Against the Tide

Globe Investor Magazine, September 18, 2008

Continued from Page 1

Sjogren of Investor Economics believes the Canadian market is by nature more conservative. "We're a nation of advice-seekers," he says. "We don't have that adventurous, entrepreneurial spirit that is prevalent among investors in the U.S." Still, he notes that recent changes in the marketplace have contributed to a curb­ing of DIY's growth. From an explosion of new exchange-traded funds to the emergence of principal-protected notes, investment products are growing increas­ingly complex, and people are having trouble making sense of them on their own. He also thinks the fierce bear mar­ket that began at the start of this decade has turned some investors away from running their own accounts. One of the defining features of the technology bub­ble was the rush by rank-and-file inves­tors to trade tech stocks through discount brokerage accounts. When the market crashed in 2000 and annihilated those accounts, many investors simply aban­doned their risky new hobby.

Today, only a small minority of Cana­dian do-it-yourselfers are what might be considered active traders. In fact, fewer than 5% of the households with accounts at the discount broker TD Waterhouse make the 30 trades per quarter that define active trading. The remainder are what are known as long-term investors who trade stocks less frequently and who may also hold mutual funds and bonds or guar­anteed investment certificates. John See, president of Waterhouse, which com­mands nearly 50% of the discount-broker market in Canada, says the average size of ­a new account is $80,000 and the average client is in his or her mid-to-late 50s. "That surprises people," he says. "But if you think about it, these people are in the peak earning years.

Managing their money is a priority in the preretirement years." Younger, thirtysomething inves­tors are considered a growth market for discount brokers, but they're more focused on mortgages and kids than they are on building assets for retirement. The fact that baby boomers dominate investing in Canada helps explain why traditional brokers retain such a strong franchise, says See. This group is used to advisers serving as the medium be­­tween individuals and the markets. Now they want to experiment with their own trades, even if they are satisfied with the service they're getting from advisers, suggests See. Which is why Waterhouse-uniquely among its discount peers-is happy to provide both no-frills trading and financial advice to those who want it. "Not everyone should do their own investing," he says.

Paul Bates, who ran discount broker­ages in the industry's early days and now serves as dean of the DeGroote School of Business at McMaster University in Hamilton, says the full extent of self-directed investing in Canada is obscured by the fact that many people have both an investment adviser and an account at a discount broker. In the discount sec­tor's early years, he says, "you either did everything online or you did it all through an adviser. Now people are doing both." He's a good example: He has a portion of his portfolio with an investment coun­sellor, while he invests the rest by him­self online.

The growth of DIY investing in Can­ada may also have been held back by prices that weren't "discount" enough. For years, TD Waterhouse charged its Canadian clients a minimum $29 to trade on the Internet, but the fee for U.S. clients was only $12 (U.S.). The $29 min­imum was pretty much the rule in Can­ada until almost two years ago, when E*Trade Canada introduced a flat $9.99 stock-trading commission for clients with $50,000 in assets or who traded actively. E*Trade Canada president Dun­can Hannay says the firm has seen a 113% jump in total customer assets and an 85% in­­crease in average assets per customer since then, which means clients are giv­ing more of their business to E*Trade, which is in the process of being taken over by Scotiabank. "We were growing steadily every year before that," Hannay says, "but it was a fraction of the growth we've had in the past two years." While See plays down the importance of lower fees and commissions in the market's growth, TD Waterhouse has matched E*Trade ­by offering a $9.99 commission to clients with $100,000 in household assets with the firm. The result: The flow of new clients has soared by 25%.

While for years discount brokers benefited from consumers' dissatisfac­tion with the service they were getting for the rich fees they paid traditional bro­kerages, discounters now themselves face gripes from clients who want to do more, and more easily.

After Ivan Sack dumped his broker, he became a convert to Inter­net trading. Sack, who for years ran a trade magazine for the gaming industry and now lives in Mississauga, is an ex­­tremely active trader. He does about 25 transactions a month and keeps a seven-figure amount in his account. He's about the most coveted type of client imagin­able. Yet he's growing frustrated with his discount brokerage's service. For exam­ple, the online trading platform isn't flex­ible enough to meet his needs for option trading. "You have to call on the tele­phone, and then there are all these crazy layers of voice mail," he says. "Mean­while, you're listening to all these com­mercials talking about how great their service is."

Whether discounters manage to accel­erate their growth and close the huge gap between their asset base and that of full-­­service firms depends in part on whether they can keep up with the needs of clients like Sack. At the same time, they have to reach out to a broader market. Water­house, for one, caters to less expert cli­ents by offering, for example, to connect investors with its bond desk so they can learn how bonds are priced. As for more aggressive investors, who are critical to the bottom line because of the commis­sion revenue they generate, discounters are luring them with access to a wider range of markets and financial products. Following E*Trade Financial's move in the U.S., TD will introduce online global stock trading this fall, starting with Euro­pean markets and followed by the Far East. And, in a nod to the huge role com­modities play in Canada's economy, TD is considering introducing commodity trading for retail investors. For investors who prefer to have professional help, TD Waterhouse maintains a financial planning division that clients can access through TD Canada Trust branches.

While discount brokers haven't lived up to their early hype, they've certainly developed a significant niche. In fact, in recent years the sector has grown at a faster rate than full-service brokerages. The five-year compound annual rate of asset growth for discounters is 15%, com­pared to 12% for full-service brokers.

And the DIY sector may be in for a growth spurt thanks not to the industry's efforts but to the coming demographic changes. The boomer generation is reach­ing retirement, which means people will have more time to manage their own money. As importantly, boomers' kids have grown up with the Internet and can't imagine doing financial transac­tions the old way. "[Investing online] is not foreign-it's foreign to do things any other way," says See.

Keith Sjogren agrees that young peo­ple are the future for discount brokers and, by extension, do-it-yourself invest­ing. "These people are less likely to seek advice than others," he says. "I wouldn't be targeting people like me. I'd be target­ing people like my son." It's the discount brokers' market to lose.

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