The biggest disconnect in the online brokerage industry today is the lack of interest shown in Generation Y clients.
Members of Gen Y – basically people in their 20s and early 30s – are tech-savvy and beyond comfortable in doing business online. But until just recently, most online brokers have treated young people just starting out as investors like the rest of their clients. In other words, those who traded the most and had the most money got the best deals.
RBC Direct Investing boldly changed the rules for young investors a couple of weeks ago when it introduced a flat $9.95 fee for online trading of stocks. RBC used to be like its bank-owned competitors in reserving sub-$10 costs for people who either had $50,000 in assets or who traded actively. If you didn't qualify, your trading commission was $29 or so.
Two independent brokers, Questrade and Virtual Brokers, charge much less than $10, and they're both good options for young investors with startup accounts. But it's still significant to see a bank-owned broker slash trading costs with an eye on attracting Gen Y.
"Over the past few years, we've seen that self-directed investing is appealing to a broader cross-section of Canadians across a range of age groups and asset levels," said Rosalyn Kent, president and CEO of RBC Direct Investing. "This includes younger and novice investors who are just starting out and may not have the assets needed to obtain reduced equity trade commissions. We hope that we're now on their radar."
None of the other bank-owned firms has matched RBC yet, but they will. When TD Direct Investing announced back in 2010 that clients would qualify for $9.99 trades with accounts of $50,000, down from $100,000, all brokers fell into line. The online brokerage business is not one in which you want to stand out as a high-cost operator.
Understandably, there's a massive bias toward high-net-worth individuals in the investing industry. The more money a client has, the more revenue she's likely to generate in fees and commissions. But much as Bay Street might wish it otherwise, most people can't bring six or seven figures in assets to an investment account.
A majority of the RBC Direct Investing's accounts have assets of less than $50,000, Ms. Kent said. With the young adults of Gen Y comprising "a substantial" number of the new accounts being set up at RBC, this pattern look set to continue.
Bank-owned brokers have barely acknowledged the growing presence of Gen Y beginner investors, but Ms. Kent says RBC aims to change that. "We're really focused on helping small investors. That's one group where we feel there's some opportunity to do better."
Late last year, RBC expanded its offering of low-cost Series D mutual funds for do-it-yourself investors and reduced the minimum investment to $500 from $10,000. The firm has also simplified the fees that apply to small accounts. A fee of $25 per quarter can be avoided if you have a total $15,000 in all accounts with the firm, make three or more trades per quarter or meet a few other criteria.
On stock-trading commissions, RBC has brought some welcome clarity for all clients by dispensing with the archaic and confusing rate structure still used elsewhere. The $9.95 fee is a flat rate – it doesn't matter how many shares you buy or sell, or whether you're trading speculative penny stocks priced under $1.
At one of RBC's competitors, clients who don't qualify for discounts pay $29 per online trade of up to 1,000 shares of any price. For more than 1,000 shares, you pay 1.5 per cent of the principal value of the trade if the stock you're buying trades at a price of up to $2. Above $2, you pay 3 cents per share.
RBC's flat rate also eliminates administrative hassles associated with the $50,000 threshold that qualifies you for sub-$10 trades. Some brokers allow you to group accounts under the same name or at the same address to get up to $50,000, but you have to contact the firm to make it happen. Also, brokers may check your account every month or quarter to make sure you qualify . If you fall below $50,000, you're back to paying $29.
Young investors who want the familiarity of dealing with a big bank should put RBC at the top of their list of candidates. But the cheapest stock trades are available from tiny Virtual Brokers, which took top spot in the latest Globe and Mail online brokerage ranking. Under a VB price plan called The Penny, clients pay 1 cent a share to trade, with a minimum commission of 1 cent, a maximum of $9.99. Electronic communications network (ECN) fees, which none of the bank-owned firms applies to mainstream clients, are not charged.
Questrade has a penny-a-share offer of its own, but with a $4.95 minimum and a $9.95 maximum. Note: Additional ECN charges may apply to some trades.
One of the most interesting low-commission deals in online investing has to be the $6.95 trades that CIBC Investor's Edge offers to people who have $100,000 in products with the firm's parent, Canadian Imperial Bank of Commerce. Investor's Edge is an adequate broker, not a great one. But if you're a 20- or 30-something with a big mortgage at CIBC, $6.95 stock trades are there for the taking at Investor's Edge.
The most interesting test case in terms of which other brokers follow RBC is Qtrade Investor – a very good firm over all that has a history of adopting the best innovations of its competitors. Quebec's Desjardins Group bought a stake in Qtrade last year and there are questions whether this deal will restrict Qtrade's nimbleness in responding to competitors.
Given that there are cheaper brokers out there, it might seem a stretch to call RBC's new pricing bold. But consider what the firm's customer service people told Ms. Kent earlier this week. "Some of our clients who have been paying $28.95 a trade have a hard time believing that we've dropped to $9.95," she recounted. "They ask, is this for real?"
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The Ultimate Gen Y Investing Guide
Check out my best ideas for young adult investors. Included is a list of brokers offering free trades for exchange-traded funds.
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Rob Carrick