Burned Investors Take Do-It-Yourself Route
By Rob Carrick (April 14, 2009)
At Canada's largest online broker, this bear market for stocks is way different than the last one.
Not worse. Better.
"Trading activity has not actually diminished, it's been at record levels," said John See, president of TD Waterhouse Group Inc.
New account openings at TD are up a lot, too. With the new tax-free savings accounts included, the year-over-year increase is 158 per cent. Without TFSAs, it's about 50 to 60 per cent.
"These increases aren't from low levels," Mr. See noted. "We've had a pretty steady run [in recent years]."
The number of investors window shopping at online brokers is up as well.
Mr. See said the use of online tours and demos of the TD Waterhouse service are up 60 per cent from last year's level. At the seminars TD runs through its 28 walk-in investor centres across the country, attendance is up 160 per cent.
What a contrast to the 2000-02 bear market.
"When the tech bubble burst, it was pretty quiet around here," Mr. See recalled. "We went from frenzy and froth to being very quiet. It was really only the income trust market that got us going again as an industry."
TD, which is celebrating its 25th anniversary, is not the only online brokerage to be experiencing bullish conditions in a bear market.
The analysis firm Investor Economics says that, industry-wide, new account openings in the fourth quarter of 2008 were 54 per cent higher than in the same period of 2007, and a stunning 81-per-cent higher than in the third quarter of 2008.
We're in the midst of the worst stock market conditions that almost all investors have ever seen, the global economy is in recession and bad news has the upper hand over good news on almost any given day.
You might think this environment would drive people to seek the expert help of investment advisers, but that's not the notable trend of the moment. Rather, it's that people are eager to invest for themselves.
Before exploring the reasons behind this trend, let's first validate it by noting that do-it-yourself investors don't seem to be at a disadvantage to those who use an adviser in terms of their returns.
Investor Economics says the value of investments held at online brokers in 2008 fell 18.3 per cent, compared with 20.4 per cent for full-service investment dealers.
In the fourth quarter, featuring the October and November from hell, assets at online brokers fell 11.6 per cent while full-service dealers were down 11.8 per cent.
Clearly, investing for yourself in rough markets is not financial suicide. But at a time of maximum stress in the markets, why are people even considering the idea of looking after their own investments?
Mr. See has some theories and they're interesting to hear in light of the fact that TD Waterhouse has in the past several years been building an investment advice division for clients who want professional help.
Mr. See believes that unsatisfactory service by advisers has been a prime driver of new account openings at online brokers.
Many advisers have never seen market conditions like we've had in the past six months, and they don't know how to react in terms of communicating with clients.
"We definitely see some adviser refugees, if you will, either because of the feeling they're being underserved or they haven't been communicated with," he said.
Mr. See said there are some other factors at work, including a feeling among investors that they were caught off guard by the bear market and want to be closer to their investments.
Online brokers offer perpetual account access on the Internet and many, TD included, have staff available 24/7 by phone.
Low costs are also driving investors to online brokerages. When returns are weak, investors naturally want to try to reduce their fees and commissions as much as possible.
Finally, Mr. See said there's a demographic aspect to the move to online brokers as baby boomers come up to their retirement years and start to pay a lot more attention to their investments.
The online brokerage slump that started in the last bear market faded away. So what can we expect from the do-it-yourself investing boom under way in the current bear market? Mr. See sees more growth ahead.
"We believe strongly in the advice side, but I think there's going to be continued growth in the self-directed side for a while."
As evidence, he cites TD Waterhouse's experience since the end of registered retirement savings plan season.
"Usually, you have a bit of a tail-off after RRSP season, because that's our big selling season, traditionally. This year, we really haven't seen that."
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