After making it through 2020, there are few things that would count as truly surprising anymore. Between COVID-19, the wild US presidential election and everything else that has unfolded this past year, 2021 can’t come fast enough for many of us.
For Canadian DIY investors and Canada’s online brokerages, despite a wild year of volatility, volume and very rapid change the macro picture appeared to be a positive one. Record account opening, revenues from trading and after a sharp selloff, a strong rebound in stock markets have favourably positioned Canadian online brokerages heading into the new year.
In the latest edition of Sparx Trading’s exclusive Look Back / Look Ahead series, Canada’s online brokerages provide a unique snapshot of the past year at their respective firms, as well as provide an enticing view to 2021 – yet one more reason the new year can’t come quickly enough.
This edition is one of the most fascinating yet. If for no other reason, hearing about what 2020 was like at Canada’s online brokerages during such historic times is worth tuning into. There is, however, so much more worth finding out about.
Also included in this issue is a fascinating preview of what Canada’s online brokerages have in store for DIY investors in 2021. Further, our unique Q&A feature zeros in on what beginner and active investors can expect from each online broker as well as what sets each online brokerage apart from their peers.
There is lots more content that DIY investors can dig into, so be sure to check out the featured brokerages that provided detailed submissions of the year that was and what’s coming up.
In the meantime, we’ve put together three key themes that emerged from this year’s series that provide some food for thought when assessing the Canadian online brokerage space.
Theme 1: Agility
COVID-19 forced massive change on everyone, online brokerages included. Withstanding a pandemic-level impact was only one of the major challenges Canada’s online brokerages had to move quickly to address, however.
Compounding the challenge was the sheer volume of interest from DIY investors to open up and fund their online investing accounts. Ultimately it came down to agility, technical capability and operational resilience.
Online brokerages who already had invested in online account sign ups were able to more readily handle the challenges that accompanied the immense interest in opening accounts than those who had to route investors through paper-driven sign up processes.
The key takeaway for DIY investors is that COVID-19 showed which online brokerages were more ‘change ready’ and which features matter during times of heightened market volatility.
Theme 2: Communication
With so much of our lives now digitized, instant access to what’s going on is now the norm. A great example is Uber Eats – where you can find out in real time where your food order is.
In that world, DIY investors will be hungry for more information from their online brokerages. It might be price, it might be service experience, it might be platforms or even promotions. One thing that stands out about online brokerages in 2020 is that those who prioritized connecting and communicating with investors are now better positioned to have their story and message heard.
With so many online brokerages available to service DIY investors in Canada, those that are able to create special content or deliver engaging investor education experiences or simply have a solid, regular communications strategy in place can ensure DIY investors have something worth tuning into.
Theme 3: User Experience
This was one of the more fascinating trends to dive into in this issue of the Look Back Look Ahead feature.
For DIY investors, it was reassuring to see online brokerages define user experience in terms of customer experience. That said, one of the challenges created by 2020 is that there are lots of novice investors who have entered the markets on a whim and for whom the markets only appear to be making new highs.
Providing this new crop of investors with the right tools and resources to navigate the journey of online investing will be important. Further, the balancing act continues between older clients who may not be as tech savvy or inclined towards mobile features, and younger investors who are demanding different aesthetics to websites and apps. Interestingly, there will be several notable upgrades in platforms and online investing experiences coming throughout 2021 so we’ll be curious how different online brokerages tackle the challenges in the new year.
Click the links below to learn about what each Canadian online brokerage had to say about 2020 and what to look forward to in 2021.
What a difference a year makes. In December of 2017, “investors” were HODLing for Bitcoin and weed stocks and were tripping over one another to open up new trading accounts as well as overloading trading systems and customer service lines at online brokerages across Canada.
While it didn’t catch everyone by total surprise, the online brokerage industry in Canada awoke in January to the undeniable reality that investors, in particular younger investors, are an important (and vocal) driver of the growth of online investing space in Canada.
The rise of the millennial investor in 2018 is one of the most important themes that emerged in the DIY investing space in Canada and underpins many of the milestones referenced in the latest series of submission from Canada’s online brokerages for the 2018/2019 edition of the ‘look back and look ahead’ series.
From the desire to participate in exciting online investing stories to the technology and experience that these digitally savvy and untethered investors expect, to prices they’re willing to pay for trading commissions, the impact of millennial investors to the online investing industry is staggering.
Canada’s discount brokerages certainly have their work cut out for them.
They have to balance catering to a very important group of older clients who have different preferences than another group of younger, and not yet as affluent, clients. All the while, they have to do so in the face of falling commission prices, increasing competition and higher technology spends.
So, how did Canada’s online brokerages fare in 2018 and what are they saying about 2019?
Theme 1: Digitization is Accelerating
Looking back on 2018 and into 2019, it is clear that Canadian online brokerages are moving more quickly and efficiently at creating a fully digital experience for online investors.
Online account opening has been a game changer for those discount brokerages who’ve rolled this feature out and has become a priority feature to deploy in 2019 for those yet to do so. Increased spending on technology, as well as creating agile teams mean online brokerages are starting to function more like tech companies in their pace and approach to change. As a result, they’re starting to catch up to the robo-advisors that have, up until recently, enjoyed the unencumbered digital edge that comes with building technology enterprises from the ground up.
Theme 2: Barriers are Dropping
Another way in which the rise of the millennial investor has impacted online brokerages in 2018 is the improved accessibility to online investing. Aside from technology improvements, there have concerted efforts to deliver accessible (and original) content about investing, notably from the largest players in the space, TD Direct Investing and RBC Direct Investing, as well as reductions in pricing for trading commissions.
Bank-owned brokerages, like CIBC Investor’s Edge, introduced young investor pricing on trading commissions while others, like National Bank Direct Brokerage, lowered the threshold to qualify for their commission-free trade offer down to $5,000.
Although it may not have been a direct catalyst in 2018, Canada’s online brokerages are also actively bracing for commission-free trading coming from Wealthsimple Trade. As this edition goes to publication, Virtual Brokers just launched a new, lower standard commission rate, which makes theirs one of the lowest for Canadian DIY investors.
Theme 3: Go Big or Go Home
If pressures to innovate with technology, and deliver more for less are headwinds, the counter to those is scale. Specifically, when it comes to being able to provide a robust online brokerage experience, size is beginning to matter.
Consolidation in the online brokerage space in late 2017 and through 2018 saw several important online brokerages merge or be acquired by larger entities. The result, independent or non-bank online brokerages became much better funded and are now even more formidable competitors to larger bank-owned brokerages.
In 2018, Jitneytrade was acquired by Canaccord, and in an exclusive announcement in their submission, they’re announcing a new direction and push towards mainstream investors, including a feature set that would put them on par with many existing online brokerages (and perhaps ahead of others).
The merger between Qtrade Investor and Credential Direct under the umbrella of Desjardins-backed Aviso Wealth has created an exceptionally strong competitor that has the scale and focus to hold its own in the bank-owned brokerage market.
