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ONLINE BROKERAGES

Lower fees, more bells and whistles

In the fourth quarter of 2008, with markets in full retreat, the number of new accounts rose 80 per cent from the third quarter, and 50 per cent from the same period in 2007

Paul Brent

Canadians have many different reasons why they sign on with an online brokerage to manage their investments and nurse their retirement nest egg. They might want to avoid higher fees at full-service brokerages, or feel increasing confidence in their own investing acumen, or simply want to take more control over their financial future.

And it's clear that the market meltdown has not deterred investors from going online and selecting a discount broker. In the fourth quarter of 2008, with markets in full retreat, the number of new accounts rose 80 per cent from the third quarter, and 50 per cent from the same period in 2007, according to Investor Economics of Toronto.

For those who haven't signed on with an online brokerage and want to do so, there is much to consider. Prices have fallen dramatically over the past few years, driven by upstart independents, and a round of industry consolidation has done nothing to stem the trend to lower fees.

As well, brokerages in general have been adding bells and whistles to their online offerings to gain any advantage over their competitors. While that too, is a positive development, it makes selecting a brokerage all the more confusing.

The first step you should take is to honestly evaluate what you will be buying and selling through your online brokerage. "Each individual has to make a determination as to whether online investing is right for them," says Jack Random, director of capital markets at the Investment Industry of Canada. "Some people who have more complicated estate planning or tax-related matters might consider using an adviser through a full-service broker."

Or you might settle on a compromise where you go online for some investing but use a full-service firm for more complicated transactions.

Mr. Random suggests that people start by cruising several of the websites operated by online brokerages and "talking to colleagues and friends, asking for their experiences of trading online."

What may seem daunting at first really isn't: Canada's big banks control the lion's share of the online investing business and offer similar services, add in five others (four, really, with Scotia McLeod's acquisition of E*Trade Canada) and you have a group that accounts for 98 per cent of the market.

In recent years, online brokerages have tried to segment the market through pricing options and marketing efforts to a spectrum of investors, from those looking to buy and sell a few stocks, to active traders who demand a suite of capabilities that would rival those of a Bay Street broker.

If you think you are going to be one of those online investment hotshots making dozens of trades a quarter and fees are an issue, a low-cost brokerage such as Questrade or Credential Direct might be for you. If you are looking for more support in the form of regular research on the economy or stocks, a bank-affiliated brokerage might be what you need.

What it Costs

The old saw "you get what you pay for" definitely applies in the online brokerage world. Fees are lower because the Web-based service is basically a stripped-down, do-it-yourself version of the full-service brokerage experience, but even in the online world price and service vary.

From the bottom up, fees start with Toronto-based independent Questrade, with trading commissions as low as 1 cent a share (with a $4.95 minimum) up to a flat $9.95. E*Trade Canada charges a $9.99 flat rate per transaction or a discounted rate of $6.99 for hyperactive traders who do more than 150 transactions per quarter.

Sampling of fees and products

TD Waterhouse, the biggest online broker, has a more complicated pricing structure: It charges $29 for trades up to 1,000 shares priced at more than $2 each and 3 cents per share for orders over 1,000. Those with $100,000 in household account assets pay $9.95 per trade (as do those who trade 30 to 149 times per quarter), while those trading 150-plus times per quarter pay a $7 flat fee.

What you can get

Most online brokerages provide plenty of online investing tools, such as online calculators and portfolio builders, customized alerts and stock and mutual fund screeners. The bank-backed brokerages - because they are the virtual arm of bricks and mortar brokerages - typically offer traders access to the steady stream of economics, fixed income and equity research that they churn out.

Stocks remain the bread and butter for brokerages but most allow you to buy and sell mutual funds, bonds and guaranteed investment certificates (GICs). Availability of these and other products, and fees associated with them, vary.

When it comes to mutual funds, a group that includes CIBC Investor's Edge, Credential Direct and Scotia McLeod Direct Investing offer fee-free trading. If buying and selling mutual funds will be the primary use of your online brokerage account, make sure you determine any and all associated fees.

If bonds and GICs are on your shopping list, look for a brokerage that has a healthy list of third-party product, which in general offer higher rates of return than the big banks, according to The Globe and Mail's personal finance writer Rob Carrick. His picks: BMO Investor Line, CIBC Investor's Edge and RBC Direct Investing.

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