One of the interesting paradoxes of DIY investing is that for many investors, the journey to doing it yourself actually starts by consulting a lot of other people. Knowing this, several online brokerages have created incentive programs aimed at giving existing clients a ‘win/win’ approach to refer their friends and family.

Unfortunately for many investors, when it comes to the current refer-a-friend promotions, it seems like there isn’t as much ‘giving’ as there is ‘taking’.

In the first of this two part series, we report some fairly surprising results from an in-depth look at the current referral promotions offered by Canadian discount brokerages and how the industry may need to rethink its current approach if it wants get DIY investors – and their friends – talking about what their brokerage offers.

A Referral By Any Other Name

Whether they’re called refer-a-friend or simply just a referral program, there are a handful of discount brokerages in Canada that offer up incentives for existing clients to refer a new client their way.

While there are technically five Canadian discount brokerages offering referral bonus programs, one of those five (Interactive Brokers Canada) has a program that only rewards the referring party and not the new client so they have not been included as part of this analysis.

In this post, we’ll focus on the following four discount brokerages:

1. BMO InvestorLine
2. Questrade
3. Scotia iTRADE
4. Virtual Brokers

Of this list, Virtual Brokers, BMO InvestorLine and Scotia iTrade are running offers with deadlines. That said, the latter two online brokerages have historically extended these programs so even though there is no guarantee they will continue to do so, we’ve included them since they’re running the programs at the time of publishing.

Currently referral programs offer either cash rewards or credits for free trades to the person making the referral (the ‘referrer’) as well as to the person being referred (the ‘referee’). This post will focus on those referrals that actually offer cash back rather than those that offer commission credits since commission pricing is somewhat variable across the different brokerages.

This is a Friend of Mine

Vouching for a financial institution is easy when a client feels good about their experience with the firm. Of course, things are made easier if there is some additional ‘encouragement’ offered by the financial institution to say thanks for the business.

While the system seems simple enough as a concept and may seem like a good idea, the devil is, as usual, in the details. This might help to explain why, although referrals are the lowest cost and most potent way to earn new clients, most Canadian online brokerages don’t have one.

So what do individuals who might want to refer a friend or family member to an online brokerage have to consider before doing so?

The table below summarizes some of the important points DIY investors should consider when it comes to the current referral offerings. In particular, one of the most important things to do is to read the terms and conditions associated with a specific offer because, as we found out, there is a lot of variability when it comes to eligibility and requirements. Nonetheless, here are some of the interesting similarities and differences across the four brokerages we reviewed.

Mo Money, Mo Choices

One of the first things that DIY investors need to know is just what they qualify for in terms of incentives. Of the four brokerages compared, Questrade has the lowest deposit threshold to qualify for a referral bonus at $1,000 whereas BMO InvestorLine has the highest at $50,000. Virtual Brokers and Scotia iTrade require a minimum of $5,000 or $10,000 respectively.

In terms of referral amounts (i.e. the amounts being paid to existing clients who refer a new client), individuals can receive between $25 and $100 per referred account depending on the discount brokerage and the deposit amount.

In this category, Scotia iTrade offers the highest amount ($100 cash back) for a new client – the caveat being that new client has to deposit at least $100,000. Interestingly, Scotia iTrade also offers clients and referees the option for a cash back reward or for commission-free trades. For ease of comparison to other brokerages, however, this article focuses on the cash-back rewards (and since brokerages may value a trade commission differently).

Questrade and Virtual Brokers have a similar structure to their referral amounts with individual clients eligible to receive cash back bonuses of $25 for each account they refer as well as a bonus of $50 added to every third referral. This structure clearly is intended to reward/incentivize clients to encourage a greater number of referrals.

BMO InvestorLine has taken a literal 50:50 approach in offering only one reward amount ($50) to both referrer and referee.

Quantity isn’t Quality

When it comes to online brokerages, it would seem that for new clients, quantity is quality – or at least it should be when it comes to asset deposits. Looking at the referee bonus offers, however, paints a paradoxical picture where the more a new client brings with them, the less they actually get.

An important distinction to make between bonuses is the difference between absolute dollar amounts and relative amounts.

Among the four brokerages compared, Questrade is clearly offering the most on an absolute basis for new clients. That is to say Questrade offers as much as $250 for deposits of $100,000+ whereas at that same deposit level Scotia iTrade offers $100 cash and BMO InvestorLine and Virtual Brokers each offer $50.

But absolute dollar amounts don’t quite tell the full story. The relative picture is more revealing.

As shown in the following table, on a relative basis the amount offered to new clients from referral cash back offers ranges from a high of 2.5% for Questrade (at the $1,000 deposit level) all the way down to 0.05% at BMO InvestorLine and Virtual Brokers. It should be noted that the 6 deposit levels shown here were used for ease of comparison across each of the discount brokerages.

In a nutshell, what this table shows is that bringing more assets to a discount brokerage via a referral is not a great strategy – at least as a standalone at certain brokerages. If there is a silver lining, some brokerages, such as BMO InvestorLine and Scotia iTrade, actually allow the refer-a-friend bonus to be combined with an existing offer (i.e. the deals are stackable) which certainly adds a much more competitive element for a new client.

Friend Zone

Still, the trend towards offering less to clients who bring more seems somewhat paradoxical, especially since clients who have lots of assets are more likely to have friends or family that also have lots of assets. And, while this may be somewhat speculative, it stands to reason that an individual looking to move $100,000 is going to have to consider the endorsement of a discount brokerage (independent or bank-owned) more carefully than someone moving $1,000 so the reward/incentive should also be proportionate to the value of the new client.

Clearly, the range of offers shows that certain brokerages are willing to be more aggressive with incentives than other. Questrade, for example, appears to be offering five times more for a relatively high value client ($100,000+ deposit) than either Virtual Brokers or BMO InvestorLine. In addition, Questrade appears to be aggressively pricing their referee incentives than most other brokerages at all the deposit levels we measured. Conversely, Scotia iTrade appears to be offering higher incentives to those doing the referring, especially at the $50,000+ deposit levels.

In part two of this series, we’ll dive further into details of the various programs including some of the red tape involved as well as the very interesting findings from the terms and conditions of each discount brokerage’s programs. If you’re at all interested in the referral programs, that’s one you’ll want to also read.

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