CI Financial’s acquisition of BBS Securities, parent to Virtual Brokers, and robo-advisor WealthBar has created a significant online investing product suite for other online investing firms to now contend with.
Finally, Wealthsimple’s launch of Wealthsimple Trade that will let investor’s trade commission-free was a massive bet that this “no cost” model could work in much the same way as it has for Robinhood in the US. Backed by Power Financial, this challenger-brand in the managed wealth space is now hoping to disrupt the DIY market as well.
Although subtle, it is also interesting to note that unlike in previous years, online brokerages this year were much less shy to disclose or advertise how many online trading accounts they have as well as the assets under management present at their firms. Online brokerages like Questrade, CIBC Investor’s Edge, and TD Direct Investing, for example, shared a bit more openly the size and scale of their online brokerage client base.
Shift Happens
While the old paradigm in financial services was about permanency the new paradigm appears to be adaptability.
It is our view at SparxTrading that as financial services companies continue to digitize, they will undoubtedly also adopt a technology company-like approach, communicating about (and subsequently delivering on) improvements and enhancements will increasingly be the metric of choice for younger investors looking to choose an online brokerage.
In other words, how “innovative” an online brokerage is will start to matter more as pricing comes down and competition increases. In a constantly and rapidly changing landscape, the challenge to Canadian online brokerages is whether they evolve with it without reducing the perceived quality.
Before diving in to this year’s submissions, we’d like to thank all of the online brokerages for sharing their updates and forecasts for Canadian DIY investors. This look back on 2018 and preview to 2019 offers a unique window into each of the organizations who participated and gives DIY investors another important set of data points with which to make their decisions around who to choose when opening an online brokerage account.
Now without further ado, below is the list of Canadian online brokerage’s who’ve participated in the look back to 2018 and look ahead to 2019. Click on the links to go directly to each submission or use the page numbers to navigate between them.
Hard to believe how fast time flies. As we near the end of the 2017, we felt it was an appropriate time to reflect on what has been yet another eventful year for Canadian online brokerages. And, while we could comment on the rise of roboadvisors or the changing preferences of online investors, we figured it would be far more interesting to hear what Canada’s online brokerages had to say about their milestones in 2017 and what they have planned for 2018.
In total, we received submissions from 9 Canadian online brokerages and we’re excited to share these perspectives from, in many cases, the voices of the individuals leading these organizations.
In keeping with the spirit of the exercise, we’ll keep the commentary to a minimum but before diving in, we highlight three interesting themes we noted shine through from comparing all of the submissions. If there’s one takeaway for online brokerage industry however, it’s that brokerages can no longer afford to stand still.
Theme 1: It’s a technological arms race
While it hardly seems surprising that online brokerages would naturally be heavily reliant on technology, the rapidly changing nature of technology has required all of Canada’s online brokerages to become more adept at leveraging this technology in their favour.
Larger online brokerages have had to adapt their technology development cycles to be faster and more agile; smaller online brokerages have had to learn how to leverage technology to do more to compete with larger bank-owned brokerages and nearly all online brokerages have had to learn how to create a seamless trading experience across screens and devices.
As smartphones continue to surpass home computers in usage, price and functionality, and as internet speed and coverage increase, there’s a greater likelihood that consumers will be using smartphones for many aspects of the trading experience. A very interesting example of this from 2017 has been the investment in enhancing options trading capability by Questrade and TD Direct Investing.
A noteworthy mention is Interactive Brokers’ deployment of a ‘personal assistant’ style trading interface (called IBot) which offers a view of how ‘AI’ might find its way into online brokerage services and help online investors execute and manage trades with simplified text and spoken commands.
Theme 2: Delivering more value to DIY investors
In a fiercely competitive discount brokerage landscape, commission costs still stand out as one of the most (if not the most) important factor for many Canadian DIY investors to consider when choosing an online brokerage. While prices still have room to fall (and they are falling), the reductions in standard commission pricing are not likely to be as significant as they were in 2014 and as a result, other features have to help Canadian online brokerages stand out.
Enhancing the value that DIY investors receive, and more importantly perceive, is one strategy online brokerages can use to keep from having to lower trading commissions.
While none of the online brokerages who provided a submission lowered their standard commission pricing this year (so far), they have found ways to lower commission pricing on certain products – such as ETFs in the case of National Bank Direct Brokerage, or to enable DIY investors to use loyalty points to pay for commissions (RBC Direct Investing).
Other sources for enhancing value came from improving and creating DIY investor content. Whether it was through investor newsletters, blogs or other content sources and streams, a number of Canadian online brokerages were actively creating and curating DIY investor-focused content.
Theme 3: Focus on better trading experiences
A third interesting theme for 2017 was to improve the trading experience. Whether it was focusing on making complex trading strategies easier to execute (e.g. TD Direct Investing and Questrade deployed improvements to complex options trading execution) or improving management of holdings and documentation (as in the case of BMO InvestorLine and Qtrade Investor), there has been and will continue to be a lot of resources devoted to enhancing how and where online trading takes place.
Like a good Netflix series, we’ve released all of the submissions provided to us by Canada’s online brokerages – although there are no shadow monsters or stranger things (we promise). So, go ahead and binge-read about some of the highlights from 2017 and get a sneak peek at what’s in store for 2018.
Even though Scotia iTRADE has a predominantly red logo, it appears that they’re banking on investors seeing this online brokerage as being green thanks to a new sustainable investing push.
Earlier this year, Scotia iTRADE launched an interesting tool for DIY investors interested in socially responsible investing by introducing a sustainability research add-on to its online trading platform. The sustainable investment tool, developed by Sustainalytics, offers information on three key company components—environmental, social and governance (ESG)—that the DIY investor can use to guide their investment choices.
Observant Scotia iTRADE clients have undoubtedly already noticed the barrage of ads online as well as the new addition to their online platform (screen capture below) seamlessly incorporated into their ‘Quotes & Research’ page. DIY investors can see at a glance how a company is performing against its peers in terms of its ESG measure.
Currently, the tool holds information across 20 industries and 1200 companies from the TSX and the Russell 1000. So, although the universe of companies covered is limited, with tens of thousands of publicly listed companies globally, presumably coverage and range will improve as more companies begin reporting ESG measures.
Scotia iTRADE may already be anticipating an expansion since the onscreen drop down menu of industries already offers more than 40 picks. Options range from ‘Aerospace & Defense’ to ‘Utilities’, with choices in-between such as ‘Automobiles’, ‘Chemicals’, ‘Consumer Services’, ‘Healthcare’, ‘Oil & Gas Producers’, ‘Steel’, ‘Textiles & Apparel’, and ‘Transportation’, to name just a few.
The overall ESG gives a score from 1 to 5, “laggard” to “leader” (a single “green leaf” with an ESG score in the bottom 5% of the industry to five “green leaves” with an ESG score in the top 5%). There is also a ranking of the company’s level of controversy with respect to “customer incidents.”
