28 June 2005

Remember When TD's Discount Broker was Cutting Edge?

The Globe and Mail, Rob Carrick, 28 June 2005

A group of investors had a discussion on an on-line forum not too long ago about which discount broker they thought was best.

The debate was started by an individual who planned to make the move from mutual funds to stocks and was looking for some broker recommendations from people using the MoneySense.ca website. One person suggested BMO InvestorLine, while another mentioned CIBC Investor's Edge. ScotiaMcLeod Direct Investing received a couple of mentions, as did Credential Direct.

What about TD Waterhouse, the market leader? Not a single strong endorsement.

"I'm with BMO InvestorLine and would recommend them along with . . . Credential Direct, CIBC and Scotia," one participant in the discussion wrote. "No, I didn't forget TD."

There was a time when serious do-it-yourself investors almost invariably recommended TD Waterhouse and predecessor TD Green Line. So strong was the firm's market presence that it resembled Microsoft's grip on software.

Today, TD Waterhouse's Canadian service has declined into mediocrity. It's worth reflecting on this at a time when parent Toronto-Dominion Bank has just pulled off a deal to combine its U.S. discount brokerage operations with rival Ameritrade. The resulting company, to be called TD Ameritrade, is a top three player in the U.S. market that TD chief executive officer Ed Clark described as a "powerhouse."

Powerhouse is a word you would have used to describe TD Waterhouse back in its Green Line days when it had 70 per cent of the discount market, or when it was the first Canadian broker to introduce stock trading over the Internet. Today, Waterhouse is a glass house. Competitors have caught up and investors have noticed.

Consultant Greg Holohan of the Taddingstone Consulting Group said TD Waterhouse's current market share in Canada is nowhere near 70 per cent today. "The last time I looked at it, we pegged it at 50 per cent, and that was three or four years ago. Now, on the basis of total accounts, I'd say it's closer to 35 per cent."

The remainder of the market is split between another 11 or so discount brokers, which means that TD's position is still strong. But the days of being the acknowledged industry leader are done.

At the heart of things, on-line brokers are a just a conduit between individual investors and financial markets. The best brokers build on this service by doing things like adding financial planning tools, deploying technology to provide real-time updates of customer account holdings and offering a variety of ways to structure a stock trade.

At TD Waterhouse, the financial planning tools are negligible. Rivals such as InvestorLine, Investor's Edge, E*Trade Canada and even independent Qtrade Investor have added real-time account updates, but Waterhouse has not. RBC Action Direct, another giant bank-owned discount broker, also lacks real-time account updates, but then Action Direct was never the innovator that TD was.

InvestorLine and E*Trade Canada have introduced trailing-stop orders, which let investors protect their gains by having a stock sold when it falls by a predetermined percentage. The old TD Green Line would have had this, too.

TD Bank has had a lot going on in the past few years, so it's understandable that Waterhouse's Canadian operations have been neglected. The integration of Canada Trust was a huge task that the retail branch network is still perfecting, the bank has been building an advice-based business under the TD Waterhouse name, and negotiations over the U.S. Waterhouse operations have being going on for a while.

Still, TD's Canadian discount brokerage operation used to be standard-bearer. TD was among the first to set up a discount brokerage in Canada back in the mid-1980s (the actual first, by the way, was Quebec-based Disnat, which is owned by Caisse Desjardins), and it opened Green Line offices in places such as Australia, Hong Kong and New York.

It was back in 1996 that TD Bank spent $715-million to buy New York-based Waterhouse Investor Services and merge it with Green Line. Ironically, the Waterhouse name is exiting the U.S. market while living on in Canada, where it has zero history or meaning and recalls the pointless Americanization of a successful Canadian franchise.

It's hard to see TD Waterhouse going back to the Green Line name, but there are lots of other ways for the bank's discount brokerage to reclaim its former position. Sprucing up both the public and client websites would be a good start, as would the addition of real-time account updating and more tools for financial planning and selecting actual investments. TD could also tackle an area where most brokers are deficient, which is documenting for clients how their investments are performing over time.

Of course, TD could also continue to cling to its market dominance without making adjustments. General Motors can attest to the effectiveness of that strategy.