May 17, 2023

Traditional and Online Investing

How do the two measure up?

The world of investing has changed a lot in recent years. A little over a decade ago, most investments could only be made by a real person, such as a traditional broker at a brick-and-mortar bank or fiduciary agency. However, today there are more options available to investors than ever before. One could continue using a trusted financial advisor at a bank or could choose to manage their investments themselves through an online brokerage or robo-advisor.

As online and self-serve investing platforms become more popular, how do they compare to traditional investment banks and financial institutions? Both options have their benefits and drawbacks, so let’s look at what they each offer.

What are Traditional Investments?

There are two main options available in today’s current investment landscape – traditional and online investing. In either case, an investor works with a brokerage, which is a company that operates as a middleman between a buyer and seller to facilitate a financial transaction. These brokers are paid in commissions or fees usually charged once the transaction has been completed successfully.

In the case of traditional investing, investors work with a full-service brokerage that provides a professional financial adviser who is tasked with managing all a client’s investment decisions while providing ongoing advice and support. Full-service brokers will execute trades for their clients and complete the purchase and sale of various investment products, such as stocks, bonds, and ETFs, while offering additional financial services. In 2020, the top three full-service brokerages in Canada were Assante, National Bank, and HollisWealth.

Due to the highly personalized nature of the relationship between a client and a traditional broker, the costs to use full-service brokerages tend to be quite high. A traditional trade can cost anywhere between $12.95 to $29.95, or more on average. Traditional brokers also earn commissions on each trade that they make for their clients, which means the less scrupulous ones may be incentivized to make more trades for their customers. While this is rare, it is important for those that opt to work with traditional brokers to ensure they have the final say over the investments made with their account.

What are Online Investments?

Unlike traditional investments that are managed by a dedicated advisor, online investments are self-directed by individual investors using online platforms that enable them to make their own trading decisions. These platforms are also called “discount brokerages” as they usually charge lower commissions due to the do-it-yourself nature of their platforms. Canada’s most popular online brokerages are Questrade, National Bank Direct Brokerage, and TD Direct Investing. While online brokers may provide resources to help investors make the best financial decisions for themselves, they don’t usually provide personalized investment advice or perform analysis for their clients.

Another branch of online brokerages which are quickly gaining popularity, especially among customers in their late 20s and 30s, are robo-advisors. Robo-advisors, or automated investment advisory platforms, are a relatively new type of digital financial advisor that provides low-cost investment management services carried out by algorithms with minimum human participation.

Interestingly, the COVID-19 pandemic has led to a surge in online investing in Canada. With many people being stuck at home since the onset of the pandemic, trading has emerged as a popular pastime for many Canadians. Staying at home, either as a result of lockdowns, quarantine measures, or working-from-home circumstances, has given Canadians the time to take control of their portfolios. Wealthsimple and WealthBar are two of Canada’s most popular robo-advisors and both have reported experiencing double-digit growth in users since the pandemic began.

Why Choose Traditional Investment Methods

Personal Broker Relationship

A personal relationship with a broker is a large part of what investors pay for when they engage with a traditional brokerage. In addition to managing their clients’ portfolios, brokers also provide clients with personalized counsel and advice, while getting to know their clients and their circumstances over time. This makes traditional investing a great choice for investors who value this kind of dedicated relationship and customer service.

With online investing, clients rarely form any kind of relationship with an individual broker when they trade, although brokers or sales assistants are typically available to online investors who seek help. However, this service may come at an additional cost.

Personalized Investment Advice

When working with a traditional brokerage, investors have access to a professional broker who is licensed and trained to conduct trades on their behalf. This means investors can consult with their broker to assess and discuss the pros and cons of making a certain trade before it occurs, providing a safety net protecting the investor from making unnecessarily risky or bad investments.

Although there is never a guarantee when it comes to the success of an investment, a broker acts as a well-informed third-party who has the knowledge and experience to help to protect their clients’ investments, to the best of their ability. They can also advise on the best approach based on a client’s goals, such as whether they plan to purchase a house in the near future. This setup is ideal for new investors and those who do not have the time to research the pros and cons of each trade they would like to make.

Online investments, on the other hand, do not provide the same level of protection, which could lead those with little investment experience to make risky investment decisions if they don’t conduct the necessary research.

Additional Services

Full-service brokerages act as a one-stop-shop for their clients, offering additional services such as wealth management, portfolio management, tax and estate planning, as well as research and advisory services, among other things. This allows them to have the full picture of their client's financial standing, helping them to offer holistic financial advice for their clients.

This is more convenient for clients as they only need to go to one person for all their financial needs.

Why Choose Online Investment Methods

Lower Costs

One of the most significant differences between online and traditional investing is the cost. The cost of a traditional trade is usually significantly higher than the cost of online trade, due to the high-touch nature of the client-broker relationship. However, since online brokerages offer more of a DIY approach with less contact with brokers, the cost of online trading is often lower, with online trades costing as little as $3.95. When it comes to robo-advisors, annual costs for these electronic advisers are typically around 0.5 percent of assets under management, compared to 1 percent to 2 percent charged by many traditional advisors.