DIY investors who want more information can also download a multi-page ESG report that details how and why the company has earned its score in each area of environmental, social and governance activity. In this way, DIY investors can decide whether the company’s organization and business structure aligns with their own views and support them, or not, with their investment dollars.
Interestingly, Scotiabank, parent to Scotia iTRADE, has an ESG report score of 61 (out of 100) and is considered an ‘average’ performer when it comes to ESG, with a relative rank of 100. Among the risks cited in the ESG report is a significant governance controversy arising from a class-action suit naming Scotiabank (and 22 other banks) in a money laundering and market manipulation investigation in the US. Ironically, where investors set their own ESG threshold might preclude them from using Scotia iTRADE at all (being a subsidiary of Scotiabank). If DIY investors felt strongly enough about ESG, then this bank-owned brokerage’s score of 61 may or may not be acceptable.
Screenshot of ESG snapshot report
A quick tour of the platform shows that the onscreen tool is easy to see, read and navigate, and the downloadable PDF document that details the ESG of a company is well laid out and comprehensive. That said, there are a few limitations too, the most important being that readers might find that comments made by the report are not thoroughly referenced.
For example, the Bombardier ESG report claims that their CSeries aircraft’s lighter weight and “other aviation techniques” can allow for “20% fewer carbon emissions during flight.” The reference to “other aviation techniques” is vague, and the carbon emissions reduction claim needs a reference the reader can trace.
That said, sustainable investing issues are complex to distill down to a short format and the layout of these reports may simply indicate a lot of information crammed into too few pages. Striking a balance between depth of coverage and readability is a challenge when the information’s scope is so broad.
Another feature of interest is an ‘Equities Screener’ page if DIY’ers want to view more companies with similar ESG values.
On the ES page, the ‘Sustainable Investing’ button, lower left, is marked with a bright red & white “NEW” notice, hard to miss on an otherwise grey and white page, as the screen capture, below, illustrates. Here is also where investment criteria get really interesting for the DIY investor—and possibly controversial.
Screenshot from screener with sustainable investing feature
DIY investors have long been able to include fundamental criteria such as the sector, country and various valuations on price and returns when looking to invest, but now investors can also screen for ‘Business and Human Rights’, ‘Bribery & Corruption’, or ‘Military Contracting’. These criteria are considered extra-financial concerns, deemed by most corporations as “noise” in terms of investment interests and by only a few as a “signal” that speaks to a company’s values and is reflected in its stock worth.[i],[ii]
The DIY investor should decide whether these criteria are important to them, or perhaps more, financially influential to a stock’s value. What’s the return on investment (ROI) on diversity hiring or labour relations in terms of a company’s performance on the stock market? Does it matter that they recycle? Or offer healthcare? Can these components even be teased out of a stock valuation?
Indeed, recent research shows that they can, and the white paper prepared for Scotia iTRADE by Sustainalytics draws on the 2016 Harvard study’s findings.
The study separates immaterial issues from material ones; that is, issues that are not generally reported as part of a company’s financial filings, but that do have impact on its corporate value (material issues) from ones that do not. The study found that corporations addressing material issues while ignoring immaterial ones outperform companies that address both material and immaterial concerns by 4% and companies that address neither by almost 9% (8.90).[iii]
Possible impacts of sustainable investing on advisors
Ironically, the notion of sustainable investing or ESG-based investing is itself not without controversy, especially for advisors or individuals who make investment decisions on behalf of others.
In the US, the Department of Labor has struggled in giving direction through its Interpretive Bulletins on the consideration that financial advisors should give to non-monetary issues aka economically targeted investing (ETIs), socially responsible investing (SRIs) and ESGs when advising on investment concerns for publicly held trusts.[iv] Its latest issuance on the matter of the Employee Retirement Investment Security Act (ERISA) and ETIs, IB 2015-01, says that ETIs may be considered when financial considerations between choices is otherwise equal.
Regardless, the issue of ETI and ESG criteria utilized when choosing investments has been argued as far as the US Supreme Court.
In its 2014 unanimous ruling that fiduciary duty was breached with the introduction of ETI or ESG criteria, the judge stated that public trustees must act solely for the “financial benefits” of plan members rather than pursue “non-pecuniary benefits” such as “employee ownership of employer stock.”[v]
This argument has been further argued in a 2016 US law paper, where the authors note that the legislation guiding trustees for ERISA requires them to invest funds “prudently,” “diversely” and “loyally.”[vi] According to this argument, anything else opens the doors to influence that might adversely impact the decision making process and possibly introduce extraneous factors that unduly influence the trustee.
The bottom line
There is some compelling evidence to suggest ESG impacts company value. What value these tools that provide this information to DIY investors offers must wait to be seen.
The issues in the US while distant, could influence policy here, where a number of provinces are now considering tightening up fiduciary responsibilities of financial advisors to guidelines similar to their US counterparts. Further, it does add an interesting twist into the conversation around what constitutes influence and recommendations – something Canadian discount brokerages (as order execution only entities) and investment industry regulators are currently wrestling with.
For the moment, however, Scotia iTRADE continues to double down on its marketing efforts to trumpet the ESG banner. In doing so, they are not only highlighting that there are now tools that can help investors make more ethically informed investments but they are also getting other Canadian online brokerages asking whether this is something that could help inspire DIY investors to vote (and trade) with their dollar.
End Notes
[i] “ . . . the number of companies issuing sustainability reports has grown from less than 30 in early 1990s to more than 7,000 in 2014, while the United Nations Principles for Responsible Investment (UNPRI), as of 2014, had 1,260 signatories with $45 trillion in assets under management.” Mozaffar Khan, George Serafeim, Aaron Yoon. “Corporate Sustainability: First Evidence on Materiality”, Digital Access to Scholarship at Harvard, Working Paper 15-073, Retrieved from https://dash.harvard.edu/bitstream/handle/1/14369106/15-073.pdf?sequence=1
[ii] “In the financial sector, half of the 63 companies surveyed by SASB’s Industry Working Group said they currently provide no disclosure on ESG issues in their 10-K filings, with another 14 percent offering only boilerplate statements and 30 percent reporting on industry-specific issues. Just 6.0 percent of the companies disclose ESG metrics. Reporting on performance and goals is virtually unheard of.” David Bogoslaw. “SASB previews sustainability standards for financials”, Corporate Secretary, 18 April, 2013. Retrieved from https://www.corporatesecretary.com/articles/compliance-ethics-csr/12425/sasb-previews-sustainability-standards-financials/
[iii] IBID, 2, Table 6, 32.
