Web Can Help Investors Save

Internet brokerages are forcing mainstream institutions to reduce the fees they charge per trade in an effort to remain competitive

ALEX ROSLIN
SPECIAL TO THE GAZETTE
Monday, November 5, 2007
The Montreal Gazette

Twenty years ago, computers were the bane of the investing world when stocks had their worst one-day tumble in North American history during the 1987 market crash.

Computer trading by big institutional firms was widely blamed when the Dow Jones Industrial Average fell 22.6 per cent on Black Monday, Oct. 19, 1987.

Today, computers have dramatically changed investing for ordinary folks, too. You can use one to buy Japanese stocks or Swiss francs from your home without speaking with a live broker.

Do a Google search for investing and you’ll get over 100 million websites. Some of them might even be useful.

And like the computer-driven speculators blamed for the panic of 1987, regular investors can also now run computerized trading programs to buy and sell stocks while they play golf or sip a martini.

The Internet hasn’t only given investors endless info on the markets. It’s also forcing many brokerages to bring down trading commissions and provide more in-house research and market tools like charting and real-time data.

In the U.S. some banks have even started to offer free online trading to larger customers.

Canadian stock brokerages still badly lag the U.S. in bringing down fees, but the advent of super-cheap independent brokerages like Questrade and Interactive Brokers offering fees of under $5 a trade has forced bank-owned brokerages to re-examine their commissions.

A growing number of banks have just started to offer trades for under $10, but so far, the lower fees apply mostly to customers with larger balances of at least $100,000 or to those who trade actively (usually at least 30 times a quarter).

In September, RBC Direct Investor and BMO InvestorLine were the latest institutions to announce fees of $9.95 for a Canadian or U.S. trade to clients with at least $100,000 in holdings.

The $9.95 fee already applied to those doing over 30 trades a quarter at RBC.

Clients with less than $100,000 or fewer trades still must pay $28.95 per trade at RBC, while those wanting to place their order over the phone with a live RBC representative must pay a minimum of $43 per trade plus other possible charges depending on the number of stocks in the transaction and share price.

TD Waterhouse announced a similar fee reduction earlier in September to $9.99 for active and large customers.

“I call it asterix pricing. You better read the fine print before you jump ship and go somewhere else,” said Glenn LaCoste, president of Surviscor, a Toronto-based financial consulting firm that publishes a survey of online discount brokerages.

Despite a lot of publicity for their recent moves, the banks are actually not targeting regular Canadian investors—those executing one or two trades per month, who LaCoste said make up 95 percent of the country’s brokerage accounts—but rather the active traders and large investors who moved accounts to independent brokerages, he said.

“Banks are trying to get into that game to get those people back,” he said.

But the banks’ fee reductions are too little, too late even for many active traders. “To think that the major banks still charge $25 per trade is crazy and a rip-off,” said Matt Caruso, a professional trader in Montreal who switched to Interactive Brokers, where he pays a commission of one cent per share for Canadian stocks and can trade global markets 24 hours a day.

“I honestly feel that anyone who trades at least twice a year and knows how to use a computer should use (an independent discount brokerage).”

Where ordinary folks may eventually benefit, LaCoste said, is from better tools, research and functionality that are being added to online brokerage websites in order to attract active traders and larger accounts.

“The features for the active guys will become mainstream.”

But as for lower commissions for ordinary Canadian investors, LaCoste said you shouldn’t hold your breath.

Online investing isn’t for everyone

Which investors are best-suited to using an online discount brokerage?

People who want their hands held should probably stick to full-service brokerages like those offered by the large banks.

They can provide market advice and help you make a financial plan customized to your needs.

If you feel comfortable making your own investing decisions and like the independence and speed of buying or selling stocks, mutual funds, options and bonds with the click of a mouse, an online discount brokerage may be for you.

Remember: these brokerages have no advisors to help you navigate the markets and are essentially just order-takers that provide a cheaper way of processing transactions.

However, online discount brokerages typically also offer investors an array of in-house research and tools like charts and stock filters.

The large Canadian banks all have online discount brokerage arms, and a number of independent firms offer the service in Canada as well.

One advantage to using a brokerage offered by one of the banks used to be the ease of switching money between banking and investing accounts.

But the proliferation of online financial transactions has made it far easier to move funds between bank accounts and unaffiliated brokerages in recent years.

For some, another concern about independent brokerages is the question of what happens to an investor’s holdings in the case of bankruptcy.

Be sure to verify whether or not the brokerage is a member of the Canadian Investor Protection Fund, which was created by the investment industry to insure losses at member firms and protects investor assets up to $1 million.