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Discount Brokerage Weekly Roundup – July 26, 2021

The Olympics are a very public stage on which athletes have to be prepared to do their best. In more ways than one, this year’s games serve up some lessons to online brokerages on how to stay cool in the public eye, as well as under the pressure of intense competition.

In this edition of the Roundup, find out which US online brokerage appears to be taking the lead when it comes to innovative approaches for the new terrain of online investing and what it could signal for Canadian online brokerages looking to get creative with client experience. Next, we recap the highs and lows for Canadian online brokerages this week and close out with healthy dose of debate and chatter from DIY investor forums.

Interactive Brokers Positions Itself for a New Normal

There’s no doubt the upcoming Robinhood IPO is going to capture a lot of attention from curious onlookers, analysts, and investors this upcoming week.

As a publicly traded company, there will be a lot of scrutiny on the operations and performance of Robinhood, and a lot more information to dive into on the kinds of efforts Robinhood is going to undertake to drive reasonable rates of return to investors.

While reporting performance might be new to Robinhood, one online brokerage that has become well-practiced to life in the public markets is Interactive Brokers. This past week, Interactive Brokers held their regularly scheduled earnings call, and while there were some blisteringly high headline numbers on client growth to report on, there were several interesting things that surfaced that appear to have flown under the radar that we see as reflecting a very agile move to navigate the new normal of online investing.

Record-breaking Client Growth

There’s no question about what the headline is with respect to the latest earnings release.

Client growth compared to a year ago was up 61% to over 1.4 million client accounts. And while it may pale in terms of number of accounts when compared to Robinhood (which is estimated to have 22.5 million funded accounts), what stands out about Interactive Brokers is that the average account balance is $250,000. By comparison, the reported median balance of Robinhood account holders was $240. 

Even though Interactive Brokers has a competitor offering to the Robinhood cost model (i.e. IBKR Lite), the primary revenue driver for the online broker is still trading commissions, not payment for order flow.

There were two other interesting things that popped up in the earnings call which didn’t get much attention and one that should have gotten more attention but was not covered in the analyst Q&A.

Inactivity Fees Lower Friction to Restart

Earlier this month, Interactive Brokers made an interesting move by removing inactivity fees. On the surface, the move seemed to suggest that Interactive Brokers might be positioning itself to make an overture to some of the clients that would typically not qualify to have the inactivity fees waived – namely, individuals with less than $100,000 in assets or those who didn’t generate at least $10 per month in commissionable trades. For an online brokerage that deliberately sets its sights on active traders, this seemed a little unusual.

Fortunately, this past week, the founder (and still active spokesperson) for Interactive Brokers, Thomas Peterffy, provided additional context for dropping the inactivity fees. Peterffy stated:

“we would like to hold on to the people who have had accounts with us to run them to continue to have accounts with us even if they become inactive for a while. And so, the account is open even if they just leave a few dollars. And then, when they are ready to invest again, they will do it with us.”

Thus, the decision to waive inactivity fees was actually a move to hold onto active trader customers who would want a pause from trading. Instead of closing an account while it is not being used and potentially going to another source to reopen it when wanting to restart trading, by waiving the inactivity fees, Interactive Brokers is hoping that those lucrative, highly active traders will find it easier just to restart an existing account rather than try to open a new one.

This use case is a great example of looking at client behaviour and finding an opportunity to reduce the friction for a client who is behaviourally inclined to actively trade to be able to restart again.

As all online brokerages are aware, active traders are particularly hard to come by, so the motive behind the move for Interactive Brokers to remove inactivity fees makes a lot more sense when positioned in terms of retention as opposed to new client recruitment.

Investor Education Innovation

Another interesting development that was mentioned in the latest Interactive Brokers earnings call was an investor education initiative developed for the online learning platform Coursera. Interactive Brokers has developed and launched a specialization, entitled a “Practical Guide to Trading Specialization,” which is actually comprised of four courses covering the following topics:

  • Fundamentals of Equities
  • Forex – Trading Around the World
  • U.S. Bond Investing Basics
  • Derivatives – Options & Futures

As of the date of publication of this edition of the Roundup, the Interactive Brokers course had a 4.3 rating (out of 5) from 45 participants and enrollment of just over 2,450 students.

In addition to being free, there is a significant bonus feature of getting a “shareable certificate” which can be displayed on LinkedIn. The very interesting catch is that in order to receive the certificate, attendees must complete a hands-on project. And one of the tools that students can use in order to complete the hands-on project is the Trader Workstation (made available via free demo account), which is the Interactive Brokers trading platform.

Investor education was mentioned in the quarterly results, indicating that this feature continues to serve a strategic purpose to better educate investors on how markets work – especially those investors who are newer to investing. Interestingly, this theme is also echoed among several Canadian online brokerages who are investing additional efforts to provide educational resources to online investors, many of whom are just getting started on their online investing journeys.

For Interactive Brokers, the Coursera investor education offering is a very polished mechanism to generate awareness and interest in the Interactive Brokers platform.

