For some on Bay Street it’s hard to believe it happened so long ago.
Younger players find it hard to imagine life before it happened.
It
has been 25 years since Canadians got their first major discount
brokerage, and stock-market investing became widely affordable.
Before then, the industry was a well upholstered club reaping fat fixed commissions.
All
brokers charged the same. Many had little or no interest in small
accounts, indulged in long alcohol-enlivened lunches and engaged in
extravagant stunts to attract or retain well-heeled clients.
“I
can well remember, the head trader for the mutual fund received,
gratuitously from a broker, a Lincoln Continental for one Christmas,”
recalls Ross Healy, then a wealth advisory underling and now CEO of
capital markets consultancy Strategic Analysis Corp.
“He reported
it to his boss and the car was duly returned, but that was one hell of
a bribe and it goes to show how very rich and fat those old fixed
commissions were.”
Then, in the spring of 1984, the
Toronto-Dominion Bank (TSX:TD) established its Green Line Investor
Services discount brokerage in the main branch at King and Bay Streets,
amid regulatory snags and desperate resistance by the brokerage
industry.
The discount business, providing bare-bones transactions with no advice, took off and drew a host of competitors.
But
TD Waterhouse – the bank doubled the operation’s size by acquiring New
York-based Waterhouse in 1996, the same year Internet trading began –
remains the largest.
It has more than 40 per cent of the
estimated $160 billion in assets held by Canadian discount brokerages,
according to John See, president of TD Waterhouse Discount Brokerage.
It
boasts 1.7 million accounts, which See – marking the 25th anniversary
with a market-opening observance at the TSX on Monday – said represents
just under one million investors.
“Our industry generally goes by
the 80-20 rule,” he said, with 20 per cent of clients trading actively
and generating 80 per cent of the revenue, while four-fifths of its
customers are more placid buy-and-hold types.
“Investing today is
mainstream, whereas 25 years ago it might have been something only for
the rich,” observed Jack Rando, director of capital markets for the
Investment Industry Association of Canada.
“It’s just so much more accessible.”
Life
on Bay Street in the old days was “far more reliable – I think you knew
what to expect,” recollects Fred Ketchen, director of equity trading at
Scotia Capital, who has spent more than half a century in the business.
“It was a different time,” asserts Ian Russell, president of the Investment Industry Association of Canada.
“The pace was totally different. It was slow, gentlemanly.”
Fixed
commissions worked when market activity was tiny by today’s standards,
and “as a broker you had to rustle around and find the other side of
the trade, so you probably earned it,” Healy points out.
“As
volumes exploded and markets became more liquid, the rationale for
having those fixed commissions disappeared, and furthermore of course
the profitability from fixed commissions just went out of sight.”
TD
Waterhouse charges a minimum of $43 per trade on phone orders, but
online transactions cost as little as $7 for active traders and $9.99
for clients with over $100,000 in their accounts.
It’s hard to
know what a typical modern full-service commission is – fees vary with
account size, type of transaction and so on – though one industry
source suggests it starts at about $85. Many clients have their
commissions buried in wrap accounts which provide various services for
a percentage of assets.
Full-service operations still reap the
lion’s share of industry revenue, with $2.3 billion in total
commissions in the year ended last September compared with $550 million
for discount brokers, according to industry tracker Investor Economics.
But Healy says there’s no doubt the discounters have put “enormous pressure” on full-service commissions.
And
See notes that the number of transactions conducted by discount
brokerages recently passed the number on the full-service side for the
first time.
“Definitely the discount brokerage movement has been
leading the volume, and it’s democratized and made it much more
affordable for people,” says Edward Kholodenko, president of Questrade
Inc., a 10-year-old discount brokerage which does stock trades for as
little as $4.95.
“We’re seeing that now,” he said. “All through
the big decline our opening-account numbers have been records, just
unbelievable.”
For TD, the discount brokerage has been hugely
successful “but it began with a real dog fight with the existing
securities industry at the time,” recalls the Investment Industry
Association’s Russell.
“It really was the beginning of the
crumbling of the four pillars” – regulatory separation of
deposit-taking banks from investment banks, insurers and trust
companies.
TD made an end run around the Bank Act’s prohibition
of the chartered banks from the securities industry. “But there was
nothing to prevent the banks from getting into discount brokerage,
which was simply the execution of unsolicited buy and sell orders,”
Russell said.
The brokers mounted a “furious defence,” he said,
but barely three years later the government allowed the banks to take
over securities dealers and “they all fell like dominoes.”
“Life has changed a great deal,” says Ketchen, who joined Scotia when the bank took over McLeod, Young, Weir in early 1988.
“New
names have shown up, many old names have disappeared, but son of a gun,
it’s still as exciting today – even more so, I suppose, for the simple
reason that you’ve got a whole lot more volatility in the market.”