[iv] “An economically targeted investment broadly refers to any investment that is selected, in part, for its collateral benefits, apart from the investment return to the employee benefit plan investor.” Department of Labor. 29 CFR Part 2509 RIN 1210-AB73. “Interpretive Bulletin Relating to the Fiduciary Standard under ERISA in Considering Economically Targeted Investments.” Retrieved from https://s3.amazonaws.com/public-inspection.federalregister.gov/2015-27146.pdf
[vi] Edward A. Zelinsky, Morris and Annie Trachman. “The Continuing Battle Over Economically Targeted Investments: An Analysis of DOL Interpretive Bulletin 2015-01”, 2015. Retrieved from: link here
Associate Vice President, Self Directed and Advised Client Digital Capabilities at TD Wealth
The online brokerage industry is no stranger to change. In fact, it was born from it. When “online” trading first came onto the scene in Canada just over 20 years ago, dial-up, DOS and CRT monitors were all the rage, the internet was just getting its footing and the concept of do-it-yourself trading seemed to be on the cutting edge of technology.
Since then, however, the technological arms race in the Canadian financial services industry has been accelerating, largely to keep pace with technologies that surround the consumers that use financial services such as online brokerages. The rapid spread of social media, mobile technology, faster computer chips and more reliable internet have posed an interesting challenge to financial services providers, including Canadian online brokerages, namely how best to keep up?
For a “behind the screens” look at how Canadian online brokerages are approaching this brave new digital world, we spoke to Canada’s largest bank-owned online brokerage, TD Direct Investing. Specifically, we chatted with Richard Wilks, Associate Vice President Self Directed and Advised Client Digital Capabilities, about his perspective on what it takes to run the online direct investing operation as well as how TD Direct Investing can successfully navigate the digital landscape going forward.
Change is the new normal
With an extensive background working with online investing at TD, Wilks has seen many changes take place. Granted, technology is moving more quickly than when TD’s first discount brokerage offering (aka Green Line) hit the market in the early 80’s, however rather than chasing fads, Wilks believes in taking a more calculated and measured approach to the quickly evolving online investing world.
While we had a fascinating discussion about how things work behind the scenes at TD Direct Investing (TDDI), there were three important themes as to how TDDI can adapt to the new digital realities of online investing.
One of the key themes Wilks stated was the importance of shifting to an agile approach to feature development. Many fintech and tech startups rely on the agile approach to building software or web apps because the aim isn’t necessarily to launch a perfect product out of the gate, but rather to launch a viable one and optimize over time.
In this way, features come to market faster and can be improved upon by getting user feedback. For example, when making enhancements to their watchlist, the TDDI development team was able to quickly gather feedback on where to improve and push out additional modifications within a few months.
Of course, being a financial services provider, the standard of what can go out the door is significantly high. There are considerations for security, compatibility and compliance that require additional effort and testing to ensure features are working correctly before anything gets released.
Another, more strategic reason to transition to the agile approach, is to be able to be nimble enough to respond if a big tech player decided to enter the wealth management space. There are already signs these moves are being made in the payment technologies arena, so it is not inconceivable that another tech firm might decide to compete in the online investing space in the not too distant future. The move to an agile approach also helps to position TDDI relative to startup fintech firms and new entrants to the wealth management space such as robo-advisors.
A second important theme that emerged was the importance of being able to listen to client feedback.
For TDDI there are a number of different channels that they use to collect client feedback. From the TDDI website, WebBroker (the flagship platform), the TD Helps forum, emails, social media as well as via client service reps, TDDI’s large user base can readily contribute feedback about a particular product.
Example of Twitter user requesting to leave feedback on feature on TD Direct Investing platform (Source: Twitter)
That feedback is then passed through to a TDDI team who discusses and decides which features can be rolled out and what the development cycle will be like for each. For a sense of scale, an average month can see between 300 to 400 feedback requests. The graphic below provides an illustration of how TD Direct Investing is able to gather feedback and ultimately translate it into a feature release.
Process for collecting and implementing feedback at TD Direct Investing (source: TD Direct Investing)
Client feedback isn’t the only catalyst for product enhancements, however. It was fascinating to learn that other factors influence feature developments including regulatory requirements as well as vision and strategy. Clearly, a balance needs to be struck between sometimes competing priorities and what is in the spotlight or trending among DIY investors.
The third theme TD Direct Investing is focusing on is the shift towards mobile. Previously, development of online features and platforms required retrofitting a desktop user experience into a mobile one. For the foreseeable future, however, it is clear that mobile will dominate and a much more effective approach is to start with the mobile user in mind and then augment functionality from there.
While many active traders are content with the desktop interface and additional screen real estate, the reality is that certain online brokerages in the US, such as Robinhood, have proven that younger users can and will use mobile-only platforms or apps to perform trades, check their accounts or portfolios and research potential investing opportunities. This supports the reasoning that mobile will continue to be an important platform to build around and it is a safe bet that TDDI’s possible future client base will be looking to mobile experience as a determining factor for client satisfaction.
Stability matters
While each of these different components represents a significant evolution in the ability of TD Direct Investing to prepare for and respond to the changing needs of its users, one component that cannot be ignored is stability.
With the increasing complexity of different technology integrations (for example data feeds from multiple exchanges, research tools and order execution) underpinning the trading experience, there is also the increased risk of things not working. A scan of Twitter comments over the past year will indicate a handful of times when outages have occurred during trading hours at various Canadian online brokerages – something that users are acutely sensitive to.
The good news for TDDI users is that there has been extensive investment in the stability of their technology architecture. In fact, TDDI has a specific nerve-centre that tracks issues as they arise in real-time and consists of a dedicated team monitoring the integrity of the trading platform, servers and network. So, while outages or disruptions may not be entirely eliminated, response time to issues is improved and the impact of disruptions can be minimized.
According to Wilks, there is a “laser-like focus” on ensuring that uptime is maximized which has helped enable TD Direct Investing’s trading platform to achieve an uptime rating of 99.6%.
New Benchmarks for Success
Innovation in the financial world is somewhat of a double-edged sword.
On the one hand, consumers want user-friendly interfaces to manage their wealth. Robo-advisors, for example, have managed to gain a foothold in the wealth management space largely by offering a much more thoughtful user experience when it comes to managing a portfolio. On the other hand, finance is also about predictability, familiarity and certainty. At the end of the day technology and platforms have to work, they have to be secure and they have to deliver on what the end user needs and wants from the service.
With several decades worth of experience in the Canadian online brokerage game under their belts, it’s clear to TDDI’s team that while no one is able to predict the next big change, TDDI is equipped to respond once it shows up. That said, the best way to get in front of big changes starts by listening to what customers are talking about.
While many DIY investors will never know about the behind-the-scenes efforts that go into the planning, execution and maintenance of their trading platforms, the reality is that, after commission pricing, choosing an online brokerage will be heavily influenced by how stable and innovative the trading experience is. The good news for TD Direct Investing and Wilks’ team is that TDDI’s clients are increasingly happy.
TD Direct Investing Resources:
To leave feedback for TD Direct Investing you can do so on the following digital channels:
Data breaches, fraudulent activity, and online tricks and traps are all around us. It happens so often we’ve dubbed March fraud month to raise awareness of the growing issues. In fact, we’ve got enough to say about it that we’ve broken up this article into two parts. Part one looks at two factor authentication (TFA) and your responsibilities as a DIY investor. Part two examines investor confidence and how you can check to be sure your advisor is trustworthy, accredited and competent. To cap things off, we’ve also included some handy resources at the end of Part one.
