October marks Investor Education Month, a national initiative that encourages Canadians to take time to strengthen their investing knowledge and make informed investing decisions.
One approach that some Canadians are considering is hybrid investing. A hybrid investor works with an advisor and also manages part of their investments on their own. According to the Canadian Securities Administrators’ (CSA) recently published Hybrid DIY Investing: A Research Summary Report, approximately one in eight Canadian investors use this dual-track investing method.
Understanding how hybrid investors think and act can offer valuable insights to help all investors make suitable and informed investment decisions, whether they are managing their portfolio entirely on their own, working with an advisor, using a robo-advisor or combining the different approaches.
What the CSA research tells us
The CSA surveyed hybrid investors nationally and then conducted focus groups with those who identified themselves as taking on substantially more risk, while conducting less formal planning. Through this research, hybrid investors shared valuable and interesting takeaways related to risk tolerance and advisor relationships.
A financial plan developed alongside a professional can reduce speculative investing behaviour
A comprehensive financial plan that takes into account an investor’s goals, time horizon, chosen investments and risk tolerance is critical to the success of any investor. Many of the surveyed hybrid investors relied on their advisor to assist them in creating their financial plan. However, those who developed a plan on their own or invested without a plan engaged in more speculative investing behaviour. This included frequent trading, investing in speculative assets like crypto and seeking very large returns in short time frames. Alternative assets like crypto are high risk and their values are largely dependent on investor interest and supply and demand. Additionally, behaviours like seeking short-term big wins can expose investors to unsuitable high-risk investments and even investment scams.
Regardless of your investing method, consider reviewing your financial plan and how you are tracking towards your goals. If you do not have a plan or you are struggling to build a plan, consider reaching out to a certified financial planner or a registered financial advisor. They can be a great resource to help align your investments with your risk tolerance.
A worthwhile advisor relationship goes beyond surface-level conversations
If you use a financial advisor, it’s helpful to remember that the relationship is only as worthwhile as the time you invest in it. The more time you take to ask questions, actively review your plan and portfolio with your advisor, and update them on changes in your life, the more informed you will both be and the more value you will receive. Taking steps to develop deeper conversations around your investment portfolio could include asking your advisor to provide insight into how your investments are aligned with your financial goals, and whether there are any optimizations needed as you near achieving your goals.
Surprisingly, 81 per cent of hybrid investors reported having a close relationship with their advisor, but only occasionally discussed their investments. In contrast, the focus group participants of highly speculative hybrid investors expressed a more distant relationship and rarely or never shared information about their DIY investments with their advisor.
Understanding your risk tolerance allows you to stay within your limits
One of the most important aspects of investing is understanding the level of risk you take. Every investor has a risk tolerance comprised of their willingness and ability to take risks with their money. A general rule of thumb is to align the overall risk of your investment portfolio to your risk tolerance. This approach helps you pick suitable investments, but also helps you set reasonable expectations on the level of potential returns you may generate in the future.
The Hybrid DIY Investing research found that 84 per cent of hybrid investors are willing to take on moderate to significant investment risk, nearly double the 46 per cent of Canadian investors overall, as reported in a recent CIRO survey. Having a high risk tolerance is not a bad thing, but when combined with an incomplete financial plan and surface-level discussions with your financial advisor, you could be exposed to potentially unsuitable investments and possibly fraud.
Fraud awareness and prevention starts with trusted sources, not gut instinct
The hybrid investor research revealed that high-risk hybrid investors were less aware of the red flags of investment fraud. Based on the results of the focus group discussions, the high-risk investors, often drawn to speculative and alternative investments, tended to overlook key steps in verifying the legitimacy of trading platforms or investments. Rather than checking registration or conducting their own research, many cited relying on intuition and informal checks online with Google, Reddit and other online forums.
Investment fraud continues to be the most prevalent form of fraud across Alberta. Given this risk, it is essential that all investors start by checking the registration of any individual, firm or platform they plan to work with. In addition to these registration checks, doing independent research on any investment you are considering and involving a third party or your financial advisor, if you use one, in the review can help mitigate the risk of falling victim to a scam.
Although the CSA research focused on hybrid investors, the findings carry important lessons for all Albertans navigating their investing journey. To be successful, it is important that you take the time to build a solid financial plan, understand your personal risk tolerance, and verify the legitimacy of all platforms and products that you are considering.
