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Discount Brokerage Weekly Roundup – December 9, 2019

With the holiday season just a few short weeks away, gifts and presents are top of mind for many folks. Fortunately for Canadian DIY investors, there are some early presents that have arrived courtesy of some of the newest online brokerages in Canada – and the timing couldn’t be better.

In this edition of the Roundup, we keep things all Canadian (for a change) with a look at the newest online brokerage to roll out in Canada – including the challenges and opportunities they face in a crowded field. From there we’ll review the latest feature being rolled out by another relatively new online brokerage, and how their newest feature can be both a blessing and a curse. As usual, we serve up some interesting chatter from DIY investors on Twitter and in the investing forums.

CG Direct Rolls Out as Canada’s Newest Online Brokerage

This past week, an important and long-awaited shift took place in the Canadian online brokerage space. Jitneytrade, the online brokerage in Canada that is heavily focused on the active trader, and which was acquired in 2018 by Canaccord Genuity, officially wound down their website and transitioned to the new online brokerage segment at Canaccord called CG Direct.

In keeping with the acquisition trend in the Canadian online brokerage space, the smaller independent discount brokerages such as Virtual Brokers, Qtrade Investor, and Credential Direct have been snapped up by larger wealth management players. In the case of Virtual Brokers, it was CI Financial and for Qtrade Investor and Credential Direct, it was Desjardins. And, although the figures related to these transactions weren’t made available, the deal for Jitneytrade was, and came in at $14.8M in June 2018.

The key takeaway: independent online brokerages in and of themselves are not sufficiently profitable to be commercially sustainable in Canada. They need to be part of a spectrum of wealth or financial management services in order to have a chance of competing in the ultra-crowded online investing segment.

So, what would possess Canaccord to wade into a very crowded online brokerage space in Canada? Like most deals, it’s likely driven by ROI.

According to Canaccord’s FY 2019 annual report, the acquisition “serves to support the Company’s mid-market growth strategy by enhancing its market share of equities trading and providing access to new areas of growth through accelerating its development of an enhanced fintech product offering.”

What a positive return looks like for Canaccord is not just growth in revenues from commissions but also a deepening of relationship with their existing (and wealthy) managed wealth client base. With the acquisition of an online brokerage, no longer does Canaccord have to step aside while their private wealth clients who want to “dabble” on their own take assets to another firm or online broker. Instead, Canaccord can now keep those clients “in the tent” and create a stronger case for bringing assets located elsewhere into Canaccord.

Of course, growing assets from within is only one facet of the ROI picture. Another component to the possible return on this purchase will be the extent to which they can win new clients. In this regard, things are going to be considerably more difficult for Canaccord to successfully execute on.

While Jitneytrade may be a name more familiar to professional traders, among most retail investors it is not. This creates two distinct challenges: one is carrying over the Jitneytrade “brand” to the active trader segment, and the second is translating the Canaccord brand into something retail investors believe is compelling.

In the case of the first challenge, retaining existing Jitneytrade clients under a new banner of CG Direct will likely not be too difficult assuming service and pricing stay relatively close to where they were pre-merger. Interestingly, digging into the details of the deal, there was a category of the transaction labelled “intangible assets” which was valued at $1.9M, which specifically related to the value of customer relationships. Indeed, the ultra-active and professional trader segment is a high-touch client, which simply means that while pricing is key, relationships matter (a lot). Going forward under a new banner of CG Direct, growing the brand among the active trader community will now require selling the merits of CG Direct as the destination for active traders. It will have to compete directly with Interactive Brokers in this regard.

The second challenge will clearly be attracting business in the retail investor segment in an already crowded discount brokerage field.

With a new brand, there are inherent hurdles to clear (such as: Who is this firm? Can they be trusted?) and out of the gate, there are already some clear stumbling blocks to winning the attention battle for CG Direct. Perhaps the biggest challenge will be the “differentiator” among the other players.

For new entrants to the Canadian online brokerage space, pricing is one of the biggest drivers of attention among DIY investors. The pricing for CG Direct – at least for the equity commissions – is at the industry standard $9.99 per trade (plus any ECN fees), which pits it against the larger online brokerage competitors. When it comes to options, though, pricing is a bit more competitive (or even better) than most of the online brokerage peers. CG Direct will be charging $1.00 per options contract with a minimum commission of $10.

On the technology front, the retail web-based trading platform for CG Direct, called DirectFolio, will be up against incredibly tough competition. While the core business of an online brokerage is order execution, the “standard” offering for most online brokerages when it comes to platform is to deliver a relatively feature rich experience. As an extension of that, the current website and digital experience of CG Direct is not the kind of wave-making experience that something like Wealthsimple Trade has been.  In particular, there is a sense that CG Direct is a “desktop” brand versus a “mobile” one, suggesting that the pace of growth in the retail investor segment is going to be limited by the ability of CG Direct to appeal to the newer, tech-savvier generation of investor who all the competitors are working very, very hard to attract.

When an online brokerage can focus its identity on a segment – e.g. if CG Direct were purely for active traders – it becomes easier for consumers to understand what CG Direct does and when the right time would be to engage them as an online brokerage. In this case, however, with CG Direct going after two segments of the market, it will be an uphill battle to structure communications to be appealing to both.

