Nuthawut Somsuk/iStockPhoto / Getty Images
The TD Easy Trade app is an excellent way to invest if you are a finance rookie, care about minimizing fees or appreciate a quick, clean way to manage your portfolio on your smartphone.
But a recent revamp of TD Easy Trade is problematic. In bumping up the number of free trades a year to 100 from 50, this app reinforces the idea that trading equals investing success. The truth is that trading a lot is like gambling, a once fringy activity that is malignantly forcing itself into the mainstream.
Another example of gambling’s emerging influence in the DIY investing world is seen in recent developments at Wealthsimple, Canada’s foremost disruptor of big-bank dominance.
I’m a happy user of Wealthsimple for some banking and a sliver of my investments, which is why I received an e-mail from the company recently that highlighted such non-core, high-risk features.
They include multileg option strategies, cash-secured puts for registered accounts (puts are an options strategy), dual-listed securities, whereby you can trade Canadian companies on U.S. exchanges to “unlock” 24/5 trading, and greater buying power for margin investing, where you use money borrowed from your broker.
Wealthsimple has also received the go-ahead from securities regulators to offer a limited version of prediction trading to clients. This kind of offering would allow clients to bet on economic indicators, financial markets and climate trends.
Prediction trading is a form of gambling, which can do to your finances what cigarettes do to your lungs. This is obvious, yet nothing can apparently stop gambling from gaining influence in the sporting world and now in finance.
What’s in store for Canada as financial firms bet on prediction markets
There’s more than the fun of wagering at work here. One theory on the growth of gambling is that it’s a reaction to current economic conditions, which are causing some people to lose faith in prosperity. If working, saving and investing aren’t getting you where you want to go, why not take a flyer on a stock or sports bet?
And, if you do engage in risky investing behaviour, you’re probably a winner in today’s blindly optimistic stock market. Sure, war is raging in multiple hotspots today and trade uncertainty hangs heavy.
But Canada’s S&P/TSX composite index is up about 5 per cent for this year and averaged 15 per cent annually over the five years to March 31. These are total returns – dividends plus share-price gains.
Investing apps like TD Easy Trade and Wealthsimple are, on the whole, a fantastic addition to the financial universe. They allow investors at all levels of income and sophistication to build wealth cheaply, easily and effectively. You should try one.
But growing a business in the investing industry requires a balance between what’s good for clients and what makes money. This is where TD and Wealthsimple are losing the thread.
It sounds like a win for clients to get 100 free trades, but the truth is that 50 is enough for 97.5 per cent of investors to get good results. More trading means more potential for risky decision-making by clients, but also more opportunity for TD to make money in ways such as currency conversion and interest earned on client cash balances.
Opinion: We must stop the scourge of prediction-market gambling coming to Canada
Offering 100 free trades also helps TD compete with the just-launched RBC GoSmart investing app, which gives clients 50 free stock trades a year.
Options trading is entirely legit, but it’s a niche thing for experienced investors. Wealthsimple’s promotion of options trading has a gamified tone that feels like it’s aimed at the inexperienced. “Trade options like an expert,” that Wealthsimple e-mail says. “The wheel strategy is the best invention since, well, the wheel! Get rolling with our wheel strategy guide.”
As for margin trading, it generates interest income for brokers on money lent to clients to buy stocks. The appeal: Gains for stocks bought on margin are magnified. The danger: So are losses. You do not want to owe money to your broker or app for money you borrowed to buy stocks that are down 30 per cent in price.
The stock markets will eventually turn against investors – frankly, we’re overdue for this. Riding the sad gambling trend to attract clients at this point seems like short-term thinking for an investing app.
The smart money right now is looking at ways to hold onto what it has, not embrace risk to make more.
Rob Carrick is a personal finance expert and former Globe and Mail staff columnist.
