Helping your D.I.Y. clients

Self-directed investing isn’t a threat to advisors who take the time to truly know their clients, and it’s also no replacement for proper, holistic financial planning.

That’s the conclusion of participants in a roundtable discussion who analyzed and commented on findings from our Ninth Annual Dollars & Sense study. This year’s survey sought to shed light on 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.

Largely, they say, it’s no big deal for clients to have self-directed trading accounts, so long as the advisor knows what’s in there and can counterbalance any risks created by those investments within advisor-managed portfolios.

It can be tricky, though, to find out about those assets. All the roundtable participants say they ask clients about online trading both at account opening and during reviews. A large percentage of surveyed advisors also indicate they ask clients about such accounts (92%)—though the investor survey found a lower percentage of clients saying their advisors broach the subject (14%).

And, much like assets kept with other advisors, clients don’t always come clean about the locations of all their assets. All our roundtable participants say they do their best to engage clients who have self-directed trading accounts, even going so far as to provide research and advice on holdings kept there. In some cases, keeping the lines of communications open even resulted in clients moving these assets back into their advisory accounts.

Bottom line: It’s fine to let clients play stock jockey, say advisors, so long as they understand the majority of their assets need to be professionally managed.

Nearly half (47%) of the 1,530 investors surveyed reported they had a do-it-yourself account for their investments. Further, of all those surveyed, on average, 62% of their household investable assets are placed in accounts through their financial advisors, while 38% of their assets are with discount brokerages or other DIY investing vehicles.

Rod Tyler, Founder, Tyler and Associates, PEAK Investment Services in Regina, Saskatchewan, believes the DIY movement can in part be attributed to normal investor behaviour.

“There’s a portion of people who by their natural inclination are going to be do-it-yourselfers,” he says. “We’re not going to change that. Likewise, there’s a portion of people who have a very difficult time extending their trust for anything.”

The trust issue was something Andrea Duchesne, an investment advisor with National Bank Financial in Pointe-Claire, Quebec, also picked up on. She further suggests the high percentage of DIYers could be speaking to a decline in trust among clients for their advisors.

“A lot of investors have said to me that they don’t use any type of full-service provider because of lack of trust in financial professionals,” she explains.

But Natalie Jamison, an investment advisor at RBC Dominion Securities in Toronto, Ontario, disagrees. “I don’t think this is a trust issue.”

One thing that may be skewing the data, she points out, is the tax-free savings account. “You may have a lot of clients doing it themselves for their TFSA,” she says. “Because it’s such a low dollar amount, it’s almost like play money.”

That said, she does concede the Bernie Madoffs of the world may have wielded some influence. “Because there’s this negative vibe out there, I think as advisors we need to do a much better job at showing what we’re truly capable of, and that one bad apple is not reflective of the norm.”

Based on the products found within clients’ DIY accounts (see “Advisors: What’s in the DIY?” this page), Barry McNicol, senior vice president and investment advisor with Macquarie Private Wealth in Markham, Ontario, speculates lower fees could actually be the bigger draw.

“I’m not sure this is a respect issue,” he says. “I think DIYers are only there for either the money savings or they had a really bad experience with an advisor and won’t go back. Otherwise you can’t find a compelling reason for wanting to be a DIYer.”

Indeed, every market has its cost-conscious consumers, notes Rob Kochel, vice president of National Accounts at Invesco Trimark. “It’s not a leap of faith to suggest the financial sector does as well.”

But are these cost-conscious investors really saving money—and earning decent returns?

“DIYers think they’re okay,” says Duchesne. “They think they can handle everything, but in reality they can’t. Time is a crucial thing when you’re doing financial planning, as we all know. I think they’re delusional in that respect. How are they measuring the DIY performance?”

McNicol agrees. “[Do-it-yourselfers’] perspective of how well they’re doing relative to an advisor, or their success levels, is all based on performance numbers. And we know they don’t have performance numbers. They’re just guessing.