Online brokerage security agreements: a handshake
First things first: don’t freak out. Despite the multitude of risks and negative headlines concerning online activity, there’s plenty of security, and lots you can do to ensure your online brokerage account is safe and secure.
That said, what DIY investors cannot do is stay complacent, or just assume that an online brokerage is either solely responsible for online account security or necessarily doing all it could to keep investment safe. Just like learning about how to choose investments comes with the territory of investing online, going the DIY investor route also requires learning enough about technology and online security to ensure that access to your trading account is as safe as is reasonably possible.
While online brokerages may have regulatory compliance standards in place that ensure a minimum level of security, investors (i.e. online brokerage clients) must also take steps to keep up too.
It’s a handshake agreement between you and your online brokerage that only works when you both maintain a steady grip.
Internet security: conditions apply
The good news for DIY investors is that most Canadian discount brokerages have a security agreement of one kind or another, offering a “100% security guarantee.”
Those agreements, however, have stipulations that depend on a DIY investor maintaining good security practices, which begs the question, what strings are attached to the ‘100% security guarantee?’
Most guarantees offered by Canadian discount brokerages are limited to “direct losses” in your online brokerage account that come about from “unauthorized” activity. At the very least that means they likely won’t cover losses that occur if you allow someone to use your account and then that person cleans you out. Also, most online brokerage security guarantees say that you must adhere to the conditions they have placed on your end. That might include installing up-to-date software such as firewalls and frequent passcode changes, among other conditions. The bottom line: Learn them. Know them. Do them.
Meet security conditions if you want losses reimbursed
Online security conditions vary among online brokerages, so be sure to check yours out—and carefully.
Here are some common concerns:
Use a unique user name and password that you change frequently. But how often is that? Not as often as you might think. A UNC-Chapel Hill study showed that people tend to create new passwords out of old ones, thus making the new one as easy to breach as the previous one. Lifehacker argues that hackers run hardware and software full-time to crack user names and passcodes and frequently changing a password isn’t going to stop them. And Mark Burnett, author of Perfect Passwords, told Wired that it’s enough to change your password every six months to one year . . . if you use one that’s 16 to 20 characters long.
Install a firewall. A firewall is like a security guard at the door to the building, checking the list for who goes in and who goes out. Of course, to add to the confusion, one of the go-to diagnostics for connectivity troubles for many trading software platforms is to disable a firewall to verify if that interferes with connecting.
Ensure your browser uses 128-bit or even 256-bit encryption—and has its own firewall. Some brokerage agreements demand it.
Protect your wireless network and internet connection from hacking by using a strong password.
Install the latest anti-spyware and anti-virus software.
These aren’t anywhere near all the conditions that you might have to meet for your internet security guarantee to kick in. And, in most cases, whether you have met the required conditions is determined by the online brokerage, not you. So, you might want to track things like how often you change your password and, at a minimum, regularly check your account (even if you’re a passive investor) to ensure no irregular account activity is taking place.
Ultimately, account security is a two-way street, and you might want to ask your online brokerage if their security system is the best it could be. More and more companies online are turning to two factor authentication, aka 2fa or TFA, as data breaches and fraud become only more prevalent.
Online brokerages: how they keep your online accounts secure
Of 14 Canadian online brokerages, three currently offer two factor authentication (TFA) including BMO InvestorLine, Interactive Brokers and HSBC Invest Direct. But what is TFA, anyway, and does it matter to have it as part of your log in system at your online brokerage? Well, the short answer might be, how much do you care about your money and investments?
Two factor authentication (TFA): the way of the future?
If you don’t know already, two factor authentication (TFA) requires two steps, or factors, as part of the authentication process when you access your account.
The first step is your username and password. The second step is either a physical token (like your debit card) or a PIN. The PIN is usually sent to you via your cell phone when you enter your user name and password. You can see it’s a pretty secure approach since only you (presumably) have your phone with you, and only you know your username and password.
The 11 online brokerages that currently do not use this system have other, multiple levels of security. These include 128-bit or even 256-bit encryption, multiple firewalls, anti-virus software, internal protocols and constant electronic monitoring, among other measures. Thought hackers get better all the time, two factor authentication (TFA) may be the best security around right now.
DIY investors and regulatory agencies call for increased vigilance as data breaches escalate
Data breaches cost Canadian companies an average of $6.03M every time they occur according to The Ponemon Institute, and Blackberry estimates that total costs for Canadian companies will reach $23B by 2019.[i]
And, like most costs, those losses are eventually passed on to consumers. Canada’s regulatory agencies are also weighing in on the matter. The Investment Industry Regulatory Organization of Canada (IIROC) itself the victim of a data breach in 2013[ii] offers a cybersecurity report card to its member organizations.[iii]
As well, the Mutual Fund Dealers Association of Canada (MFDA) offers a 4-part toolkit that investors can use as a guide including checking out your advisor and the organization to see if either has been litigated against.
Costs alone may lead to two factor authentication (TFA) become more widely used, as losses from data breaches or hacking can be fantastic. While industry certainly has financial motive to prevent exploits, DIY investors are making their thoughts on the matter heard too.
In 2016, for example, Redditors had a vigorous debate over security at a popular online brokerage, Questrade. One redditor commented, “I think this should be a higher priority than their many website facelifts of recent months.”
As they often do on the DIY investing forums, John, a support representative from Questrade, responded: “I can confirm that we have moved beyond the investigation phase and are working on a two-factor authentication solution. We will be announcing more details as the project progresses.”
If your DIY investor account is breached, act fast
In the event your account is compromised, there are several things that will need to be done relatively quickly to qualify for coverage of an online brokerage security guarantee.
Here are a few:
Notify your online brokerage immediately.
Change all passwords immediately.
Determine what data has been breached.
Contact all credit reporting agencies.
Put stops on all your credit cards.
DIY investor takeaways
Although most Canadian online brokerages do offer guarantees protecting investors from unauthorized access, the fine print of what clients must do often varies from brokerage to brokerage. It is therefore important to ensure that you comply with your discount brokerage’s specific conditions to have the guarantee apply.
Finally, here’s a list of a few extra resources to help boost online fraud awareness.
Are you susceptible to fraud, security breaches and online vulnerability?
DIY Investor check: take this quiz to see how vulnerable you could be to an investment scam
Check out this four-part toolkit from the MFDA and take the quick quiz to check your knowledge on fraud.
Investment Industry Regulatory Organization of Canada (IIROC) resource on fraud protection — they have also produced a cybersecurity report. Using this report, member firms can ensure they are up-to-date with online security measures.
