August 18, 2020
There’s a boom in speculative trading, and clients are not immune to the hype, as Ken Van Leeuwen, an independent broker with LPL Financial in New Jersey, can attest after a longtime client called him two weeks ago with an unusual request.
“He asked why we don’t put all of his account in Tesla and Amazon all based on the fact that they were doing so well,” said Van Leeuwen whose firm manages about $260 million in client assets.
It would have been a significant increase from the 5% positions in each of those companies that the client held, according to Van Leeuwen, who declined to specify the total size of the account. He eventually talked the client out of the move by explaining the benefits of diversification and using their experience during the tech bubble of the early 2000s as an example.
“What you really have to do is keep explaining risk and what it means, and how it could turn around on their portfolios,” said Van Leeuwen, who started his brokerage career in 1981. “I never want to put these people in jeopardy.”
Day trading and speculation have experienced a surprising resurgence thanks to easy-to-use technology, heightened market volatility and a rise in unsupervised time in the Covid-19 induced work-from-home era.
Volume at Bank of America’s Merrill Edge platform was up 180% year-over-year in the second quarter, and that mirrors similar 100%-plus increases at discount brokers such as TD Ameritrade Holdings, Charles Schwab Corp., E*Trade Financial, according to Cerulli. And ‘free’ trading app Robinhood Markets said the number of revenue-generating trades in June outpaced those incumbents.
Advisors like Van Leeuwen are finding themselves on the front lines of not only with assets they oversee, but even advisor-directed households often keep around 10% of assets in a ‘DIY’ account where they may be tempted to take more risk, according to Boston-based consulting firm Cerulli Associates.
Rather than ignore those accounts, now is the time for advisors to be inquisitive about clients’ outside trading activities and to potentially collaborate to help them approach those risks safely, according to Cerulli.
“Instead of attempting to squelch clients’ interest in hopping on the latest investing bandwagon, advisors can strengthen their relationships through collaboration,” John McKenna, retail investor market analyst at Cerulli, wrote in the study. “By understanding the size and objectives of a client’s personal trading account, the advisor can help set budgets and ground rules to help their clients make optimal choices on their own.”
Addressing the traditionally taboo subject of speculative accounts can help spare the client from taking outsized risks, strengthen the client relationship and eventually bring more assets in-house where they can be professionally managed, according to Cerulli. It can also help advisors boost ties with younger investors who are “particularly vulnerable to making investment decisions based on immediate reward,” according to the report.
“A trusted advisor could reinforce the threats of confirmation and overconfidence biases, and suggest that the client can continue their activity, but may want to pocket some of their gains,” Cerulli said. “By pursuing this approach, advisors can reinforce their position as trusted partners to which clients consistently turn when faced with evolving financial circumstances, rather than salespeople set solely on gathering incremental assets.”
To be sure, some advisors still have a zero-tolerance policy when it comes to day trading or speculative investing. Melanie Housden, a Hamilton, Texas-based independent broker with Raymond James Financial Services, said she has heard from a small number of clients interested in purchasing cruise line and airline stocks that were trading at extremely low prices, but her answer is a resounding “no.”
“I have advised against day trading,” said Housden, founder of an eponymous Raymond James-affiliated independent advisory firm that manages over $100 million in client assets. “I encourage them to remember what their long term goals are, and the amount of risk that they would be willing to take, or the amount of money they were willing to lose.”
And of course, Finra’s rules against private securities transactions prohibit brokers from actually making specific recommendations or placing trades in accounts outside the firm.
Clark Kendall, founder of an eponymous advisory firm in Rockville, Md., that manages $300 million in assets, said advisors should not waste their time advising on assets held in day-trading accounts. Just let clients know that any amount they put into those accounts, they should expect to lose, he said.