Consumer Bulletin: Be aware of the risks of DIY investing
More Canadians are choosing to be self-directed or do-it-yourself (DIY) investors than ever before. In 2020, over two million new DIY accounts were opened in Canada - more than double the amount opened in 2019. This represents an unprecedented rise in the number of Canadians who trade securities on their own using the services of an order-execution-only (OEO) firm. A key feature of OEO firms is that they provide investors with access to trading platforms but do not provide investors with any recommendations, advice, or suitability assessments.
Related to this, there has been a significant increase in complaints to OBSI from investors about their experiences at OEO firms. Many of these complaints have related to:
- Transaction errors – These errors generally refer to what is perceived as the incorrect execution of an order or other mistake that affects the consumer’s transaction.
- Service issues – These issues are either technical, such as a system failure that leads to service disruptions, or non-technical, such as the poor handling of consumer concerns.
- Margin issues – These issues typically have to do with situations that can arise when consumers decide to buy investments on margin (borrowing to invest).
In some of our cases, complainants saw their primary issue amplified because:
- Their account was highly leveraged (a significant proportion of their account was purchased on margin).
- They purchased stock options and then experienced severe consequences from rapid and unexpected price changes and market volatility.
These investors often believe that the firm has either caused or contributed to their financial loss.
DIY investing involves risk and accountability
When investors decide to invest without an advisor, they save on the fees that an advisor would charge. But they also accept the responsibility and risks involved in making their own investing decisions.
It is important to remember that anyone is vulnerable to losing money if they:
- invest on their own without adequate investing knowledge,
- do not stay informed about their investments and the market, or
- use complex investing strategies without understanding the limitations and potential risks of these strategies.
The purpose of this bulletin is to inform investors of what can happen when things go wrong with DIY investing. Below, we share the risks to be aware of based on our recent case experience.
Risk # 1: You may experience disruptions that impede access to your investing platform.
When investing through a DIY platform, service interruptions and delays can happen, and when they do, they can lead to missed opportunities and potential losses.
During the pandemic lockdowns, OEO firms expanded their number of accounts significantly, as many new DIY investors went online to invest on their own. However, during the pandemic, there were periods of high market volatility when many investors tried to use firms’ online platforms at the same time, occasionally overwhelming systems. When those investors phoned their firm to speak to an agent instead, they often experienced long wait times due to extraordinarily high call volumes.
When using an online platform, an investor’s ability to trade can be affected by a system shut down, technical difficulties or an inability to access the platform. While such disruptions are usually rare, the terms of most account-opening agreements state that the firm will not take financial responsibility for losses caused by a technical service problem.
OBSI Case Example - Technical difficulties cause service issues for consumer
Mr. D was a seasoned investor who had been a client of his OEO firm for more than a decade. During that time, he was pleased with the level of service he received. One day, he encountered several technical issues with the firm’s website. It started with delays while logging into his account. Then, once he logged in, the “order status” tab was unavailable, and the order screen did not display properly. As a result, Mr. D was unable to view the status of his orders or any information on the order screen.
Mr. D felt uneasy because he had intended to make some important trades. When he called the firm to report the issue, he was unable to reach an agent due to long wait times. As soon as his account access was restored, in fear of further interruptions, he began selling stocks at a lower price than he originally intended and lost $13,500 USD. Afterwards, he complained to the firm about the service disruption and asked to be compensated for the money he had lost.
The firm refused because it said that in the account-opening agreement that Mr. D signed, he had agreed that the firm could not be held responsible for losses that occurred from system problems.
During our investigation, we reviewed the circumstances and confirmed the terms of the agreement. While there was no basis for us to recommend compensation, both the firm and Mr. D expressed an interest in settling the matter, and we assisted them in reaching a settlement of a goodwill gesture of $5,000 USD.
Risk # 2: Purchases on margin increase the risk of financial harm
While margin debt has reached an all-time high in Canada, the decision to borrow to invest should never be taken lightly. Investing on margin amplifies investment gains but also losses because investors risk losing their capital as well as what they have borrowed.
Additionally, like a credit card, line of credit or any other loan product, the firm extending the credit imposes certain conditions that consumers must agree to when borrowing funds. Important conditions that margin investors need to be aware of relate to margin eligibility and margin calls. These conditions give firms the ability to decide which securities can or cannot be purchased on margin and allow the firm to demand repayment at any time and to sell the investments in the account if the margin call is not met, regardless of the losses this may cause.