Online brokerages also tend to have much lower required minimum opening balances than traditional brokers. It is common for traditional brokerages to prefer to work with clients who have a few thousand dollars available to invest, and some brokerages require at least $5,000 in your account for them to accept a client. On the other hand, online brokers do not have the same requirements to open a brokerage account, with minimum balances as low as $500 – or even less for robo-advisors.

These savings allow investors to keep more of their money, making online investments an attractive choice for those who would like to start by investing small amounts of money.

Financial Education

To compensate for the absence of a dedicated investment advisor for their clients, online brokerages usually provide large information libraries for their customers, including up-to-date charts that illustrate trading data and trends. Wealthsimple, for example, has an extensive resource library that covers topics such as personal finance 101, an investing masterclass, as well as tax education.

Most online brokerages allow customers to customize their login pages to allow them to easily see the most current performance of the stocks they are interested in. Many traditional brokerages now provide similar services, however, since customers pay higher brokerage fees, they often expect the broker to conduct the study and make recommendations for them.

Increased Flexibility

Traditional brokerages are usually open from 9:30 a.m. to 4:00 p.m. Eastern Time, which are the same hours as the stock market. For a traditional brokerage client to relay their trading instructions to their broker, they will usually need to schedule an appointment, either online, over the phone, or in person, which takes time. Time is money in the stock market and a delay might be costly.

Conversely, the reaction time for online trading is extremely fast — one can complete a trade in the blink of an eye without needing to go through another party to complete their trades. This flexibility makes online trading a great option for those who value the speed of transactions. It is important to note that many traditional brokerages now offer extended service hours to compete with online brokerages. However, there may be additional fees involved, though this is becoming less typical as they strive to stay competitive.

The Bottom Line

Although many investors cherish the traditional broker-client connection, industry changes have driven an increasing number of clients to switch from traditional to online investing. Both forms of brokerages have advantages; and picking which one to use is a matter of weighing the features and benefits each has to offer. Inexperienced and high net worth investors may opt to deal with a broker, whilst individuals with investing experience who value lower trading costs may prefer to do so on their own online.

Regardless of the approach you take, there is always a risk when making an investment. Do not invest more than you can afford to lose, and always make investments that align with your own personal goals and financial situation.

< Older Post Newer Post >

Is Canada Really in a Recession?

December 23, 2023

Context A CBC News article discussed the possibility of the Canadian economy heading into a recession, or whether the country has already passed that threshold. The article discussed this possibility based on slowed growth, high inflation, and the Bank of Canada’s continued interest rate hikes. Analysis A recession is a significant reduction in economic activity that occurs over a length of time, usually months or years. One of the most accepted definitions of a recession comes from the economist Julius Shiskin in 1974, who identified the threshold to an economic recession as two consecutive quarters of declining GDP, although economists often argue about the comprehensiveness of this measure. The causes of a recession can be quite complicated and have many contributing factors. Some common examples include a sudden economic shock such as the recent COVID-19 pandemic, excessive debt, asset bubbles, inflation, deflation, or large technological changes. One major factor influencing the probability of an economic recession includes rising interest rates from the Bank of Canada, which has implemented the highest hike in the shortest amount of time in all of the bank’s history, raising the rate over eight times since 2022. The Bank of Canada increased interest rates in order to curb inflation since rising interest rates discourage taking on debt and spending. This further encourages companies to lower prices or slow inflation to increase demand. Currently, the Bank of Canada is keeping at the 5.0 percent rate but has said that further hikes are not off the table as inflation may continue to exceed acceptable rates. Increases in interest rates can certainly contribute to or precede a recession. In fact, the Bank of Canada has raised interest rates three times to slow inflation since the 1960s and all three times this action led to an economic recession. Current fears of a looming economic depression are also not unique to Canada, as following the COVID-19 pandemic, the global inflation rate increased to 8.73 percent in 2021. This was due to supply chain issues, as well as the effect of the Russia-Ukraine War creating rising food and energy prices, as well as general fiscal instability. A majority of the World Economic Forum’s lead economists agreed earlier this year that we could see the beginning of a global recession starting in 2023, which would certainly affect the Canadian economy. The article also discusses the Canadian economy’s slowed economic growth, as the GDP has stagnated in the second quarter of this year. However, it suggests other factors may explain the decrease, including striking port workers in British Columbia, and the resulting negative effect on economic activity. An RBC report mentions how on a per-person GDP basis, there has already been a decline for four straight quarters despite a surge in population growth, and concludes overall predictions for GDP growth do not look promising despite local factors including Canadian wildfires and strikes. They also point to a 0.5 percent increase in the unemployment rate over the past few months, which has historically tended to indicate a looming recession.

