Advisors may begin to see interest from DIY investors burned by a risky investment and not wanting to make the same mistake again.Hispanolistic/iStockPhoto / Getty Images
A new report from the C.D. Howe Institute makes the case that Canada has done well in providing affordable, limited investment advice for those with less than $100,000 to invest.
Senior C.D. Howe fellow Paul Bourque, former head of the Investment Funds Institute of Canada (now the Securities and Investment Management Association), argues the regulatory environment has contributed to this success, with mutual fund dealers benefiting from lower operational and compliance costs because they’re focused on a narrow range of products.
He also says the decision not to ban embedded sales commissions prevented an advice gap for less wealthy households that has surfaced in the United Kingdom and Australia, where upfront fees often deter investors from seeking advice.
Although the report makes recommendations about how to maintain access to advice, it doesn’t touch on the growth of the do-it-yourself investment channel, in which almost half of Canadian investors now have accounts.
Mutual funds still have more than triple the assets under management of exchange-traded funds in Canada, but ETF AUM is growing at a much faster pace. Furthermore, the majority of ETF assets are now held by DIY investors rather than advised clients.
The growing number of investors bypassing the traditional advice channel was the topic of a panel at the OSC Dialogue on Tuesday in Toronto.
Shannon Lee Simmons, financial planner and founder of the New School of Finance, pointed to high fees as one reason more investors are going the DIY route.
“If you’re a retail investor who’s not a high net worth investor, product fees can be astronomically high,” she said, pointing to funds with management expense ratios of 2.5 per cent.
She also spoke about the “3 a.m. fear” that’s consuming a growing number of educated young people: a feeling of despair about the state of the world that makes long-term retirement saving seem quaint or ridiculous.
“The long-run, standard, diversified low-fee portfolio is boring and it’s going to take a long time [to deliver results],” she said, describing what she hears from certain clients. “‘What about climate change, and what if the world blows up, and what if robots take over and we don’t have sovereignty ... ?’”
Ms. Simmons said this fear contributes to the popularity of alternative investments, such as crypto, private markets and prediction markets, among people who may not understand what they’re buying.
Many see these investments as a hedge against the traditional channels they no longer trust, she said.
What will lead these self-directed investors to seek advice?
One way is by getting burned and not wanting to make the same mistake again. Since the explosion of DIY investing during the COVID-19 pandemic, markets have seen massive gains, with the bear market in 2022 the only significant downturn.
“A lot of people are confusing their luck with financial savvy for the trades that they’ve been doing,” Ms. Simmons said.
The next downturn could see investors who have taken on more risk than they realized seeking advice.
Ms. Simmons, a fee-for-service financial planner, said many of the new clients that come to her have had those experiences and they’ve done enough research to know there are things they don’t know.
“I have a very sophisticated level of the population coming to me,” she said. “They’re willing to pay out of pocket for an expert to tell them to have some boring investments as well.”
But she acknowledged that while fee-only financial planning is an effective stopgap for some investors who don’t want to pay high fees on their investments, it can still be expensive.
The industry needs to find another way to provide advice at a low cost when investors need it, she said.
Last month, the Canadian Investment Regulatory Organization (CIRO) released its new guidance that allows order-execution-only dealers to provide more support to DIY investors. Online platforms will be able to offer sample portfolios, issue alerts indicating it’s time to rebalance portfolios and flag when investors have significant leverage.
Ms. Simmons suggested dealers go further and introduce more friction to protect those 3 a.m. doom-traders.
“We could do one of those decision trees [that allow] someone to second-guess: Do I actually want to do this?” she said.
“‘Do you have emergency funds? Yeah? Cool. Do you have two months’ rent saved? Yeah? Okay, go ahead with your trade.’ Something like that can make it fun.”
It might also be a marketing opportunity for advisors. As more people are locking themselves out of their devices intentionally because of a lack of self-restraint, pitching advice as a point of positive friction could be appealing to those stressed-out DIY investors tired of thinking about trades they should or shouldn’t make in the middle of the night.
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