Where there’s smoke, there’s fire. There’s certainly been no shortage of smoke as fires rage across the country, however, in the online brokerage space, it appears that commissions are definitely smoldering and set to touch off a fire sale in the coming months.
In this week’s roundup, we take a look at a major US-based financial services provider that just went all in on zero-commission trading fees. From there, we provide a quick scan of some small but interesting developments in the Canadian discount brokerage space that crossed our radar in the week. As always, we close out the roundup with interesting chatter from DIY investors in forums and on Twitter.
J.P. Morgan Drives Trading Commissions Down to Zero
Just when you thought that things couldn’t get any wilder in the battle for DIY investors, this past week yet another financial services provider has decided that trading commissions should be a thing of the past.
Unlike last week’s announcement by Wealthsimple Trade to drop online trading commission fees to zero here in Canada, when J.P. Morgan announced this past week that they too would be deploying commission-free trading in US, the publicly traded online brokerages swiftly lost a collective $5.5B in market cap.
J.P. Morgan’s new platform, called “You Invest” offers users 100 free trades in the first year and those who retain at least $15,000 receive 100 free trades per year thereafter. Higher net worth clients are eligible to receive unlimited commission-free trading. Those with less than $15,000 or who use up their commission-free trades will be charged $2.95 per trade, which is about half price of where commissions are generally at the big US online brokerages. In a nutshell, pricing for trading online in the US is set to get much cheaper.
The latest move by J.P. Morgan is bound to redraw the map on online brokerage pricing in the US.
On the zero-commission trading side, Robinhood, which up until now enjoyed no competition with commission-free stock trading, is bound to have to get even more creative to build its brand and attract new clients at the blistering pace it has been doing so. With a player that has the size, reputation and reach J.P. Morgan does, Robinhood is facing quite the opponent.
At the other end of the spectrum, the larger online brokerages in the US such as Schwab, TD Ameritrade and E*Trade Financial are also bracing themselves for the inevitable price drop. Interestingly enough, while trading commissions are important, firms such as Schwab and Ameritrade may be better positioned to contend with a ‘zero-commission’ player because they have diversified their revenue streams so that they are not exclusively reliant on trading commission fees. And, for firms like Interactive Brokers, whose fees are already quite low, the impact may not be as drastic.
The conversation surrounding J.P. Morgan’s latest move certainly mirrors many of the same points being made here in Canada regarding Wealthsimple Trade. One of the biggest challenges to the ‘free trading’ platforms is that they have to learn to accommodate and support the active and somewhat active trader. In the case of J.P. Morgan, offering up 100 commission-free trades per year is a signal that they’re interested in the ‘occasional’ or passive investor, however even this tier of investor expects a feature set that helps to navigate the maze of data surrounding stocks and trading.
Investors who are heavily reliant on advanced or sophisticated trading platform features and order types, for example, may take an interest in the zero-commission pricing but will likely not see the same kind of value in a poor or limited trading experience. Free might not be good enough of a value without alerts, watchlists, stop orders and more. What that implies is that there will undoubtedly be a looming battle over user experience and innovation that will come to dominate how DIY investors on both sides of the border assess what makes a ‘good’ choice for an online broker.
Another crucial component to the zero-commission conversation right now is that the right tools and resources need to be made accessible for DIY investors to actually execute trades and generate order flow. If not, there are going to be lots of zombie accounts sitting with idle deposits. For Wealthsimple, there is already a solution to put idle cash to work. For online brokerages, however, they may have to adopt Interactive Brokers’ approach and simply offer to pay interest on cash balances. Of course, building the right content tools and screeners is much easier said than done. Figuring out how to deliver financial content to an audience that is primarily mobile-first will require reimagining how to address a topic like personal finance in a way that is entertaining, accessible and ultimately value added.
Finally, it is important to note that commission price is one of several ways in which online brokerages derive revenue. If trading commissions go down, perhaps other fees will likely rise to offset the drop, or perhaps online brokerages will choose to ‘unbundle’ their service the way that airline carriers or cable providers have, so that DIY investors can tailor what they pay according to what they use. Of course, this also portends the dreaded baggage fee equivalent – let’s hope it doesn’t come to that.
Clearly, commission-free trading is quickly becoming a new force for online brokerages to have to contend with. That said, investors will have to pay in some way shape or form for the ‘free’ trade. Whether it’s through execution efficiency, currency conversion, margin lending, data platforms or any of the host of other charges, it’s important to ask what the “catch” might be, as there almost certainly is one.
Stay tuned as not only are there Canadian online brokerages who will be mounting a challenge to Wealthsimple Trade, but there are now also likely US online brokerages who’ll be figuring out how best to price a response to zero-commission online trading.
Like a good summer salad, here’s a quick and refreshing medley of online brokerage and investing stories that also crossed our radar this (and last) week.
National Bank Direct Brokerage Pushing Benefits
In a highly competitive landscape, loyalty is becoming an ever more valuable commodity among online brokerages. Earlier this month we noted that National Bank Direct Brokerage had posted their “Distinctive Benefits” offer to their home page. Along with cross-town rivals Desjardins Online Brokerage who have also deployed a similar program, other online brokerages (especially bank-owned brokerages) have programs in place for higher net worth DIY investors. What’s changing is that we might start to see more of those programs find their way into the spotlight.
Interesting Offers for Younger Investors
This week there was also an interesting article from the Globe and Mail’s Rob Carrick talking about low-cost online investing services. In particular, it appears that there is a reference to an upcoming (yet to be published) offer by CIBC Investor’s Edge which will lower commissions on ETF trades to $5.95 for post-secondary students, as well as waive administration fees on ‘small’ registered and non-registered accounts.
Also revealing in this article was information on RBC’s digital advice/robo-advisor offering, RBC InvestEase, which is waiving management fees (on the first $10,000) for individuals who sign up for a new account by the end of October.
Scotia iTRADE Moving Quietly with USD Accounts
After a very quiet rollout of their new USD registered account offering, clients of Scotia iTRADE received notice via email that Scotia iTRADE has, in fact, gone live with the USD registered account feature. While we expect there to be much louder and more prominent advertising to come, it looks like coverage on this feature is happening at a very measured pace.
Discount Brokerage Tweets of the Week
From the Forums
Post Before You Leap
There was still lots of chatter this week from forum participants about Wealthsimple. One debt-free user started a discussion on which type of platform he should use to begin his investing journey. Read what others had to say in this Personal Finance Canada reddit thread here.
This post from reddit’s Personal Finance Canada Section, offered a number of interesting insights for a young DIY investor who wants to convert their parents’ mutual funds to an e-series. Worth a read for some good, plain language clarification on making the switch.
Into the Close
That’s a wrap on another week. Regardless of what’s happening in politics north or south of the border, markets are powering higher. Seems like the market has more bull than…well you know who. Speaking of good runs, it’s fantasy football season yet again, so if you’re looking to pick even more portfolios, this is prime time to do so. Regardless, with only a few more days left in August and summer nearing the ‘end zone’ be sure to enjoy it and have a wonderful weekend!