[ii] The IIROC lost financial information for 52,000 clients involving 32 investment firms when a laptop went missing in February, 2013. IIROC. (2016). IIROC to support clients whose personal information was on a lost portable device [Press release]. Retrieved from http://www.iiroc.ca/Documents/2013/d8d465f9-0a37-4325-8732-1b12cbd2ddb8_en.pdf
With all the legal and political battles going on in the US right now, it’s a little hard to keep track. There are, however, a pair of feuds that DIY investors and Canadian discount brokerages may want to keep on their radars, namely the commission price war between US online brokerages and the efforts to rescind the Department of Labor’s (DOL) Fiduciary Duty Rule.
A tale of two fees
For DIY investors, competition between online brokerages is generally a good thing whereas for the online brokerages themselves, it’s not so rosy.
Compared to the Canadian discount brokerage marketplace, the world of US online brokerages is much more competitive. While the standard thesis that competition drives price cuts helps to explain why commission pricing is under pressure in the US online brokerage market, there’s also potentially another strategy related to the Trump view on financial deregulation that some bigger players in the DIY investing space might be hoping to use to their advantage.
Over the past several years, while interest rates have been low and market volatility muted, major players in the online brokerage space have diversified away from relying heavily on trading commission revenues and instead increased the proportion of their revenue that relies on fee-based advisory services, including newer services such as robo-advisors.
The result: certain players, such as Schwab, one the largest of the US online brokerages, now make most of their money from services and fees other than trading commissions. Other brokerages, such as their peers in the space TD Ameritrade or E*Trade Financial, are relatively more dependent on trading commissions.
Thus, the bigger players like Schwab can sway their online brokerage peers into a price war and still emerge a winner because they have the assets and scale to price out their competition.
Making the cut
While the pricing wars on US trading commissions between online brokerages seemed to have subsided for the time being, the carnage on the charts is already clear. Schwab’s price chart looks remarkably untouched by recent price cut announcements, whereas TD Ameritrade has clearly been knocked down a few pegs.
Chart of TD Ameritrade from 3/10/17
Chart from Schwab 3/10/17
Fidelity, one of the three biggest Assets Under Management (AUM) companies (the others being Vanguard and Schwab) led the battle to rock-bottom pricing several months ago by dropping commissions on some of its Blackrock ETFs, among other assets. Fidelity and Blackrock share an ETF alliance where traders can buy certain products, especially ETFs, through either company without paying extra fees. The alliance brought Fidelity in to the ETF game and helps both companies shore up market share against competitor Vanguard Group.
Fidelity continued to lower fees in February and March, slashing $7.95 trade commissions by $3 to $4.95 on online trading stocks and ETFs, then chopping 10 cents from its options pricing contracts, from $0.75 to $0.65. Fidelity manages assets of just below $2 trillion. The play created a domino effect prompting Vanguard and Schwab to quickly follow suit.
The Vanguard Group, with AUM hovering over the $3 trillion USD mark, announced in early 2017 that it was also lowering fees on trading stocks and ETFs. Vanguard had already dropped prices on 35 different funds in December of last year.
Screen shot of Schwab’s commission fees (as of 3/10/17)
Schwab now boasts having the lowest fees on trading stocks and ETFs—saying that “technology and scale” have lowered operating costs and allow them to pass savings on to their clients . . . well, maybe . . . but one wonders how much the prize of gathering assets and the possible ‘repeal’ of the US Department of Labor’s new fiduciary rule has to do with it.
One rule to cut them all
The US DOL Fiduciary Duty Rule is intended to ensure that financial advisors act in an investor’s best interest, and avoid conflicts of interest when they give advice on retirement planning and purchase and sale of assets.
Brokers and others who work on commission may be most affected as a potential conflict of interest arises.
At least one AUM firm, Blackrock, has admitted that price drops have been influenced by the impending rule, scheduled to come in to effect on April 10 . . . but just to throw another wrench into the works, President Trump signed a memorandum in February directing the DOL to review its implementation of the fiduciary rule. That likely means it won’t take effect next month anyway. No matter, it seems everyone has jumped into the pool of fee restructuring, whether they wanted to or not.
Unsurprisingly, values of the stocks for the brokerages themselves see-sawed in the past few weeks in response to the plummeting fees.
Could it happen here?
Could a price war on commission fees happen with Canadian discount brokerages? Technically it already has.
Canada had a similar price war in 2014 when standard commissions for trading stocks and ETFs nosedived to $9.95 from $29 for online brokerages once RBC Direct Investing changed its fee schedule. Minimum investments thresholds to qualify for cheap commissions were also dropped for most brokerages at the same time.
The plot twist to the Canadian online brokerage price war story is that Virtual Brokers bowed out of the ultra-low commission pricing competition with Questrade signalling that there may be a floor to what a non-bank owned Canadian online brokerage charges for commission pricing. That said, CIBC Investor’s Edge has had the lowest standard commission pricing ($6.95) amongst major Canadian bank-owned brokerages since 2014 and this hasn’t yet prompted its bank-owned peers to follow suit.
As for the fiduciary rule, Canada may take its cues from spirit of the DOL plan. There has been an undeniable interest in improving the protections for investors in the face of complex financial products and services.
For at least the past five years, the Canadian Securities Administrators (CSA) have been toying with the idea of placing a similar obligation on Canada’s financial advisors by setting a regulatory “best interest standard.” The standard would work to ensure that financial advisors act in the best interest of their clients, have appropriate disclosures regarding sales of assets and funds, and otherwise protect the interests of the investor. That said, there are still disagreements from provincial securities regulators that demonstrate just how controversial the notion of acting in the ‘best interest’ of a client is.
Interestingly, the firestorm surrounding TD Bank this past week put this very topic into the spotlight in Canada with the revelation that staff may have been operating unethically in suggesting or providing financial products or services to bank clients.
Bottom Line
Financial services, and investment services in particular, may have different dynamics in the US and Canada but they nonetheless follow some very basic economic principles.
Competition drives innovation and pricing that favours consumers, however, what also appears to be true is that providers like online brokerages will need to find more creative (and still legal) ways in order to generate profits.
With fees falling fast and furious, and President Trump with pen in hand, until the dust settles it’s hard to say who will win the race to the bottom in US and whether the trend of ‘deregulation’ in the US will be a counterpoint or inspiration to regulators here. Judging by the fallout in this week’s news, however, Canadians are being vocal in backing investor protection.
Snapchat has taken its sweet time to go public since co-founder and CEO Evan Spiegel hinted in 2015 that the company needed an IPO. But the time for Snapchat (whose official name is now Snap Inc) to go public has finally arrived. This week, 200M Class A Common stocks went public, and what an entrance it made. Up 44% in its debut and another 10% the day afterwards, there’s a lot being priced into the hopes and dreams of this millennial phenom. Whether shares hold their value or have it disappear like the ephemeral messages that drives its popularity remains to be seen.
