Against the Tide

Do-it-yourself investing was supposed to be the norm by now, but Canadians are holding back. What’s the problem?

Globe Investor Magazine,
September 18, 2008
By Rob Carrick
illustration by Nick Dewar

As a teenager in Pembroke, Ontario, Ivan Sack used earnings from his paper route to buy stocks and spent time after school reading the ticker tape at a local brokerage office. So the idea of having a stockbroker to guide his investing never sat well with him. “I really didn’t feel I needed a broker,” recalls Sack, now a 58-year-old retiree. Despite his reservations, he succumbed to following the tra­dititonal investing route. In 1996, however, Sack cut his broker loose after hearing that discount brokerage TD Green Line (now TD Waterhouse) had introduced online stock trading for individual investors. “Literally within a week or two, I opened an account and started investing for myself,” he says.

Back in the mid-1990s, people like Sack—up on business news, comfortable with new technology, confident in their knowledge of market mechanics—were a new and growing breed that seemed ready to propel do-it-yourself investing into the mainstream. The technology boom was just beginning, the Internet was making its way into the public consciousness and new clients were flooding to discount brokers. The full-service brokerage business had long feared the low-cost newcomers. Andrew Kniewasser, president of the Investment Dealers Association of Can­ada in the early 1980s, saw the entry of TD and other banks into the discount game as a “matter of life and death” for his industry.

But along the way, something hap­pened to DIY investing. Despite steady growth over the past 25 years, it’s never really threatened the adviser-driven busi­ness. “I don’t think the do-it-yourselfers have grown as much as a lot of people expected,” says Keith Sjogren, director of strategy consulting at market analysis firm Investor Economics. “If you’d asked people a decade ago, they’d have expect­ed the soloists to be a much more impor­tant group than they are now.”

Discount brokers—sometimes called online brokers or direct brokerages—are the link between self-directed investors and the markets. They provide no advice and are thus able to charge as little as $5 for a stock trade—or about 5% to 10% of the commissions demanded by full-ser­vice investment advisers. (Discount bro­kers who specialize in active trading go as low as $1 per trade.) In 1983, the Ontar­io Securities Commission gave birth to the industry by deregulating brokerage commissions, but it was the Internet that empowered people to take investing into their own hands. Sites like TheStreet.com, MSN Money and Globeinvestor.com gave investors a level of information that used to be reserved for professionals. Mean­while, discount brokers encouraged online trading by allowing clients to check their accounts at any time, and providing them with financial-planning tools, equity re­­search, stock quotes and charts.

The growth of DIY was also spurred by investors’ dissatisfaction with their advisers’ performance. Michael Dolenko, a partner at Toronto market research firm Phase 5, has talked to a lot of dis­count brokerage clients about why they made the switch, and finds this to be the most common reason. “They feel they’re not getting the attention and the service levels [they want],” he says, “or they feel that their portfolio is just getting churned and they’re paying large fees.”

Cheap, easy and unmediated: These three factors combined to turn discount brokers and their DIY clients into sig­nificant players in Canada’s financial markets. Today, discount brokerages hold $180 billion in assets, and account for half of all retail stock trading, according to Investor Economics. Still, that pales in comparison to the haul realized by full-service brokers, which had $719 bil­lion in assets at the end of last year. It means traditional brokerages have $4 for every $1 held by discount brokers.

The gap between DIY and convention­al investing in Canada is even more star­tling when compared to the U.S. industry. A study by Forrester Research, a Massa­chusetts-based analysis firm, has found that Canadians are much more likely than Americans to delegate their investing deci­sions to advisers. Here, 48% of house­holds have at least one account with an investment expert, compared to 31% in the U.S. Forrester estimates that 13% of Canadian investors are do-it-yourselfers, compared to 23% of Americans.

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