Beyond just awareness, however, the fact that users are being nudged to download the Trader Workstation is a savvy move by Interactive Brokers to directly market to, if not, onboard new customers. Granted, a course as demanding as this won’t see a crushing flood of individuals flock to it; however, Interactive Brokers understands that their strategy on new customers is about quality rather than quantity. The added bonus that individuals who complete this course can share it on their LinkedIn profile will advertise the course as social proof and underpins just how innovative this latest move is from a marketing perspective.

As online brokerages here in Canada and in the US wrestle with trying to provide educational content that DIY investors will actually consume, this Coursera offering by Interactive Brokers provides an interesting example that other online brokerages are likely going to be inclined to consider replicating.

Crickets on Crypto

Of course, one of the big developments that we were listening for more information on, which surprisingly, did not get discussed on the conference call, was the launch of cryptocurrency trading on Interactive Brokers.

Earlier this year, we reported the launch of crypto trading by Interactive Brokers; however, there hasn’t been much in the way of details provided since then. Perhaps not entirely by accident, Thomas Peterffy – a notable critic of cryptocurrency – also went on record as saying that he himself now owns some cryptocurrency.

The shift, it seems, sounds like capitulation.  

Peterffy has clearly seen that there is at least some possibility of cryptocurrency becoming a valuable asset class regardless of his personal belief on the thing. Most traders understand that it’s best not to fight the tape, and for the foreseeable future, cryptocurrencies continue to be a part of where money is flowing to.

What was said about the cryptocurrency trading at Interactive Brokers was minimal – the only update we received is that there is more news to come at the end of the month.

Once again, the remarks made over the earnings call and during the Q&A component of the call provide a unique window into the mindset and possible strategic direction of Interactive Brokers going forward. While the kinds of disclosures and discussions are usually well-vetted and rehearsed, the reality is that the occasional hint or nugget gets dropped.

By their own admission, despite the strong numbers posted for the quarter, Interactive Brokers (like other online brokerages) is seeing that there is a slowdown in the pace of online investors rushing to open an online brokerage account and trade it with the same fervor that they had last year or during the first calendar quarter of 2021.

To navigate the next normal, it’s becoming clearer that new features and offerings are going to be required. In this case, it seems that for Interactive Brokers, features such as cryptocurrency trading, as well as client experience features, like reducing inactivity fees, educational resources, and ramping up of customer service are going to be important drivers to hold onto existing clients rather than purely seeking out new ones.

Canadian Online Brokerage Updates

While there’s been lots happening with US online brokerages this past week, Canadian online brokerages have also been busy juggling their own ups and downs.

On the upside, National Bank Direct Brokerage announced the conclusion of the Biggest Winner competition. The ETF picking contest, organized by Horizons ETFs and sponsored by National Bank Direct Brokerage, is now in its 10th year with National Bank Direct Brokerage, having sponsored the competition for the past nine years.

This year, there were 2,620 registrants which, according to contest organizers, was the highest registration since the first edition of the competition. The winner of the competition managed to generate a six-week return of 25.67% and took home the top prize of $7,500. Second place won $2,500 and there were six weekly prizes of $500.

For National Bank Direct Brokerage, this contest is a unique way to boost awareness of the online brokerage and position itself alongside an important selling point: the fact that they offer commission-free trading of ETFs. Of course, the challenge for all Canadian online brokerages coming out of the pandemic is to find creative ways to connect with investors, especially at a low cost.

With a prize payout of $13,000 and just over 2,600 registrants, the numbers from an advertising point of view work out to just under $5 per registrant, which is an exceptionally good deal if some of those registrants end up taking a closer look at either Horizons ETFs and/or National Bank Direct Brokerage.

Even though National Bank Direct Brokerage has been a long-time sponsor of this event, the past year seems especially relevant in terms of the attention that this bank-owned online brokerage has been getting from online investors. And (see forum post below), the additional marketing activities that NBDB is undertaking will almost certainly help in generating more interest and curiosity.

On a literal down note, this past week also saw a number of online brokerages in Canada impacted by a technical outage from Akamai that took down brokerage trading during market hours. More than just online brokerages were impacted, with major banks in Canada, as well as major tech and business names, experiencing service interruptions.

In predictable (and understandable) fashion, Twitter and reddit were awash in acrimonious posts from unhappy online investors, many of whom learned the hard way just how fragile the online trading environment can sometimes be. And even when online brokerages aren’t themselves the culprit, the fact that customers can’t get what they want, when they want it, is enough to leave a digital trail of negative sentiment.

Interestingly (and fortunately), the immediate reaction from investors who were frustrated by the outage were tempered by other online investors and users who posted that the outages were impacting other sites and companies, and this was not an event that was broker-specific.

Nonetheless, the lesson for online brokerages is to be prepared for some (or many) users to take a shoot-first, ask questions later approach to service interruptions. The easier it is for online brokerages to communicate service status and cause of interruptions, the easier it will be for the “fact-checkers” to be able to broadcast reliable information to those users simply blowing off steam.

From the Forums

Word on the Street

When it comes to questions about online brokerages, there are the usual suspects that DIY investors are curious about. Lately, however, we’ve spotted more questions being asked about National Bank Direct Brokerage, such as this post from reddit, in which one user is looking for opinions from fellow DIY investors on this increasingly popular online broker.

