Why Are Online Broker Accounts Growing?

Bear markets have often been times when investors swear off stocks. But this time around, online discount brokerages are reporting sizable jumps in clientele during one of the steepest sell-offs in decades. Scotiabank’s discount broker, for example, racked up 60% growth in accounts over the past year. Other major online brokerages were not far behind.

Some observers have speculated that this trend represents a shift to do-it-yourself investing. Disenchanted with the losses they were incurring, investors are “firing” their advisers and venturing out on their own. Or they are dumping mutual funds with their high fees for exchange-traded funds and stocks. But a survey of 65,000 investors earlier this year by J.D. Power & Associates (for its Full Service Investor study to be released June 24) found a different explanation.

In a mini-whitepaper released today, J.D. Power says the trend is driven more by the desire of investors to diversify over investment channels. That is, investors at full-service brokers are increasingly opening up accounts with online discount brokers: in last year’s survey, 25% of full-service investors reported using an online brokerage firm whereas in this year's survey, the percentage using an online brokerage had jumped to 36%.

Why so? The mini-paper postulates that the bear market has spawned a new frugality, “a situation in which an investor might call their adviser to get recommendations on portfolio mix and stock selection, but then turn around and place their order online for $9 or $7 per trade rather than spending $250—or 2% of total transaction value—by trading through an adviser.” In a bull market, investors might not mind full-service commissions but when they are losing money, that extra trading charge could become painful enough to motivate opening up an account with an online broker.

Below follows an interesting chart from the mini-white paper: “Investment Advisory Services Used By Investors in Canada.” The 41% “None’ category includes investors i) who do not have investable assets other than employer pensions and stock plans or ii) do not use investment advisory firms.

I would have liked to have seen on the chart a separate number for those not using an adviser – i.e. exclusively a discount online broker. But elsewhere in the document, it says the percentage who fall into this category (if I understand right) is 16% — which the document says was still on the low side (I guess they mean in relation to other countries).

Comments

[Moon Kil Woong:]

In general, you save a bundle buying your own stocks and holding them. For one there is the benefit of not paying taxes until you sell them. Also you avoid the wonderful charges mutual funds and other packaged "investments" charge you. Whether or not you actually make money, well, that's your business not theirs obviously. Their business is to get as much money out of you as possible for the longest time possible.

If you do invest yourself and buy stocks in a brokerage account you can save yourself a lot by using a discount broker considering the fee full service brokers prove they don't have your interest in mind.

If you use a discount brokerage be very careful. Even this method is rigged against you. Oftentimes you pay $19.99 per transaction but they make all their money being their own market maker. that means they get to pocket the spread by buying the security and then selling it to you which may end up being a lot more than 2%. The best method is the one they hate the most, that is calling them and waiting for confirmation which doesn't let them 1) wait until the stock drops enough to make a huge spread on your buy price, 2) buy the stock and then sell it to you at a higher price 3) or look for someone who can sell to them at a low price so they can buy it up and then fill your higher order price. Market makers.... aren't they great guys. Gotta love them...

All in all, don't trust people with your money more than you have to. And always be aware of the games people play.

Jun 23 07:23 AM

[TradingHelp...:]

The rise in online brokerage accounts is partly attributable to consumers being fed up watching their highly paid face-to-face brokers consistently lose their money

If you are going to lose money, you may as well do it online with less fees, and maybe even manage the stock picking yourself... and lose money.

Jun 23 07:29 AM

[texpat:]

Scotiabank recently acquired eTrade Canada, which might explain their 60% growth figure.

Nonetheless, the growth in online/discount brokerage accounts makes sense. If you're giving an advisor 2% on every buy order, it makes a big difference when factored into the rule of 72. Not to mention that many advisors are pressured into groupthink, so your money just ends up following the herd's.

Maybe the kind of mischief described by Moon Kil Woong occurs, but I've never seen evidence of it at Schwab (US) or TD Waterhouse (Canada), where I've never had a fill at an unexpected price and where market orders have almost always executed in seconds, even when routed to the TSX from Schwab. If you call an online broker, the commission will usually be higher, often much higher. So if you suspect mischief, try a limit order at the market price and/or start to look for a new broker.

Jun 23 08:30 AM

[Ray Winter:]

I switched to managing my own investment portfolio when I realised that nobody else looks after my money like I do.

My previous brokers were, by and large, young men with very little real world experience and blatently out to make money for their organisations
from the fees I paid.

