It was painful to begin with, but some say the arrival of the self-directed brokerage industry has contributed to the strength of the full-service brokerage today.

“There’s a bit of an equilibrium that has become established,” says Paul Bates, dean of the school of business at the DeGroote School of Business at McMaster University in Hamilton, Ont. Bates was president and CEO of discount brokerage Schwab Canada before the firm retreated from the country during the bear market of 2001.

“You don’t see the sort of acrimonious discussion that you saw in the beginning of online brokerage,” he adds.

There’s no question that full service advice took a hit in the decade since 1996, ceding about $130 billion to the online brokerage industry. But the advice-based channel has ultimately held its ground.

According to Toronto-based Investor Economics Inc. , the online brokerage channel had amassed $166 billion in assets under administration in 2006, up from $31 billion in 1996. That’s 6.7% of all invested assets up from 2.9% in 1996, and it represents annual compound growth of nearly 19%.

“From the mid 1990s to these days, Canadians have put more and more in equities and equity funds, and this channel is well positioned to take advantage of this,” says Carlos Cardone, a researcher at Investor Economics.

Certainly, the growth of those accounts has been affected by their contents. With the exception of two years, Canadian clients have invested through a global bull market and through a commodities- led boom, and 40% of that growth is asset growth, not accounts.

The number of Internet brokerage users has grown to more than 800,000, or about 2% of the Canadian population, from about 500,000 a decade ago, according to Forrester Research, Inc. , a Massachusetts-based industry consultant. This is a conservative estimate, according to Canadian online brokerage industry executives.

The advice-based channel still dominates, with more than $1 trillion in assets, up from less than $500 billion in 1996. And while the online brokerage channel growth will continue to outpace the full-service model, growth on the full-service side will not slow down or be threatened by the discount channel, according to Investor Economics’ outlook.

The research firm sees the intermediated advice channel taking more than 48% of assets in 2011, with the discount brokerage side taking in only 7%. (Bank direct and bank advice will take in 30% between them, down from about 35% today.)

Retirement and wealth planning bring concerns such as insurance and estate planning that cannot be dealt with effectively through direct channels and the people who tend to need broad planning services like these are among the wealthiest.

“The whole fear that the advisor would be gone was ill-founded,” says Douglas Steiner, chairman and CEO of Perimeter Financial Corp. , and former president of E*Trade Canada Securities Corp. “It’s like having a masseuse once you build up the trust.”

That was not the attitude back in the late 1990s. Accusations reached extremes, with each side of the debate implying that the client was being poorly served by the other. On the one hand, advisors were simply stock pushers, eager to charge commissions for what was increasingly valueless, widely published advice. The direct channel was playing fast and loose with regulatory rules and ethics, disregarding know-your-client rules, advisors charged.

Today, it’s possible to understand the entire “wealth management” trend among full-service brokerages as a function of technological change. While it’s true that demographics are changing and that clients are looking for more financial and estate planning, the online brokerage forced the full-service brokerage to realize its strength.

The typical advisor has had to change his style of business and has been forced to provide solid advice and portfolio building at the minimum, instead of order execution, says Doug Coulter, president and CEO of RBC Direct Investing, who has also worked at RBC Dominion Securities Inc. for more than a decade, overseeing much of the wealth management platform. “The [self-directed] business has sharpened everyone’s focus,” he says.

Indeed, Bates, who had founded his own direct channel with Toronto-based Priority Brokerage Inc., had always said that the discount brokerage model would force advisors to prove the value of their advice.

That’s not to say that the online brokerage channel has not had its troubles. The value of the transaction has plummeted. Lower trading fees and lower margins have affected the discount brokerage industry since its inception, as has keeping up with technology. Canadian firms are always adding new research tools to simply keep their clients on board, which costs money.

@page_break@Even discount firms are acknowledging that the more service and “advice” they can offer in the context of broader financial planning issues, the safer their accounts are. RBC Direct Investing plans to offer more financial planning tools in the new year, Coulter notes.

No matter which way you slice it — by asset growth, account numbers or by trades — the largest online brokerage by a large margin is TD Waterhouse Discount Brokerage, partly a result of the firm’s pedigree, according to president and CEO John See. Taking 50% of the market, the firm always had a lot of clout within the bank.

It had less conflict with the full-service side of the brokerage business, a fact that has rankled full-service advisors at the firm as demonstrated annually by remarks in Investment Executive’s Brokerage Report Card.

TD Evergreen lost its name and was subsumed by the TD Waterhouse Canada Inc. brands and, by assets, the full-service side has grown at a faster rate than the self-directed side, says See.

The two sides of the firm manage wealth management more or less seamlessly, and referrals go both ways.

Retirees, for example, who have more time and interest in managing the investment income from day to day, have requested accounts that allow them to do so, even if their first relationship was with an advisor, See says.

It is a trend that Coulter at RBC Direct Investing says the advisory side “has to come to grips with.”

“As more affluent investors trade online, the full-service brokerage firms that neglect their own online channel are putting themselves increasingly at risk. That is because clients do want to go online, see their balances, see their research, even though they may be dealing only with a full-service broker,” says Coulter.

Bates reflects that a few years ago there was a “blinding glimpse of the obvious” – that many clients wanted advice part of the time, but they certainly wanted to do their own trades some of the time, as well.

“It’s fair to say that [TD Waterhouse] figured that out early in the game,” says Bates. “They’ve got an advisor side and a strong discount brokerage but the name on the door is the same on both ends of the service.”

Firms such as E*Trade and Disnat Online Brokerage, a division of Desjardins Securities Inc. now offer multiple platforms at different price points for clients wanting completely different service levels.

Many clients build a portfolio and make frequent visit to the site, but execute few trades. Fewer are willing to pay a higher price for a platform that gives them quick, cheap access to markets.

“Our business has evolved from the early days of online investing and cheap trades into one with low price at the foundation, but clearly the product and service level has evolved,” says Duncan Hannay, president of E*Trade Canada in Toronto.

For its part, E*Trade says a market of so-called “mass affluent” investors with $100,000 or more in invested assets are still making their way over to the self-directed business from the full-service side if they’re not able to find what they need there.

Looking ahead, Forrester expects 1.54 million Canadian households will be buying and selling investments online in 2012 — a 73% increase over today.

Moreover, the research company expects that nine out of 10 Canadian households will be online at least once a month by 2012. IE