Four years ago, Jack Simons had a blow-out with his financial advisor. His advisor’s partner gave Simons some bad investing advice and a stock went sour, costing the Toronto-based business consultant thousands of dollars. At the same time, Simons was beginning to feel frustrated with the high fees he was paying, so when he lost money, he made what his advisor thought was a drastic decision: he opened a self-directed account with TD Waterhouse.

His advisor was livid. “He thought I was leaving him,” says Simons. “It strained our relationship.”

But Simons didn’t remove all of his investments from his bank-based advisor. He only took one of his several accounts away. Now, the two have a strong relationship. They play golf together and the advisor still manages most of his money, but Simons likes having one account he can control.

Simons is just one of a growing number of investors using both an advisor and a self-directed online brokerage account. According to a 2009 survey conducted by JD Power, 36% of full-service investors in Canada also have a self-directed discount brokerage account.

Tony Ierullo, senior manager of strategic development for TD Waterhouse, adds the same JD Power study suggests 65% of investors who use an advisor at his bank also have a discount brokerage account. “It supports the idea that investors will split their assets,” he says. “They’ll do some with an advisor and continue to do a portion themselves.”

As more people choose to handle part of their portfolios on their own, advisors are at a crossroads: start embracing investors who use discount brokerages or risk missing out on a large client base.

The only way advisors will avoid losing clients to an online brokerage, and turn self-directed investors into long-term clients, is to get over the fear that do-it-yourself accounts are bad for business. But it’s an attitude a lot of advisors still hold.

“I don’t work with clients who have accounts at discount brokerages. It doesn’t work,” says an Ottawa-based CFP who asked not to be named. “It’s like giving your advice away for free.” The advisor says a lot of hard work and money goes into generating the reports and information he uses to base his investment decisions on. If he tells a client something, and that person then uses the advice for a self-directed account, the research is essentially a waste of money.

The CFP also thinks DIY clients don’t see the value in advice. He admits some people will want both, but “it’s like being half pregnant,” he says. “You’re either a DIYer and want to make your own selections and guide your own portfolio, or you need assistance and professional help. In that case, it doesn’t make sense to have a discount brokerage account.”

A Toronto-based advisor who also requested anonymity was even more direct in his disdain for DIY investors: “A client using a discount brokerage would not be a client I’d want any more than someone using the Ontario Government’s online gaming site.”

He agrees with the Ottawa advisor, saying online investors are like accountants – they make bad clients because they think they’re smarter than the advisor. “They read one newspaper article and then think they know more about everything financial,” he says.

Both advisors said while they wouldn’t necessarily stop working with a client who opened an online account, they wouldn’t help them either.

“I’d wish them good luck,” says the Toronto advisor. He’s fine with clients leaving assets at his firm, but he doesn’t want to know what that client’s doing with his other accounts.

“I’m not going to tell the client to take a walk,” adds the Ottawa CFP. “But I would be clear with them and say I’m not going to do all this research [and] give you selection advice just so you can go to a bank and trade for $9.99. They’d have to be a seven-figure portfolio client for me to do that.”

The Toronto advisor thinks people can change – they may start with a TD Waterhouse account, but then want an advisor later. He says it’s more a matter of age and maturity than anything else. “When you’re younger you think you’re smarter than you really are, but you’ll realize one day maybe someone else might know more about this.”

Brenda MacDonald, a Victoria-based CFP and independent financial counsellor, says these attitudes are based mostly in fear. “Some advisors are threatened by a client who knows more than they do. But that knowledge is good for an advisor. A client who is well educated will understand when the market dips and won’t blame you directly. Someone who doesn’t have a clue will blame his advisor. They’ll also keep the advisor on their toes.”

She says advisors should be encouraging instead of fearful. In fact, she says advisors may even want to tell capable clients to open a self-directed account. It may be better for an overall portfolio to put some blue-chip stocks in an account and save on management fees. The advisor would continue to seek out more complex investments and new issues.

Anyone with a computer and some basic financial knowledge can invest online, but most don’t have a clue on how to develop an overall financial plan. This is where advisors can turn a self-directed investor into a long-term client.

Patricia Domingo, an investment and retirement planner at RBC, says many of her investment-executive clients know a lot about capital markets and have self-directed accounts, but they may not know the specifics of financial planning.

Domingo sees a lot of clients like Simons; people who were unhappy with an advisor and so put some of their money in an online brokerage account, but continue to retain the services of a CFP. Many of her clients abandoned their advisors altogether, only to sign up with her months later.

“They couldn’t properly manage their account,” she says. Also like Simons, the majority of her self-directed clients only have a small portion of their overall investments in an online account. Self-directed clients are often risk takers or like having a few brand-name stocks they can hold on their own, says Domingo. “They want to put a bit of extra money at risk,” she explains. “You have to tolerate it. I can’t give them advice on that piece of the portfolio, but you have to consider it in the overall plan.”

Despite a higher risk tolerance, they still need help, especially as they near retirement. Ierullo says advisors need to offer a full suite of financial-planning services. It’s things like estate planning, retirement goal-setting and business-succession advice that clients can’t get from an online brokerage. Just don’t expect them to abandon their DIY devices. “We don’t see them giving up their self-directed business,” he says.

