According to Citadel Securities, retail trader activity accounted for nearly 25% of the market volume this past summer while it accounted for 10% of the market in 2019.
During the pandemic, many investors turned to day trading in order to occupy their time, to network with others, and to offset the loss of traditional forms of entertainment such as sporting events. Also, online brokers have eliminated commissions, giving the impression that day trading is free. The increase in stock market volatility that accompanied COVID-19, along with the substantial rally off of the market lows in March, have also contributed to day trading’s recent popularity.
It’s critical to explore how this impacts your relationship with existing and prospective clients. Day trading has the potential to negatively impact an investor’s ability to achieve their financial goals, and it is important that advisors explain how this can happen. On the flip side, this newfound interest in the financial markets is something that can work for an advisor and they might want to seize the moment and deepen the level of engagement they have with their clients.
Here are five ways to continue delivering value amid the biggest retail investor surge in over a decade.
- Manage expectations: As with the dot-com bubble and Bitcoin craze, investors are going to hear stories that describe big profits earned from day trading over the past few months. Consequently, they may be tempted to do trades that don’t align with their long-term investing goals. While chasing opportunities may be tempting, now is the time to step in as the voice of reason.
- Discuss implications to their financial plans: The cost of trading is usually not a problem for an investor with a long-term view. They incur this expense once up front and then typically only when they choose to rebalance the portfolio to bring their asset allocation back into line or divest the position. However, for a day trader, who can do hundreds of trades in a single day, these pennies can add up quickly and turn into a drag on performance.
- Articulate the dangers of a concentrated portfolio: Another problem with day trading is that it can leave the investor with a concentrated portfolio. There is a saying that “diversification is the only free lunch in finance”. Properly diversified portfolios tend to have better risk-return characteristics than concentrated ones. Undiversified portfolios leave investors exposed to more risk, especially when their portfolios are concentrated in some of the most volatile securities in the market.
- Leverage a digital advice platform: A digital advice platform, such as RobustWealth, can play a valuable role in keeping investors on track. In these solutions, portfolio management and trading, once configured, are automated over time. This automation allows the advisor to focus more on their client (and the temptations they face) and less on the mechanics of managing money. RobustWealth’s auto-rebalancing feature is a valuable service for those that want to ensure their investments stay on track.
- Offer a compelling alternative: This is where you can put their newfound financial energy to work. Meet with them and review the potentially powerful result of changes in their spending and savings habits. Sometimes small changes in financial behavior can have a significant effect on someone’s ability to achieve their financial goals.
It is during times like this, when markets are volatile and potentially risky behavior is in vogue, that advisors can really shine. Seize the moment and engage with your clients. They need you now perhaps more than ever.
How is RobustWealth serving advisors?
Learn about our technology solutions by requesting a demo today.
Investing involves risk, including possible loss of principal.
Returns represent hypothetical performance and do not guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted.
The subject matter in this communication is educational only and provided with the understanding that RobustWealth, Inc.® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.