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Discount Brokerage Weekly Roundup – December 2, 2019

Sandwiched between Black Friday and Cyber Monday, the beginning of December is undoubtedly synonymous with big savings and big deals. This year, there are definitely both in the world of online brokerages here in Canada and in the US.

In this edition of the Weekly Roundup, we review the latest deals activity to cross the wire at the outset of December and explore some interesting trends for the end of 2019 and early 2020. From there, we peer into the fog of online brokerage war as the massive news of the Schwab / Ameritrade deal continues to send shockwaves of uncertainty through the online investing industry. For a great change of pace, we’ve also got the ever popular DIY investor tweets as well as chatter from investors in the forums.

December Deals & Promotions Update

It’s a new month and that means another chance to revisit the discount brokerage deals and promotions scoreboard to see what’s new for the month as well as what trends are emerging for promotions from Canada’s online brokerages.

There’s a slight bit of irony to the fact that the end of financial literacy month (November) coincides with both Black Friday and Cyber Monday, since the former is all about learning how to manage money wisely and the latter are all about getting consumers to open up their wallets with the promise of deep discounts. In the world of online investing, the irony extends just a tad further, with “discount brokerages” now cutting commission rates to zero (at least in the US) in the hopes of seeing more trading activity take place.

Before going too far into the trends or strategies that we see unfolding, the good news is that the deals and promotions activity heading into December is upbeat (at least for DIY investors).

Despite there being no online brokerage launching a deal on December 1st, there are currently 24 offers available to DIY investors and the brokerages currently offering deals represent some of the most popular choices in the space.

Kicking off December, most of the big five bank-owned online brokerages, with the exception of TD Direct Investing, have either commission-free trade offers or cash back promos currently in the market. This offers considerable value for DIY investors to choose from and is dominating what investors are looking at on SparxTrading.com.

That said, we’re expecting some volatility and turbulence over the typically quiet holiday period because of the spacing out of expiry dates on some of the current offers.

RBC Direct Investing, one of the bigger players in the online brokerage space behind TD Direct Investing, has their commission-free offering currently scheduled to expire on December 13th. BMO InvestorLine’s seasonal offer is set to expire at the beginning of January 2020 and both Scotia iTRADE and CIBC Investor’s Edge have deals set to expire close to the end of February or beginning of March – which coincides with the RSP contribution deadline of March 2, 2020. So, even though the beginning of the month may be relatively quiet, there’s a good chance that there will be more activity as the month progresses or as soon as the new year hits.

One big development in the online brokerage space that is likely going to impact the way in which deals and promotions unfold in the new year is the move to zero-commission trading in the US.

In Canada, the wave of zero-commission trading has yet to fully take hold and between now and the time that it does, the go-to place for online brokerages to get the attention of value-conscious investors is going to be with deals and promotions.

Knowing what’s at stake in terms of having to lower commission prices to zero entirely, the better option for online brokerages is to start dishing out bigger and more valuable incentives to attract new clients (or more accurately, more assets) and more importantly, to retain clients (and their assets).

We’re already seeing that online brokerages are starting to get more creative with what they’re offering.

Scotia iTRADE, for example, launched a new promotion at the end of November which combined both a cash back promotion with a discount in standard commission fee down to $6.99 per trade. That same promo also offered the option to choose commission-free trades instead of cash back. And, to boot, this is a tiered offer that ranges from deposits as low as $5,000 all the way up to deposits of at least $5M. This is by far one of the most comprehensive offerings in terms of choice and targets. By contrast, BMO InvestorLine’s tiered offer is focused on cash back and for higher deposit levels only.

For brokerages other than the big-five bank-owned online brokerages, the mix of already low commission prices and convenience-appeal of a bank suggest that there has to be a mixture of bold thinking and savvy marketing to navigate the choppy waters for their brands going forward. There are likely to be firms that will try to tread water with middle of the road promotional offers, however, it is clear that to stand out from the big bank online brokerages, one strategic area to do that is with promotional offers.

It almost goes without saying but the commission rate drops or promotional offers alone are not going to be enough to keep clients, the service and value experience has to also measure up otherwise customers will choose a provider who gets the details and little things that are important to online investors right. That said, unless there’s something to get attention away from the behemoth and ultimately familiar banks, investors will likely default to the fastest and easiest option this holiday season.

