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Expect more consolidation among on-line brokers

Saturday, February 16, 2002

Goodbye, Charlie.

Charles Schwab Canada is about to exit the on-line brokerage business in this country and other brokers are sure to follow in the year ahead.

There are now 15 on-line brokers providing the same basic service to Canadians -- trading of stocks, mutual funds, bonds and sometimes options over the Internet and by telephone.

For sure, all the big banks are going to hang onto their on-line brokerage operations. The banks want to dominate the wealth management business and you can't do this without offering an option for clients who prefer to make their own investing decisions.

As for everyone else, you have to wonder whether they've got the money and commitment to survive the killer slump that has weighed down the sector for almost two years now.

Schwab Canada is owned by San Francisco-based Charles Schwab Corp., which pioneered the discount brokerage business, and is still regarded as the premium name in the sector. Schwab arrived in Canada in 1999 and now it's leaving via a proposed sale of its assets, including $1.5-billion held in 28,000 client accounts, to Bank of Nova Scotia.

It's a deal that perfectly captures the new on-line brokerage reality. Schwab, a small and struggling player in Canada, sells out to a bank that is building its presence in on-line investing by making an acquisition.

Expect more small fish to be swallowed just as Schwab was.

"It's a natural evolution because, quite frankly, there were probably far too many companies getting into the discount brokerage than there should have been," says Douglas Hart, president of research firm Hart & Associates.

"We haven't seen much [attrition] so far, but it's just a matter of time," adds Tom Flanagan, president of BMO InvestorLine. InvestorLine is owned by Bank of Montreal,which is another example of a bank that is firmly devoted to on-line investing. Last year, it paid $830-million to buy CSFBdirect, a large U.S. outfit owned by Credit Suisse of Zurich.

Aside from Scotiabank's purchase of Schwab Canada, the only recent sign of consolidation in the on-line sector was the purchase last year of tiny Canada Invest Direct by eNorthern, itself a marginal player.

Mr. Flanagan said dismal conditions in the investing industry right now may hasten the departure of some on-line brokers.

"This RRSP season is one of the worst I've seen," he said. "Trading volumes are not coming up the way we had hoped."

Most prominent among the independent, non-bank on-line brokers is E*Trade Canada, a subsidiary of the big U.S. on-line broker E*Trade Group. E*Trade Canada has long been dismissed as a minor player by its bigger competitors, but president Colleen Moorehead says the company is committed to the Canadian market.

In fact, E*Trade is making a play for Schwab Canada clients by offering them free trades and other deals that could be worth as much as $1,800 in total.

Ms. Moorehead said E*Trade's strategy is to portray itself as an alternative to the bank-owned brokers for active, savvy investors. As evidence of how the strategy is working, she points to an increase in the number of customer accounts to 85,000 from just over 50,000 a year ago.

Some might point to Schwab's exit from Canada as a sign that on-line investing is a fad in decline, but Ms. Moorehead disagrees.

"Has the market been as buoyant as it was in 1999 and 2000, when we were in the middle of a raging bull market? The answer is No," she said.

"But on the other hand, you also have to look at the question of whether the consumer is actually turning around and saying, 'I don't want to invest on-line, I'd rather go back to doing it with the abacus.' The answer, again, is No."

For investors, consolidation means less choice and the annoyance of having your account switched to a broker that may not be as good as the one you're with now.

For example, look at Schwab Canada and Scotiabank's on-line brokerage, which is changing its name to ScotiaMcLeod Direct Investing from Scotia Discount Brokerage.

Schwab won The Globe and Mail's 2000 ranking of on-line brokers and placed fourth in 2001. Scotia Discount has improved a lot lately, but it was well back in both rankings.

If you're concerned about a lack of competition in the on-line brokerage world going forward, you can take some encouragement from the fact that U.S. broker Datek Online continues to work on opening up a Canadian operation.

While Canadian brokers charge anywhere from $25 to $29 for trades of up to 1,000 shares, Datek charges $9.99 (U.S.) for all trades of up to 5,000 shares. Now, that's competitive.

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