Banter Ads

When it comes to advertising, there is simply no pleasing everyone. Of course, if the goal is to generate an emotional response to get people thinking (and talking), then mission accomplished. This fascinating reddit commentary emerged from the recent advertising battle taking place between popular online brokerages Questrade and Wealthsimple Trade.

Into the Close

That’s a wrap on this week’s online brokerage activity. There’s no question that the Robinhood IPO and associated fanfare are going to be in the spotlight. Like everyone else, we’re curious to see where the dust (and price) will settle on the first day, but this is certainly a week for the history books. And, speaking of history in the making, the Olympics are now well underway. Congratulations to team Canada for already making a splash at the games.

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Discount Brokerage Weekly Roundup – July 19, 2021

There are rare occasions in the Weekly Roundup when the outside world serves up a perfect metaphor for what’s going on in the world of online brokerages. And this week, it’s all about big names, big billionaires, and big launches.

In this edition of the Roundup, we take to the launchpad to witness the liftoff of new feature at a popular bank-owned online brokerage. From there, we pull up the radar screen for some interesting activity on the advertising front, as well as a potential billion-dollar payday to the founders of a US-based online brokerage (if they can manage to scale their business even farther than it already has gone). As is standard fare, we also serve up intriguing DIY investor commentary on fractional shares and trading platform glitches.

BMO InvestorLine Launches adviceDirect Preview

About two weeks ago, the BMO YouTube channel (BMOCommunity) started to share a number of videos about one specific product line: adviceDirect.

Fast forward to an announcement this past week of the launch of a new service from BMO InvestorLine: adviceDirect Preview. This new service enables users to take a test drive of the adviceDirect experience (albeit with limited functionality) and tinker with the “free account” features.

This announcement isn’t so much a new service as much as it is a new twist on an existing service. adviceDirect launched (waaay back) in September 2012 as a solution to support self-directed investors with decision making around their trading and portfolio management. Since its initial launch, adviceDirect has undergone a number of changes, including lowering the minimum required to open an adviceDirect account from $100K to $50K, and the capping of annual fees to be paid for this service at $3,750.

The new “preview” feature for adviceDirect is aimed at providing new users with some of the resources available to full adviceDirect clients. Signing up for an adviceDirect Preview account is free and provides users with access to personalized watchlists, trading ideas via five preset stock screeners, learning and educational materials, and access to the recently launched Healthcheck portfolio analyzer.  

One of the natural questions that has accompanied adviceDirect is who this service is for exactly?

On the one hand, self-directed investors are generally averse to paying for advice, and on the other hand, those who might be willing to pay for advice and wealth management services prefer to have the day-to-day oversight and management taken care of by a professional.

That adviceDirect has managed to endure despite these questions is an indicator that there is a segment of online investors who prefer to have access to a trusted, credentialed professional who can weigh in on trading and portfolio management decisions.

Interestingly, unlike the world in 2012, in 2021 there are now rich and active communities of online investors in places like reddit that can help investors “crowdsource” answers to investment decisions. That said, getting personalized attention from a professional in a reasonably convenient manner is a compelling proposition to those who don’t believe that random strangers on the internet will be a reliable resource for financial advice.

On balance, adviceDirect Preview is an interesting proposition for DIY investors who are advice-curious.

While only a select number of features are available in the adviceDirect Preview platform, those features could be used to help evaluate whether or not an investment plan is “on track” – something the adviceDirect platform is essentially built around.

Given the relatively high watermark to qualify for an adviceDirect account, younger investors or those just getting started might not qualify for the full experience for some time. That said, by offering a free version of the adviceDirect experience, it is a creative way for BMO InvestorLine to identify and cater to potentially valuable new clients.

From an industry perspective, being able to offer a “try before you buy” is a great strategy to create a relationship with curious DIY investors. For adviceDirect in particular, this move will hopefully help open up opportunities for skeptical investors to see whether there is value to be had in the advice-lite version of wealth management solutions.

Among the important benefits for BMO InvestorLine is that the adviceDirect platform is unique among online brokerages in Canada. Getting the model to work and to be cost effective is not something that can happen overnight, so if other online brokerages are going to start emulating or delivering something similar, there is going to be a long runway before adviceDirect finds a direct competitor.

And, while adviceDirect might not be a stranger to uphill battles, this year in particular stands out as a challenging one to launch new features in.

This spring/summer in particular has seen a surge in feature releases from Canadian online brokerages big and small. As we’ve covered in numerous Roundups this year, the flurry of new features coming to market suggests that the marketing and communications teams have their work cut out for them. Already, the activity on YouTube to release content related to adviceDirect suggests that a significant push is coming to promote this platform. The creation of a “preview” version of adviceDirect offers up both a boost of awareness of the platform, as well as a possible group of prospective future clients, so for BMO InvestorLine, it seems like a winning combination.

If history offers any lesson on adviceDirect, it is that it will continue to be more niche compared to the core DIY investing experience. With many more new investors now participating in the stock market, however, a material number of these investors might be inclined to seek out additional tools – and advice – about what to do after the fast money trades have come and gone. And, if there’s one clear example in favour of taking things slow and steady, adviceDirect is it.

