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    Key points

    Regardless of where you happen to be in Canada, it’s clear that the dog days of summer are here. The heat outside, however, pales in comparison to the heat felt by Canadian online brokerages to compete with one another. With it being so close to the beginning of a new month, this edition of the […]

    Regardless of where you happen to be in Canada, it’s clear that the dog days of summer are here. The heat outside, however, pales in comparison to the heat felt by Canadian online brokerages to compete with one another.

    With it being so close to the beginning of a new month, this edition of the roundup puts a heavy focus on just how competition is impacting the race to win over new clients with a deep dive on a newly launched promotion from one major online brokerage. Following that we take a look at a tactical move by another online brokerage to continue pushing into investor education and then review one discount brokerage’s strategy of taking advantage of low interest rates (while they’re still available). Finally we take a look at the discount brokerage tweets of the week and close out with a pair of fascinating conversations from the investor forums.

    Let’s Make a Better Deal

    As July winds down, the discount brokerage deals and promotions activity saw a slight uptick from two brokerages – BMO InvestorLine and Virtual Brokers.

    Starting first with the latter, Virtual Brokers has decided to revive the deal that had technically expired at the end of June and extend it through to the end of August. The offer is for 25 commission-free trades that are good for use for up to one year.

    At the other end of the deposit spectrum is the offer from BMO InvestorLine. In keeping with their nautical themed campaign imagery, BMO InvestorLine’s latest cash-back offer is a shot across the bow at the two other discount brokerages currently jockeying for clients with deposits of at least $100,000: Scotia iTrade and Questrade.

    There’s a lot about BMO InvestorLine’s latest cash-back promotion that clearly signals they’re actively courting clients who have larger deposits/assets. First, the minimum deposit to qualify for this promotion is $100,000. The only other brokerage with an offer exclusively geared towards this deposit level is Questrade with their Apple Watch promo. That said, one of Scotia iTrade’s current cash-back promotions also has minimum qualifying tiers that match BMO InvestorLine’s almost exactly for deposits at or above $100,000. For that reason and because Scotia iTrade is a bank-owned brokerage, it is likely that the offer from BMO InvestorLine is going to compete with Scotia iTrade’s cash back offering rather than the Apple Watch .

    With that in mind, comparing the BMO InvestorLine deal to the Scotia iTrade deal reveals that each discount brokerage seems to be trying to win particular segments of the marketplace (see table below).

    While both are offering $1,000 cash back for deposits of $1 million or more, it appears that Scotia iTrade is offering a greater cash back offering at the $100,000 – $249,999 tier than BMO InvestorLine but at deposits between $250,000 and $999,999, BMO InvestorLine looks to be outbidding Scotia iTrade.

    Cash Back Amount
    Minimum Deposit Amount Scotia iTRADE BMO InvestorLine
    $15,000 $50
    $50,000 $100
    $100,000 $250 $200
    $250,000 $350 $500
    $500,000 $500 $750
    $1,000,000 $1,000 $1,000

    Curiously, both bank-owned brokerages seem to have created an incentive structure with diminishing returns. That is, the more that an individual deposits in absolute terms, the less the individual investor actually gets back in proportional terms. Here is a graph that compares the relationship between deposit size to cash back. As the graph clearly shows, the more an individual deposits, the lower the percentage cash-back they receive.

    It begs the question as to why the incentive structure was built this way, especially if brokerages want to attract deposits (in industry lingo – to increase their share of wallet). Usually consumers are given extra incentive to purchase at volume, not less. Under the current structure of these offers, DIY investors have greater financial incentive to move their business across several brokerages instead of consolidating assets at one in order to maximize their return. Here’s how.

    Within the current promotions being offered, if an individual wants to maximize their incentive, and they had the assets (and desire) to do so, opening an account with Scotia iTrade AND BMO InvestorLine would net them more than opening an account with just one.

    For example, individuals with $200,000 or more in assets who open an account at only one of these brokerages would net $250 (at Scotia iTrade) or $200 (at BMO InvestorLine). If, however, they split that deposit into two $100,000 deposits at each of BMO InvestorLine and Scotia iTrade, they would receive $450. For those keeping score, that’s 0.225% on $200,000 instead of either 0.13% (Scotia iTrade) or 0.1% (BMO InvestorLine).

    For those looking to have their $1 million dollars go further, the following table shows that settling for $1,000 cash back at one brokerage is leaving serious money on the table.

    Hypothetically, splitting the $1 million deposit across the following current cash back deals (from BMO InvestorLine, National Bank Direct Brokerage, Questrade AND Scotia iTrade simultaneously) would actually only require $900,000 and net $1650 back resulting in a return of 0.18% (in aggregate) as opposed to the 0.1% from either of the top tier offers from Scotia iTrade or BMO InvestorLine.

