Once largely the domain of stock traders, online brokerages are responding to the needs of a diverse new clientele
- Canadians using direct investing to achieve their short- and long-term financial goals. Beyond dramatically reduced costs of trading, investors now have access to an online world of information, lower-cost investment products and other tools.
Jason Storsley, president and CEO, RBC Direct Investing, says intense competition has driven down costs due to commissions by about 47 per cent just since 2005. "Many of our clients pay as little as $6.95 or $9.95 per trade."
He says, similarly, investors can now benefit from low-priced investment product options, including low-cost managed mutual funds. "Until recently, self directed investors may have been reluctant to invest in mutual funds because of the management expense ratios, or MERs, that are attached to them."
MERs for most mutual funds include the cost of advice - fees paid to financial advisors. Naturally, investors who do their own research and make their own investment decisions don't want to incur those costs.
While Exchange-Traded Funds (ETFs) have presented an obvious alternative for online investors for some time, new options for investors seeking active management are also available. One is a new fund series available through RBC Direct Investing in a partnership with RBC Asset Management.
"Over 40 different 'Series D' funds are available to our investors, with MERs ranging from about 0.68 per cent to 1.45 per cent. On average, MERs are about half of the industry average, so the savings can be quite substantial over time," says Mr. Storsley.
An example is the 1.15 per cent MER of the Series D RBC Canadian Equity Fund, compared to the average 2.54 per cent MER for Canadian equity funds. Invest $25,000 over 15 years, and that difference will add an additional $12,000 to returns, says Mr. Storsley, noting that "RBC Asset Management was named Fund Family of the Year by Lipper (a Reuters company) in 2007 and 2008."
With low-fee managed mutual funds and ETFs available through online accounts, direct investors have access to the best of both worlds.
"A lot of the talk about the advantages of mutual funds versus ETFs is framed in an all-or-nothing context," says Dan Hallett, mutual fund analyst and director, Asset Management, High-View Asset Management Inc. "But blending ETFs with mutual funds allows investors to benefits from lower costs and achieve nice style diversification."
As an example, he says, an investor may want to use ETFs for U.S. stocks and an active (managed mutual) fund for overseas and Canadian stocks. "You can bring your costs down without giving up entirely on the promise of greater potential returns through active management."
In other words, minimizing costs doesn't mean that investors must do all the heavy lifting themselves.
"Our investors are constantly surprised at the wealth of information and the access to the tools and resources that we give them - at no cost - on our website," says Mr. Storsley.
Online tools can help do-it-yourself investors articulate their financial goals and translate those goals into an appropriate asset allocation plan. With RBC, investors who wish to expand their investment expertise can even do so without risking their capital. RBC Direct Investing provides practice accounts, with $100,000 worth of practice money to invest in stocks, bonds, mutual funds, ETFs and options. "It's an opportunity for our clients to gain confidence and investment knowledge without having to put their own money on the line," says Mr. Storsley.
For investors who wish to keep the process simple,while benefiting from appropriate asset allocation, 'model portfolios' are an attractive option, says Mr. Storsley.
"They're designed by experts, and they offer instant diversification to our investors who don't necessarily want to get into the nitty-gritty of having to choose individual funds that may be right for them."
Even with lower fees, simplicity and discipline remain important ingredients in investment success.
"You really have to be mindful about how much trading can drive up your costs," says Mr. Hallett. "It doesn't take long before a few trades here and a few trades there really add up to a lot of money, percentagewise. An ETF may have a
management fee of 0.2 per cent, but the cost to the individual depends on what they do after they buy it."
Before committing to an online broker, ask questions
Shopping for an online broker for your long-term portfolio? Here are some questions you may want to ask.
- What interest rate is paid on cash balances, and are there higher return options available for the cash portion of my portfolio?
- How many GIC and bond issuers do I have access to through my account?
- In addition to ETFs, what low-cost mutual funds are available to me?
- What research and education resources are available to me?
Frugal Trader, who blogs at MillionDollarJourney.com, says, "Even for buy and hold investors, fees are an important aspect of a discount brokerage." He suggests asking the following additional questions:
- What are the annual maintenance fees on the account? Is there a minimum balance before the fees are waived?
- How much does it cost per trade for stocks or options?
- How many shares can I trade for that amount? Can I get lower cost trades if I meet a minimum balance?
- What kind of protection against fraud does the system have? If the account is compromised, does the brokerage have any coverage?