With E*Trade.com not only do I get instant, low cost trading direct from my PC but they also provide me with online levels of market analysis and sophistication completely free-of-charge that were previously reserved for large Bank trading floor operatives.

There are going to be a great number of investment advisors looking for work in the not too distant future.

Jun 23 10:01 AM

[The Simple ...:]

All of the above given reasons for the expansion of online brokerage accounts sound reasonable, and there may be another: extremely low return on bank savings products. I have seen some direct evidence of this in people who formerly used bank money markets and CD ladders, moving to short duration bond funds and similar vehicles in search of something more than 1% yield. In many cases it is preferable to buy these through a discount broker's fund supermarket, rather than directly from the fund.

Jun 23 10:38 AM

[DmytrenkoArtem:]

Market have waves of changing market's participants type. Now we would see that numbers of mutual funds which will outperform market will increase, coz we would have a bigger part of individual investors - so market will be less efficient. Its not my opinion fully, its more due to EMH (effective market hypothises)

Jun 23 11:43 AM

[Anthony B:]

I had an account with zecco last year, and had to leave when they upped the account minimum for the 10 free trades a month. I've been at ThinkOrSwim ever since, and been very happy with their platform and service for the price.
I might make a move to interactivebrokers for 1/3 lower commissions, ridiculously low ($1/trade), but I'm not sure the lower quality service and platform is worth it. Also, interactive brokers must be doing some of the practices that Moon Kil Woong mentioned in order to be making money on $1 commission trades.

Jun 23 12:11 PM

[Zenfar:]

I think the trend went something like this for some, people lost money in the dot com bubble doing it themselves, so they go to an adviser. The assume the adviser was doing a good job, until the next bear. Then they fire the broker and think they can do better themselves.

Jun 23 01:20 PM

[sethmcs:]

Surprisingly TDAmeritrade has actually executed trades higher than my ask or lower than my bid. In this volitile market that is sure appreciated.

Jun 23 04:54 PM

[robert.b.fe...:]

I suspect there are many reasons for the phenomina. Technology has improved to the point where any one can execute a trade in seconds. Folks like me have reached a place in life where we have enough disposable income to warrant opening a brokerage acount. As part of a diversified plan it makes sense if you do your home work and have the intestinal fortitude to stick to your strategy. Back in the day your only option was to go to a pro so I started a front loaded IRA (PINDX) with First Command. They ran afoul of thier clentele got sued and now aren't allowed to charge me for the services I purchased via front loading years ago. I started a new career after the Army (yes I'm leveraging a government pension) and a ROTH 401K with it. I opened a broakerage account with USAA and use thier services reasearch and financial advisors for a buy to hold strategy using a tax exempt money market as the storage and cash recepticle. Since I had to educate myself on this stuff so I was long in cash when along came the crash and now I'm hoping to make some cash. I think I'm not alone here.

Jun 23 05:35 PM

[NYTReader:]

In addition to E-Trade Canada, Scotia also bought TradeFreedom.
www.tradefreedom.com/e...

Jun 23 06:22 PM

[derryl:]

sethmcs wrote, "Surprisingly TDAmeritrade has actually executed trades higher than my ask or lower than my bid. In this volitile market that is sure appreciated."

I've had the same experience with Scotia's iTRADE, surprisingly often. It's like they're actually serving the interests of their customers!

Jun 24 12:37 AM

[Aki Izayoi:]

Most of these investors/"traders" are stupid. Sure, they might not win with buy and hold, but trading is a bad way for most people to profit. Still, these people will lose out over other REAL traders/ speculators who do have a long term time horizon and information asymmetries that they can exploit from retail investors.

If I were a greedy speculator... I would think about taking the other side of their trades.


"I think the trend went something like this for some, people lost money in the dot com bubble doing it themselves, so they go to an adviser. The assume the adviser was doing a good job, until the next bear. Then they fire the broker and think they can do better themselves"

I love that comment.

One reason, despite the Austrian inflationistas on Seeking Alpha, that I expect lower interest rates in the future (like around 2.9% for the 10 year note) is that the return on investment will be very low, buy and hold equities will not be seen as a long run winning strategy, and people will give up trading because most people are horrible traders, and accept a low return on capital. It happened in Japan although there were households there that initiated carry trades by borrowing yen and buying high yield currencies for some yield.

Jun 25 03:27 AM