An increase in day trading prompts advisers to change their approach

Day trading

The market downturn in March and April 2020 that abruptly ended a 12-year bull run in equities presented rare buying opportunities not seen since the end of the last recession in 2009, and with millions of Americans now working at home, people are devoting more time to day trading in lieu of other activities, according to the latest Cerulli Edge – US Retail Investor Edition.

While day trading is traditionally seen as the domain of investors with limited advice relationships, adviser-reliant households keep substantial portions of their assets independent of their advisers. According to the research, adviser-assisted households indicate that they maintain discretion on nearly 40 per cent of their assets, despite entering an involved relationship with a traditional adviser. During this period of market volatility, there is potential for investors to aggressively pursue investment decisions without adviser consultation – especially if they have expressed interest in specific securities previously.

Trading among young investors has increased notably. This group is particularly vulnerable to making investment decisions based on immediate reward, creating misalignment between short-term gains and long-term goals. Behavioural biases, such as herding and confirmation bias, can influence key decision-making. 

“When such large movements in low-priced stocks lead to double- (or even triple-) digit percentage gains, it is common to see investors try to get in on the act out of fear of missing the rally, while a few good picks at market lows lead other investors to feel as though they are being rewarded for their stock-picking prowess,” says John McKenna, retail investor market analyst at Cerulli. 

These situations can lead to potentially dangerous investing consequences as investors seek aggressive investment strategies without considering whether the position aligns with long-term investment objectives, creating disproportionate vulnerability if, and when, the bubble bursts.

Cerulli has long emphasised the need for advisers to be active listeners and engage with their clients, but current trends could potentially call for a more inquisitive disposition. 

“Instead of attempting to squelch clients’ interest in hopping on the latest investing bandwagon, advisers can strengthen their relationships through collaboration,” adds McKenna. By understanding the size and objectives of a client’s personal trading account, the adviser can help set budgets and ground rules to help their clients make optimal choices on their own. The behavioural biases mentioned above can severely undermine a client’s trading decisions, making an advisor’s assistance critical in avoiding missteps.