12.5 per cent of investors have managed and DIY accounts, what does that mix mean for these clients' advisors?
People can easily hold two apparently exclusive ideas in their heads at the same time with no issue. That can be true of their politics, their sporting loyalties, and their financial decisions. A recent study by the Canadian Securities Administrators (CSA) found that when it comes to the adoption of DIY investing, a growing number of Canadians appear capable of an apparent cognitive dissonance. Their study found that one in eight Canadian investors are hybrid investors, with their own DIY accounts and accounts managed by a financial advisor.
Despite DIY marketing that decries advisors’ fees as wealth killers, more than 12 per cent of Canadian investors are choosing to trust an advisor with some of their money and manage some themselves. The survey found that these investors are disproportionately younger males with university degrees. They expressed greater tolerance for risk and a high degree of certainty in their decisions. They also expressed a mixed degree of closeness with their advisors, valuing the relationship while also seeing it as more transactional.
“The study unearthed that one of the big things they’re getting out of [hybrid investing] is more speculative activity,” says Josh Sheluk, CIO & Portfolio Manager at Verecan. “I think most advisors, us included, would shy away from endorsing and certainly facilitating that speculative activity, whether it's crypto, or options, or very high risk high reward type trades… It sounds like a cohort of the population is going to the DIY platforms to get that element of risk taking or the lottery tickets that they're not able to get through an advised relationship.”
While Sheluk notes that DIY accounts can be used as a ‘release valve’ for clients wanting to pursue an investment area he could never endorse, he also sees the hybrid mix as potentially problematic. He says he would begin by trying to dissuade these clients and showing them how poorly many of these speculative investments have gone. He views the decision to pursue a different approach as likely detrimental to that client’s long-term financial future. At the same time, if they absolutely have to invest in something that Sheluk can’t endorse, he’d rather they use a low-cost brokerage to at least save on fees and transaction costs.
Hybrid investing, he notes, can introduce a somewhat difficult competitive dynamic between the advisor and client. Clients may be comparing their returns from their DIY accounts and their managed accounts and using that comparison to critique their advisors’ approach. Sheluk believes that when working with hybrid clients it’s important for advisors to set the ‘rules of engagement’ where short-term outperformance is contextualized within a client’s goals and used to support the wider financial plan.
Sheluk also stresses to those clients that the rhetoric around DIY investing is so focused on fees it glosses over some of the trading costs and incentives baked into those platforms. Having worked on the low cost brokerage side before joining Verecan, Sheluk notes that the incentives on these platforms are to trade frequently, which incurs transaction costs and tends to result in lower performance long-term.
At the moment, he notes, many of those hybrid investors might feel good about their DIY accounts. In recent years, broad market indices have been very strong and investors’ risk appetites have been rewarded. Buying the dip has tended to yield better results, and corrections have been short-lived. Sheluk notes that the discipline that comes with a managed approach might not show its value as clearly in this environment as it does in a more severe correction.
In setting those ‘rules of engagement’ around hybrid clients, Sheluk argues for clarity on the advisor’s part as to how much of the client’s wealth they are managing themselves and the risks that could pose them. He also argues for clear expectation setting that allows the advisor and the client to talk on level terms about the impact of a decision made in the DIY account. Advisors can also take the opportunity to level set and demonstrate the ancillary services they offer beyond just investment management. Advisors also need to assess the dynamics at work with any particular client and determine whether or not they believe the relationship is worth it for them.
“it's a bit of a judgment call for the individual that's sitting across from that client, whether it's going to be a reasonable hybrid relationship or one that is just too tedious to deal with,” Sheluk says. “I think without a doubt, it makes your job more difficult as a financial advisor to advise somebody who's hybrid versus somebody that has all of their assets with you. There are actual financial planning implications to what somebody is doing outside of your firm that you might not be aware of or you might be just it's more information that the client needs to provide to you that you don't have access to so it can be problematic and it is more work for the advisor.”