    Discount Brokerage Deposit Amount Cash Back Rate of Return
    Scotia iTRADE $500,000 $750.00 0.15%
    BMO InvestorLine $250,000 $350.00 0.14%
    NBDB $50,000 $300.00 0.60%
    Questrade $100,000 $250.00 0.25%
    Total $900,000 $1,650.00 0.18%

    While dealing with multiple providers/brokerages might be an inconvenience for some, others look at spreading assets across multiple providers as a risk management strategy and as a way to get access to exclusive features each brokerage offers. There’s also nothing preventing consolidating those accounts at a particular brokerage in the future for additional benefit (once the mandatory balance holding period is complete).

    Of course, moving accounts around to get incentives isn’t necessarily as lucrative as certain fixed income low-risk strategies. That said, for those in the market for a discount brokerage and who don’t mind being more transient, shuffling between providers can actually work out to being more lucrative than parking in one place.

    Most discount brokerages will not be thrilled about clients constantly turning over however the fix seems somewhat straightforward – value the clients with higher deposits equal to or greater (on a proportionate basis) than smaller deposits.

    Exploring Options

    With exciting initiatives planned for this fall (more on that as we draw closer to September) Desjardins Online Brokerage is once again playing the investor education card to reach out to DIY investors.

    In their latest offer, Desjardins Online Brokerage has teamed up with investor education firm Learn to Trade Global to offer discounted options education training. The team at Learn to Trade Global may be familiar to anyone attending the options education seminars from the Montreal Exchange (including options education day) as both Jason Ayres and Patrick Ceresna conduct seminars on behalf the exchange.

    In this latest offering from Desjardins Online Brokerage, individuals who are clients (or become clients) of Desjardins Online Brokerage receive a heavily discounted (90% off) price for options education training. For $99 individuals are eligible to receive 3 months access to a number of educational materials related to options investing as well as model portfolios and trading ideas. In addition there are six live online “strategy labs” that clients can access live or watch archived versions of.

    A strong focus on investor education has paid off in years past for Desjardins Online Brokerage especially in their partnership with Tyler Bollhorn from Stockscores. With this latest venture with Learn to Trade Global, it should be an interesting proposition for DIY investors looking for a structured approach to learning more about options trading from two very recognizable figures in this space.

    Questrade Refinancing Debt

    While low interest rates have been a headwind to the online brokerages in many respects, one Canadian online brokerage has taken the opportunity to refinance some of their higher interest debt to presumably better terms.

    In an article published earlier this week in the Globe and Mail (for subscribers only), it was reported that Questrade had raised $10 million dollars at an annual interest rate of 10% and has recently repaid the original lender, Crown Capital Partners. According to the article Questrade’s CEO, Edward Kholodenko mentioned that the loan has been mostly refinanced to more favourable terms.

    Questrade, however, is no stranger when it comes to accessing capital at rather hefty interest rates. Additional research on some publicly listed entities that have provided capital to Questrade reveal that Questrade has financed several million dollars at rates as high as 16%.

    Given that Questrade is a private corporation, it is difficult to get a specific and transparent understanding of its financials. That said, some indirect indicators, such as these financing figures, their continued aggressive expansion into wealth management, their low client acquisition costs and building out service capacity in their online brokerage segment means that Questrade continues to push forward in becoming a contender in the Canadian wealth management industry, regardless of the short-term cost.

    Discount Brokerage Tweets of the Week

    This week’s tweets show once again how Twitter is increasingly becoming a medium on which individual investors are addressing customer service issues with Canadian discount brokerages. Questrade and Scotia iTrade were on the hot seat for a number of reasons whereas many of the other brokerages were largely inactive or not mentioned at all.

    From the Forums

    We Interrupt This Program

    In this interesting thread about TD Direct Investing’s maintenance schedule, several users from the Financial Wisdom Forum voice their collective discontent with not being able to get online when they feel they should be able to, especially when looking at overseas markets.

    Too Good To Be Free?

    While many DIY investors are enjoying the benefits of fierce competition between online brokerages, there comes the point where it becomes natural to wonder how or if companies can afford to make money – especially when giving things away for free. In this post, one reddit user wonders aloud whether Questrade’s free ETF purchases are too good to be true.

    Into the Close

    That’s a wrap for this week’s roundup. After all that data it’ll be great to kick back and indulge in some regression of the non-spreadsheet variety. Have a great weekend and here’s a brief reminder of what we’re missing while beating the heat!