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Special Series: J.D. Power & Associates – Discount Brokerage Rankings Explained Part 1

JD-Power-Section 1 - Discount Brokerage Rankings


In the first part of our special series on discount brokerage rankings and reviews, we take a look at one of the most popular consumer research organizations, J.D. Power and Associates, and their annual survey of self-directed investors’ impressions of Canadian discount brokerages known as the Investor Satisfaction survey.  The results from this survey form the basis for the highly coveted J.D. Power and Associates award for the Canadian discount brokerage industry. As such, both consumers and the discount brokers pay close attention to the results of these surveys.

For consumers trying to choose between the many options in the discount brokerage market, using reviews and data from actual customers is a popular strategy to help make a decision.  With several ratings systems now being provided to self-directed investors, there seems to be some confusing and potentially conflicting messages being communicated about different discount brokerages. Not all reviews are created equally, however, nor do they measure identical features, which is why sometimes the results can seem confusing.

To help demystify the ratings and to give Canadian self-directed investors a better understanding of J.D. Power’s rankings, we’ve taken a look at the following four questions:

  1. Who is J.D. Power and Associates?
  2. What does the Investor Satisfaction survey measure?
  3. How is Investor Satisfaction measured?
  4. What does this survey and its ratings mean for consumers?

1.      Who is J.D. Power and Associates?

J.D. Power and Associates is a professional consumer research firm.  They are among the most widely recognized names in marketing research and have a solid reputation for conducting thorough research on the experiences of consumers with brands or products.  Although they are well-known for their work in the auto sector, J.D. Power and Associates (J.D. Power) also conducts surveys across a number of different sectors, including the banking and financial services sectors.  Of particular interest to Canadians looking for a discount brokerage, J.D. Power has been conducting surveys of investor satisfaction with Canadian discount brokerages since 2009. Over that period of time, they have surveyed over 11,500 clients of Canadian discount brokerages asking them about various components of their experience with discount brokerage account providers.  J.D. Power makes their money by selling the detailed results and analysis of their research to major brands so that these brands can better understand the needs and experiences of their customers and, in theory, work to improve those experiences.

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Special Series: A comparison of the Canadian Discount Brokerage Comparisons

As part of a special series on the comparison of Canadian discount brokerages, we’re taking a look at some of the major providers of this information so that self-directed investors and those interested in researching Canadian discount brokerages can gain a better understanding of the types of research that is done, what the results of that research mean and some of the important perspectives of those involved with the research as well as those who are featured in it.

The first part of this series starts by looking more closely at one of the major sources of consumer experiences with discount brokerages, the J.D. Power and Associates Investor Satisfaction survey.  We begin by looking at the survey itself and what it measures, then we’ll look at the historical results and lastly we’ll provide important perspectives from both J.D. Power and Associates as well as from Disnat, the discount brokerage that has managed to place first in the survey for the past four years.

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Discount Brokerage Weekly Round Up – Nov. 23rd 2012

This week the biggest news for discount brokerages came in the form of the 2012 Globe and Mail Canadian discount brokerage rankings.  Rob Carrick’s annual survey of the Canadian discount brokerage industry looked at 12 firms this year. The top spot went to Virtual Brokers which narrowly edged out the six year champ, Qtrade while the bottom ranking company was HSBC InvestDirect.  The average score (out of 100) was 61.2% (with a standard deviation of 10.0 for those who mind the stats).   What was interesting about looking at the stats was how most of the companies performed about the same (statistically speaking) except for Virtual Brokers and Qtrade.  What this means for self-directed investors is that the difference between 3rd and 12th is not that significant and that even 1st and 2nd are only slightly more distinguishable than the rest.  To read more about the rankings and our analysis, click here.  Also, we put together a sortable version of the table of this year’s results to help make it easier to compare.

Another very big piece of news from discount brokerage deals section was the announcement by Questrade of the unlimited trading promotion.  Scotia iTrade was the first to offer unlimited trading for 100 days, however like all innovations in this very competitive market, there’s a good chance that others will try to do the same. What sets this deal apart from the one offered by Scotia iTrade is that Questrade is offering unlimited trading for account deposits  as low as $1,000 and $25,000 whereas Scotia iTrade’s deal requires a minimum deposit of $50,000. Not all self-directed investors really need or want unlimited trades, especially if it is only for one or two months, but for some it is one more reason to lean towards Questrade.

