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Discount Brokerage Weekly Roundup – June 29, 2020

Despite the progress being made in the fight against COVID-19 here in Canada, it will still be quite some time before things truly return to some sense of normal. For the time being though, uncertainty and caution abound heading into the long weekend here and in the US.

In this edition of the Roundup, we take a look at an interesting story that highlights the challenges that digital wealth management is posing to traditional financial advisors. Of course, digital platforms for wealth management also have some sobering news to come to terms with and are being forced to understand the importance of building strong training and communication elements in their service. As always, we wrap up with chatter from investors on the forums and on Twitter.

Sore Spot: Do Ads About Advisors Tell the Whole Story?

For many years, Canadians watching any major sporting or entertainment event on television have likely encountered commercials depicting people having uncomfortable conversations about investing. More specifically, uncomfortable moments about investing with financial advisors. After years of being criticized, it seems like advisors have had enough.

Questrade, the firm behind the campaign to encourage people to move away from financial advisors, is probably best known for their online brokerage services. Over the past few years, however, they have increasingly made inroads into the managed wealth territory, primarily with their digital wealth management (aka robo-advisor) offering.

Originally known as Portfolio IQ, and later rebranded to Questwealth in 2018, the move by Questrade into the managed asset world mirrors a trend in the online brokerage space in the US. In fact, the largest online brokerage in the US, Charles Schwab, generates a substantial amount of its earnings from management of wealth rather than revenue from trades (since they’ve gone to zero for commission rates, this difference is even more pronounced).

Making a splash in the managed wealth arena is no small feat, especially for a new entrant, which explains in part the decision to make a very visible, very provocative set of commercials that strike at the heart of what many investors see as a pain point: price. Specifically, the cost for financial advice.

This past week, an article appearing in Wealth Professional took aim at Questrade’s marketing campaign and its characterization of wealth advisors. In particular, one of the central arguments of the article is that the advertisements paint all advisors with a similar (negative) brush and that it doesn’t reference the fact that there are advisors who provide valuable services for their clients for a “fair” price.

Of course, Questrade is not alone when it comes to challenging traditional managed wealth fees. Other digital wealth management firms – like Wealthsimple – are challenging traditional providers of managed wealth services. Nonetheless, Questrade’s multi-year campaign is one of the most recognizable.

For many Canadian investors – especially those with dedicated wealth managers – it is difficult to understand the broader value of the services being provided if most of that service centres around mutual fund selection, a point made by the Wealth Professional article.

At its core, it seems unlikely and perhaps irrational that a company that is paying for advertising or marketing their product or service would not do so in a way that presents them in the most favourable light or that presents a specific use case. Add to that the challenge of taking a topic like personal finance and making it engaging enough for people to pay attention, and it starts to become clear that to get people’s attention, you have to present the information in a way that makes an emotional connection.

Another interesting takeaway from this article is that while Questrade has successfully managed to ruffle some feathers over the years, both in the online brokerage segment as well as in the managed wealth one, there hasn’t been as creative or concerted an effort by a counterpoint to advertise to Canadian investors.

While Questrade was certainly within their rights to deploy a marketing campaign (or several campaigns), there is also nothing stopping the stakeholders or competing financial advisories from advertising, either. And, therein lies the challenge and opportunity facing providers of financial services: they have to find a creative and compelling way to get onto the radars of their target audience and follow through with a digital experience that extends or represents what the personal experience would be like.

There are certainly situations in which clients appreciate the value and experience of an advisor. However, as Questrade and other online brokerages have shown, those situations can’t be the “easy” ones. The discount brokerage industry arose out of the order-execution job function previously done by many financial advisors. Robo-advisors arose from the desire to create an easy-to-manage solution for balanced portfolios that don’t cost as much as many mutual funds.

Financial advisors who truly delight their clients will see referral business be an important channel, and that kind of advertising is both the most valuable as well as the hardest to compete against.

Trading Online Highlights Risks of Poor UX

When it comes to trading online, especially in the past few months, there is no shortage of emotion.

For new investors, it is difficult to appreciate the number of moving parts (and therefore the number of possible failure points) that online investing requires to work exactly right. However, those who’ve actively traded the markets for any appreciable length of time know that it’s inevitable there will be some kind of technical hiccup or mishap.

Whether it’s a platform outage, flash crash, or some other event, for most casual investors, these are passing news stories. But for those who trade actively, these kinds of incidents can – and do – induce panic.

A tragic story earlier this month of the suicide of a young trader, Alex Kearns, highlights just how important it is for online brokerages to remember the consequences of their technical systems operating correctly, as well as for their user interfaces to work as intended and their risk management protocols to operate sensibly.

While the causes of suicide are complex, one factor that appeared to play a role was the belief by Kearns that an options trade had left him owing over USD $700,000. Specifically, the balance showing was negative because of an options trade that had yet to fully settle.

Among the many stories written about this incident, a common theme references the “gamification” of trading and user interfaces, which, in the case of online investing, muddies the waters when it comes to appreciating the consequences and severity of the actions being taken. It is a delicate but important balance to simplify and make an investing platform engaging but not do so in a way that removes important safeguards to protect clients and their capital.

For their part, Robinhood acted quickly and released a statement on their blog by the company’s co-founders as to what they intend to do in response. Three important steps they committed to taking were adding additional criteria for education relating to options trading, expanding options education, and improving the user interface. Robinhood also made a USD $250,000 donation to the American Foundation for Suicide Prevention.

The reality confronting the online brokerage industry – which is having its best year in memory with regards to account growth and new clients – is what they need to do in order to continue to innovate technologically but also to create a platform and market access experience that is in line with the experience and/or understanding (not just the risk appetite) of the instruments being traded.

As a result of this incident, it will become imperative for online brokerages to invest more heavily in creating clearer communications on how trading works on their individual platforms and what the “trading” cycle looks like – especially around settlement and money moving around and to better evaluate risk.

Discount Brokerage Tweets of the Week

From the Forums

Is It Impossible to Find Good Help These Days?

A curious forum user asks if there are any reasons to use private wealth management over DIY investing. Fellow Redditors weigh in on this debate and lay out the pros and cons of both in this post.

Till Debt Do Us Part

A Redditor in this post brings up the timeless question of whether or not they need to wait to be out of debt before beginning to invest, and a lively conversation ensues.

Into the Close

That’s a wrap on what is shaping up to be another very volatile period inside and outside of the markets. After such a rapid bounce in the market, there are more than a few skeptics out there regarding the sustainability of the recent market rise. Heading into a couple of big holidays this week, however, it seems like even more caution will be warranted for life inside and outside the market. Wherever you choose to celebrate the upcoming Canada Day (and Independence Day), here’s hoping it’s safe and enjoyable!

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