Online discount brokerages can be an exhilarating experience for investors coming to it via the old full-service advice model. Apart from low commissions (typically $10 a trade if you have at least $50,000 invested), there’s the speed of execution and the feeling that you are in control.
Unlike the old days, where a seasoned adviser would mediate and perhaps ask you if you’re “sure” about the wisdom of a particular trade, the online investor executes trades at the click of a mouse button.
Such freedom is a two-edged sword. A recent poll found do-it-yourself online investing to be more convenient and easier to learn than expected, but there was also a cautionary note. Twenty-three per cent of 1,000 online investors polled by Environics bought a hot stock without doing sound research, 21% started buying securities without a plan, 10% bought at market peaks and 9% felt they reacted too quickly when the market dipped. Fifty-eight per cent said their biggest challenge was deciding what to invest in.
But discount broker customers don’t have to go it alone on advice. A good fee-only financial planner who’s happy to let clients implement their own online trades can give you the best of both worlds: reasonable costs and guidance.
Acting precipitously based on emotion can be costly, and these volatile sideways markets are bound to whipsaw investors continually over the next several years.
Discount brokerages and fee-only financial planning are a great fit, a kind of yin and yan. Coupled with indexing through index mutual funds or exchange-traded funds, the three are the key strategic components underlying what I call “The Findependence Day Model.”
Fee-only or even fee-based advisers can pay for themselves by acting as a sober second opinion and restraining self-directed investors from succumbing to emotion-laden decisions at what may prove to be the worst possible time.
Unlike the United States, where fee-only financial planners are ubiquitous, they are a rare breed in Canada. There are only about 150 true fee-only financial planners in all of Canada. Compare that to 75,000 who sell financial products of some kind, or to the 25,000 who call themselves financial planners.
If you can’t find a fee-only planner, it shouldn’t be difficult to find a fee-based one. The latter charge a percentage of portfolio assets, which are typically between 0.75% and 1.5% a year. By contrast, fee-only advisers charge by the hour, month or year, or by the project (such as designing a financial plan or conducting a comprehensive portfolio analysis).