BUSINESS

STOCKING UP ON A BUDGET

Cut-rate brokers are making it easier and cheaper than ever to buy shares

SHIRLEY WON January 15 1996
BUSINESS

STOCKING UP ON A BUDGET

Cut-rate brokers are making it easier and cheaper than ever to buy shares

SHIRLEY WON January 15 1996

STOCKING UP ON A BUDGET

BUSINESS

Cut-rate brokers are making it easier and cheaper than ever to buy shares

After a long day at the office, Winston Chen likes nothing better than to go home and boot up his personal computer. But rather than simply surfing the Internet or playing games, he plays the stock market. A few years ago, he became fed up with full-service stockbrokers, who charged big fees and were always trying to talk him into buying particular shares. Now, using special software supplied by a discount broker, Chen places his buy and sell orders leisurely from his recreation room in suburban Toronto. “I like making my own decisions,” says Chen, 42, a manager at a telecommunications company. An avid reader of the financial press, he also manages discount-brokerage accounts for his wife and three children, aged 12 to 15. “I buy mostly blue-chip stocks and I don’t speculate,” Chen says.

He is one of a growing number of Canadians who are becoming do-ityourself investors through discount brokers. Unlike traditional brokers, discounters do not normally dispense advice on what stocks to buy or sell. Instead, they merely execute orders for investments, ranging from stocks and bonds to more sophisticated financial products such as options. Most customers still place their orders by telephone, but some discounters, including Chen’s, allow investors to manage their accounts by computer. Either way, consumers can receive no-frills service for as little as a fifth of the rates charged by traditional brokers. “We are moving more and more to a doit-yourself type culture,” says John See, president of Green Line Investor Services Inc., the country’s -

largest discount broker. “People are becoming more value-oriented.”

Discount houses have been part of the American stock-trading landscape for 20 years, but the industry only took root in Canada in the mid-1980s, following the deregulation of brokerage commissions in Ontario and Quebec. Since then, the business has grown rapidly, to the dismay of many established brokers. Tony Hepburn, president of Odium Brown Ltd., a Vancouver-based full-service brokerage, says his firm is trying to fend off competition from the nofrills shops by expanding the range of services to investors. For example, the firm runs a children’s educational program that makes it

possible for parents to buy a small number of shares—less than the typical lot of 100—in a company such as Walt Disney Co. for a minimal commission of $10 or $15. ‘We are trying to build the future by that kind of activity,” Hepburn says.

For Green Line, meanwhile, the shift in investment culture has paid off handsomely. A subsidiary of the Toronto-Dominion Bank, Green Line now claims between 60 and 70 per cent of the discount market, with about $14 billion in customer assets after swallowing competitor Marathon Brokerage Discount Investment Ser-

vices two years ago. Next in size is

Royal Bank’s Action Direct, which last week announced that its clients will soon be able to make stock trades by personal computer—a service Green Line introduced in 1993. All of the other chartered banks have their own discount brokerage subsidiaries. Vancouver-based Hongkong Bank of Canada jumped into the fray last summer, while Canada Trust rolled out Easy Line Brokerage in late October.

The growth of the discount brokerage industry is partly a response to the demographic bulge of baby boomers, the oldest of whom are about to hit 50. Some boomers accumulate assets suddenly through inheritances, while others have been socking away money for years in registered retirement savings plans (RRSPs).

Unlike their parents, however, baby boomers have grown up with discounters and are therefore more likely to turn to a cut-rate broker when they want to buy stock. They also have access to vast amounts of investment information through financial newspapers and magazines, newsletters, business software and on-line databases— services that have helped to fuel the recent boom in North American stock markets.

Value-conscious investors are also receiving assistance from groups such as The Canadian Shareowners Association, a Windsor, Ont.-based nonprofit organization whose membership has grown to nearly 10,000 since its inauspicious start-up a month before the October, 1987, stock market crash. ‘We teach investors how to identify quality stocks when they are on sale,” says association founder John Bart, a professor of finance at the University of Windsor.

By some estimates, the discounters now handle nearly 20 per cent of Canadian retail stock trades, compared with at least 30 per cent in the United States. “There is the potential for the Canadian share to grow to 30 to 35 per cent over the next 10 years if we follow the U.S. trend,” says Peter Bacon, president of Hongkong Bank Discount Trading. The bank’s entry into the field was prompted in

Although charges vary, small investors often save between 50 per cent and 85 per cent by buying and selling shares through a discount broker Fee to buy 100 Fee to buy 1,000 shares at $20 shares at $20 each each Discount $30 to $75 to broker: $43 $85 Full-service $75 to $300 to broker: $85 $450

part by that expectation of growth; in addition, market evaluations showed that many of its Asian investor clients would be attracted to a discount-brokerage operation. “A lot of this group tends to be business owners and entrepreneurs who live with risk as a way of life,” says Bacon. “Investing in the markets is not seen as something to be afraid of.”