Francis D’Andrade, a Toronto-based consultant who works with various financial institutions through his company, Financial Outcomes, thinks advisors will have to take a more holistic approach to financial planning if they want to survive.

“There’ll be a need for a more mature advisor who can handle both sides of the balance sheet,” he says. “They’ll need to become a credit expert and a growth expert. I think the advisor of the future will be the one who can connect the dots.”

When advisors start embracing investors who use self-directed accounts, they’ll realize there’s a whole world of potential clients just waiting for advice.

Many people start investing online – maybe they only have a small amount of money to spend or they want to learn a few things about investing before going to a professional – but it’s possible for advisors to turn these DIY newbies into lucrative clients. Finding them is the hardest part.

D’Andrade says banks are beginning to realize their online brokerage businesses need to be more closely aligned with their advisor communities. But it’s too difficult for advisors to call up a bank’s self-directed clients, not to mention there could be privacy breaches if they did that. The financial consultant says institutions must advance their technology to identify which clients could use extra assistance.

“Advice is going to [get] much more virtualized and more proactive,” he says. “It’s not just I call you and you come in.”

He says a computer algorithm, of the type credit card companies already use, could determine how many investors have over $5,000 in a chequing account, and then attempt to sell them a money-market fund. The algorithm can also identify when a client’s needs become more complicated and direct them to the bank’s financial planning department.

Of course, not every advisor will get referrals from a computer, and it could still be a long time until banks are set up to offer this kind of service.

MacDonald says online brokerage users like attending investing-related lunch-and-learns. As long as the advisor avoids making the meeting a sales pitch, and focuses on useful investing information, they could get access to a wealth of potential clients. If attendees like what they hear, there’s a good chance they’ll call you up when they’re in need of financial advice.

“I know a few people who have met their advisor that way,” she says. Initially, a client may only come seeking estate-planning advice, but, MacDonald says, in time clients may move most of their investment portfolio from their online account into the hands of the advisor.

Self-directed investors need to know an advisor has their best interests in mind and that their investments will be safe in another person’s hands. Trust is something Domingo works hard at achieving. “If I can build trust, that client who was only willing to talk about a small amount of money right now may eventually bring over their additional amount,” she says.

MacDonald agrees. She tells advisors not to be pushy; just be available for questions. “It might seem like a waste of time,” she admits, “but hang on and you’ll get some really good clients.”

Clients need to know an advisor isn’t just talking to them for their money. “Answer their questions, tell them about a new product, and the next thing you know, they might not want to do it all themselves,” she says.

Even though Simons enjoys playing with part of his investments without help, he has no plans to abandon his advisor.

“It’s hard to be successful without other people’s input,” he says. He likes sharing ideas with a professional. He also appreciates the resources his advisor brings to the table. Fortunately, his advisor has come around to the idea of clients doing some investing on their own. Simons doesn’t share what he does with his advisor, though he admits his advisor would like to know what’s in the account. But it hasn’t affected his planner’s ability to build his net worth.

When it comes down to it, there’s one thing Simons’s advisor does that his online brokerage can’t do: “He’s there for me,” says the investor. “He’s frank and honest and that’s why I’ll always be his client.”

There’s no evidence online brokerages pose a threat to advisors. In fact, surveys indicate about 60% of full-service investors use advisors exclusively, and the ones who don’t still have thousands of dollars in assets with professionals.

But if a client does remove assets, it could be a signal something’s wrong.

When Jack Simons transferred some of the assets he had with his advisor into a brokerage account, he did it because he was upset with advice he received. And Brenda MacDonald personally trades via online accounts because she, too, disliked the advice she was receiving.

“It was then I decided I’m not going to pay someone to do this for me,” she says. MacDonald took an unconventional route to becoming a DIY investor: she got her CFP and then started investing on her own. That was ten years ago and she still manages her own investment portfolio.

These are the types of stories that scare one Ottawa-based CFP, who didn’t want to be named. He says if a client removed a significant chunk of assets from the advisor’s firm and put it in a discount brokerage account, “within six months they’d be gone.” In his eyes, the removal of assets is a signal there’s something wrong with the relationship.

If a client is determined to remove some assets from his or her advisor, it’ll be hard to stop them.

But relationships can be repaired through honest communication. MacDonald says communication is important to a healthy union, and Simons agrees. He talked to his advisor about the mistakes made and feels confident it won’t happen again. It helps that it was another advisor at the firm who made the mistake, but even so, he was able to get past the animosity he felt toward the firm – and the losses he incurred from bad advice.

Still, unless a client removes a major chunk of assets, advisors shouldn’t worry too much. Almost a third of TD Waterhouse investors use both online services and a financial advisor. So if a client opens an online account, it may be wise to see if there are any issues that need fixing, but don’t panic – your client, and his or her assets, aren’t likely to disappear.

  • Bryan Borzykowski is a Toronto-based financial writer.

    Originally published in Advisor's Edge