Discount brokers, long the brash upstarts in the brokerage sector, are posting rapid gains in assets under administration as more investors keep closer tabs on their holdings and use the Internet to buy and sell their investments. Many of these discounters are also doing much more than competing on price alone, offering new trading tools, product offerings and educational features that appeal to a broader client base and aid the investing process.

“More and more clients who deal with advisors are also choosing to manage a portion of assets on their own at discount brokerages,” says Jason Storsley, president of RBC Direct Investing, a division of Royal Bank of Canada, in Toronto. “And our attrition rate is low. Once clients recognize how easy it is to manage their own portfolios, they are reluctant to leave.”

According to figures from Toronto-based Investor Economics Inc., AUA in the online/discount brokerage channel stood at $193 billion as of Sept. 30, 2009, representing a 16% increase from a year earlier and a three-year average annual growth rate of 8%.

Full-service brokerages remain the giants of the industry, with AUA of $673 billion, but their one-year growth rate of 3.6% was a mere fraction of that by the discounters. During the past three years, full-service brokerages have shown a scant average annual increase of 1.3% in AUA.

“Since the crash, discounters have recovered rapidly to surpass their previous peak, and AUA is higher than it’s ever been,” says Guy Armstrong, senior consultant at Investor Economics, who points to numbers indicating that before the market freefall that began in September 2008, AUA at full-service brokers peaked at $721 billion, and has not yet returned to that level. Discounters showed a 2008 peak of $183 billion in AUA, and although they also suffered the effects of the bear market, their AUA has subsequently recovered to new highs.

“There is a move toward greater self-directedness amongst our customers,” says Duncan Hannay, managing director and head of online brokerage services at Bank of Nova Scotia. “Customers are looking to take more control over their finances, or a portion of their finances.”

Investor Economics is projecting that by December 2013, AUA in the discount channel will be $223 billion, representing an 8.7% average annual growth rate from 2008. The full-service channel will grow by 8.2% a year, to $848 billion, and will remain the dominant channel, the firm predicts.

“The pie is growing for everyone, but our slice is growing faster,” says Nicolas Milette, president of National Bank Discount Brokerage, part of National Bank of Canada, in Montreal.

Not only has AUA increased, but clients of discount brokerages are trading more actively than ever before, with the number of trades per client moving from six trades per year in 2006 to 10 annual trades in 2009. One of the main reasons for the attractiveness of discounters is undoubtedly price. Commissions have dropped to as low as $6.95 per trade for the most active clients — and this floor is matched by the industry’s major players, which include the discount-brokerage arms of the major chartered banks. The industry’s average commission on a discount trade is $18, down significantly from $43 five years ago. With commissions charged on both the buy and sell side of a trade, a markedly lower commission can make a significant difference to overall client returns.

“The [discount] industry does compete on price, and the price advantage is one of the major reasons for its growth,” says Milette. “There’s been a lot of volatility in the market, and when the market is gyrating up and down, there tends to be more trading.”

John See, president in Toronto of TD Waterhouse Discount Bro-kerage, a division of TD Waterhouse Canada Inc. and the industry leader, with more than half the market share in the discount-brokerage category, says the industry “has been on a bit of a tear” since September 2008, with more trading activity as well as more interest in research and educational information: “Volatility spurs activity and interest. The buy-and-hold philosophy, and calling your broker semi-annually to see how you’re doing, works in a stable environment. But during the past 18 months, we’ve seen an insatiable demand for knowledge. People want to know how they are being personally impacted by moves in the market, and how it’s affecting their retirement savings. A full-service advisor simply isn’t able to provide that kind of instantaneous update to every client.”

@page_break@Discount brokerages are no longer the exclusive domain of active and aggressive traders, and their clientele is branching out to include long-term and conservative investors who prefer to do their own research and make their own decisions rather than relying on the advice of a full-service advisor. Many clients at discounters also have accounts with full-service firms, and are conducting only a portion of their business with discount brokers. Ipsos-Reid Corp.’s 2009 industry survey reported that 37% of full-service brokerage clients also had an online brokerage account. That’s up from the 25% reported in its 2007 survey.

The trend is also going in the other direction, with some discount clients moving to full-service firms as their needs become more complex and they require sophisticated advice, particularly when it involves elements of tax and estate planning. Milette sees the discount brokerage as an “entry door” for clients who may ultimately find it convenient to do other types of financial business through sister companies, and he says that 90% of National Bank’s discount-brokerage clients are full-service bank clients as well.

“We do not provide advice, but we assist in the investment decisions by giving as much objective information as we can,” says Milette. “While commission costs have dropped over the past few years, the range of tools and the depth of research that discounters provide has increased. Our clients are getting more for less money.”

Increasing comfort with the Internet is also driving the interest in discount brokers, with 90% of the channel’s transactions made online and the rest by telephone. As the Internet infiltrates more human activities and becomes a vehicle for purchasing a growing number of goods and services, it’s a natural evolution for securities trading to be included.

“Culturally, the penetration of the Internet is almost universal amongst our targeted clientele,” says See. “It’s becoming increasingly embedded in everyday life. People are looking for the immediate gratification that the Internet provides, and online trading is part of that cultural evolution.”

The Internet is also an ideal medium for a wide variety of educational tools, including webinars, tutorials, market and individual securities analysis, charting functions and screening capabilities. RBC Direct Investing, for example, has recently introduced an online practice account that allows participants to activate and use a practice account free of charge, creating a mock $100,000 portfolio. Investors can try out various investing strategies without risking their own money, and can start over again at any time. The practice accounts also allow access to numerous online learning resources of varying levels of sophistication.

“We offer the practice accounts to all clients, as well as to non-clients who are just looking,” says RBC’s Storsley. “They allow investors to build confidence in trading in all types of securities, including stocks, mutual funds, exchange-traded funds and fixed-income securities. The response has been tremendous. A lot of investors who may have been on the fence are taking the step of learning how to trade online without risking their own money.”

Storsley says that more than half of the practice accounts have been opened by investors who have not traded online before, adding that the online accounts also allow clients to work their way up to more complex products. For example, clients may have traditionally traded mutual funds, and practice accounts give them a way to get comfortable with individual stocks, or they may want to experiment with stock options strategies.

“What characterizes our clients more than demographics or education is a common attitude,” Storsley says. “Clients are interested in learning about investing, and we provide the information to give them guidance and validation.”

Discount brokerages also provide tools to help their clients assess their own risk profile and then construct portfolios with a suitable asset mix. Portfolios can be built using a preset mix of mutual funds or ETFs, or investors may choose to pick their own securities within certain categories but maintain the overall suggested asset mix. IE