For Canadian discount brokerages, 2014 has already been an eventful year. It has now been just over a month since RBC Direct Investing announced the lowering of their standard trading commissions and in that time, the predicted response from several other bank-owned online brokerages has materialized. Since the RBC announcement, BMO InvestorLine, TD Direct Investing and National Bank Direct Brokerage have all lowered their standard equity commission pricing with more bank-owned brokerages expected to follow suit.

Going forward, there are two important reasons why do-it-yourself investors will have to pay extra attention to the online trading account plans being pitched to them. First, in the short term, expect pricing to continue to change as more brokerages adjust to the new ‘standard’ fee at below $10 per trade.  Second, discount brokerages will be marketing even harder to communicate what makes one brand better than another. For consumers, the upside is that they can likely expect more promotions, however the downside is that they will likely have to untangle a lot of clever marketing and read the fine print much more closely on any offers presented by Canadian discount brokerages.

In this two part series, we take a look at the bank-owned discount brokerages and the recent shift in standard commission pricing to uncover what this means for self-directed investors and for the discount brokerage industry in Canada.

Catch a Falling Star*

The priority self-directed investors place on commission pricing is an open secret amongst discount brokerages big and small.  As a case in point, several of the discount brokerage rankings that use cost as part of their measurement framework typically weight cost among their top categories. Considering the competitive dynamics of the industry, however, it is understandable why price is a popular battleground between competing firms.  While having a major bank-owned brokerage such as RBC Direct Investing lower its pricing,  there may have been other forces at play too. The presence of deep-discount brokerages such as Questrade and Virtual Brokers may have also helped to accelerate the pricing cuts. Whatever the case, it is clear that consumers were growing impatient with prices and other providers were able to gain traction with that dissatisfaction.

Judging by the consumer reactions online to the commission price cut as well as the speed with which other major bank-owned online brokerages have followed RBC’s move, two things are clear:  competition amongst discount brokerages remains high and pricing matters to consumers.

Who is Impacted by the Reduction in Commissions?

The impact of reduced commission pricing is a definite bonus for consumers and a bit of a thorny issue for the online brokerages. In terms of the discount brokerages, those bank-owned brokerages that decide to delay lowering prices much longer or to not lower them at all are essentially handing prospective clients over to their competitors on a silver platter.  Smaller discount brokerages or deep-discount brokerages are also going to have to get creative in order to compete against the bigger players who can often sell the ‘convenience’ and ‘customer service’ factors.  From a business perspective, whether the lower commission prices motivate investors to trade more often is something that remains to be seen.

For self-directed investors, the impact of lower pricing is likely to involve having to confront a lot more marketing from the discount brokerages.  Discount brokerages have to work harder to generate revenues from lower trading commissions and so they are likely going to work harder to differentiate themselves from one another. As a result, filtering through the advertising and comparing brokerages’ offerings may become trickier for self-directed investors.

As the activity in our discount brokerage deals & promotions section shows, brokerages are coming up with all kinds of offers and incentives for DIY investors.  In fact, even with only four bank-owned brokerages lowering their pricing, the clever marketing is already evident in the structure of the sub-$10 commission offerings. As we illustrate in our next part, it is important to pay attention to (and analyze) the details of each offer and to learn about brokerages in order to see how the offers vary between discount brokerages.

Blame it on the Range

Arguably the biggest group of investors for whom this pricing drop makes a difference is those who have portfolios under $50,000. Typically this describes younger investors, those who have not been investing in equities, mutual funds or ETFs for a long time or those who simply have not been able to accumulate assets at these levels.

For those with balances over $50,000 (but under $250,000) the ‘recognition’ that came with having this portfolio size has been effectively removed, something that several forum threads/posts have expressed concerns about.  Nonetheless, for those in the $50,000+ club, commission pricing is largely unchanged.

For the sub-$50,000 group, however, there are some important details to consider. While the $50,000 asset threshold has now been lifted in order to qualify for lower commission rates, those with lower portfolio balances may still be subject to account fees known as ‘maintenance’, ‘inactivity’ or ‘custody’ fees.

Generally speaking, the threshold under which inactivity fees are being charged at bank-owned brokerages ranges from $10,000 (at BMO InvestorLine) to $20,000 (at National Bank Direct Brokerage).   That said, there are several additional details that investors may want to factor in depending on whether their portfolios don’t meet or exceed this range.

Doing the Waive

The good news for investors whose portfolios fall below the account balance threshold is that fees can be waived at each of the bank-owned brokerages currently offering sub-$10 trade commissions. Depending on the discount brokerage, there may be the opportunity to avoid paying these kinds of fees by doing some of the following:

1. Executing a certain number of trades per month or per quarter
2. Contributing a certain amount per month to a pre-authorized investment plan
3. Holding additional accounts with the same discount brokerage

In part 2 of this series, we look at each of these strategies and some of their potential advantages and disadvantages from a cost perspective.