How to pick an online broker

Stephen Handelman had two full-service brokers offering advice on what stocks they thought he should buy and sell. But after a decade of paying commissions yet making most of his trading decisions by himself, the Toronto businessman chucked his financial advisors and decided to go it alone. That was 15 years ago.

“They made me broker,” quips Handelman, 48. “Every now and then a good tip, but for the most part I was self-administering my own portfolio anyways and calling in trades.

“How foolish was that?

“I made a trade, I’d get a ticket in the mail, and I’d be paying $250 on the buy. Then, of course, there’s money on the sell.

“It started to bother me, especially on trades that were my own.”

It’s that sentiment that has online brokerages doing brisk business as Canadians look to take trading matters into their own hands.

A BMO InvestorLine study revealed that 34 per cent of Canadians have either adopted online investing as a way to make and manage their investments or are considering doing so. Nearly two-thirds like the freedom to invest at their leisure and have the control and confidence to make their own investment decisions.

Five years ago typical online investors were men in their 30s who traded regularly and were extremely knowledgeable about the financial market, says Jason Storsley, president and chief executive officer of RBC Direct Investing.

But this has changed. More women and novice investors have jumped on board, thanks to user-friendly software and instructional videos and webinars offered by online brokerages.

But the activity is not for everyone. Online trading is ideal for those who are confident in managing their own investment portfolio and have the time to educate themselves about how to do it right, says Bob Grant, Scotiabank’s managing director and head of its Online Brokerage service.

“If they do have the confidence to do their own investments, there’s a sense of empowerment and independence and control over their finances that an online brokerage can bring to the table,” adds Grant.

The biggest difference between full-service brokers and online brokers is guidance.

Full-service brokers provide insight on the financial market, suggest trades, and then place them when clients give the nod.

Online brokers provide do-it-yourself investors with software and educational tools and will answer questions on how to do things. But they do not give advice on trades.

Edward Kholodenko, president and chief executive officer of online brokerage Questrade, believes online brokerages make sense because they’re cost-efficient and convenient. Questrade, for example, charges $4.95 per trade. Full-service brokers typically charge an annual maintenance fee or a percentage of account assets.

He says some online brokers expect customers to maintain a minimum account balance or a number of monthly trades to qualify for certain commissions.

It’s faster to make a trade online, as there’s no phone call to place and no missed opportunities if the market moves while the phone is ringing.

But without a proper plan in place, the consequences could be financially devastating. Kholodenko says the most successful traders are the ones who plan when to get in and when to get out of a position. Or as Grant puts it: “The more informed and educated an investor is, the better their investment portfolio performs.”

“The mistake is not having a plan to begin with or ignoring it when the markets are in turmoil,” says Kholodenko. “They trade out of emotion like fear or greed rather than logic. If you’ve planned your entry and exit point, then there’s no question: you can be confident that you’re limiting your losses and maximizing your gains. Which is exactly what you want to do with your money.”

Handelman is once again considering hiring a full-service broker “just to see what I’m missing.”

He says his online brokerage provides great service “but the minute I call them and ask about, say, Apple, they’re not giving me anything.”

To get them to do so would mean handing over some money for this service, and he knows that he’ll be second guessing the broker at each trade.

“I sleep easier at night knowing that if I buy something online and it doesn’t do well, I can slap my head and say, ‘You’re an idiot’ as opposed to blaming [my broker],” he deadpans.

“We can think a stock is amazing, but we have no idea that the company is about to announce tomorrow some kind of terrible news that is going to send the stock plummeting.

“I have no idea, you have no idea, nobody knows.”

Want a broker?

Looking for an online broker? Ask yourself these questions:

•How solid is the broker? Determine reputation by checking websites such as the Investment Industry Regulatory Organization of Canada. Ask friends and family for recommendations and quiz them about their customer service experiences.

•What is your trading style and what is your goal? Infrequent traders likely don’t need real-time quotes and charting, nor do they need to route their orders to specific exchanges. Active traders, though, should choose a platform offering complex quotes and analytics so they can quickly examine the bid, the ask, and the depth of the market.

•How much will it cost? Ask about trade prices, and look into hidden costs, including annual fees, charges for inactive accounts, and trailer fees paid by mutual funds companies to brokers.

•How quickly can you get a response to your questions? Look for different channels of communication such as email, live chat and phone.

•How will it work? Sign up for a trial account containing virtual dollars and start making imaginary trades to test-drive the software platform before signing up.

Suzanne Wintrob