One component of the story that we have not yet dove into is the potential for robo-advisory services to also emerge from this transaction. In addition to Jitneytrade, Canaccord acquired Finlogik – a company also started by the founder of Jitneytrade. The Finlogik side of the deal also brings with it the software platform that could be used for the deeper push into the digital wealth management experience (e.g. robo-advice) and the web-based trading platform for the self-directed investor.

Ironically, as online brokerages, their core business comes down to execution. In this case, success of the CG Direct brand will undoubtedly come down to execution on the value proposition and brand promise.

For active investors and traders, this means CG Direct needs to continue to execute well on the “bespoke” pricing and service experience that Jitneytrade was known to offer. And, in wading into ultra-competitive waters on the retail investor side, delivering on the value that online investors expect from a discount brokerage (pricing, platform, ease of use, service, resources, etc.) will be crucial if the online brokerage arm of Canaccord is going to be more than a retention tool for existing clients.

Wealthsimple Trade Transfers Now Active

The journey of a thousand miles begins with a single step. In the road to bringing even lower commission costs to Canadian DIY investors, Wealthsimple Trade has been slowly moving forward on its plans to be a genuine competitor to other Canadian online brokerages. This past week, the social media feeds for Wealthsimple Trade highlighted another important step that the zero-commission brokerage has taken to make it easier to do business with them: enable account transfers.

DIY investors can now request a transfer of their eligible registered and/or registered accounts to Wealthsimple trade. Among the accounts users can transfer over to Wealthsimple Trade are TFSAs, RRSPs and non-registered accounts.

As an added bonus, if the amounts being transferred over are greater than $5,000, then Wealthsimple Trade is willing to cover the transfer fee that the existing brokerage will likely charge on the way out.

There is still no way to directly transfer between Wealthsimple and Wealthsimple Trade, however the fact that it is now possible to go from one institution directly into Wealthsimple Trade without having to sell a portfolio into cash first is a big plus for DIY investors who want to take a dive into the zero-commission experience.

For other online brokerages, even though the changes that are taking place at Wealthsimple Trade are still small enough not to be too concerning, the ability to have investors transfer funds and securities away from their brokerage is one which undoubtedly raises some eyebrows.

The addition of account transfer capability was undoubtedly an important feature to get rolling just before RSP season ramps up to full speed, however, this particular feature is not without its risks.

Unlike many of its peers, Wealthsimple Trade (and its parent, Wealthsimple) have made significant strides to redefine user experience in the financial and wealth management space. Their websites, apps and even content are very much the envy of other wealth management firms and as such, the Wealthsimple brand has earned a substantial degree of goodwill with consumers, in particular millennials.

Of course, aesthetics aside, when it comes to people and their money, emotions inevitably factor in and expectations around reliability, stability and speed are also crucial. Why this matters in the context of account transfers is because unlike account opening (which can be completed in minutes online) the account transfer process can take anywhere from two to four weeks (and in many cases, even longer). This pits the ultra-fast, low-friction experience and promise of Wealthsimple Trade against the realities of the financial network between online brokerages in Canada today. And, for anyone who reads the financial forums and tweets about online brokerages on a regular basis, it’s clear that account transfers make up a unique category of frustration among DIY investors.

So, as widely anticipated as this feature is for Wealthsimple Trade, it is almost one of those “be careful what you wish for” situations as well.

Not only is the risk (based on ample evidence from other DIY investors’ brokerage transfer experiences) of mistakes incredibly high, the consequence and subsequent optics of delays that stretch into the weeks and months are terrible. If Wealthsimple Trade manages to generate enough interest, they could be the victims of their own success when it comes to having too much volume of transfer activity taking place, which would also strain their internal resources. Add to that the very high likelihood that their target client is on social media in some way shape or form, and the magnitude of the mistake or delay – even if it is not on Wealthsimple’s end – would be outsized relative to their peer firms.

When it comes to trading and markets, timing is really everything. In the case of Wealthsimple Trade’s new transfer capabilities, it may be a question of investors waiting and seeing as to whether or not the two to four week window is realistic or if it is something even longer. If there’s one thing worse than paying bad fees, it’s enduring the uncertainty of exactly who has your entire nest egg while it’s being moved. Trading markets is fun, trading brokerages – at least from what is written about online – not so much.

Discount Brokerage Tweets of the Week

From the Forums

No Time for Bonds

A DIY investor questions the advantages of bonds over HISAs. Fellow forum users weigh in, providing insight on situations in which each type of investment would prevail. Read more here.

Slow and Steady Wins the Race

A 45-year-old, self-employed Redditor wants to start investing and turns to the forums for guidance on where to begin. Read the advice that fellow forum users gave this new DIY investor here.

Into the Close

That’s a wrap on another eventful week. Fortunately this week there was lots taking place in the Canadian online brokerage space. Just like the shopping habits of many consumers, the online brokerage space still might have a few last-minute surprises left before the end of 2019. With a new decade just around the corner, some new discount brokerages starting to make waves here in Canada, there’s lots for DIY investors to look forward to in 2020. To anyone braving the malls to shop, hats off to you and wishing you lots of great parking karma!

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