Ottawa Mayor and Lansdowne Park

December 21, 2023

Context The City of Ottawa Mayor, Mark Sutcliff released a statement about a revised plan for the redevelopment of Lansdowne, an urban public park containing historic landmarks and commercial venues. The project includes the demolition of a sports arena complex, stadium stands, and the building of a new event center, residential units, and retail space. Despite suggesting the new plan has addressed the concerns of residents, many issues remain. Analysis The City of Ottawa and the Ottawa Sports and Entertainment Group (OSEG) have been in partnership to develop Lansdowne since 2012 and finished an original redevelopment of the park back in 2014. A few years later in 2019, the financial sustainability of the park came to the city council’s attention, and in 2020 the partnership was extended another 10 years with direction to develop a new plan to revitalize Lansdowne. Consultation with community members started in 2020, with the original concept released last year in 2022, and a revised version released this month. Community feedback was acquired through various platforms including public information sessions, an open email for feedback, and public surveys. A summary report of that feedback was published on October 6th, which highlighted the six most common themes of community residents’ concerns. The first concern was related to the size and number of the multiple high-rise apartments which were designed to exceed 30 floors. In the new plan , they have removed one of the three planned buildings, with fewer total units in each, and only one tower with the potential to be built at 40 stories. Residents were also concerned about the loss of greenspace due to the new event center construction. Many people suggested they wanted that greenspace allocated elsewhere, or alternatively, an accessible greenspace roof on the event center. Although in the original plan the city had conceptualized a greenspace rooftop on the event center, this was scrapped in the new plan as it was deemed too expensive to maintain. Respondents wanted a restriction of vehicles to the premises to promote pedestrian safety, a concern that has existed since Lansdowne was first renovated back in 2014. They also wanted more public transportation infrastructure to and from the park, whether that is the local city buses, trains, or cycling infrastructure to reduce congestion on connecting roads. Relatedly, residents also desired more accessible public use space from washrooms to water fountains to usable and free space for people to occupy. The new plan has reduced the number of parking spaces for the residential buildings to meet the Bylaw limit of 0.4 spaces per unit, down from 739 to 336 spaces, while they added 36 new spaces for the event center. In terms of accessible public space, the new plan includes 27,000 square feet of space originally earmarked for the third residential building, now available for an unspecified “public realm.” Residents also wanted more local and less corporate or big-box businesses, to reflect the unique local community better. The new plan does suggest the amount of retail space has been reduced from 108,000 square feet to 49,000 square feet but does not directly address the desire to attract smaller, local businesses. Finally, there was also a concern about financial transparency of how the project is being funded and the resulting impact on the City. The Federation of Citizens Association (FCA) which represents over 70 community groups voted unanimously to oppose the new plan, which comes with a very costly price tag of $419 million, increased from $332 million of the first plan. They cite that the debt comes at a time when the transit system is facing major issues, and the city is struggling with a housing affordability crisis.

Danielle Smith - Conflict of Interest

December 20, 2023

Context Newly elected Premier of Alberta Danielle Smith has defended her cabinet which is coming under fire over conflict-of-interest concerns. Environment and Protected Areas Minister Rebecca Schulz’s husband, Cole Schulz , may be lobbying the government in the areas that the Minister works in. Cole Schulz's firm is working on removing the protection of a threatened caribou range to make room for the oil and gas industry – which has raised concerns over who has Minister Schulz’s ear. Analysis The company that Cole Schulz is a partner with, Garrison Strategies, was hired by the Explorers and Producers Association of Canada and is working to influence the government on the issuing of reclamation certificates for oil and gas sites. The lobbyists are working to gain more access to protected caribou habitats to expand the oil and gas industry. They are hoping to “ address the moratorium on tenure in caribou regions ” which would effectively give them better access to land and investments. The Little Smoky and A La Peche herds in northwest Alberta were protected by a moratorium in 2013 which stopped the granting of new energy leases in this area. At the time, 95 percent of the herd’s range was heavily damaged. Phillip Meintzer of the Alberta Wilderness Association found that though records show that Garrison didn’t contact Environment and Protected Areas directly, the firm’s causes are “ too close for comfort ”. Meintzer also notes that as Garrison works on opening the protected caribou land for Alberta Energy, Environment and Protected Areas should be working on a protection plan for the federally and provincially designated threatened animal . Minister Schulz is working closely with the ethics commissioner, however, Danielle Smith confirmed that “ the ethics commissioner has looked at it, given guidance and there’s no violation [of the Conflicts of Interest Act]”. Cole Schulz also indicated that his firm wasn’t aware that Minister Schulz breached the Act at any time. Meintzer suggests that this situation “ calls for a further look ” from a third party. Sources https://globalnews.ca/news/9988998/alberta-premier-danielle-smith-rebecca-schulz/