“The young investor strategy is a focus that we’ve had for some time,” said Viki Lazaris, head of BMO InvestorLine.Fred Lum/The Globe and Mail
Canadian banks are slashing the trading fees charged by their online investing platforms, a sudden about-face after years of ignoring intense competition from independent rivals with cheaper prices.
In the past month, Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal each cut their discount brokerage prices. Now any of their clients, regardless of their portfolio size, can buy or sell a stock for $9.95 to $9.99 – a low fee historically reserved for clients with tens of thousands of dollars to invest.
The timing is no coincidence. January and February constitute prime RRSP season and account for more than half of all long-term mutual fund sales. Low fees can help attract new clients at this crucial time of year.
New customers are crucial if the discount broker sector is to continue its growth trajectory. Between June 2008 and June 2013, online brokerage assets in Canada climbed 42 per cent to $263-billion, according to market research firm Investor Economics.
Banks are putting a new emphasis on their discount broker arms as growth in retail banking slows. Financial institutions have responded by trying to squeeze bigger profits out of money management – and they're conscious that online trading platforms can offer attractive margins. Traditional full-service brokerages, which employ advisers who meet face-to-face with clients, are expensive operations, with advisers often eating up 40 to 50 per cent of the fees earned. Discount brokers don't have that overhead.
The lack of middlemen has other benefits for the banks. Under the full-service model, mutual fund companies pay special fees to advisers for putting clients in their funds. These payments, known as trailer fees, often amount to 1 per cent of the money invested. The banks' discount brokerages still often collect these payments, even though they don't employ any advisers.
BMO, TD and RBC say the major impetus for their price cuts is a desire to attract younger customers, who wouldn't have qualified for lower fees under the old pricing system. The earlier a bank can win over twenty-something investors, the more likely they are to remain with the bank as they earn more and invest more money. "The young investor strategy is a focus that we've had for some time," said Viki Lazaris, head of BMO InvestorLine.
But the banks stress they aren't ignoring more seasoned clients. Older investors are becoming more comfortable with technology and often have more time to tend their portfolios in retirement, making them prime candidates for self-directed portfolios.
Financial institutions say their goal is to cater both to those who use self-directed discount brokerage accounts as well as those who need face-to-face time with advisers. "From our experience, a lot of users actually use both," said Alfred Chung, director of TD Direct Investing. "We don't see those two things as mutually exclusive. They can actually complement each other really well."
Still, many clients only invest online and some need special care – especially if they're young and don't know much about basics such as portfolio diversification. To help this group, TD has set up 32 direct investing branches across the country, where clients can ask questions and attend investing seminars. BMO has taken a different route and last year rolled out its AdviceDirect platform, an interactive online tool that recommends products and asset mixes depending on a client's personal financial profile.
Despite the new rock-bottom trading fees, banks still face stiff competition from independent discount brokerages. Questrade offered $9.95-a-trade pricing for all clients seven years ago, and its basic pricing can now be as little as $4.95 a trade. The brokerage also heavily markets the fact that it rebates most mutual fund trailer fees back to its clients. "We're a self-service online broker," said CEO Edward Kholodenko. "We didn't feel that it was fair for us to take the trailer fee."
As everyone battles for the discount customer, it's possible that all the firms will emerge as winners. After all, nothing encourages investing more than rising markets. "You're seeing investors dip their toes back into the water," Mr. Kholodenko said.
Tim Kiladze