As disgruntled inves-tors assess the recent damage to their portfolios, they are grabbing control over their finances — and discount brokerages are reaping the benefits.
Discount brokerages in Canada have seen a surge in new account openings in recent months. In the fourth quarter of calendar 2008, new account openings soared by 80% over the number of accounts launched the previous quarter, according to estimates from Toronto-based Investor Economics Inc. Year-over-year, new accounts were up by 50%, to 3.4 million accounts in Canada’s retail online brokerage channel.
Some firms saw even sharper growth. In November, the number of new accounts at RBC Direct Investing, an arm of Royal Bank of Canada, surged by 86% over November 2007 levels. Growth in December was up by 72% year-over-year.
That trend has continued into 2009. In January, Toronto-based Questrade Inc. experienced 65% growth in new account openings from the previous month.
“The entire industry is seeing a large influx of new, online, ‘do it yourself’-type of accounts,” says Edward Kholodenko, president and CEO of Questrade. “And that’s only been exacerbated by the recent market turmoil and volatility.”
Previous market downturns have resulted in similar shifts toward self-directed investing. According to Jason Storsley, incoming president and CEO of RBC Direct Investing, widespread market sell-offs make investors realize that even under the control of a professional money manager, their investments aren’t protected from risk. “Perhaps those inves-tors thought that they would be immune to this type of an economic downturn,” he says, “and have realized that they weren’t.”
But in the past, Storsley adds, the flood of new discount brokerage accounts has never been this extreme.
According to Bill Doyle, vice president and principal analyst at Massachusetts-based Forrester Research Inc., many new discount brokerage clients are attracted by the prospect of keeping closer tabs on their assets, particularly during times of such extreme volatility. Investors increasingly want to check the status of their investments daily — or even several times a day — something they may not be able to do at a full-service brokerage.
“More and more customers,” says Doyle, “want to be able to check themselves.”
Furthermore, the trend toward lower trading fees at discount brokerages has made active trading more affordable. In January, for instance, Questrade sharply reduced its mutual fund trading fee to $9.95 a trade from $30 and launched a new service that rebates mutual fund trailer fees to unitholders. Other firms charge commissions as low as $6.98 a trade for equities transactions, subject to minimum trading activity levels.
These cost cuts have been particularly appealing to investors who are attempting to take advantage of opportunities presented by the market sell-off. Growth in this type of opportunistic trading has fuelled a significant boost in recent trading volumes, statistics show. According to estimates from Investor Economics, trading volume in Canada’s discount brokerage sector rose by 20% in the fourth quarter of 2008 from the previous quarter, and rose by 25% from the fourth quarter of 2007.
“A lot of it is driven by opportunistic trading,” says Guy Armstrong, senior consultant at Investor Economics. “This is tied to the market volatility that has been experienced since late last summer.”
Another key factor driving investors online is the growing availability of tools and resources that allow people to make educated investment decisions independently. Discount brokerages have recently launched a variety of such tools as they attempt to attract clients that have little investment experience.
In August 2008, for example, RBC Direct Investing launched a new program that offers clients professionally designed model portfolios based on their investment objectives and risk tolerance. The program helps clients determine their appropriate asset mix, but eliminates the time-consuming task of selecting individual stocks.
“It’s designed for people with not a lot of investment knowledge,” says Storsley. “You don’t need to be an expert stock-picker to be a self-directed investor.”
Toronto-based TD Waterhouse Discount Brokerage recently introduced several enhancements to its account-management platform, including a stock-screening program that enables clients to identify investment opportunities that fit their investment criteria. TD Waterhouse has also launched a program to alert clients regularly — via email or mobile device — of company news, analyst recommendations or other events that could affect their investments.
Questrade, meanwhile, has partnered with an international investment education company, California-based Online Trading Academy, to offer clients free workshops on trading and investing.
@page_break@Many discount brokerages also provide clients with regular market commentary and thorough research on specific mutual funds and stocks.
“If investors use the tools that are available from these online providers today,” says Paul Bates, dean of the DeGroote School of Business at McMaster University in Hamilton, Ont., and a pioneer of discount brokerages, “they have access to an awful lot of material.”
Online resources are not equivalent to personalized professional advice, adds Bates, but some investors are probably questioning the value of advice after seeing their portfolios take a hefty hit in recent months. “The challenge,” he says, “is for the provider of the advice to continue to demonstrate that he or she is adding value to the client relationship.”
Some investors may simply be opening accounts at discount brokerages as a temporary stop for their money, says John See, president of TD Waterhouse, as they determine a new strategy or seek out a new advisor. While account growth is up at TD Waterhouse, See expects that some of the new clients are not necessarily long-term self-directed investors.
“They’ll be here for a period of time,” he says, “until they realize that they really don’t want to manage their own investments.”
Other investors have probably opened self-directed accounts to hold a portion of their assets — not necessarily their entire portfolio.
“It’s a growing trend,” says See, “to have a portion of your investments that you manage yourself and another portion either with an advisor or managed on a discretionary basis.”
Still, the growth that discount brokerages are experiencing appears to be part of a long-term trend, according to Forrester’s research. In recent years, Doyle says, investors have become much more hands-on and involved in their finances, thanks in part to the Internet.
“We as individuals are more responsible for our financial health than we used to be,” says Doyle. “More individuals are seeking their own information and making their own decisions.” IE
Investors choose to do it themselves
Discount brokerages see a surge in account openings
- By: Megan Harman
- February 25, 2009 February 25, 2009
- 09:22