Starting to invest is similar to flying for the first time because both activities tend to take people out of their comfort zones. Once budgeting skills are developed, savers must conquer their fears and put their money to work. The next step is picking the right plane and crew for takeoff.
“You can be fully hands-on and fly the plane yourself, you can fly with the support of tools and a co-pilot, or you can be fully hands-off and do the autopilot,” says Silvio Stroescu, president of BMO InvestorLine.
In order to choose the right account, fledging investors must choose the investment style right for their experience and comfort.
Be the captain
Self-directed investing involves watching over your investments and making every decision about them on your own, including what to buy and sell and rebalancing your portfolio. If you think of investing as similar to flying a plane, says Silvio Stroescu, president of BMO InvestorLine,” using self-directed platforms and making investment decisions on your own “is equivalent to flying the plane as the pilot.”
The do-it-yourself approach will save you the most in costs. Since you’re working for yourself, you’re only paying transaction and account fees. These costs can add up quickly, however, undoing any self-service savings. For example, BMO Investorline charges $9.95 a trade and $25/quarter for accounts holding under $10,000 (waived with at least two trades per quarter). Questrade charges between $4.95 and $9.95 a trade depending on the number of shares, and $24.95/quarter for accounts holding under $5,000 (waived with one trade per quarter). Newer industry entrant, WealthSimple Trade, doesn’t charge any fees for trades, however, they won’t let you trade penny stocks (which beginners are best to avoid anyway).
Do-it-yourself investing is right for you if you are able to commit to key aspects of portfolio management, says Stroescu. First, do you have the time required to do research and rebalance your portfolio as the market evolves? Second, do you have the investment knowledge necessary to make smart decisions? And finally, Stroescu asks, do you have “the emotional fortitude to not react to noise? The biggest risk is hearing something happening in the market and instead of making the right decision that aligns with your goals, making the wrong decision by reacting to noise and panicking.”
“A lot of the folks that join our platform come in with a high degree of confidence,” but that engagement drops, says Stroescu. “Only about a third of our clients are rebalancing their portfolio and making trades two years after they started. There is a sentiment of higher euphoria as people come on initially. The level of knowledge you need and the time that you have to invest registers later on.”
Engage autopilot
When Stroescu started to invest, “I was part of the group with high energy and high enthusiasm and wanted to do it on my own,” he says. Then he hit a wall. He was building a career and realized, “I just didn't have the time to make smart decisions as a self-directed investor.” Stroescu changed his course. “I pursued a solution similar to autopilot. I bought a portfolio that rebalanced for me,” he noted.
Questrade or Wealthsimple also offer ‘robo-advice’ products, allowing clients to choose from a small number of actively-managed funds made up of ETFs. The funds differ based on investors’ risk tolerances and usually have a much smaller management fee than full-service brokers.
“But I wasn't making the decisions myself,” says Stroescu. And that can take a toll on your day-to-day comfort level. You’re at the whims of an index or portfolio manager and not getting feedback from a human on a regular basis. “If you feel that you're reacting to noise or you feel butterflies in your stomach, that's when it’s a good sign to have a conversation with an advisor, just to have a human-sounding board,” says Stroescu. Leaning on people with expertise usually gives investors a higher degree of comfort. “Having that human connection to provide validation can be very powerful,” he adds.
Online brokerages have been trying to attract clients by providing experts to talk to investors on the phone, in addition to robo-advice or self-directed offerings. But if you’re looking for holistic financial advice – not just investment advice – you’ll need a human to provide an assessment fit for your situation. Electronic platforms today is that they can't combine all aspects of financial planning. “It's usually one dimensional. I manage my clients’ investments. I'm also helping them with their taxes and talking to their accountant, talking to their lawyer if there's estate planning, and then tying it into their cash flow management and retirement planning,” says Alim Dhanji, a senior financial planner with Assante Wealth Management. “Everything needs to work in harmony for a plan to be really efficient,” adds Dhanji, “It can be hard to find good support online”
Hire a copilot
“Sometimes people need that human touch,” says Dhanji. “It’s like trying to get into shape on your own. It takes more out of you then having a personal coach. Having an advisor keeps you on target, keeps you accountable and is there for you, as opposed to robo-advice where you have to figure things out on your own.”
Many people overlook other parts of their finances “and a lot of planners are one-dimensional too,” he adds, “investing and planning has so much emotion involved with it. When you look for an advisor, you need to find somebody who can manage all aspects of planning, not just investing,” according to Dhanji.
Full-service brokers often have high account minimums, making them out of reach for new investors with smaller portfolios. A hybrid strategy could bypass this hurdle, says Graham. There are lots of fee-for-service financial advisors or planners out there today and you can talk to one, regardless of whether or not you are a self-directed investor. Doing so, says Graham, “doesn't mean you necessarily have to pay out [a percentage] of your portfolio.”
Regardless of whether your portfolio is large enough to qualify for full-service advice, ensure you ask plenty of questions and keep a close eye on the types of funds you’re being sold. One key question is: “Is this fund DSC?”. These are the dreaded “trailer fee” funds with embedded costs that have been gouging Canadians – avoid them at all costs. And by all means, shop around for the right fit – one planner recommends visiting at least five potential candidates. You deserve to be comfortable and confident that your interests are top of mind.
When it comes to investing, the ‘pilot’ or advisor should get you to your destination, says Dhanji, “but it might not always be based on the initial plan. There could be turbulence. It could be later or quicker based on different variables. But at the end of the day, their job is to ensure your safety and give you peace of mind.”
As time passed, Stroescu learned more about investing and “now I have a mix, where some of my investments are with an advisor and some are managed through a self-directed platform. I have a hybrid approach.” Another efficient combination could be a robo-advice account paired with a fee-based advisor for an occasional checkup. And some investors feel that, after enough experience and with the right tools, they can invest comfortably without having to pay for advice. Morningstar’s tool section can be a compass for investors to navigate their options.
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