Disconnect on risk aversion

Clients keep cold, hard cash in their do-it-yourself account, says our Ninth Annual Dollars & Sense Study.

This year’s survey of both investors and advisors asked why some investors have decided to fly solo in recent years, and how advisors interact with clients who opt to conduct some of their trading online or through other discount options.

Advisors, meanwhile, appear to favour balanced funds and solutions that bring measured returns and limit risk exposure.

According to the data, those with both advisor and do-it-yourself (DIY) accounts tended to hold more liquid assets (cash, GICs, term deposits) in their DIY portfolios, while the advisor accounts held more funds (balanced, equity, money market) as well as GICs, term deposits and T-bills.

“I know some of my clients who have a do-it-yourself account consider that account as their cash reserve,” says Natalie Jamison, an investment advisor at RBC Dominion Securities in Oakville, Ontario. “And they always tell me, ‘If the roof caves in or we have a car accident, we’re not touching our money with you; that’s our safe, long-term money. We’ll take it out of that other account.’ Which is fine by me.”

But maybe there’s something else at play. Jamison suggests a lot of DIY accounts may just be the result of people opening tax-free savings accounts. But if that’s the case, investors don’t seem to realize they can put ETFs or stocks or mutual funds in their TFSA. “They think it’s just a savings account.”

This belief is partly the fault of advisors, says Barry McNicol, senior vice president and investment advisor with Macquarie Private Wealth in Markham, Ontario. Some of his colleagues question why he wants to open up TFSAs worth just $5,000.

McNicol replies that many times, “There’s the husband and wife, so it’s actually $10,000. And the paperwork [can be done] in five minutes. And five years will go by like that. Husband and wife; what’s that, $50,000? So open your TFSAs. We let [big firms] like ING take money away from us.”

Jamison notes there were a fair number of investors with mutual funds in the DIY accounts. But this may also not be the most prudent use of DIY funds. “[Clients] pay the same MER, whether that fund is held [in the DIY account] or it’s with me,” she says. “If it’s held through me, [clients] get advice for that cost.” Andrea Duchesne, an investment advisor with National Bank Financial in Pointe-Claire, Quebec, remarked on ETFs in the DIY accounts. “I was surprised to see the small percentage using exchange-traded funds,” she says, seeing as “the do-it-yourselfers are looking generally to save on commissions or fees. They’re missing out on all the market runoff by having a larger portion in cash or high interest savings accounts.”

So what’s an advisor to do?

Nearly one-third (32%) of the advisors surveyed with at least 10% of their client base having DIY accounts said they don’t provide any help with those accounts.

But they may be missing out. For starters, a review of all investments makes sense from a risk-management perspective: If you know what’s in the DIY account, then you can make educated decisions about what to do with the assets you have under management.

Though Duchesne asserts that few of her clients have DIY accounts, she always makes sure to ask about them. “I present it as a complete diagnostic; as in, ‘This is why we have less risk on this side if you are highly invested in equities in your DIY accounts.’”

Another reason is clients are not putting their DIY assets into the most lucrative investments.

If advisors helped their clients more with these accounts, instead of reacting with fear and loathing, maybe they could kill two birds with one stone. Not only can aiding the DIYers create goodwill and go a long way towards building trust, but it may also be what eventually persuades these clients to move the rogue assets to their advisors for safekeeping.

Says Jamison, “The fact that we provide some kind of value-add on the DIY account cements the relationship to allow serious money to then come over to us. You know, I always believe good karma comes back. You help somebody and they’re grateful.” And they also learn just how valuable advice is.

The Dollars & Sense research suggests there’s some incongruity between advisors and their typical clients when it comes to their opinions on what the ideal investments are for current market conditions.

According to advisors, their clients are still rather risk-averse, and believe it prudent to be heavily invested in cash (40%) and other short-term, highly liquid products such as GICs, term deposits and T-bills (51%) — despite some of the lowest interest rates ever seen. Advisors, meanwhile, appear to favour mutual funds (with balanced and equity funds ranking highest at 66%, and fixed income and bond funds a very distant second at 38%), individual stocks (34%) and segregated funds (34%).

“I think there’s a reason why there’s a high proportion of your typical clients wanting GICs and high-interest accounts: They’ve had a difficult experience,” says Rod Tyler, Founder, Tyler and Associates, PEAK Investment Services in Regina, Saskatchewan. “They feel safer there, where in fact I’d suggest that’s exactly where they don’t need to be, unless it’s for things like short-term investment horizons that they may have or rainy-day money.”

Jamison agrees. “The clients are saying, ‘I’m still scared. I want 40% cash, I want 20% money market funds, 51% in GICs.’ But our heads are telling us [this] should be way lower. There’s a disconnect; it’s probably a six-month lag to when the client will say, ‘Okay, now I’m ready to get that cash invested.’ We need to work closely with our clients to advise them on other approaches that may better meet their needs.”

So what should advisors be recommending – or avoiding?

“We don’t do a lot of stock trading,” adds McNicol. “And I don’t think our clients want us to. I’ve moved away from it [because] we now have flash trading, bad credit reporting, tainted research. I’m doing my clients a disservice by recommending stocks.” While not everyone might concur that stocks should be avoided, one thing all agree upon is the need for diversity and balance.