Event Horizon

The upcoming week in events is a bit light as we come to the close of November and financial literacy month.  One interesting looking seminar that is coming up this week is geared towards options trading.  The TMX group will be presenting via Scotia iTrade, Understanding the Collar Strategy.

Best Canadian Discount Brokerage Tweet of the Week

This week’s best discount brokerage tweet again comes from the affiliate of Disnat Direct,  @DesjardinsGroup.  We saw this week’s tweet as a way to spread a little goodness for a worthy cause.  Desjardins will be donating $50,000 to cancer research across three organizations that gets the most votes here.

The People Have Spoken

It was a very big week for the Canadian discount brokerage space with the release of the 2012 Globe and Mail brokerage rankings.  A lot of buzz was created around whether these were actually seen as valuable or not.  This thread in the Red Flag Deals personal finance forum was a particularly heated conversation.

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Tax Loss Selling – Bargain Hunting for Stocks

Tax Loss SellingFor bargain hunters, “Black Friday” has become synonymous with big crowds and massive deals.  Retailers, forever trying to get an edge on one another, have also bought into (and fed) the mania that has now come to be known as the biggest pre-Christmas shopping bonanza of the year.  Is there an equivalent “discount season” for bargain hunters in the stock market?  There is…almost.

Canadian stocks are sometimes subject to a seasonal occurrence called “tax loss” selling, which tends to put stocks, especially those who’ve had a rough go during the year, on sale.  Tax loss selling typically starts taking place in November and December and can be a chance to pick up some bargains if you’re willing to do a bit of homework and planning.

The reason behind tax loss selling season is fairly straightforward.  Individuals, especially savvy investors, want to minimize their tax exposure (i.e. pay as little tax as possible). Taxes are a part of investing.  If you make money on an investment outside of a registered account, a portion of that money gets taxed (either as a capital gain or business income).  Because gains are taxable, if you have no gains then you aren’t taxed. One strategy to minimize gains is to offset them with losses.  But why would anyone take a loss just to avoid taxes?

The crux of the strategy rests on the idea that if there are losers in your portfolio that aren’t really going to do anything for you or that might represent “dead money”, it may be better to realize the loss than to keep “hanging in there”.  It becomes even more compelling to do so if you’ve realized a gain during the year for which you’re going to have to pay taxes on.  So, either way you take a hit – sell an asset at a loss or keep a losing asset, but pay tax on a winning one (assuming you have winners). The bottom line is that if the losing asset is just going to be a loser, the smarter hit to take is to get out of the loser and use the loss against any actual or potential gains.

There are a couple of rules that investors have to keep in mind when employing this kind of strategy.  The first rule to know is called the “superficial loss” rule.  For most investors, if you sell a stock at a loss and buy the same stock back within 30 days (regardless of the account you do so in), the Canada Revenue Agency (CRA) considers this to be “superficial loss” (see this link for the CRA article “What is a superficial loss?”). A capital loss cannot be claimed if the loss is considered a “superficial loss”.  Instead, if a stock is sold at a loss and bought back within 30 days, the adjusted cost base will need to be calculated.  The second rule to keep in mind is the deadline date in the calendar year for a sale to be considered for that tax year.  It can take up to three business days from the date a stock is sold for the actual trade to settle.  Because of statutory holidays in December (Christmas and Boxing Day) and weekends, the last day to execute the sale and have it count for this year (2012) would be December 24th.

When individuals start to sell en masse, the overall effect is depressed prices.  Typically, the underperformers are the ones on the chopping block and sometimes the selling is more enthusiastic than justified taking prices down below what the “market value” would be under “regular” conditions, thereby setting up the potential for bargains to be found. For more experienced investors, they typically prune their portfolios ahead of the year end selling in preparation for any bargains that might present themselves.

