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The Robinhood logo is displayed on an iPhone. The gamification business model grew in popularity with the rise of the U.S.-based fintech startup.Justin Sullivan/Getty Images

Canadian regulators are paying closer attention to the rise in do-it-yourself investor activity as online users, many of them first-time investors with limited knowledge of financial markets, turn to unreliable social-media platforms for financial advice.

“The difficulty today is that the traditional investment industry is not necessarily capable of delivering advice to smaller accounts. And millennials – even if they could access that type of advice – are quite comfortable just tapping away on their phones for it,” said Stan Magidson, chief executive of the Alberta Securities Commission and chair of the Canadian Securities Administrators, the umbrella group for provincial and territorial securities commissions, during an investor protection conference last week.

The number of DIY investors has increased steadily since 2020 when Canadians began to pour COVID-19 savings into the market. In 2021, more than 3.6 million new DIY accounts were opened at discount brokerages, according to data provided by Toronto-based Investor Economics, a unit of ISS Market Intelligence. That was an increase from 2.3 million in 2021, and 846,000 in 2019.

At the same time, a new group of online personalities emerged to offer financial advice on a number of social-media platforms, including Twitter, Reddit, YouTube and TikTok. Known as “fin-fluencers,” they are often unlicensed individuals posting investment advice to the masses in the hope of obtaining online clicks and shares.

“There’s a much stronger participation rate among retail investors – including do-it-yourself investors – who aren’t relying on traditional sources of information,” Ontario Securities Commission chief executive officer Grant Vingoe said during the in-person and virtual audience at the conference.

“We all know that everyone is a few keystrokes away from creating a trading account, setting up a margin account and making leveraged investments in the market. It has become easier than ever.”

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But the DIY model is increasingly becoming a challenge for Canadian regulators as more and more unsophisticated investors access online trading platforms – also known as order-execution-only (OEO) sites – that are prohibited by regulations from providing any type of investing advice to clients.

“So-called investing newbies are getting hurt and leaving the channel,” Josh Book, chief executive of Parameter Insights Inc., a market research group, said in an interview.

“The current regulatory regime around what constitutes ‘advice’ seems wholly outdated for the times we’re living in. Especially as the lines blur between what constitutes investing advice and where people go to get it,” Mr. Book said.

For several online trading platforms, the impact of not providing advice became very evident during the GameStop Corp. phenomenon in 2021, when a group of novice Reddit traders inflated the share price of certain meme stocks, including the U.S.-based video game retailer and AMC Entertainment Holdings Inc.

Blair Wiley, chief legal officer at Toronto-based online financial provider Wealthsimple Inc., said while the trading activity in the meme-stock craze was extreme, his company could not warn investors of the risks involved in particular trades as the current regulatory framework does not allow it. Companies that offer full-service investing advice have to ensure trades meet a client’s suitability.

Instead, Wealthsimple inserted volatility warnings for any stock that moved dramatically within a short period.

“We couldn’t start blasting messages about risk to our clients because we don’t have a suitability assessment for our self-directed clients,” Mr. Wiley said.

Another concern of regulators is the gamification in retail trading platforms, where users are incentivized to trade more frequently through competitions to move up on leaderboards and be rewarded with online confetti. The gamification business model grew in popularity with U.S.-based fintech startup Robinhood Markets Inc. HOOD-Q, but it does raise red flags for risk, says Cristie Ford, a professor at the University of British Columbia.

“A business model of an institution like Robinhood, which is paid for order flow, means that the entire system is designed around incentivizing people to trade, trade more frequently, trade in larger amounts and to trade in riskier products such as margin accounts,” Prof. Ford said. “And that model can really induce people to take on excessive risk.”

The OSC recently conducted a study to look at what drives retail investor behaviour and how gamified elements may impact behaviour – good and bad – when making investing decisions. The report is expected to be published later this month.

Mr. Magidson said, historically, there was a very “bright line” for retail investors when they decided to go on a trading platform knowing it was “unadvised territory.” But that line is not as clear anymore.

“I think we have to ask ourselves whether or not going forward we’ve drawn the right lines here or not in the two categories of advice channels and non-advice channels,” he said.

During the discussion in Toronto, Mr. Madigson, who spoke remotely from Calgary, said if high demand continues from young investors, there could be some “obvious” changes to the discount brokerage model around investor education, as well as a more “extreme” suggestion of allowing discount brokers to offer advice.

“I’m not suggesting we go there and there are a lot of shades of grey between this, but should there be some modicum of advice in the OEO channel?” he said.

The challenge for regulators is how to balance investor protection with not tilting so far that rules hinder business.

“It’s simple to say let’s minimize risk but without some degree of risk taking in the financial system, people won’t be able to earn a sufficient return to provide for their financial futures,” said Andrew Kriegler, chief executive of the Investment Industry Regulatory Organization of Canada.

Mr. Kriegler said the industry must evolve past the two silos of advice and non-advice channels. Rather, he said, financial institutions have to consider how much supervisory and regulatory touch is needed for specific products, and that guidance has to be proportionate to the risk of the investor.

He pointed to the example of trading binary options – an investment product that the CSA banned in 2017. “There was no value to investors so the system did the right thing by putting a big red X over them,” he said.

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