On the Radar: Quick Online Brokerage Stories

Ad Battle

Even though there is a really interesting YouTube video about sharks and blood in the water, it still feels apropos to point out that in a fiercely competitive space, it seems like Canadian online brokerages sense something is up. Or more appropriately, down.

After scanning casually through reddit, one very interesting ad campaign from Questrade surfaced that appears to take direct aim at some of the pain points users have expressed with Wealthsimple Trade.

Ironically, for anyone who has spent any time on YouTube lately, Wealthsimple Trade ads are everywhere, indicating that there’s a bit of a digital media blitz taking place among Canadian online brokerages.

As mentioned above, there have been a whole slew of new features launched this year by online brokerages, and clearly, there’s got to be new marketing campaigns associated with these brands.

With much more advertising expected this year than in past years, we anticipate even more fierce competition for attention and some creative campaigns to surface before the end of 2021. Stay tuned!

Sherwood Like a Billion

Would a billion-dollar payday make you work harder or more creatively? We’ll soon find out whether or not putting another billion dollars on the line will prove to be the catalyst that gets Robinhood’s share price to hit certain targets by 2025.

In a recent article on the upcoming Robinhood IPO spotted on Reuters, there’s apparently a huge payday ($1.4 billion USD) for cofounders Vladimir Tenev and Baiju Bhatt if they can get the stock price of Robinhood up to $101.50 per share, even more money if the share price hits higher price levels.

What would need to be true for Robinhood, an already popular online brokerage, to hit the kind of per share price levels noted in their filing, would be to attract even more clients who are active investors and for Robinhood to find more ways to monetize their growing client base. With the cash generated from the IPO, there will certainly be a number of options to consider; however, it looks like increasing their global footprint and their service offering to clients will likely be a big part of the plan.

From the Forums

A Glitch to Scratch

After a year with a popular online brokerage, one DIY investor simply had enough of the technical hiccups. Find out from this post, which features ended up becoming points of frustration for one reddit user, as well as what other DIY investors had to say in response.

It’s Been a Slice

Now that fractional shares are here, there are clearly some kinks to get out of the way. In this post from reddit, a confused reader turns Wealthsimple Trade’s latest feature into an intriguing discussion about how, exactly, fractional shares work.

Into the Close

That’s a wrap on another out-of-this world edition of the Roundup. While billionaires going to space is definitely going to make it to the highlight reel for the year, there are also going to be lots of upcoming records to be broken at the Olympics. Attendance won’t be one of them (unless it’s for the fewest attendees). Here’s wishing everyone an award-winning week and the Canadian athletes all the best!

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Discount Brokerage Weekly Roundup – July 12, 2021

Seems like soccer and hockey players aren’t the only ones working overtime this summer – online brokerages are keeping themselves (and their competitors) very busy. While there might not be any big trophies or awkward press conferences, it seems like there is no shortage of things for online investors to be cheering about this summer.

In this edition of the Roundup, we highlight the biggest small development: the arrival of fractional stock trading in Canada. Next, we dive into a fee drop announcement that appears to be a much bigger deal than it seems. As always, we wrap up with DIY investor chatter from the forums.

Fractional Shares Now Available at Wealthsimple Trade

Thirteen isn’t usually considered a lucky number, but for Canadian DIY investors, it just became one.

This past week, Wealthsimple Trade launched fractional share trading in Canada (albeit on a limited basis), and as result, the landscape of online trading appears to be poised for yet another big change.

Although the list of stocks eligible for fractional stock trading is small, by introducing fractional share trading to mainstream investors in Canada, Wealthsimple Trade has managed to take yet another highly sought-after feature from the US online brokerage space and make it a reality for Canadian DIY investors.

Ever since fractional share trading became commonplace among mainstream US online brokerages, such as Schwab’s “Stock Slices” and Robinhood’s fractional share trading program in late 2019, Canadian DIY investors have been vocal about wanting this kind of feature to be launched by Canadian online brokerages.

This launch is yet another example of Wealthsimple Trade following the lead of US online brokerage Robinhood in delivering online brokerage services in a commission-free way. It also comes at a time in the Canadian online brokerage market when new features and value-added offerings are flooding the market. Given how popular this latest release will be, however, other features being released by brokerages are now going to have to compete even harder for user attention.

There’s lots to unpack with this latest announcement by Wealthsimple Trade, perhaps the most significant being that the die has been cast for fractional share trading here in Canada.

To tease out how the rest of the online brokerage field might respond, it is valuable to look at some context around fractional share trading, especially focusing on who this feature is most appealing to.

To level set, fractional share trading is when online investors can purchase a fraction of a share instead of a whole share. In some dividend reinvestment schemes, investors have been able to do this with dividends but never when buying a stock that doesn’t offer a dividend.

The primary appeal of fractional share trading is that investors with limited assets can still participate directly in purchasing shares of companies whose stock prices might be quite high. For example, one of the names on the list of eligible stocks, Shopify, is currently trading at almost $1,863 per share (closing price at the time of writing), which would require an investor to pony up at least this amount to purchase one whole share. With fractional share trading, investors can now own the amount of a stock that they can afford to buy.