“They confuse hope and confidence and the few winners they have in the portfolio with skill and documented strategies, which is what we give them. And even if they do have performance numbers, they’re dollar-weighted, which in an account that has cash flows, can badly distort the data. Time-weighted or Modified Dietz is the best way of measuring performance, and DIYers don’t have access to that technology.”

Maybe there’s something else at play here, though. “A lot of the younger consumers out there just don’t think they have enough assets that anybody would be interested in,” suggests Kochel.

Jamison corroborates this. “Brokerage houses typically require that [an investor] have an account of a certain size before taking them on as clients,” she asserts.

So maybe many DIYers just don’t feel they have a choice, even if they want advice.

“It’s all about the money,” adds Tyler, speaking to the fact that many wealth-management firms turn lower-income people away. “And the people at the lowest end of the scale have the least ability to affect some sort of choice.”

Kochel also suggests some investors have waded into DIY territory because their advisors don’t believe in a certain asset class or a certain exposure. An example: ETFs.

“I’ve had a few people who’ve said [to me], ‘My advisor philosophically doesn’t believe in ETFs, and I do; therefore, I’m going to manage this asset class myself,’ ” he says.

With all these surmised reasons for DIY investing, is it possible to create a profile? Do DIYers fit into a specific age category, or exhibit a certain type of investor behaviour? McNicol sees them as investors “in their 40s and early 50s, who are consumed by their lifestyle, who don’t do a great job of saving.

“They contribute infrequently, if at all, to their RRSPs,” he adds, “and they’re home-run hitters. They believe when they pick those stocks, they’re going to get a double or triple or whatever over time. Because that’s what history and the media have told them—that it’s easy to do it on your own. They’re not planning things out.”

And data from the Dollars & Sense Survey indicates that impression isn’t far off the mark: The average age of the pure DIY investors surveyed is 42.6, while people with assets in both advisor and do-it-yourself accounts average 45.3 years. By comparison, the investor with 100% of their assets with an advisor is on average 49.4 years old.

In Jamison’s opinion, most of these DIYers are also male.

“In my practice,” she says, “I’ve seen couples where the wife has her money with me, and the husband has the do-it-yourself account. He thinks he can do it better, and she says, ‘well, I’m happy getting advice, and my mind is at ease; I can sleep at night knowing somebody is giving me guidance and support.’

“What we’ve seen is, after a few years of doing this, or as soon as you go through the first crash, the husband’s assets come over. He gives up. And I’ve never seen the reverse. I’ve never had a male client with a female DIY [partner].”

This is borne out somewhat in the Dollars & Sense survey data: Among the pure DIY investors interviewed, 40% were women, while 60% were male.

When asked whom they routinely turn to for financial advice (see “Clients: Whose advice do you follow?” page 16), investors with advisor-only accounts and those with both advisor and DIY accounts turned most often to advisors (63% and 56%, respectively). DIY-only account holders, meanwhile, turned most often to their bank branches and family and friends (43%).

Advisors also saw a very high adherence rate with respect to their advice by these respondents (99% for the advisor-only and both advisor and DIY groups).

Duchesne opines this speaks to the fact that investors “still view financial professionals with a lot of confidence, seeing as they accept the advice that’s given to them.”

She also notes with interest that DIYers appear to be seeking out advice, despite maintaining control over their accounts.

But Jamison’s concerned by how many investors take advice from the media (19%), “because the media aren’t registered professionals and know nothing about the individual they’re trying to dispense advice to, the way we know our clients. When we’re dispensing advice, it’s personalized to their situations.”

McNicol observes that while investors do sometimes turn to the media for advice, they take the advice much less frequently, despite its being free.

“They take the advice from us, from the institutions, the advisors, and directly or indirectly they’re paying for that advice, either through a commission or a fee.

“So I conclude that they believe the advice they pay for has more value to them.”

