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Dale Jackson

Personal Finance Columnist, Payback Time


The ice cream truck has come to Main Street.

Desjardins Online Brokerage has joined National Bank Direct Brokerage and Wealthsimple in eliminating commissions on trades of stocks and exchange-traded funds (ETFs).

It’s a trickle-down bonus from a decades-old trend where technology has slashed the cost of executing a trade. The move is designed to take market share from the big traditional banks that only in the last few years lowered their standard trading fees for modest accounts to $10 from $30.

Terms vary depending on the discount broker or the account, but the endgame from the broker’s perspective is to generate more trading - and bigger fees - in the long run.

According to a recent release from Surviscor, a Toronto-based company that specializes in comparing and rating financial services, the discount brokerages are likely making up for it with higher foreign exchange rates, delayed market data or by sending trades to third parties that may not provide the best execution price. It adds that some low-fee brokerages offer limited access to U.S.-listed stocks or ETFs.

Low fees also don’t tell the whole story. The most recent Surviscor online brokerage customer satisfaction survey ranks Desjardins Online Brokerage, National Bank Direct Brokerage and Wealthsimple well behind online brokerages affiliated with the big banks like TD Direct Investing and Scotia iTrade.

While discount brokerages score high on fees, they tend to lag on other survey criteria relating to the general user experience and perks such as market research, and education and planning tools.

In many cases, low commissions are conditional on a minimum number of trades made in a certain time period, which could cloud rational investment decisions. Frequent trading does not equal better performance. In fact, evidence suggests frequent trading often hurts overall returns.

Of course, investment fees count as certain and direct losses, but independent studies that compare trading frequency and returns where fees are stripped out are hard to find. A 2006 Oxford University study by Brad M. Barber and Terrance Odean showed that women traders significantly outperformed men partly because they made fewer trades.

Frequent traders often try to time the market, which several broader studies show most often doesn’t work out well for the same retail investors being targeted by discount brokerages.

The point is; pushing fees as a primary consideration for investing lends to a casino mentality. Some of the most successful professional money managers will only make a handful of trades in months and spend the rest of their time researching opportunities and risks that may never come to fruition.

For retail investors who mimic professional money managers by executing strategies and investing for the long term, a $10 trading fee doesn’t mean a heck of a lot.

Tiny trading fees are probably appealing to speculators who want to dabble in small amounts, and that’s what discount brokerages seem to be encouraging.

Serious investors saving for retirement who only have small amounts to invest at a time can avoid trading fees by making regular payments in a no-load mutual fund. Mutual funds can provide a basket of stocks like an ETF; but unlike ETFs, which trade on stock exchanges, trades are not executed for mutual funds.

There are, however, a raft of other fees associated with mutual funds, so it’s wise to do your homework.