Clearly, fractional share trading is not something that ultra-high net worth clients might be interested in as much as DIY investors who are just starting out, or who have modest investable assets. And that, it seems, is a key driver behind why we’re seeing fractional share trading at Wealthsimple Trade before we’re seeing it elsewhere – they’re deliberately launching features that would appeal to their core customer demographic base. Although the target audience for Wealthsimple Trade is younger and therefore not flush with a large amount of investible assets (yet), the reality is there is a very large target audience to who this applies, which provides the scale required for a program like this to be economical for Wealthsimple Trade.

Another interesting angle to this launch is that Wealthsimple Trade opted to have only four Canadian securities and nine US-listed securities to start. Of the four Canadian stocks, Shopify seems like a shoe-in based on its price and trading volume, but the remaining three choices seemed somewhat arbitrary. Even if Royal Bank and Canadian National Railway could be attributed to the combination of relatively high price and high liquidity, TD Bank – which at last check was trading at $84.70 – is lower in price than say BMO or CIBC, so it is curious as to why the one bank was included in the first list and not several others. It was also curious to see why only four names made the starting grid in Canada, but twice as many in the US.

Based on the business model of Wealthsimple Trade, offering up more choices for investing in fractional shares in US-listed stocks makes sense. Not only are there more “high priced” stocks to choose from to be a part of this program, but Wealthsimple Trade stands to make more money per trade (1.5% foreign exchange fee) for US-listed stocks.

And therein lies the fly in Wealthsimple Trade’s “low cost” ointment.

There is a growing “awakening” taking place among online investor communities that while Wealthsimple Trade’s zero commission pricing is a good deal for Canadian investments, it can actually be more expensive than a traditional online brokerage for US-listed stocks. The fractional share trading model unfortunately does nothing to alleviate that situation for smaller investors, and gives them the unenviable choice to pay a premium to participate on a fractional basis, or to use an ETF to obtain fractional exposure (potentially at another online broker).

There is no doubt more buzz to come around fractional share trading at Wealthsimple Trade. Competitor Canadian online brokerages are almost certainly going to have to follow suit in much the same way that several US online brokers did when fractional share trading went live in the US. That said, until Wealthsimple Trade changes their business model to allow for more competitive pricing to trade or invest in US-listed securities, incumbent Canadian online brokerages have a narrow window of opportunity to highlight their own cost efficiency in this regard and bring to market the ability to trade fractional shares.

We don’t anticipate Wealthsimple Trade’s list of eligible stocks for fractional share trading will stay at 13, however, the longer they keep their pricing for US-listed securities in place, the unluckier they may become.

Interactive Brokers Eliminates Inactivity Fees

If there’s one thing that online investors collectively enjoy hearing about, it’s a fee drop. Interactive Brokers announced this past week that effective July 1, 2021, they are no longer charging the $10 per month of inactivity fees to their clients. News of this move made a big splash.

While inactivity fees are sometimes a deal breaker for beginner or less active investors, at Interactive Brokers, their core customers have usually been highly active investors or day traders. So hitting the $10 per month in commission spend or having more than $100K in assets was not much of an issue.

Data from their most recent monthly metrics reveal, for example, that clients are averaging 500 trades per year for 2021 (estimated from the annualized Daily Average Revenue Trades or DART data per account for the first six months, and then averaged), which works out to about 2 trades per day – a threshold that would handily get most clients past the $10 per month in commission fees generated. As such, inactivity fees are likely not a material source of revenue for Interactive Brokers – although the impact of this move will be something we’re looking out for on their next earnings release.

Despite the $10 fee per month not necessarily being relevant to active investors, for passive or less active investors, the fee was a point of contention. It was interesting to note that coverage of the fee drop made it to Barron’s magazine, and among Canadian online investors, there was significant chatter about the decision to drop the monthly fee.

It is helpful to note that among online investors in DIY investor forums, Interactive Brokers is (and has been for many years) a very popular recommendation among active and value-conscious investors. With low commission charges and incredibly low margin rates compared to peer firms, one of the few things that kept coming up among online investors as a strike against Interactive Brokers was the inactivity fee. Thus, while it is not surprising to see some level of discussion take place about this latest development, it is remarkable that there is THIS much discussion about it.

As it happens, there’s a good reason for Canadian online investors to be extra happy about the inactivity fee drop.

Inactivity fees are one place that TFSAs are susceptible to being charged. Given the contribution limits and the caution against over trading in a TFSA account (lest one catch the ire of the CRA), it seems only natural that this account type at Interactive Brokers would attract inactivity fees (a similar case could be made for RRSPs as well for many investors). As such, inactivity fees served as a major deterrent to investors being able to consolidate accounts with Interactive Brokers until now.

Although it might be a function of the demographic that both trades online and who frequents reddit, the names that continuously came up in forum threads alongside Interactive Brokers were Questrade and TD Direct Investing.

Like Interactive Brokers, Questrade and TD Direct Investing also allow for options trading, which is typically associated with active investing. One of the quirks that characterizes Canadian DIY investors is that they often have more than one online brokerage account – with different accounts at different providers serving different purposes.

