The surge in risky online trading among retail investors – highlighted by the recent meteoric rise and stomach-lurching fall of video-game retailer GameStop Corp.’s GME-N stock – is creating challenges for financial advisors.
Some investors suffered a bout of “FOMO,” or fear of missing out, as online forums such as Reddit, social media and eventually mainstream news media propelled online trading among investors in struggling companies such as GameStop and cinema operator AMC Entertainment Holdings Inc. AMC-N, among others. At the same time, there has also been a flurry of investor interest in bitcoin and cannabis stocks.
Investors have been encouraged to jump in on these trends thanks to the advent of no-commission, “gamified” trading platforms, an onslaught of easily accessible market information and boredom resulting from being stuck at home during the COVID-19 pandemic, says Bryce Sanders, president of New Hope, Penn.-based Perceptive Business Solutions Inc., which coaches advisors on how to attract high-net-worth clients.
That can put advisors in a tough spot as clients have been asking how they can get in on the action, he says.
“You can’t stop them because it’s their money,” Mr. Sanders says. And if a client asks their advisor to make a trade, “You can’t say ‘no I won’t do it,’ because just imagine if the stock doubles.”
Mr. Sanders recommends advisors start by asking clients the right questions if they bring up the idea of making risky trades, such as: Where did you learn about this? Why do you think this is a good idea? What has to happen for this trade to work out?
He also recommends advisors keep clear records of discussions and trade directives, noting if they are “unsolicited” trades initiated by clients.
However, “it’s important the advisor not be an adversary but act in the client’s best interests,” he adds.
Some clients have decided to take matters into their own hands and open a do-it-yourself (DIY) trading account so they can “play” the market, says April-Lynn Levitt, a coach with The Personal Coach, which focuses on coaching advisors, in Oakville, Ont.
According to data from financial services research firm Investor Economics, more Canadian investors signed up for DIY online trading accounts, with more than 2.3 million gross accounts opened last year, up from 846,000 accounts opened during 2019.
In the U.S., one trading app that’s gained attention is Robinhood, which isn’t available to Canadians. No-commission trading apps in Canada include Wealthsimple Trade, while QTrade, Questrade, Virtual Brokers and others have flat fees on stock trades.
This trend concerned the Investment Industry Regulatory Organization of Canada (IIROC) enough for the regulator to re-issue its bulletin on DIY accounts earlier this month.
“We urge investors to be careful about where they are getting their investing information, as many sources are unregulated and may contain inaccurate information,” says Lucy Becker, IIROC’s vice-president of public affairs and member education services. “This may lead to misinterpreting investment research and subsequently betting the farm.”
One of the best ways for advisors to manage these potential market bubbles is to send educational information to clients proactively, Ms. Levitt says.
Advisors can remind clients about past market frenzies that collapsed, such as the dot-com bubble, and stocks like failed tech giant Nortel Networks and gold miner Bre-X. “It’s good to get out in front of it,” she says.
If a client comes with a request to buy a risky stock that’s in the news, Ms. Levitt recommends advisors take a deep breath, and hold back the natural response of “No, that’s not a good idea.”
Instead, acknowledge the request, she says, and ask questions to dig deeper including, “What are you trying to achieve?”
To put it into perspective for clients, advisors need to ask: “What amount of money would you be comfortable losing if [the investment] goes to zero,” Ms. Levitt says, and calculate how losing that amount of money might impact their longer-term financial goals.
For advisors with clients who insist on investing in these risky market movers, Ms. Levitt says investors should use a separate online trading account, unconnected to their retirement fund. Advisors should also recommend clients limit this play money to 10 per cent of their portfolio – and preferably less.
Even using a DIY account, an advisor can still assist clients with a rational strategy regarding when to sell some holdings in order to protect their investment from a decline, she says. Without that discipline “that’s not investing, it’s speculating. It’s gambling.”
Steve Rogers, an investment strategist with IG Wealth Management in Toronto, recommends advisors tell clients to label any “risky” investment as an expenditure, just like you might budget some gambling money when going for a vacation to Las Vegas, with no expectation of bringing any money home.
Advisors need to remind their clients that “buying something impulsively is the worst thing you can do in investing,” he adds, particularly if they’re lured into the riskiest types of investments like short-selling or buying on margin without understanding the potential repercussion that they can lose far more than just their original investment.
If investors want to give a riskier investment a try, it’s good to have a discussion with their advisor, Mr. Rogers says, because it could lead to a broader discussion of their investment goals. They may want to add a bit more risk, overall, to their portfolio and that can be done in a more measured way, he adds.
“It can take some of the emotion out of the decision,” he says – and it’s a way for advisors to help educate their clients and help weigh the risks of such investments.
“GameStop is not a good [investment] if you don’t know what a short squeeze is,” Mr. Rogers adds.