Self-directed online traders found to take more risks

Online investors who make most financial decisions without the help of an adviser are more active traders and take bigger risks than those who seek guidance, a new study found.

About 56% of investors who traded securities online described themselves as completely self-directed, while 38% said they got some professional advice and 6% said they got all their advice from an adviser, the J.D. Power and Associates report about online investors said.

Of respondents who said they were self-directed, 14% called themselves aggressive traders who were willing to take risk, compared with 7% of investors who received some financial advice and 4% of those who said they got all their advice from professionals, according to the study, released Oct. 24.

The report was based on responses from 5,024 individuals who invested through online brokers. Investors had to have made at least one online transaction in the previous year to be included in the study.

Online traders as a whole were more likely to have stocks and exchange traded funds in their portfolios than investors who had accounts with full-service firms, said David Lo, director of investment services at Westlake Village, Calif.-based J.D. Power and Associates. Self-directed online investors also were more active traders, with 11% making 60 or more transactions a year, he said.

“Low-cost transaction fees are the norm for online trading, and self-directed investors are far less tolerant of high commissions because they are not taking advantage of the services provided by a financial adviser,” he said.

The study also measured investor satisfaction with their online trading firms, and for the seventh year, St. Louis-based Scottrade Inc. ranked highest.

Online brokerage units of The Vanguard Group Inc. of Malvern, Pa., and San Francisco-based Charles Schwab & Co. Inc. placed second and third, respectively, in terms of overall investor satisfaction.

Over the past several years, customer expectations for online brokers have evolved from caring mostly about cost to valuing fast confirmation of trades, reliable websites, sites with useful resources and, in some cases, branch offices, Mr. Lo said. “These other things are now critical to keeping people as customers,” he said.

Self-directed investors especially like having a branch office so they can get answers right away and make deposits, Mr. Lo said. Customers also tend to be more tolerant of fees if they have a branch near them, he said.

Scottrade has more than 300 branch offices, while Vanguard has very few. However Vanguard has been successful because most of its online investors are less aggressive, Mr. Lo said.

Financial advisers have different ways of handling customers who want to invest online with discount brokers.

Sarah J. Hussey, a principal at The Weston Financial Group LLC of Bridgewater, N.J., which manages $160 million in conjunction with her partners at Integra Investment Service LLC in Lyndhurst, N.J., has phased out customers who did their own online trading.

“Many individual online traders who are not full-time investment professionals are looking for the types of returns that I will never promise,” she said.

Some are highly influenced by popular investment shows, magazines or newspaper articles and would take a lot of her time asking her opinion on something that they had read about.

“I need to be working for the clients who have chosen to have me oversee and manage their hard-earned money,” Ms. Hussey said.

These clients may have thought they were willing to take a risk, but they were really just after higher returns, she said. “They don’t understand what it’s like to take the risk of losing 40%; they just wanted to gain 40%,” she said.

Ms. Hussey said she isn’t willing to take responsibility for that amount of risk.

At Full Life Financial LLC in Nashville, Tenn., Keith Newcomb has a couple of clients who invest online. One uses an online account to buy highly speculative micro-cap stocks into which he believes he has insight, he said. Another trades options as a “serious hobby.”

In all these cases, there is an entertainment aspect or social aspect of wanting to invest in something to which a colleague or friend tipped them, Mr. Newcomb said.

“They’ve all made investments for the thrill of investing in the past,” he said. “Sometimes it has been very costly, but they still enjoy it.”