With this latest announcement from Interactive Brokers, it is likely that both Questrade and TD Direct Investing are going to see existing clients – especially active traders – move some of their other less active registered accounts over to Interactive Brokers. In industry lingo, it means that Interactive Brokers is poised to win a greater share of wallet.

For DIY investors, it won’t necessarily be all upside though.

If online investors aren’t mindful of transfer fees, leaving one brokerage to go to another could incur some non-refundable transfer fees. Unlike most Canadian online brokerages, Interactive Brokers doesn’t cover the transfer fees charged by another online brokerage. As the tweet below shows, it’s because Interactive Brokers doesn’t charge them when clients transfer out, and as such, IB doesn’t believe they should pay for them when other brokers charge them.

Another feature that investors used to the bank-owned online brokerage experience may not factor in is data subscription fees. At some online brokerages in Canada, data fees are included for level one or two quotes. At Interactive Brokers, however, clients must pay extra for snap quotes or real-time data, which drives up the cost for the casual user.

Despite Interactive Brokers’ largely active trader customer base, the elimination of an inactivity fee will likely have a positive impact on those Canadian clients who have multiple types of accounts with Interactive Brokers, or who have until now elected to not have less active accounts.

The fact that something as seemingly benign as the removal of an inactivity fee has generated as much discussion as it has points to there being significant user interest to consolidate some or all eligible accounts into Interactive Brokers.

As is the case in the US, around the world it appears that Interactive Brokers is squaring off against low-cost players that can attract less active or less affluent clientele. By reducing the hurdle to being a client, Interactive Brokers is embarking on an interesting direction to become much more appealing to mainstream investors than a niche trader-focused tool. In Canada specifically, this small but important fee change appears to be enough to trigger a wave of account transfers, and as a result, we expect to see some interesting developments in the active trader segment in response.

From the Forums

Need Some Pace

The innovation game is tough, especially among Canadian online brokerages. In this post, one user laments a perceived lack of innovation at a popular online brokerage once seen as cutting edge.

Storied Service

One thing is true about social media, folks aren’t shy to complain about what is not going well. For that reason, this post on reddit where someone took the time to relay their positive service experience at an online brokerage, stood out as unusual.

Into the Close

That’s a wrap on an especially nail-biting week (at least for sports fans). Of course, heading into earnings season (again) with economic data looking especially bullish and vaccination rates continuing to creep higher, there’s likely no shortage of excitement coming. Here’s hoping you find a fun way to stay cool and take time out to enjoy a treat (or two)!

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Discount Brokerage Weekly Roundup – July 5, 2021

It seems fitting that a short week is also a week for shorts (and not the bearish kind). With Canada Day and Independence Day interrupting the normal flow of trading activity for most DIY investors, it’s actually a great time to sit back, relax, and enjoy a good summer read. Fortunately, the online brokerages here in Canada and the US are teeing up a fair bit of interesting reading heading into July.

This edition of the Roundup features a recap of the latest deals and promotions activity at the outset of July, and what deals activity this month is telegraphing for the remainder of this year. Next, we take a quick look at a huge development in the US online brokerage market: the Robinhood IPO. As always, we keep things spicy with some fascinating DIY investor banter from the investing forums.

Online Brokerage Deals Get Creative

Summer is normally a time when things get a little sleepy in and around the online brokerage space – especially when it comes to deals and promotions. This year, however, things are definitely not “normal” among Canadian online brokerages.

The start of a new month is a convenient time to check in on the state of deals and promotions among Canada’s online brokerages, and this month’s pulse check has turned up some interesting findings for DIY investors and industry watchers to consider.

While there were no new (big) deal launches to announce to start the month, one of the biggest headlines to report on is the extension of National Bank Direct Brokerage’s 100 commission-free trade deal. This offer, which launched in March of this year and was set to expire at the end of June, has been extended until the end of September. On a relative basis, it is by far the biggest commission-free trade deal available to DIY investors in Canada. And with a year to use those commission-free trades, it is also a challenge for rival online brokerage offers to measure up to.

Contextually, this past year has also been an important one for National Bank Direct Brokerage in terms of mainstream exposure.

Having earned top spot in several online brokerage rankings, including the low cost online brokerage crown from Surviscor, and best online brokerage from MoneySense, and best online brokerage for investor satisfaction from J.D. Power, forum chatter among DIY investors clearly shows increased awareness of, and interest in, this online broker. After many years at the periphery, there is something noticeably different about the volume of interest as well as the comments and feedback from existing users.

Objectively, National Bank Direct Brokerage’s price point of standard commissions, the option for commission-free ETF trades combined with the commission-free trade promotional offer for new clients, and the perceived safety and convenience of a bank-owned online broker present a compelling combination for DIY investors. The biggest hurdles facing National Bank Direct Brokerage at this point, it seems, are awareness by more Canadian DIY investors (something that advertising can address) as well as the account opening experience.  

Thus, the decision to extend the deal through the end of the summer bodes well for National Bank Direct Brokerage, as well as for DIY investors, and raises the bar for competing Canadian online brokerages.

Differentiating between Canadian online brokerages is challenging for most DIY investors, so one of the natural starting points is price and subsequently features. With National Bank Direct Brokerage in the spotlight on both of those components, promotions are a natural complement to round out the increased visibility of this online brokerage with value-conscious DIY investors.

