Discount brokerages on the rise

The study – in its fifth year – also found that the percentage of moderately active traders (i.e., clients who make between one and 12 trades a year) among discount-brokerage clients has increased to 58% this year from 46% in 2012, while the amount of their investible assets has increased to a median of $141,191, up from $133,665.

Furthermore, investor satisfaction with discount brokerages rose for the third consecutive year. Overall, investor satisfaction, as measured by J.D. Power’s 1,000-point investor satisfaction index, was 724 this year, up by 24 points from 2012 and by 45 points since 2011. The study assesses investor satisfaction with six factors: interaction, trading charges and fees, account information, account offerings, information resources and problem resolution.

As a result, advisors should be uncomfortable with investors’ increasing reliance on online brokerage platforms, says Lubo Li, senior director of the financial services practice with J.D. Power. The significant growth in clients relying solely on discount brokerages, he says, shows that these investors are more confident about their ability to do some or all of their investing on their own.

Trading commissions charged by discount brokerages have fallen dramatically in recent years, Li adds, and will continue to drop. “That will erode the margin and the appetite for advisory services,” Li says, noting that this is one of the reasons for the continued growth of fee-based compensation schemes for advisors.

However, executives at some companies that have both discount brokerages and advisor sales forces are not overly concerned about the potential threat to advisors. In fact, the rise of discount brokerages does not suggest a smaller role for advisors, says Nancy Paquet, president of National Bank Direct Brokerage Inc. (NBDB), a subsidiary of Montreal-based National Bank of Canada. (NBDB scored highest for client satisfaction in this year’s survey.)

Paquet says that a steady 10% of NBDB clients are true do-it-yourself investors. The vast majority of NBDB clients may trade through the discount brokerage on the side but also continue to work with an advisor to plot overall investment strategy and retirement plans.

“Of course, some people will always see discount brokers as a threat, but we don’t give advice,” she says. “Most advisors now are really client-centric and they do the full holistic approach to wealth management. We don’t. We only serve the investment part of the full financial planning offering.”

However, the line between those discount brokerages offering advice and those not doing so is blurring.

Last year, BMO InvestorLine Inc., a subsidiary of Toronto-based Bank of Montreal, introduced its adviceDirect online service, which provides clients with technology-driven recommendations and advice for fixed-income and equities investment products via a portfolio-optimizer software application that is backed by live support from investment specialists.

So far, BMO InvestorLine is the only discount brokerage to offer such advice, Li says, and its competitors are evaluating its success.

The adviceDirect service “is basically bridging the two” models of full-service and discount brokerages, Li says: “BMO has benefited. Partly, it’s seen as innovative; that it’s offering something unique in the market. That alone is a positive thing for the [parent] bank.”

Viki Lazaris, president and CEO of BMO InvestorLine, suggests that rather than being a challenge to advisors, the discount brokerage should be seen as another option for clients. “At BMO Financial Group,” she says, “we have a number of services available to investing clients. And we continue to see all of them as very strong businesses that will continue to grow.”

Li suggests that in this competitive climate, advisors need to know their clients and why those clients need the advisor’s services. “There has to be a clear value proposition,” he says. “Before, the value proposition was not that urgent an issue; now, it is. Secondly, for the mainstream advisors, the sooner they can move to a fee-based system, the better.”

NBDB topped the investor satisfaction ranks in the J.D. Power survey with a score of 757, getting high marks for interaction, account information and account offerings. Next was Disnat, part of Lévis. Que.-based Desjardins Group, (750); BMO InvestorLine (742); and TD Direct Investing (734).

J.D. Power’s 2013 survey includes responses from more than 3,000 investors who use investment services with discount brokerage firms in Canada. The survey was conducted this past May and June.

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