The chatter: why SNAP’s Class A common stock offering gives investors the jitters
The investor circle is making a lot of noise about the stock structure that SNAP rolled out this week with its IPO on the NYSE. There are A, B, and C level stocks, with only 200M Class A common stocks available to the ‘main street investor’. Remarkably, the Class A shares are non-voting stocks that anyone can buy—and that’s what the noise is about. No votes? So you can pay, but you get no say (although apparently you can still attend the AGM). Class B stocks are reserved for executives and early investors and carry one vote per share. The Class C stocks are held by CEO Evan Spiegel and co-founder CTO Bobby Murphy. Each of these stocks carries 10 votes. That means all the votes are held by the early investors and the co-founders, and the co-founders maintain a stranglehold of nearly 90% ownership in the company through the stock structure and vote-rich Class C stocks.
Snapchat founders ring the opening bell at NYSE. (screenshot of NYSE website).
The stock structure: SNAP IPO not that unique
It’s not the first time that an IPO has structured itself so founders and early investors maintain control of shares—that also allows them to retain a controlling interest in what happens with the product they created, after all. But usually investors receive at least a token vote on the shares they buy, even if majority interest remains elsewhere. SNAP isn’t even trying to pretend they’re offering any real say in their company, and flat out said so in their IPO filing: “to our knowledge, no other company has completed an initial public offering of non-voting stock on a U.S. stock exchange”. So the question investors need to be prepared to ask themselves before investing is: what’s my level of confidence in the founders and developers of SNAP?
SNAP’s IPO: comparing SNAP to Facebook and Twitter
It’s impossible to watch yet another social media IPO without thinking back to Facebook’s bumbled opening with Nasdaq, and Twitter’s better opening, but later less successful, offering. Biographical comparisons are also hard to avoid between SNAP’s co-founder, Evan Spiegel and Mark Zuckerberg. Both are university drop outs, and both had expensive fights with turfed co-founders they had to pay off to shut up.
Facebook went public five years ago in 2012, stalled at opening by technical glitches. In part, the Nasdaq couldn’t handle the huge demand for the stock. Facebook hiccuped—Nasdaq got sued (a couple of times) for its bungling of the IPO—and for months the stock roller-coasted, at one point below $US29 after opening at $US38 and climbing as high as $US45 the first day.
Twitter hit the ground running in 2013 at $US44.93 and quickly climbed to $US69 before plummeting like a stone year over year to its current valuation of just under $US16 per share. Facebook now sells at a cool $US137, nearly the same price as Apple stock. What happened? And can we use the lessons of Facebook and Twitter to predict SNAP’s trajectory?
Facebook was already a giant in the industry when it went public. It had 483M daily users, $3.7B in revenue, and a positive net income of $1B. SNAP has barely one-third as many daily users even today, at 158M, revenue of $404.5M, and posted net losses of $514.6M in 2016. At first blush, SNAP looks a lot more like Twitter when it went public in 2013 with 100M daily users, revenues of $317M, and a net loss of $79M. What’s different?
SNAP: it’s about the next generation of internet users
SNAP has a private valuation of about $18B, a strong user base of under 30-year olds, especially in Europe and the USA, and a group that does not want to use Facebook (mostly because their parents use it). But a Business Insider graph tells a possibly different tale.
About 45% of SNAP’s users are under the age of 24; that amounts to about 71M users. Facebook has about 16% of its users in the same age range. But FB’s total daily user number is 1.2-1.65B, meaning at least 192M users are 24 or younger . . . hmmmm. Still, Zuckerberg is concerned enough about SNAP that he unsuccessfully tried to buy the company for a rumored $3B. He did buy Instagram, a direct SNAP competitor, in 2012 for $1B. Since then, he’s copied SNAP’s upgrades, notably Snapchat Stories, but it doesn’t seem to be stemming the tide of kids clicking in Snapchat.
The thing that’s different is that SNAP is visual, not text-based, and the snaps you send only last a few seconds before they dissolve. Given the growing concerns about internet pornography and not knowing where your data might be going (and whether your parents, teachers or the police might see it), SNAP is a popular choice to avoid these potential problems. It also changes the way the net is used, something that FB may not be able to compete with, no matter what it does with Instagram. It’s just seen as yesterday’s app to a user group that changes its whims with the wind . . . . SNAP is just where it’s at.
IPOs: buying SNAP . . . take a number
SNAP is the biggest social media company to go public since Twitter, back in 2013. There are multiple underwriters including Morgan Stanley and Goldman Sachs who are leads on the deal. The way IPOs work is that shares are sold to major investment banks, broker dealers and dealer-investors, usually in large numbers. It’s just easier when you’re trying to sell millions of shares to sell to the big guys who can afford to buy them in bulk. These get distributed to investors. It can be hard to participate in an IPO just because the average investor is usually only buying a relatively small number of stocks. This pent up demand for ‘retail investors’ to participate in the hype is likely one of the reasons why SNAP rose as much as it did on its debut and first full trading day.
Are IPOs a gamble? Well, FB’s rocky start has since turned in a stellar performance. Their initial 108B valuation has almost tripled: FB is worth about 382B today. And Twitter? Worth roughly one-half their initial valuation of $24B in 2013. Where will SNAP end up? Your guess is probably as good as anyone’s . . .
If you haven’t heard much about IPOs this year, you’re not alone.
Globally, investment bankers have had a lot more time on their hands and deal flow has slowed to its lowest levels in a decade (see data on Global IPO proceeds below, courtesy of Renaissance Capital).
Global IPO Proceeds to June 2016 Source: Renaissance Capital
Just about 6 months ago, however, Questrade waded head first into IPO deal waters by launching a new feature on their website: an IPO Centre. Despite the challenging environment, Questrade’s vision for this area appears to be one of convenience for those investors looking for information about companies raising capital from initial or secondary offerings.
Here are some highlights for DIY investors:
First, it’s free to access, which is always nice for investors looking for interesting investment ideas. Deals are listed in a table format and after a deal link is clicked on, Questrade provides further details and a summary of the product in question, from the deal size to the use of proceeds. While due diligence is naturally required, fundamental investors will appreciate this essential overview format. Questrade advises clients to read the company issued prospectus, as would any broker.
Second, there’s more than just companies coming to market. Despite the name, IPOs of company stocks aren’t the only types of offers featured.
Questrade’s IPO Centre also highlights fixed income deals, new structured products, and secondaries for equities. In fact, in the 6 months since its launch, Questrade has featured 106 deals (as per the “closed” section of the IPO Centre), and at the time of publication, there are currently two open offers. Interestingly, of the closed offers, the vast majority (about 88%) have been some kind of treasury or structured product offering, validating many observations that the Canadian IPO market for companies coming to market has been virtually non-existent for 2016. It should be noted that Questrade’s IPO centre covers Canadian IPOs only.
Number of closed offerings on Questrade’s IPO centre ytd (Source: Questrade IPO Centre website)
While the branding and layout are cool, this kind of feature is evolutionary rather than revolutionary. US brokerages such as TD Ameritrade, E-Trade Financial and Interactive Brokers provide similar platforms and in Canada, Scotia iTRADE offers a variation on this deal information. In this case, Questrade looking to differentiate itself from its Canadian discount brokerage competitors. In a highly competitive market, every little feature helps.