In addition to National Bank Direct Brokerage’s promotion extension, there were a couple of other bank-owned online brokerages that had important developments in the deals arena.

HSBC InvestDirect’s 60 commission-free trade offer expired at the end of June. Promotional activity from HSBC InvestDirect has been somewhat cyclical in terms of offers coming to market. Unlike other brokerages, such as BMO InvestorLine, which have much more frequent promotions, HSBC InvestDirect tends to be very tactical during the calendar year. As a result, though this commission-free trade offer expired, if history is any predictor, there could be space for one or two more promotions from HSBC InvestDirect between now and the end of the RSP contribution deadline in 2022.

The other bank-owned online brokerage to cross our deals and promotions radar this month was Scotia iTRADE. Specifically, the modest commission-free trade deal that offers new clients five commission-free trades, plus a bonus five for attending a series of educational webinars aimed at educating attendees about investing online.

With the number of free trades offered being so low (in comparison to other offers currently available), the point of interest here is that Scotia iTRADE is reactivating promotions and doing so by positioning commission-free trades alongside investor education. Of note, this commission-free trade promotion and associated investor education webinar series (pitched as a “bootcamp”) is targeted to younger investors.

This younger demographic of investor is increasingly of interest to Canadian online brokerages, as the past year has shown the appetite for online investing has increased among younger DIY investors. There is clearly a need for better understanding of how investing and markets work that DIY investors can benefit from.

It will be interesting to see how other established online brokerages – such as the bank-owned online broker peers – apply incentives and promotions around key activities (like attending a webinar series). For Scotia iTRADE, however, it is going to be important to gauge whether DIY investors believe that the effort required to attend a webinar is worth the reward of a few commission-free trades.

The bank-owned brokerages weren’t the only ones getting creative with deals and promotions this month, as the challenger brand Wealthsimple Trade also appeared to ramp up its promotional efforts as well.

Throughout the spring and into the early part of the summer, there has been a noticeable acceleration of the use of the “free stock” promotion by Wealthsimple Trade. As part of this offer, new clients (that sign up organically or via referral) can be eligible to receive the cash equivalent of the price of a stock from a pool of select stocks (chosen by Wealthsimple Trade).

This lottery-based approach appears to be similar to the approach used by popular US online broker Robinhood, however, in the case of Wealthsimple Trade, the dollar-equivalent of the stock is provided to the new client instead of a share of a particular company. And, to boot, the dollar amount for the highest stock, Amazon – which last closed at about $3,500 USD (about $4,300 CAD) – makes for a great headline.

The fine print on the Wealthsimple Trade promo clarifies that the “bonus” is a cash deposit and that the value of the bonus ranges between $5 and $4,500, with about 90% of clients receiving less than $50.

One of the most important objectives of online brokerages offering promotions is client acquisition (i.e. getting more customers). In the case of the Wealthsimple Trade promotion, the math behind the current promotion implies that there is a very low cost to Wealthsimple Trade to obtain a new client by using this structure. Even without knowing the probabilities and associated bonus amounts for the remaining 10% of clients, the fact that the average payout is $20 for a new client makes the cost to Wealthsimple Trade extremely attractive.

Despite it being an unusually busy summer for feature releases at Canadian online brokerages, there is also creative activity taking place on the deals and promotions front.

Now that we’ve crossed the halfway point of the calendar year, it is a safe assumption that several influential Canadian online brokerages are already working on their plans for promotions launching this fall (or sooner).

With a massive amount of money invested in enhancements and improvements at many online brokerages, looming competition on the commission-free trading front, as well as a return to “normal” that now includes individuals working from home (and returning to an office), it will be increasingly more challenging to stand out to DIY investors. As a result, like the weather in the summer, we fully expect deals and promotions action to heat up from here.

Robinhood IPO in Motion

Despite it being an incredibly busy year for IPOs (or perhaps because of it), there is one recently announced IPO that is almost certainly going to make waves when it officially launches: Robinhood.

This past week, the popular US online brokerage filed its prospectus to become a publicly traded company under the ticker symbol HOOD (to be listed on Nasdaq). While the details about how much money they intend to raise, and at what share price they intend go public at, are still to be determined, the ability to look “under the hood” at the company’s financial and performance figures reveals a data gold mine to anyone interested in the online brokerage industry in general, and the rise of Robinhood in particular.

Like any prospectus, the document is comprehensive, and as a result, incredibly long and detailed. Buried in the 300+ page document, however, are some incredible figures and statements about the current state of the online broker and what some of its future plans include.

As lengthy as the Weekly Roundup can get, there is far too much information about the online brokerage industry in the prospectus than can be covered in detail here. So, as more information inevitably emerges over the next few weeks, here are some initial figures that stand out.

Valuation: The rise in the valuation of Robinhood is staggering. From its inception in 2013, the company has grown to be worth (at time of publication) $12 billion USD and forecasted to be worth as much as $40 billion at public offering.  