Whether they use an advisor or not, Jamison notes roughly the same percentage rely on an accountant.

“As an advisor, that’s telling me we should be working much more closely with the accountants,” she asserts. “Because their clients are listening and taking their advice.”

“The accountants, the insurance agents and the lawyers—boy, people listen,” remarks Tyler. “I’ve been told by many accountants that they’re actually moving their practices over to providing advice, because people trust them so much.”

For this reason, he agrees with Jamison that advisors should be getting closer to those professionals.

So, how do advisors determine if their clients are trading online or elsewhere? According to the advisor survey, most simply ask for disclosure about DIY accounts. Or so they say.

The investor research, however, tells a different story. Only 38% of investors with both an advisor and a DIY account told their advisor about the account; 9% didn’t own up to it at all; and over half—54%—actually weren’t sure if their advisor knew about their DIY account (see “Clients: Do you tell?” page 18). Even more disconcerting, more DIY investors said they disclosed their assets voluntarily than were asked about them.

So are advisors really asking about DIY accounts as much as they should be?

McNicol thinks many don’t ask because they’re worried about what the client might think. “The clients [may] think [advisors] are trying to gather assets, and they’re not comfortable with that,” he suggests. But he definitely believes advisors should be asking.

“First and foremost,” he says, “it’s good compliance, and it helps the advisor ensure the client has good advice on a big-picture basis.”

He also suggests there are professional, tactful ways of asking. “I say to my client, ‘When you go to your doctor and he writes you a prescription, he also needs to know what medications your specialist is giving you. It’s no different [with your financial advisor]. If you’ve got a DIY account and it’s full of stocks, I’m fine with that. But when I look at your overall asset allocation, I need then to be more conservative on my side to counterbalance it.’ ”

Building on that, Duchesne asserts it has to be an ongoing process; an advisor must regularly ask about the accounts, because he or she can never be sure what sorts of choices clients are making in their DIY portfolios, and what measures the advisor therefore must take to manage the risk.

Jamison, meanwhile, thinks the fact that 54% of investors don’t know if their advisors are aware they have outside assets can only say one thing: They don’t have a financial plan.

“If their advisor is doing a proper financial plan, they’re gathering the data to know where the assets are, whether it’s pension assets or DIY accounts. But typically 75% of advisors say they ask their clients. We all say we ask them, but the clients are saying no, in fact 27% actually just volunteer their info.”

When asked how they help their clients with their DIY investments, 32% of advisors surveyed said they provide no assistance. But unless there’s a compliance reason for this, maybe advisors are missing an opportunity by refusing to deal with them.

“I don’t treat DIY as my enemy,” says McNicol. “I treat it as my friend. I [actually ask my clients], ‘Is there anything I can do to help you with the DIY? Do you need some information?’ ”

At the next appointment, he asks the client how the account is doing, and what sort of performance he or she has had. The client thinks they’re doing reasonably well, until McNicol shows them his own performance numbers. Inevitably, they return with the rogue account, and ask what should be done with it.

“The client knows if it’s really bad. I just say, ‘I think you need a bit of help.’ And I try to find some wins in their portfolio. I think we have an obligation to help the DIYs, because if they start messing up, they’re going to be a drain on society.”

Jamison also says she offers assistance with her clients’ DIY accounts. Case in point: She has a client with an E-trade account who asks her for advice all the time. “Sometimes I put in my little comment; what I think about a stock, for example. Sometimes I provide a little perspective and let him figure out the best next steps,” she says.

“Well, he just called me last week to say that some extra family money is being transferred to us for management.

“Why? Because I provide him with a bit of insight in relation to his DIY account. It’s a thank-you.

“You know, I always believe good karma comes back. You help somebody and they’re grateful.”

Don’t fear the do-it-yourself account. A little help goes a long way to building trust. And, just maybe, when clients are sure you’re in their corner, and want to help them rather than simply gather additional assets, they’ll reward you for your trust in them.