvestorLine. “It’s offering many more value-added services than there were in the past.”

Not all investors are well suited to self-directed investing, however. Even those investors who have an interest in managing their own finances often will do so with only a portion of their portfolios, leaving the bulk of their assets with a full-service advisor.

“We do know, in a general sense, that people tend to use multiple channels,” says Guy Armstrong, senior director and managing consultant with Investor Economics.”You can’t sit back and look at the full-service channel or the financial planning channel and say, ‘Wow, there’s money that’s obviously running out of these businesses [and into self-directed brokerages].’ We don’t see that in the data.”

Still, the appeal of low-cost, do-it-yourself investing is likely to endure – particularly as the brokerage industry at large adjusts to new regulations concerning disclosure and transparency.

“I’m subject to [Phase 2 of the client relationship model, but] I’m going to tell consumers they paid $4.99 for their trade,” says Grant, citing Scotia iTrade’s commission fee for active traders. “I’m happy to have everyone else tell the consumer what they’re paying for their trade.”

In fact, after several years of relative quiet, this year has seen a return of a commission fee battle among discount brokerages. Most of the largest players have dropped their standard fee – the one available to all customers regardless of AUA level or activity – to slightly less than $10, with fees for active traders set even lower. In July, Credential Direct, the discount-brokerage arm of Vancouver-based Credential Financial Inc., lowered its standard commission rate to $8.88.

Discount brokerages are hoping that the lower commission fees will spur their clients to become both more active and engaged with managing their own accounts, as well as resist the temptation to sit on their cash.

“Trading is important, not so much from the commission revenue [the firm earns] but from the confidence it gives investors,” says Jim Lund, vice president of online services with Credential Direct. “The more confident they feel with your service, the more likely they are to stay, trade and be successful investors.”

Some discount brokerages – notably, Toronto-based RBC Direct Investing, Royal Bank of Canada‘s discount brokerage arm – have expanded their lineup of so-called D-series funds, versions of actively managed funds that feature reduced management expense ratios, to entice cost-conscious consumers further.

Part of the increased competition in price, products, features and services is strategic in nature, with each discount brokerage looking to stand out in a crowded field of more than a dozen discount-brokerage platforms.

“The discount brokerage industry is a ‘one-up’ industry,” says Glenn LaCoste, president and lead analyst with Toronto-based research firm Surviscor Inc., adding that most firms find at least one competitive category in which to stand out among their peers. “[Participants] one-up competitors in key areas just to say that they are the best, despite the fact that there are minimal differences.”

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