Despite the rough year in IPOs, Twilio’s successful IPO in the US earlier this summer and speculation that Real Matters may seek to go public in Canada this fall suggests that there still might be a headline or two left before the year is out. In the meantime, all that Questrade’s IPO Centre can do is continue to be prepared.
For additional information on Questrade’s IPO Centre, check out this blog post.
One of the interesting paradoxes of DIY investing is that for many investors, the journey to doing it yourself actually starts by consulting a lot of other people. Knowing this, several online brokerages have created incentive programs aimed at giving existing clients a ‘win/win’ approach to refer their friends and family.
Unfortunately for many investors, when it comes to the current refer-a-friend promotions, it seems like there isn’t as much ‘giving’ as there is ‘taking’.
In the first of this two part series, we report some fairly surprising results from an in-depth look at the current referral promotions offered by Canadian discount brokerages and how the industry may need to rethink its current approach if it wants get DIY investors – and their friends – talking about what their brokerage offers.
A Referral By Any Other Name
Whether they’re called refer-a-friend or simply just a referral program, there are a handful of discount brokerages in Canada that offer up incentives for existing clients to refer a new client their way.
While there are technically five Canadian discount brokerages offering referral bonus programs, one of those five (Interactive Brokers Canada) has a program that only rewards the referring party and not the new client so they have not been included as part of this analysis.
In this post, we’ll focus on the following four discount brokerages:
BMO InvestorLine
Questrade
Scotia iTRADE
Virtual Brokers
Of this list, Virtual Brokers, BMO InvestorLine and Scotia iTrade are running offers with deadlines. That said, the latter two online brokerages have historically extended these programs so even though there is no guarantee they will continue to do so, we’ve included them since they’re running the programs at the time of publishing.
Currently referral programs offer either cash rewards or credits for free trades to the person making the referral (the ‘referrer’) as well as to the person being referred (the ‘referee’). This post will focus on those referrals that actually offer cash back rather than those that offer commission credits since commission pricing is somewhat variable across the different brokerages.
This is a Friend of Mine
Vouching for a financial institution is easy when a client feels good about their experience with the firm. Of course, things are made easier if there is some additional ‘encouragement’ offered by the financial institution to say thanks for the business.
While the system seems simple enough as a concept and may seem like a good idea, the devil is, as usual, in the details. This might help to explain why, although referrals are the lowest cost and most potent way to earn new clients, most Canadian online brokerages don’t have one.
So what do individuals who might want to refer a friend or family member to an online brokerage have to consider before doing so?
The table below summarizes some of the important points DIY investors should consider when it comes to the current referral offerings. In particular, one of the most important things to do is to read the terms and conditions associated with a specific offer because, as we found out, there is a lot of variability when it comes to eligibility and requirements. Nonetheless, here are some of the interesting similarities and differences across the four brokerages we reviewed.
*minimum based on deadline. Referral bonus to be deposited by Aug. 15/16
Mo Money, Mo Choices
One of the first things that DIY investors need to know is just what they qualify for in terms of incentives. Of the four brokerages compared, Questrade has the lowest deposit threshold to qualify for a referral bonus at $1,000 whereas BMO InvestorLine has the highest at $50,000. Virtual Brokers and Scotia iTrade require a minimum of $5,000 or $10,000 respectively.
In terms of referral amounts (i.e. the amounts being paid to existing clients who refer a new client), individuals can receive between $25 and $100 per referred account depending on the discount brokerage and the deposit amount.
In this category, Scotia iTrade offers the highest amount ($100 cash back) for a new client – the caveat being that new client has to deposit at least $100,000. Interestingly, Scotia iTrade also offers clients and referees the option for a cash back reward or for commission-free trades. For ease of comparison to other brokerages, however, this article focuses on the cash-back rewards (and since brokerages may value a trade commission differently).
Questrade and Virtual Brokers have a similar structure to their referral amounts with individual clients eligible to receive cash back bonuses of $25 for each account they refer as well as a bonus of $50 added to every third referral. This structure clearly is intended to reward/incentivize clients to encourage a greater number of referrals.
BMO InvestorLine has taken a literal 50:50 approach in offering only one reward amount ($50) to both referrer and referee.
Quantity isn’t Quality
When it comes to online brokerages, it would seem that for new clients, quantity is quality – or at least it should be when it comes to asset deposits. Looking at the referee bonus offers, however, paints a paradoxical picture where the more a new client brings with them, the less they actually get.
An important distinction to make between bonuses is the difference between absolute dollar amounts and relative amounts.
Among the four brokerages compared, Questrade is clearly offering the most on an absolute basis for new clients. That is to say Questrade offers as much as $250 for deposits of $100,000+ whereas at that same deposit level Scotia iTrade offers $100 cash and BMO InvestorLine and Virtual Brokers each offer $50.
Refer-a-Friend Bonus Amounts Offered by Canadian Online Brokerages
But absolute dollar amounts don’t quite tell the full story. The relative picture is more revealing.
As shown in the following table, on a relative basis the amount offered to new clients from referral cash back offers ranges from a high of 2.5% for Questrade (at the $1,000 deposit level) all the way down to 0.05% at BMO InvestorLine and Virtual Brokers. It should be noted that the 6 deposit levels shown here were used for ease of comparison across each of the discount brokerages.
In a nutshell, what this table shows is that bringing more assets to a discount brokerage via a referral is not a great strategy – at least as a standalone at certain brokerages. If there is a silver lining, some brokerages, such as BMO InvestorLine and Scotia iTrade, actually allow the refer-a-friend bonus to be combined with an existing offer (i.e. the deals are stackable) which certainly adds a much more competitive element for a new client.
Friend Zone
Still, the trend towards offering less to clients who bring more seems somewhat paradoxical, especially since clients who have lots of assets are more likely to have friends or family that also have lots of assets. And, while this may be somewhat speculative, it stands to reason that an individual looking to move $100,000 is going to have to consider the endorsement of a discount brokerage (independent or bank-owned) more carefully than someone moving $1,000 so the reward/incentive should also be proportionate to the value of the new client.
Clearly, the range of offers shows that certain brokerages are willing to be more aggressive with incentives than other. Questrade, for example, appears to be offering five times more for a relatively high value client ($100,000+ deposit) than either Virtual Brokers or BMO InvestorLine. In addition, Questrade appears to be aggressively pricing their referee incentives than most other brokerages at all the deposit levels we measured. Conversely, Scotia iTrade appears to be offering higher incentives to those doing the referring, especially at the $50,000+ deposit levels.
In part two of this series, we’ll dive further into details of the various programs including some of the red tape involved as well as the very interesting findings from the terms and conditions of each discount brokerage’s programs. If you’re at all interested in the referral programs, that’s one you’ll want to also read.
Global IPO Proceeds to June 2016 Source: Renaissance Capital
Number of closed offerings on Questrade’s IPO centre ytd (Source: Questrade IPO Centre website)
