Another week and even more new features from Canadian online brokerages. Read about the big news on fractional share trading from Wealthsimple Trade as well as inactivity fees being eliminated at Interactive Brokers.
Seems like soccer and hockey players aren’t the only ones working overtime this summer – online brokerages are keeping themselves (and their competitors) very busy. While there might not be any big trophies or awkward press conferences, it seems like there is no shortage of things for online investors to be cheering about this summer.
In this edition of the Roundup, we highlight the biggest small development: the arrival of fractional stock trading in Canada. Next, we dive into a fee drop announcement that appears to be a much bigger deal than it seems. As always, we wrap up with DIY investor chatter from the forums.
Thirteen isn’t usually considered a lucky number, but for Canadian DIY investors, it just became one.
This past week, Wealthsimple Trade launched fractional share trading in Canada (albeit on a limited basis), and as result, the landscape of online trading appears to be poised for yet another big change.
Although the list of stocks eligible for fractional stock trading is small, by introducing fractional share trading to mainstream investors in Canada, Wealthsimple Trade has managed to take yet another highly sought-after feature from the US online brokerage space and make it a reality for Canadian DIY investors.
Ever since fractional share trading became commonplace among mainstream US online brokerages, such as Schwab’s “Stock Slices” and Robinhood’s fractional share trading program in late 2019, Canadian DIY investors have been vocal about wanting this kind of feature to be launched by Canadian online brokerages.
This launch is yet another example of Wealthsimple Trade following the lead of US online brokerage Robinhood in delivering online brokerage services in a commission-free way. It also comes at a time in the Canadian online brokerage market when new features and value-added offerings are flooding the market. Given how popular this latest release will be, however, other features being released by brokerages are now going to have to compete even harder for user attention.
There’s lots to unpack with this latest announcement by Wealthsimple Trade, perhaps the most significant being that the die has been cast for fractional share trading here in Canada.
To tease out how the rest of the online brokerage field might respond, it is valuable to look at some context around fractional share trading, especially focusing on who this feature is most appealing to.
To level set, fractional share trading is when online investors can purchase a fraction of a share instead of a whole share. In some dividend reinvestment schemes, investors have been able to do this with dividends but never when buying a stock that doesn’t offer a dividend.
The primary appeal of fractional share trading is that investors with limited assets can still participate directly in purchasing shares of companies whose stock prices might be quite high. For example, one of the names on the list of eligible stocks, Shopify, is currently trading at almost $1,863 per share (closing price at the time of writing), which would require an investor to pony up at least this amount to purchase one whole share. With fractional share trading, investors can now own the amount of a stock that they can afford to buy.
Clearly, fractional share trading is not something that ultra-high net worth clients might be interested in as much as DIY investors who are just starting out, or who have modest investable assets. And that, it seems, is a key driver behind why we’re seeing fractional share trading at Wealthsimple Trade before we’re seeing it elsewhere – they’re deliberately launching features that would appeal to their core customer demographic base. Although the target audience for Wealthsimple Trade is younger and therefore not flush with a large amount of investible assets (yet), the reality is there is a very large target audience to who this applies, which provides the scale required for a program like this to be economical for Wealthsimple Trade.
Another interesting angle to this launch is that Wealthsimple Trade opted to have only four Canadian securities and nine US-listed securities to start. Of the four Canadian stocks, Shopify seems like a shoe-in based on its price and trading volume, but the remaining three choices seemed somewhat arbitrary. Even if Royal Bank and Canadian National Railway could be attributed to the combination of relatively high price and high liquidity, TD Bank – which at last check was trading at $84.70 – is lower in price than say BMO or CIBC, so it is curious as to why the one bank was included in the first list and not several others. It was also curious to see why only four names made the starting grid in Canada, but twice as many in the US.
Based on the business model of Wealthsimple Trade, offering up more choices for investing in fractional shares in US-listed stocks makes sense. Not only are there more “high priced” stocks to choose from to be a part of this program, but Wealthsimple Trade stands to make more money per trade (1.5% foreign exchange fee) for US-listed stocks.
And therein lies the fly in Wealthsimple Trade’s “low cost” ointment.
There is a growing “awakening” taking place among online investor communities that while Wealthsimple Trade’s zero commission pricing is a good deal for Canadian investments, it can actually be more expensive than a traditional online brokerage for US-listed stocks. The fractional share trading model unfortunately does nothing to alleviate that situation for smaller investors, and gives them the unenviable choice to pay a premium to participate on a fractional basis, or to use an ETF to obtain fractional exposure (potentially at another online broker).
There is no doubt more buzz to come around fractional share trading at Wealthsimple Trade. Competitor Canadian online brokerages are almost certainly going to have to follow suit in much the same way that several US online brokers did when fractional share trading went live in the US. That said, until Wealthsimple Trade changes their business model to allow for more competitive pricing to trade or invest in US-listed securities, incumbent Canadian online brokerages have a narrow window of opportunity to highlight their own cost efficiency in this regard and bring to market the ability to trade fractional shares.
