What DIY investors should tell their advisors

Recently, one of Tim Morton’s clients asked him to help with some do-it-yourself ETF trading.

Morton’s a financial advisor with CIBC Wood Gundy and his client has a self-directed side account. He wanted those DIY trades in Canadian ETFs to complement the globally focused portfolio he has with Morton.

“He’s an intelligent man, very experienced in investing so he probably has some preconceived ideas about what he wants,” says Morton. He adds, for instance, if the client wants a 10% weighting in Canadian REITs, he’s willing to help the client look for the two best Canadian REIT offerings.

“You can work well with an advisor on that sort of mutual basis,” he says.

It’s no longer uncommon for advisors to work with clients who have self-directed accounts, while continuing to manage their primary investments. Such clients typically allot themselves some “play money” typically accounting for 10% or less of what they have invested. It’s money they can afford to lose without jeopardizing their life plans.

Advisors are increasingly open to offering assistance, in part because doing so lets them keep an eye on the client’s overall exposure to stock market risk. As part of the process, an advisor will need to review his or her Know Your Client documents with the client to ensure the plans meet with suitability requirements established by the firm and by regulators.

Clients who want to make DIY trades also should discuss their goals for those accounts with primary advisors. For example, they may want to achieve a certain target return, or invest in a particular type of ETF which the advisor can help them research.

Dealing With “Play Money”

Investors can also study how their advisors deal with these ETF accounts. Morton’s clients typically look for an average 6% to 8% net return, so he would create an asset mix for their other accounts based on that target.

Deborah Frame, vice president for investments and chief compliance office at Cougar Global Investments, says DIY investors should also watch the market environment when deciding whether to purchase equity or fixed income ETFs.

Overall, the buck on DIY accounts stops with the client, so it’s important for advisors to determine if an investor can in fact handle some DIY. Clients who are comfortable with fixed income and equity drawdown in their capital, and are optimistic markets will be higher in the long term, would be good candidates for DIY investing, says Morton.

But anyone who won’t stick to a game plan and pull out holdings when the market swings, they should think twice.

“The technical skill set and the emotional skill set – those two are very important,” for DIY investors, he says.