Green Line’s See says that in the early days, customers of discount brokerage were typically males aged 50 and older. Now, about 20 to 25 per cent of his firm’s clients are women, with an average age in the mid-40s. Sheryl Arnason, 49, of Winnipeg converted to a discount broker two years ago after a bad experience with a full-service broker, who convinced her and her husband to buy several high-risk stocks for their self-directed RRSPs. “My broker would sometimes phone up just before the market would close and say, ‘I’ve got this great stock. Do you want it, yes or no?’ ” says Arnason. “When I asked questions, he was always in too much of a rush.” Finally, Arnason—who owns an insurance and real estate company in partnership with her husband—dumped that broker. She now makes her own investment decisions after scanning publications such as The Investment Reporter, a weekly Canadian stock market newsletter. “I do my own research,” says Arnason. “I also phone companies and I talk to the chief financial officers and vicepresidents of finance.” By her own reckoning, she saved about $15,000 in commissions on trades in 1995 by taking the discount route.

In their advertisements, discounters often claim they can save investors as much as 85 per cent compared with full-commission brokerage fees. Rates, however, depend on the transaction. “Discount brokerage isn’t just one business any more—it’s a whole series of different approaches,” says Andrew Scipio del Campo, president of Scotia Discount Brokerage. Both InvestorLine and Scotia Discount Brokerage are the lowest-cost dealers for Canadian stock trades, charging a $25 base rate plus a per-share charge depending on the stock price. At the higher end, Green Line charges a $35 base fee plus a per-share charge, or a $43 minimum for Canadian stock trades under $2,000. (Customers can receive a further 10-per-cent discount by using a computer or touch-tone telephone trading system instead of a live operator.) Green Line says those higher fees are justified because it offers investment seminars, independent research reports for a fee and mutual-fund specialists to help customers choose a fund. By comparison, most full-service brokers charge a percentage of the value of a stock transaction—two per cent is common. The minimum fee is generally about $80, although charges for big trades—roughly $20,000 or more—are negotiable.

While discount brokers once attracted more sophisticated investors who simply wanted low-cost stock trades, they have now become more mainstream in offering conservative products such as guaranteed investment certificates and mutual funds. In fact, some discounters offer more than 400 mutual funds, including those from competing banking institutions. “The biggest myth about discount brokers is that you have to be a big stock player, which is really not the case,” says Mike Bastian, president of Royal Bank’s Action Direct. “For instance, you can choose from over 17 different issuers of GICs from us so you can choose the best rate in GICs. And you can deal with us and still buy TD Green Line funds, Altamira, Trimark and CIBC funds—all through one network.”

But Patrick McKeough, editor of The Successful Investor newsletter and author of Riding the Bull: How You Can Profit from the Coming Stock Market Boom, warns that discounters are not for everyone, despite the allure of cheaper commissions. “I know a lot of investors who have had some unfortunate experiences with full-service brokers and then went to discounters. They tried to do it on their own and they wound up with even worse results on their portfolio,” says McKeough. “It’s something people forget in the rush.”

Facing low-cost competition, full-service brokers are taking steps to entice investors back to their fold. Many larger firms have expanded their training programs for brokerage staff, hoping to convince consumers that the higher fees are worth it. They are also trying to increase the credibility of their sales forces by hiring people with other professional qualifications—such as lawyers and accountants—as investment advisers. And some are offering new services such as “wrap accounts,” for which investors pay a fixed annual portfolio-management fee instead of commissions based on each transaction. Depending on the dealer, the minimum investment required can range from $50,000 to $250,000. “A wrap account removes some of the perception that brokers are just trying to churn accounts and raise commissions with every trade they do,” says David Driscoll, editor of The Investment Reporter.

Smart investors can hedge their bets by dealing with both types of brokers. Jim Giles, 38, a Toronto accounting teacher, has been an active investor since his teenage years. He still prefers to use a full-service broker for his larger self-directed RRSP portfolio. More than two years ago, however, he began using two different discount brokers to buy and sell shares in small emerging companies for his non-registered account. “My risk tolerance is high,” says Giles. Besides, the lower fees make playing the market that much more enjoyable.

SHIRLEY WON