The scramble for clients by discount brokerages has turned into a price war, with more than a dozen firms offering lower fees, more bells and whistles, and even cash inducements to switch providers.
But there has been a noticeable shift in target in recent months. Discount brokerages had been focusing on the small but lucrative “active trader” segment — clients who make more than 25 trades in a quarter, thus generating high commissions. But now discounters appear to be including everyday clients, especially the “mass affluent investor” who can bring in significant assets.
E*Trade Canada, a subsidiary of U.S.-based discount giant E*Trade Financial, has been setting the tone, coming out with lower fees and an accompanying advertising campaign that targets the bank-owned brokerages.
In September, the Toronto-based E*Trade announced a $9.99 commission on each equity trade — the number of shares is unlimited — for clients who have $50,000 or more in assets. Previously, only traders who executed 30 or more trades in a quarter enjoyed the $9.99 rate, while everyone else paid $19.99. E*Trade became the first domestic discount broker to offer a premium rate based on clients’ assets rather than activity.
“This was a pretty bold move on E*Trade’s part,” says Jamie Suther-land, a senior analyst at Toronto-based research firm Investor Economics Inc. It puts pressure on competitors to lower commissions, he adds.
E*Trade, Canada’s largest non-bank-owned discount brokerage, is also offering new customers who bring $25,000 or more from another firm 100 commission-free trades for the first 60 days and reimbursement of transfer fees up to $125.
“Winning market share is a key part of our market strategy,” says Duncan Hannay, head of E*Trade. “We want to be the dominant competitor.”
So far, the bank-owned discount brokerages, which control 90% of the market, have opted not to drop their prices for everyday investors to match those of E*Trade, although most discounters have sweetened their value propositions in recent months.
HIGHER PRICES JUSTIFIED
Bank-owned discounters don’t feel as compelled as the independent brokerages to drop prices, experts say, because they have a steady supply of customers migrating from their sister banking subsidiaries. They also believe that, as subsidiaries of Canadian financial giants, they can offer clients a level of service and support and a sense of stability that independents can’t provide, thus justifying their higher prices.
“The banks dominate the market,” Sutherland says. “They have a solid stake in the ground.”
A week after E*Trade’s announcement, TD Waterhouse Discount Brokerage, which manages more assets than all the other discount brokerages combined, announced it will also offer a flat $9.99 fee — but only to active traders. It chose to leave the rate for its other clients at $29. But investors who have accounts in excess of $500,000 will also qualify for the $9.99 premium, as well as for access to other services and features.
“The commission rate is only one consideration, in terms of the cost of investing,” says John See, president of Toronto-based TD Waterhouse. “There is also quality of execution, performance, being able to access the Web site when you need it and resolution of problems. It’s the whole package, especially for long-term investors.”
TD Waterhouse became the industry’s dominant player by getting in early — the company started in the early 1980s after brokerage commissions were deregulated in Canada — and making acquisitions over the years. TD Waterhouse is the only Canadian brokerage whose parent has a significant presence in the U.S. (through its co-ownership of TD Ameritrade, which it bought into last year).
See says one of TD Waterhouse’s big advantages is that it can offer its high net-worth clients free advice from licensed planners and refer them to the bank’s full-service or private-client businesses. In fact, See says, assets of more than $1 billion were referred from the discount business to the bank’s advisory channel in 2005.
“Many customers come in believing they have the time and the wherewithal to manage their own money. But then they realize that’s not the way they want to do it,” See says. “So, we are constantly referring self-directed clients to full-service advisors under our larger TD Waterhouse platform.”
In October, Royal Bank of Canada announced that its discount brokerage, formerly known as RBC Action Direct, would change its name to RBC Direct Investing, and offered a 1% cash incentive on accounts of $25,000 or more to investors switching from another brokerage, to a maximum of $2,500 on one account or $10,000 per client. The offer runs until the end of November.
@page_break@The name change is intended to brand the discount arm with Royal Bank’s other subsidiaries and promote better public recognition, says Doug Coulter, president and CEO of RBC Direct Investing.
ENCOURAGING SWITCHING
“We’re second in the market, in terms of market share. But we’re well below what I would say is our ‘natural’ market share, the market share most RBC businesses enjoy,” Coulter says. “We believe there is an opportunity, given that we put out the right product at the right price, to grow into what we would deem to be our natural share.”
Coulter says RBC Direct In-vesting elected to make a cash inducement to “invest in our clients,” suggesting that, for an average client who might make as few as three or four trades a year, the offer of free trades or a cut-rate price might not be much of a benefit and, therefore, not much of an incentive. Still, he did not rule out lowering fees in the future.
Almost all the other bank-owned discount brokerages, as well as the independent niche players, have tweaked their value propositions in recent months, lowering fees or enhancing their service or product offerings. In the U.S., where discount brokerage competition is even fiercer than here, an announcement in October by Bank of America Corp. that it would offer free trades to clients with a minimum of US$25,000 in assets sent share prices of U.S. discount brokerage firms plummeting as investors worried about the effects of a price war.
Discount brokerages make money on fee-based services and spread-based products, as well as from commissions.
Although no Canadian companies have offered free trades, the price war and the larger war for market share show no signs of ending.
“Prices are such that margins are getting fairly skinny,” Coulter says. “It’s important for players that are committed to this business to be running efficiently and have the critical mass [in number of clients] to allow them to that.” IE
Discount brokerages waging a price war
The scramble for clients has firms offering rates based on assets and reimbursing transfer fees
- By: Rudy Mezzetta
- November 1, 2006 November 1, 2006
- 11:18