There are about 15 discount brokerages operating in Canada, but less than a handful offer investors zero-commission trades.Mark Blinch/Reuters
No-fee trading platforms are attracting a wave of do-it-yourself investors in Canada, accounting for almost half of all new account openings and almost a third of all trading activity.
A report set to be published Wednesday morning by ISS Market Intelligence shows online discount brokerages that do not charge a fee for stock trades saw a significant jump in the number of new account openings, as well in the overall number of trades, over the 12 months ended June 30, 2022.
During that period, the report found that firms offering zero-commission trading generated 46 per cent of all new accounts opened, as well as 30 per cent of all trades in the industry – higher trading volumes relative to their size than commission-based firms.
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Zero-commission trading platforms, as well as online mobile applications, boomed in the United States after investment giant Charles Schwab launched a zero-commission option in 2019. But adoption in Canada has not been as rapid.
There are about 15 discount brokerages operating in Canada, but less than a handful offer investors zero-commission trades. The majority of online brokers charge from $6.95 to $9.99 a trade, depending on the number of transactions an investor makes a month, while several platforms offer zero-fee trades only for exchange-traded funds, or for just a limited number of trades per quarter.
“For a broader zero-commission sweep to occur in Canada, one of the industry’s Big Five banks would likely have to topple the first domino,” ISS Market Intelligence, formerly Investor Economics, said in the report.
Wealthsimple Trade was the first platform in Canada to offer a zero-commission trading in 2018, followed by National Bank Direct Brokerage , Desjardins Group’s online brokerage and newcomer MoGo Inc. in 2021.
Whether the platforms can remain profitable over the long term remains to be seen, says Vince Linsley, associate director at ISS Market Intelligence in Toronto.
“While the zero-commission model has the potential to attract a number of new investor cohorts, Canadian discount brokerage firms must carefully weigh the offer against the impact of the loss of trading revenue,” Mr. Linsley said in a statement.
This is particularly noteworthy, Mr. Linsley said, because Canadian firms lack the ability to leverage some of the non-trading revenue lines available to their U.S counterparts, such as receiving payment for order flow, or offering a paid subscription model in which investors pay a premium for research, U.S. dollar accounts and real-time stock quotes.
Some companies, including Canada’s big banks, may decide to adopt a commission-free model as a way to attract a new segment of investors – particularly those under the age of 35, Mr. Linsley said.
“It provides an opportunity for larger wealth companies to cultivate relationships with younger investors and then potentially refer them into other advice channels as their financial needs expand, such as with a full-service adviser,” Mr. Linsley said in an interview.
Young adults are less trusting of traditional investment professionals than older investors, and are more likely to seek information on platforms such as YouTube, Instagram and TikTok, according to a report released Tuesday by the B.C. Securities Commission (BCSC).
Just 23 per cent of young investors work solely with advisers, compared with 40 per cent of Canadian investors as a whole.
As a result, the ISS Market Intelligence report found that younger investors are opening online brokerage accounts in droves. From September, 2021, to June, 2022, the number of accounts held by investors under the age of 35 increased by 360,000, and zero-commission firms captured 69 per cent of the growth.
While these investors make up just 16 per cent of the total market share in terms of assets, they are taking on more risk investing in individual stocks and are more likely than any other age group to self-manage some or all of their investments.
About half of young adults are self-managing more than 50 per cent of their investments, the BCSC said, as well as investing in higher-risk financial products, such as options and mortgage investments.
“This research shows young investors are following a different path than generations before,” BCSC spokesperson Pamela McDonald said in a statement. “By understanding the goals and behaviour of younger investors, we can have a clearer idea of the tools and support they need to work toward a positive financial future.”