With many Canadians looking beyond Canada’s borders for new sources of investment growth, advisors are facing a threat from discount brokerages that aim to make it easier and more affordable for retail investors to invest in international equities.

In September, TD Waterhouse Discount Brokerage launched a global trading platform that allows clients to trade on 10 global markets throughout Europe and Asia Pacific, with the option of settling trades in seven different currencies. Accessible to anyone with a cash or margin account, the platform provides real-time access to the markets for flat-fee commissions, starting at 29 euros per trade, plus fees and levies that apply to certain markets.

Previously, TD Waterhouse clients could trade international stocks only through a licensed rep over the telephone, for a much steeper price.

“There was demand, and growing demand … for Canadian investors to assume direct exposure outside of North America,” says John See, president of TD Waterhouse Discount Brokerage in Toronto. “The ability to do that, as a Canadian investor, has been extremely limited.”

Uptake on the new service has been strong, See says, as more than 6,000 clients signed up for global trading access in the first six weeks.

HSBC InvestDirect is one of the only other discount brokerages in Canada with similar online global trading capabilities. The firm has offered clients access to five markets outside North America, with the option of settling in 11 currencies, for a few years now. Clients can trade securities on an additional 30 markets over the telephone.

“It’s definitely growing in popularity,” says Rick Kelln, senior vice president of retail and direct channels with HSBC Securities (Canada) Inc. in Vancouver. “The majority of our business would still be focused on domestic business, but the international market is where we see the growth.”

Having witnessed growing trading volumes on the Hong Kong market in particular, the firm recently slashed its trading commissions for that market by introducing a new flat-fee commission structure.

“With some of the new clients that we’re seeing coming in, and some of the interest that we’ve seen in that market, we saw a great opportunity to change our pricing structure,” says Kelln. He says the new flat fee is competitive with commissions that Canadian investors pay on North American stock market trades.

The growing interest in international stocks comes at a time at which North American economic growth is expected to lag many other markets — especially developing ones — in the next few years.

“Investors are looking for other ways to grow their wealth and their portfolios, as well as diversify out of one specific region,” says Kelln. “The Canadian landscape itself is only about 4% of the global index, so there’s lots of other opportunities out there.”

Part of the demand is also coming from immigrants to Canada, who may be more familiar with stock markets back home than with North American markets.

“These clients are generally well educated and could have been sophisticated investors in their home countries, before immigrating to Canada,” says See. “They want to invest not only in North America, but maintain connections with their previous markets.”@page_break@Meanwhile, full-service brokerages are also seeing interest from clients in international equities. But rather than investing directly in stocks, clients at these firms typically get exposure through mutual funds or exchange-traded funds.

“They want the better diversification and the professional management provided by mutual funds,” says Kate Warne, Canadian market strategist with Edward Jones in St. Louis.

Edward Jones’s research analysts cover some foreign stocks, but not enough for clients to be able to build diversified portfolios of foreign equities. The firm’s advisors discourage clients from trading individual stocks because of this limited research — and because most clients lack the time to thoroughly research these foreign stocks on their own.

“When you think about the things you need to know to buy an individual stock, how do you keep up with all the information you need to make good decisions about when to buy and when to sell?” Warne asks. “I’m not sure it’s the right thing for most investors to take on the additional burden of learning the things they need to be able to do it well.”

She points out that investors trading on foreign markets also need to consider many other factors, such as exchange rates, the costs associated with currency-exchange transactions, foreign-dividend taxation policies and market trading hours.

“It becomes more complicated very quickly,” she says. Investing abroad through a mutual fund, she points out, eliminates these complex decisions.

Similarly, Michael Herring, managing director and investment strategist with Toronto-based BMO Nesbitt Burns Inc., considers individual stock-picking in foreign markets too risky for most retail investors.

“The farther you get away from the developed world, the riskier it becomes,” he says. “It becomes a lot more like buying a lottery ticket, in my opinion.”

Herring considers ETFs an effective way for Canadian investors to get affordable, diversified international equities exposure. He’s also a strong advocate of mutual funds, particularly for holdings in less-developed markets.

In markets with less transparency and less accessible information, managers have a better chance at discovering unique insights that could help them outperform, Herring says: “The farther you get away from developed markets, the easier it is for managers to outperform their benchmarks.”

Mutual funds and ETFs are also popular tools among discount brokerage clients, but a growing number of these investors are interested in holding stocks directly, Kelln says: “We’ve seen more customers moving from [mutual funds] into specific securities within those markets.”

Although not all investors have time to conduct the research necessary to trade foreign stocks actively, the discount brokerages are attempting to make the research process quicker and easier for clients. In fact, both TD Waterhouse Discount Brokerage and HSBC InvestDirect offer their clients company news, market research, charting tools and market data from around the world. IE