Number of new accounts: The stat cited by Robinhood in its prospectus was that an estimated 50% of all new accounts created in the US between 2016 and 2020 were Robinhood clients. The total number of clients at Robinhood as disclosed in their prospectus was 18 million.

Cost of acquisition: Through the use of a variety of tactics, Robinhood’s cost of client acquisition at the end of March 2021 was – wait for it – $15. That number reflects exceptional performance improvements that have taken place over time, however, it’s a figure that’s sure to give any online brokerage, Canadian or American, a jolt. One of the key drivers of the exceptionally low client acquisition cost has been the Robinhood Referral Program. As mentioned above in the context of Wealthsimple Trade, the promotion of providing a “free stock” for the referral bonus has paid off in spades for Robinhood. It almost defies belief to report that 98% of customers receive a reward between $2.50 and $10.

Revenue mix: There are several interesting data points reported on when it comes to Robinhood’s revenues, but the standout figure relates to the product mix – specifically that options trading represented the highest amount of revenue for Robinhood.

Unlike many other IPOs, the Robinhood IPO is more than just business – it has taken on almost a cultural significance.

While many industry observers and consumers might view the vision of Robinhood to “democratize finance” with skepticism and discount it as marketing, the reality is that through a combination of design, technology, and pricing (and marketing – which they also have spent a fortune on), Robinhood has carved out a space for itself that enables it to compete – on some level – with much larger and longer established brands in the same space.

What was perhaps most striking about the vision for the company as laid out in the IPO filing, was the desire to become the “go-to” app for personal finance, just as Gmail is the go-to app for email and Google Maps is for maps. And, just like those apps, the market that Robinhood is eyeing goes beyond just the US, and is looking at Asia and Europe as additional destinations.

Without question, the Robinhood IPO is going to be in focus and discussion throughout July – which is being forecasted as the launch date for the IPO. To add to the conversation, Robinhood has set aside a significant portion (between 20% to 35%) of its shares to make available to its customers at the time of IPO, meaning that clients will be able to access the actual IPO pricing rather than have to wait until the stock starts trading to get those shares.

From a big-picture perspective, it is fascinating to have witnessed Robinhood launch from inception and grow into an internationally recognized financial services brand worth billions of dollars. The lesson for Canadian online brokerages is clearly that fintech firms can and will come in and displace market share for existing stakeholders. It is already happening in Canada with Wealthsimple Trade, and if Robinhood’s IPO journey is any indicator, there’s an even stronger impetus for Canadian online brokers to pay attention to design and features or risk being forced to play catchup.

From the Forums

Day Trading Up

Fast money and high stakes trades aren’t for everyone. Rare as they might be, DIY investors interested in day trading need to know which online brokerage is best when it comes to supporting this kind of activity. Find out which online broker was a unanimous choice in this reddit thread.

In-formed Opinion

When it comes to opening an online brokerage account, one of the least enjoyable parts of the experience is the sheer number of forms and agreements that need to be completed. One common anxiety-inducing form is the W-8BEN. Find out what one DIY investor went through in this post.

Into the Close

That’s a wrap on this early-July edition of the Roundup. Now that we’re into the second half of the year, and things are opening up again, trips and get togethers will be in focus. Of course, for any hockey fans, the Stanley Cup is in focus as is the cool rink the games are being played in. Stay cool out there!

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Discount Brokerage Deals & Promotions – July 2021

As we kick off a new month, the activity in the online brokerage deals and promotions section appears to be mixed.

On the positive side for DIY investors, there was an important extension of a popular promotion from National Bank Direct Brokerage that will undoubtedly continue to attract attention and serve as a catalyst for other online brokers to serve up something equally compelling to new clients.

Wealthsimple Trade also appears to have made some important updates to its promotional mix, pushing more definitively into the “free stock” deal for new account sign ups and for referral offers.

Finally, there was a small commission-free trade offer from Scotia iTRADE linked to DIY investor’s taking a stock market education training series which reflects the ability of incentives to be used alongside key value drivers (in this case investor education).  

Less positive is the fact that some deals have expired heading into July. Specifically, HSBC InvestDirect’s commission-free trade offer ran its course and concluded into the start of July.  

Now that we’ve crossed into the second half of the calendar year, we fully expect deals and promotions activity to start picking up, even more so as we approach September.

This year there’s definitely something unusual in terms of online brokerage activity. Given the large number of new features being released by online brokerages this summer, it’s a safe bet things won’t be as quiet as they usually are when it comes to promotions, and we’re anticipating seeing some more creative offers surface over the next few months.

As always, if there are promotions that we’ve missed that would benefit other DIY investors, let us know and we’ll update our coverage.

Expired Deals

HSBC InvestDirect’s commission-free trades offer formally wrapped up at the end of June.

Extended Deals

National Bank Direct Brokerage extended its popular 100 commission-free trade offer. The new expiry date for this promotion is September 30th.

New Deals

The newest offer to cross our radar was from Scotia iTRADE, who is offering up to 10 commission-free trades (five for using the promo code during account sign up, and five for attending their educational ‘bootcamp’ on investing). This was an interesting offer insofar as it was offering up commission-free trades as a reward for attending a series of educational webinars on investing.

Be sure to check out our discount brokerage deals filter for more information on current promotions.