OBSI Case Example - Consumer’s margin borrowing triggers major financial loss
Mr. H was a senior who was managing his own retirement savings investments. He had more than 50 years of investing experience. During the week leading up to the pandemic shutdowns, Mr. H was active on his OEO firm’s trading platform. He regularly purchased securities on margin and his account was highly leveraged. Within days of the first lockdown in mid-March 2020, he could no longer get online access to his account. This left Mr. H in a risky position due to the leverage in his account and the volatility in the markets.
When Mr. H called the firm for assistance, he waited on hold for a long time before the automated system disconnected him. He also made several unsuccessful attempts to log into his account. Because Mr. H could not access his account, he was unable to respond to the firm’s margin calls. As a result, the equity in Mr. H’s account reached a negative position, leading the firm to sell his securities to pay off his debt, leaving no money in his account.
Mr. H complained that the firm was not prepared for the surge in website traffic and telephone inquiries that had occurred due to the pandemic. In our investigation, we reviewed Mr. H’s account-opening agreement and found that he had agreed to accept the disclosed risks involved with using the firm’s online trading platform, which included extreme market activity. Based on our findings, we did not recommend that the firm compensate Mr. H for his losses.
Risk # 3: All transactions are at the discretion of the firm
While OEO firms offer investors the tools to trade independently, their role is to execute orders, monitor the platform and ensure a secure online environment. As a result, every transaction that a consumer makes is subject to the firm’s approval and may be delayed or rejected. This means that a trade may not be automatically executed, or executed at all, and investors may be negatively affected by the outcome of a firm’s approval decision. Generally, firms require that consumers agree to these terms in their account-opening agreement.
OBSI Case Example - Consumer alleges financial harm due to firm’s oversight
Mr. N enjoyed investing on his own. He tried to place an online order to buy shares of Stock Q, but the firm’s website was experiencing technical difficulties. When Mr. N called the firm, a representative acknowledged the website issues and offered to execute Mr. N’s order over the phone. Mr. N provided her with instructions to buy shares of Stock Q and she followed them.
Before ending the call, Mr. N asked the representative how he would know if the order had been executed. She told him that if the trade was filled, she would notify him by email or phone, and he would see the transaction on his account the next day. Mr. N ended the call with the expectation that he would receive a notification from the firm to confirm the execution of his order for shares of Stock Q. The firm did not contact Mr. N.
The next afternoon, Mr. N signed into his account and found out that his order had been executed the previous day. The stock’s value had considerably decreased. Worried about Stock Q’s declining value, Mr. N sold his shares and experienced a loss of $1,100. Mr. N claimed that the firm’s lack of follow-up caused his financial loss because if he had known he was invested in Stock Q, he could have sold earlier.
The firm admitted to not notifying Mr. N as agreed and offered him a $200 goodwill gesture. The firm refused to compensate Mr. N for his entire loss because it believed it had fulfilled its obligation to execute his order and had no further responsibility.
During our investigation, we concluded that if the representative had notified Mr. N about the order, he could have prevented approximately $650 worth of losses. Based on our findings, we recommended compensation of $650. The firm agreed to our recommendation and Mr. N accepted their offer.
What to do if you decide that DIY investing is right for you
- Read your account-opening agreement carefully. This is where you will find important disclosures about the investment products and level of service that your OEO firm offers, as well as any costs involved. It is important to be aware of and understand the risks and benefits of using their service.
- Exercise extreme caution when using leverage and trading in options on OEO platforms. Always consider what your position will be if you lose access to the platform or have to meet a margin call.
- Consider having OEO accounts at more than one firm, so that if you cannot access one platform, you may be able to make offsetting trades through another.
- Understand that OEO firms will not accept responsibility for any errors or miscalculations you have made. The firm expects that consumers who invest without advice have adequate investment knowledge to protect themselves and are already familiar with the risks of DIY investing. Make sure you are comfortable with being your own investment advisor.
Related case studies and resources
DIY investing leads to more than $100,000 in losses
Consumer alleges online investing app misled her about margin borrowing and interest obligations
IIROC Investor Bulletin: Is a DIY account right for me? (February 2021)