We don’t anticipate Wealthsimple Trade’s list of eligible stocks for fractional share trading will stay at 13, however, the longer they keep their pricing for US-listed securities in place, the unluckier they may become.
If there’s one thing that online investors collectively enjoy hearing about, it’s a fee drop. Interactive Brokers announced this past week that effective July 1, 2021, they are no longer charging the $10 per month of inactivity fees to their clients. News of this move made a big splash.
While inactivity fees are sometimes a deal breaker for beginner or less active investors, at Interactive Brokers, their core customers have usually been highly active investors or day traders. So hitting the $10 per month in commission spend or having more than $100K in assets was not much of an issue.
Data from their most recent monthly metrics reveal, for example, that clients are averaging 500 trades per year for 2021 (estimated from the annualized Daily Average Revenue Trades or DART data per account for the first six months, and then averaged), which works out to about 2 trades per day – a threshold that would handily get most clients past the $10 per month in commission fees generated. As such, inactivity fees are likely not a material source of revenue for Interactive Brokers – although the impact of this move will be something we’re looking out for on their next earnings release.
Despite the $10 fee per month not necessarily being relevant to active investors, for passive or less active investors, the fee was a point of contention. It was interesting to note that coverage of the fee drop made it to Barron’s magazine, and among Canadian online investors, there was significant chatter about the decision to drop the monthly fee.
It is helpful to note that among online investors in DIY investor forums, Interactive Brokers is (and has been for many years) a very popular recommendation among active and value-conscious investors. With low commission charges and incredibly low margin rates compared to peer firms, one of the few things that kept coming up among online investors as a strike against Interactive Brokers was the inactivity fee. Thus, while it is not surprising to see some level of discussion take place about this latest development, it is remarkable that there is THIS much discussion about it.
As it happens, there’s a good reason for Canadian online investors to be extra happy about the inactivity fee drop.
Inactivity fees are one place that TFSAs are susceptible to being charged. Given the contribution limits and the caution against over trading in a TFSA account (lest one catch the ire of the CRA), it seems only natural that this account type at Interactive Brokers would attract inactivity fees (a similar case could be made for RRSPs as well for many investors). As such, inactivity fees served as a major deterrent to investors being able to consolidate accounts with Interactive Brokers until now.
Although it might be a function of the demographic that both trades online and who frequents reddit, the names that continuously came up in forum threads alongside Interactive Brokers were Questrade and TD Direct Investing.
Like Interactive Brokers, Questrade and TD Direct Investing also allow for options trading, which is typically associated with active investing. One of the quirks that characterizes Canadian DIY investors is that they often have more than one online brokerage account – with different accounts at different providers serving different purposes.
With this latest announcement from Interactive Brokers, it is likely that both Questrade and TD Direct Investing are going to see existing clients – especially active traders – move some of their other less active registered accounts over to Interactive Brokers. In industry lingo, it means that Interactive Brokers is poised to win a greater share of wallet.
For DIY investors, it won’t necessarily be all upside though.
If online investors aren’t mindful of transfer fees, leaving one brokerage to go to another could incur some non-refundable transfer fees. Unlike most Canadian online brokerages, Interactive Brokers doesn’t cover the transfer fees charged by another online brokerage. As the tweet below shows, it’s because Interactive Brokers doesn’t charge them when clients transfer out, and as such, IB doesn’t believe they should pay for them when other brokers charge them.
Another feature that investors used to the bank-owned online brokerage experience may not factor in is data subscription fees. At some online brokerages in Canada, data fees are included for level one or two quotes. At Interactive Brokers, however, clients must pay extra for snap quotes or real-time data, which drives up the cost for the casual user.
Despite Interactive Brokers’ largely active trader customer base, the elimination of an inactivity fee will likely have a positive impact on those Canadian clients who have multiple types of accounts with Interactive Brokers, or who have until now elected to not have less active accounts.
The fact that something as seemingly benign as the removal of an inactivity fee has generated as much discussion as it has points to there being significant user interest to consolidate some or all eligible accounts into Interactive Brokers.
As is the case in the US, around the world it appears that Interactive Brokers is squaring off against low-cost players that can attract less active or less affluent clientele. By reducing the hurdle to being a client, Interactive Brokers is embarking on an interesting direction to become much more appealing to mainstream investors than a niche trader-focused tool. In Canada specifically, this small but important fee change appears to be enough to trigger a wave of account transfers, and as a result, we expect to see some interesting developments in the active trader segment in response.
The innovation game is tough, especially among Canadian online brokerages. In this post, one user laments a perceived lack of innovation at a popular online brokerage once seen as cutting edge.
One thing is true about social media, folks aren’t shy to complain about what is not going well. For that reason, this post on reddit where someone took the time to relay their positive service experience at an online brokerage, stood out as unusual.
That’s a wrap on an especially nail-biting week (at least for sports fans). Of course, heading into earnings season (again) with economic data looking especially bullish and vaccination rates continuing to creep higher, there’s likely no shortage of excitement coming. Here’s hoping you find a fun way to stay cool and take time out to enjoy a treat (or two)!