It pays for investors to diversify with online brokers

Benj Gallander and Ben Stadelmann
Saturday, May 5, 2001

The pattern is familiar by now. A new technology gets the public excited. Service providers scramble to add capacity as demand soars. Then, just as companies manage to build a massive infrastructure, demand flattens out and competition increases. Dwindling revenues force companies to cut costs and lay off staff. Service to the public suffers.

It happened to Internet service providers, and now it’s hitting online brokers.

Look at the recent snafu for users of TD Waterhouse’s Webbroker online trading system. Subscribers trying to access their accounts were suddenly confronted with a torrent of legal verbiage — over 3,400 words worth — including demands for eight separate acknowledgements, and a final “I agree” declaration.

Based on customers’ reactions, TD may as well have been asking for their first-born, and given the impenetrable jargon, anything seemed possible. The truth was simpler; it was just Nasdaq’s way of protecting its real-time quotations.

The obvious solution was for the bank to allow customers to opt out of real-time Nasdaq quotes and get on with their trading. And TD eventually went this route, but only after sustained complaints and pressure from customers.

(During better times TD’s managers would have solved this problem in the time-honoured manner for solving computer glitches: Lock all their best geeks in a room, order a truckload of pizza and Coke and let the overtime fly.)

But this isn’t a story about a blinkered, unfeeling bureaucracy jerking consumers around. Instead, it’s what happens when service capacity gets out of sync with demand. Not long ago, the online brokerages were desperately training new employees in an effort to shorten the unacceptable wait experienced by customers trapped in the limbo of voicemail hell. Just as these reinforcements finally became available, trading volumes wilted, and competition ramped up with new players entering the online market.

And now increased competition is leading to specialization. More and more your “best broker” is going to depend on the type of trade you want to make. The Web site has an excellent tool called: “Which discount broker is cheapest?” Plug in the parameters — Canadian or US, the number of shares, the price, and market or limit order — and this nifty application spits out the cost of the trade at 13 competing online brokers.

While discount brokers are quite competitive on commission fees overall, fees can easily differ by 100 percent depending on a specific trade. The differences can be startling. Example: for a 4,000-share trade of a Canadian stock at 40 cents, Scotia Discount Brokerage offers the cheapest commission available — 32 percent less than the most expensive broker, Charles Schwab. But for a trade of 300 shares at $31, Scotia ranks last, charging 43 percent more than the leader, ENorthern Online.

Commissions aren’t everything, of course. Online brokers compete for investors across a broad range of services. All the more reason to observe the tenet of “diversification,” and spread your business around.

While your online brokerage would like nothing better than for you to park your entire portfolio with them — and leave it there indefinitely — this is probably not in your best interest. Granted, it’s a hassle to keep track of multiple accounts, but there are advantages.

And if one broker suddenly requires you to write an ode to “buy and hold” before you can sign on in the morning, it’s nice to have an alternative lined up.