Getting to know the effect that investors can have on the market can give you a bit of an edge when looking for opportunities to invest. A cautionary note to take heed of is that often stocks that are either “cheap” or underperforming are doing so for a reason.  If much of the market has given up on the stock then going against the crowd can be a dangerous strategy.  As such, savvy investors typically do their homework in advance on who they are watching and wait for a good opportunity to step in.  To learn more about tax loss selling, here are three extra resources to read.

Globe and Mail – Investor’s almanac: How to harvest tax losses – (2011) – John Heinzl

Financial Post – Time to take your losses – (2011) – David Pett

The Blunt Bean Counter – Tax Loss Selling The 2012 Version – (2012) – Mark Goodfield

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The Mindless Investor Chapter 1: You Can Beat the Market – Chapter Review

Highlights of Chapter 1 – The Mindless Investor

In the introductory chapter of The Mindless Investor, Tyler Bollhorn sets up several important ideas and goes through some common pitfalls of most self-directed investors. Here are three key points from chapter 1.

Key Point #1: Most Stocks Don’t Beat the Market

Mindless Investor - Overcome Being Average

The first and most important theme of the first chapter is about overcoming being average.  According to Tyler, realizing that most of the stocks don’t beat the market most of the time is essential to getting beyond average returns. Getting away from being average means doing things that may seem to go against the “common wisdom”.  It is exactly that conventional wisdom, however, that Tyler puts forward as the enemy to most individual traders.  Despite what many think, smaller traders have several advantages compared to the larger participants.  The key is to understand how to use their size appropriately.

Key Point #2: Don’t Get Emotionally Attached

Mindless Investor - Don't Get Emotionally Attached

A second important theme of this chapter is being in the right frame of mind to be a successful trader. Successful traders are those who don’t get emotionally attached to the stocks they trade, they simply focus on what matters most – whether they have managed their risk and whether the stock is performing as it should.  Learning how to win and lose correctly are critical skills.  They start with understanding that winners have to be allowed to run, and that losing is part of trading.

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Globe and Mail 2012 Canadian Discount Brokerage Rankings Review

Virtual Brokers Takes Top Spot

The 2012 Globe and Mail Canadian discount brokerage rankings are out as of today with Virtual Brokers claiming the top spot and displacing the 6 year “reigning champ” of this survey, Qtrade (which came in second), by a razor thin margin.

Becoming Globe and Mail’s top ranked brokerage, albeit barely, was a pretty lofty achievement for Virtual Brokers for a number of reasons, not the least of which is because they were sitting at the bottom of the ranking back in 2010. This year (2012) marks only the third year in which Virtual Brokers has been included in the ranking, so for such a recent entrant into the ranking pool to move up so quickly is certainly noteworthy.

So what took Virtual Brokers from the bottom of the pack in 2010 to being crowned the best Canadian discount broker for 2012?  Certainly credit is deserved where credit is due.  Virtual Brokers has aggressively priced their services far lower than many of their peers and started to match the types of services found at their competitors.  Of course, it also helps to understand how the types of categories that went into this ranking could impact the outcome. In order to understand what being the “best discount brokerage” really means, we took a closer look at the rating system used by the Globe and Mail’s Rob Carrick.

Looking at the Ranking Structure

The following five sections (and the percent they play in the scoring) are used in the Globe and Mail discount brokerage ranking to assess each Canadian discount brokerage:

  1. Costs – 25%
  2. Account Information – 25%
  3. Trading – 20%
  4. Tools – 20%
  5. Innovation -10%

For this ranking, the two factors that heavily influence the overall ranking are costs and account information (combined they form 50% of the score).  The last three categories of trading, tools and innovation combine to form the other 50% of the ranking.  Interestingly, when looking at the definition of innovation: “Which firms are leaders in terms of cutting prices and introducing new services, and which are followers?” price comes in again.

Thus, the prices that a brokerage charges for its services end up having a bigger influence in the overall score relative to any other single component.  Virtual Brokers had the strongest showing on fees and innovation and tied for first in the “trading” category which likely gave it the edge it needed to squeak out ahead of Qtrade.  Qtrade shone brightest in the “account info” category.  Sometimes the overall ranking can mask some particularly noteworthy performances.  On the good side, buried in the results is an impressive perfect 20 out of 20 that TD Waterhouse managed to achieve in the Tools category (even though they were ranked 6th overall).  Conversely, the lowest ranking was given to HSBC InvestDirect which ‘earned’ a particularly biting comment: “They win in one respect – most annoying log-in process.”

