A race to the bottom that investors win

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This article was published 27/05/2023 (1232 days ago), so information in it may no longer be current.

Robinhood may not steal from the rich and give to the poor like the folklore hero did.

Yet the U.S.-based, online trading platform for do-it-yourself (DIY) investors has reshaped the discount brokerage industry over the last decade by offering no-commission trading.

Even in Canada, we have seen its influence on the DIY market. First Wealthsimple Trade, now called Wealthsimple DIY, offered no-commission trades.

More recently, National Bank and Desjardins have eliminated commissions on trading stocks and exchange-traded funds (ETFs).

That likely helped propel the latter two Quebec-based financial institutions to the top of the most recent JD Power’s Self-Directed Investor Satisfaction Survey.

Desjardins ranked first, while National Bank came in second ahead of Questrade, which charges commissions as low as $6.95 per trade, in third. The major banks — which charge trading commissions — rounded out the rest of the list.

Yet regardless of ranking, the survey found Canadians are generally ambivalent about their DIY platforms, says Craig Martin, global head of wealth and lending intelligence at JD Power.

He points to the survey’s findings regarding whether respondents would recommend their current DIY platform to friends and family.

“I would call that the canary in the coal mine where the vast majority wouldn’t really recommend their current DIY trading provider.”

Still, Martin notes when it came to overall satisfaction scores, those firms that eliminated trading commissions “are starting to separate themselves from the pack.”

Laurence Amann, Desjardins manager of business solutions for its online brokerage, says the two financial institutions’ main markets are Quebec, though both have national reach.

“So of course, if National Bank moves in this direction, we’re ready to do the same,” she says, adding that shifting to no-commissions was really a natural evolution of its DIY brokerage.

For Desjardins, moving to no commissions in fall 2021 offered it a competitive edge in attracting younger clients.

“It’s really a door to enter Desjardins and then grow into other products like mortgages and credit cards,” Amann further explains.

Of course, the original no-commission trading platform in Canada is Wealthsimple, which follows a similar model to attract clients with no-fee trading while offering a growing number of other financial products, including cryptocurrency trading, tax services and cash accounts.

“When we launched DIY in 2019, over 120,000 Canadians signed up,” says Matthew Karasz, director of product at Wealthsimple.

Today, the fintech company has more than three million clients and $20 billion in assets under administration.

And it still stands out from the rest by offering fractional trading, much like Robinhood does in the U.S.

This affords smaller investors the ability to purchase with $100, for example, less than one share of a stock priced at $1,000 as opposed to having to save up $1,000 or more to gain a stake in the company.

That’s one reason why the founder of stocktrades.ca, a DIY resource website, found Wealthsimple’s DIY platform worth a closer look.

“It’s pretty much all I use right now,” says Dan Kent, based in Calgary. Although he does not use fractional trading, Kent notes it is especially attractive for young investors with fewer assets.

Still, even Kent admits he had misgivings at first about Wealthsimple’s platform with its bare-bones functionality.

While “still really no-frills” in design, it has improved since its launch, he adds.

That said, other platforms have their advantages, notably offering free access to research services like Morningstar Prime that otherwise costs about $250 annually.

“So, you really have to weigh the pros and cons.”

For Kent, no-commission trading far outweighs any downsides of Wealthsimple’s platform.

More generally, however, Kent says it’s likely the biggest reason many investors do not switch discount brokerages — even to those offering no commission trades — is their worry that opening a new account and moving assets will be onerous.

“So, although they may never recommend their platform to others, they won’t switch because of the perceived pain of doing it.”

Yet as more young investors are drawn to no-commission platforms, large financial institutions may find they need to jump into this race to the bottom.

“Yes, it’s hard to leave your existing provider because there’s some stickiness and doubt regarding whether the firm across the street is better,” Martin notes.

But the risk for discount brokerages that don’t cut commissions is the snowball effect over time of losing out on more and more young investors with few assets today who are signing up for no-commission trading platforms in growing numbers, who are likely to become the wealthy clients of the future.

Furthermore, these investors are typically more satisfied with their no-commission trading experience, the JD Power survey shows.

In fact, even though Wealthsimple had too few assets to qualify for the survey, JD Power has done preliminary polling of its users, “and early scores show customers are happier,” Martin says.

Given no commission trading is gaining in popularity and is generally appreciated by investors using platforms that offer it, it may only be a matter of time before one of the big banks does the same and the rest follow suit.

“I think if one makes the jump, that is going to change the landscape dramatically,” Martin says.