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History of the Brokerage Industry
Stocks and bonds of corporations and governments began trading several centuries ago during the Renaissance. In the past, only wealthy individuals and large organizations participated in these financial markets. Today, trading in these securities has become common even among the middle class and small investors. The reason for this shift is quite simple: people have figured out that there are higher returns in the brokerage industry, compared to banks. The advent of the Internet has also made access to securities markets much easier than in the past.
The Brokerage World Today
Both large and small investors, including individuals and institutions, trust Canadian online brokerage firms listed above with trillions of dollars today deposited in millions of accounts. These range from business accounts to personal accounts to college savings plans. There are also retirement accounts available, which are very popular today. They include both employer-sponsored plans and individually-funded accounts.
A Bank Account Compared to a Brokerage Account
Suppose you deposited $20,000 in a bank account earning 1.0%. By the time you withdrew the funds 30 years later, the account would be
worth nearly $27,000. The annual returns would not fluctuate, because bank deposits guarantee a stable and fixed return. This method of
investing certainly is the safest and has the lowest volatility.
Instead of putting the $20,000 in a bank, suppose you invested it in a basket of stocks and bonds at a brokerage house. Since the value of stocks and bonds fluctuates over time, there is no guaranteed return. But securities have a long history of outperforming bank products. If the average annual return of your $20,000 investment was 8.0%, a reasonable projection, after the same 30-year time span, the account would be worth more than $200,000. That's $173,000 more than the bank account earned!
Types of Brokerage Firms
Today there are three main types of brokerage houses in Canada listed above: traditional, discount, and robo. In the traditional model, investors pay roughly 1-2% of an account's value to hire an investment advisor or team of them to manage the account and provide investment advice. This might include a financial plan, estate planning, and retirement advice. This model oftentimes includes an actual face-to-face meeting with a financial planner to go over the client's financial situation, goals, and long-term financial needs. As you might guess, this is the most expensive of the three.
The second type of broker is the discount firm. This model grew out of the first as demand for lower fees increased. Account owners often do their own investing without any advice or assistance from the broker, although some discount firms do offer low-cost investment advisory services.
Discount brokers have websites with educational materials so that investors can learn more about trading before depositing any funds. Some brokers also provide paper trading, which is a method to practice buying and selling with a virtual currency.
Stock and ETF trades with discount brokers cost anywhere from $5 to $10, on average. Frequent traders who place enough transactions can receive reduced rates with certain firms. Although discount brokers may have account fees, there has been a push in recent years to reduce or eliminate them altogether. Some brokers also allow a trading account to be opened with no deposit of funds.
The newest of the three models is the robo-advisor. As the name implies, a computer program is responsible for managing brokerage accounts. The investor answers questions in a brief survey, and a software program chooses a basket of securities, usually exchange-traded funds, to buy. The ETF's are supposed to be in line with the customer's risk tolerance, which the computer detected in the questionnaire. Choosing the robot over the human advisor is the cheapest option. Accounts are typically managed for less than 0.50%, and sometimes even for free. Trades usually are free as well.
Retirement Accounts
Each of the above three brokerage types offers retirement accounts in addition to general trading accounts. All of the normal securities, such as stocks, bonds, ETF's, and mutual funds, can be traded in a retirement account. Most brokers have the same pricing schedule for both retirement and non-retirement accounts; although there might be a few differences in some cases. Retirement accounts frequently have tax advantages as well.
The example case shown above between the bank product and brokerage account is a good illustration of how investing in securities rather than bank assets can produce above-average returns over the long term. This is why many investors have chosen securities firms over banks for retirement savings and planning.
Don't Forget to Consider Brokerage Fees
When choosing a company from the brokerage firms list, be sure to look over the company's fee and commission schedule. This pricing section will reveal what various activities cost, such as opening an account, placing trades, selling shares of a mutual fund, using a debit card, or closing an account.
Significant differences can exist between firms when it comes to pricing, including brokers in the same category. For example, one discount broker may charge $9.99 for stock trades while another firm might charge $0 for clients with large balances. One traditional broker may offer a financial plan for free to advisory clients, while another may charge several hundred dollars. And a robo-advisor may cost as much as 0.5%, while another may be free indefinitely or for an introductory term. Over time, differences in commissions and management fees can really add up.
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