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Questrade to offer unlimited free trades

We spotted the latest deal offered by Questrade – and it is a big one.  On the heels of Scotia iTrade’s offer of 100 days of unlimited trading, Questrade has responded by offering up to 3 months with unlimited trades.  While a slightly less amount of time than Scotia iTrade’s deal (100 davs vs ~90 days), the Questrade deal offers the potential for unlimited trading with much lower funding requirements for two of the three promotion levels.   Here’s how the deal breaks down:

  • With $50,000, you get 3 months unlimited trading
  • With $25,000 you get 2 months unlimited trading
  • With $1,000 you get 1 month of unlimited trading

The $1,000 deposit level is among the best deals we’ve seen going and the $25,000 is also pretty competitive.  For more info, check out Questrade’s Infinite Deal page here.

To compare this deal to other discount brokerage promotions, check out our current deals page here.

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Discount Brokerage Weekly Roundup – Nov. 16/2012

Canadian discount brokerages seem to be busy in their workshops planning what to unveil for next year.  Many of the major financial institutions have their financial year end at October 31st which means they’re setting budgets and planning marketing campaigns for 2013.  Because of the upcoming Globe and Mail discount brokerage rankings due out next week (see below), marketing teams are holding their breath as to how to respond.

In the meantime, a couple of Canadian discount brokerages are jumping the gun with some new promotions.  Scotia iTrade just launched a new “refer a friend” promotion, in which referring business to them can get you either a) $50 or $100 dollars or b) 10 or 50 trades free.  If the most recent J.D. Power & Associates  Investor Satisfaction rankings prove to be correct, however,  Scotia iTrade may find getting referral business from their clients a bit of a challenge. The number of Canadian discount brokerages currently offering “refer a friend” deals is now three (Questrade and BMO Investorline are the other two).  For updated details on discount brokerage promotions, see our deals page here.

Questrade appears to be heavily promoting their new Ring the Bell with Questrade campaign (with spots on StockTwits and BNN) in which the grand prize winner will get to ring the opening bell at the NASDAQ Marketsite in New York City.  In addition to airfare, hotel and $500 in spending money, you will get broadcast on the famous NASDAQ MarketSite screen (which you can see a live webcam of here).  For more information on the “Ring the Bell with Questrade” contest, click here.

Also, as mentioned in this article in the Globe and Mail, this week Rob Carrick will release his annual Canadian discount brokerage ranking.  We know that discount brokerages are eagerly awaiting this year’s results as this comparison, along with the J.D. Power and Associates ranking are great publicity for the discount brokerages.   If you’re interested in Canadian discount brokerage rankings, look out for our upcoming special “comparison of comparisons” series where we compare the different comparisons of discount brokerages.

Event Horizon

This week will be a busy one for HSBC as they are taking their series, “Global economic forecast – the world in 2013 and beyond” across the country.  This seminar will take place in Toronto (Nov. 19th), Saskatoon (Nov. 20th), Edmonton (Nov. 21st), Calgary (Nov. 22rd) and Vancouver (Nov. 23rd).  To register for the event you have to be a member of the site Business Without Borders.  Membership to the website is free as is entrance to the talks.  For more information click here.

Best Canadian Discount Brokerage Tweet of the Week

This week’s best discount brokerage tweet comes from the affiliate of Disnat Direct,  @DesjardinsGroup.  Typically the tweets from @DesjardinsGroup point to interesting articles in the news elsewhere, but a link to original economics research caught our eye.  Specifically, the report on what might happen to the U.S. dollar going into the much talked about fiscal cliff.  To read the tweet, and the article, click here.

The People Have Spoken

This week, a post by J Watts in the Canadian Money Forum, started an interesting discussion on the “Best Bank for Mutual Funds and Direct Investing”. If, like J Watts, you’re a long-time holder of mutual funds, you might want to have a peek at what others had to say.