Certainty Begets Uncertainty

They say when it rains, it pours. It seems like a fitting description for the online brokerage space in the US this past week (and for the past 8 weeks) which saw perhaps the biggest repercussion of the zero-commission fee move unfold.

Last week, we reported that Schwab was rumoured to be in talks to buy out TD Ameritrade, and this past week the announcement was made official. Schwab announced that it would be purchasing TD Ameritrade in an all stock deal valued at $26B USD. With the stroke of a pen, two of the US’s largest online brokerages combined forces to create a super online brokerage with almost $5T (trillion) USD in assets under management (AUM).

The question that everyone is asking is naturally where things go from here? In particular where things go for E*TRADE Financial, which for a long time was viewed as the most likely candidate to be acquired. Though just speculation, the case for takeover of E*TRADE seems to still be viable. There are still entities large enough to take on acquiring an online brokerage (including competitors like Fidelity or even Goldman Sachs) however, even a private equity deal in which the business pieces were sold off to different parties could make sense given the value of the different business lines operated by E*TRADE.

In addition, this past week the online brokerage credited with accelerating the move towards zero commissions, Robinhood, quietly withdrew their application for bank status, putting their cash management plans in limbo. Curiously, despite this about-face, there are still images for debit cards on the homepage of the website, suggesting either that they’re slow to update their site (not likely) or that there will be cash management coming but through a partnership with an existing financial institution – potentially similar to what Google is orchestrating in its partnership with Citibank to create their “Cache” program.

Sufficed to say, it has been a whirlwind of activity into the end of the year. Judging by the degree of uncertainty still surrounding the acquisition of Ameritrade by Schwab, the fallout for brands like E*TRADE and Robinhood, and the new world in which online investor preferences are going to shift to focus on the other value drivers of the online investing activity flow.

The big question to DIY investors is “so what?” In particular, for Canadian DIY investors there is clearly an undercurrent of consumer demand for the same kind of pricing in Canada that online investors in the US receive. On Twitter as well as in financial investing forums, Canadian investors are calling for rates to drop to zero for commissions – the premise being if the US online brokerages (as in ALL of the US online brokerages) can go to zero, why can’t Canadian brokerages? It’s a fair question and not one that Canadian online brokerages can answer well just yet, with one exception – Wealthsimple Trade.

Perhaps the only thing that is clear at this point is that there is a great deal of uncertainty looking forward in the online brokerage industry. The fun part of that uncertainty is that it leaves room for speculation.

The one thing that analysts can hang their hats on as far as value is the assets that individual investors bring with them and what that, in turn, can be converted into as far as revenue for the financial services firm. Looked at in this light, financial services firms rely on having large pools of users to achieve the scale required to be sustainable. That also means that technology platforms, such as all of the members of the FAANG stocks, are likely competitors for the traditional financial services firms. For that reason, our best guess for the path forward for the large (and especially not so large) financial services firms will be becoming exceptionally interesting and helpful in the financial management of everyday investors. Anything less, and there’s going to be a cheaper and faster alternative provider for it.

Discount Brokerage Tweets of the Week

From the Forums

One Hit Wonder

After switching jobs at 40, this Redditor’s pension payout was put into a LIRA. Worried about the future of the economy, this forum user seeks advice on how to proceed with their pension. Read the responses of fellow Redditors here.

Mad Max

Having already invested in a HISA and GIC, a DIY investor is considering using their TFSA to invest in index funds to get the best returns. Redditors weigh in on this financial situation and provide guidance on the best ways to use a TFSA effectively.

Into the Close

Fitting heading into the holiday season that that’s a wrap on another edition of the Roundup. With Cyber Monday now upon us, there are clearly deal hunters on the prowl and by all accounts this year was a strong one for shopping activity. Savvy DIY investors also know that this is the most wonderful time of the year for bargains on under-performing stocks (*cough cough cannabis and energy*). So, while there’s more than enough uncertainty to go around these days, don’t lose sight of the opportunity it creates. Happy deal hunting!

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