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Discount Brokerage Weekly Roundup – Nov. 9th 2012

The big news from the Canadian discount brokerage industry this week was the huge announcement that OptionsXpress will no longer be available in Canada.  Virtual Brokers will be acquiring all of the OptionsXpress Canada accounts as of December 1st pending regulatory approval. This now narrows the number of Canadian discount brokerages that provide a powerful and easy to use options trading platform along with great stock market education resources down by one.  According to an apparent notice sent to clients (which we found posted here but cannot confirm its authenticity) from OptionsXpress Canada, individuals who wish to transfer to another discount brokerage must let OptionsXpress Canada know in writing before November 23rd otherwise the account will be passed along to Virtual Brokers. Be sure to contact OptionsXpress Canada directly for any questions.

Questrade announced this week that they are serving as market maker on behalf of Foran Mining Corporation (FOM on the TSX Venture Exchange).  The one year agreement will take effect November 12th and Questrade will receive $5,500/month for these services.  Questrade has been somewhat active in adding companies to its market making segment adding American Vanadium, Red Tiger Mining and Destiny Media earlier this year.  To see the TSX market makers list, click here.

When National Bank Direct Brokerage announced via twitter that they have a LinkedIn page we got a little excited as they’re currently not really around on the social media scene except via their parent National Bank’s twitter feed (to see who which discount brokerages are active on social media, click here). Unfortunately, when we stopped by to have a look around there wasn’t a lot of content on there yet.

Don’t forget, November is Financial Literacy Month.  We’ll be posting all sorts of interesting gems for self-directed investors to help them enhance their knowledge of investing and finance. For more information on Financial Literacy Month activities, check out this page here.

Best Canadian Discount Brokerage Tweet of the Week

Even though the LinkedIn tweet left us scratching our heads a little, National Bank managed to score another tweet of the week for their Clearfacts newsletter on the difference between investing and trading.  You can read the article via their tweet here.

Event Horizon

This upcoming week has a couple of presentations for self-directed investors that are likely to be interesting.  Tyler Bollhorn’s new book, The Mindless Investor, is launching so he’s running a couple of free sessions to explain some of the principles from his book and how do-it-yourself investors can use these to help them with their trading.  Sessions will be held in Calgary (Nov. 12th) and Vancouver (Nov. 13th).

The People Have Spoken

Sometimes matching stock orders between buyers and sellers takes time.   It’s usually why discount brokerages give themselves a few days to get things settled behind the scenes.  Usually it’s a three day (known as T+3 as in Time + 3 days) window between the transaction date and the settlement date (for a great explanation, see this link).  This week, forum poster raxdax10 wanted to know why the money didn’t appear on their TD Waterhouse discount brokerage account after selling a stock.  Read what some helpful folks had to say here.

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OptionsXpress Canada officially exiting the Canadian Discount Brokerage market

The Canadian discount brokerage market this week saw one of the players officially exit by selling their Canadian operations.  Virtual Brokers announced today that they will be buying out OptionsXpress Canada effectively signaling the end of OptionsXpress in Canada and shrinking the number of big discount brokerages by one.  The business agreement is set to take effect on December 1st pending regulatory approval.

OptionsXpress Canada, which is owned by American discount brokerage Charles Schwab, had put their Canadian business under review in September and halted accepting new Canadian clients. The fact that Canada’s discount brokerage industry is shrinking in not entirely a surprise given the size of the Canadian market and the number of competitors battling for their share of the investor pie.  With investor sentiment keeping many out of the markets as well, discount brokerages have faced some major headwinds in trying to gain new business.

For Virtual Brokers, the additional accounts will provide a lift to their business, assuming they can hold on to the new accounts. Those used to the OptionsXpress platform and suite of services may be on the hunt for something similar.  Also, Virtual Brokers is already working through the recently announced decision to move the back office functions of trade clearing away from Penson and bring it in-house. While they may be busier than usual, the official statement from Virtual Brokers (which can be found in the following news release) suggests this is another big stride in their race to deliver a competitive experience for consumers.