Investor behavior is a big reason why the online broker service is so bad

Stock markets at BMO InvestorLine, the Bank of Montreal’s online broker, on King Street in Toronto

Fernando Morales / The Globe and the Post

When the volume of stock trading spiked last March, online brokers should have had more foresight to expand their online and phone customer support capabilities.

But the rush to trade stocks lately is like nothing we’ve seen before – a trading tsunami that continues to intensify.

Online broker BMO InvestorLine reported late last week that trading volume was double what it was the previous week, which was a record in itself. « It’s a steady increase, » said Silvio Stroescu, President of InvestorLine, in an interview in mid-January. « The dynamic continues to grow. »

Globe and Mail’s latest online brokerage ranking doesn’t include phone response times, and the average for the 12 companies was a dismal 92 minutes (check ranking on company data). Heavy social media trading in GameStop and other stocks over the past week contributed to website outages at some brokers, meaning customers were unable to access their accounts or place trades.

According to InvestorLine, January was a record month for trading volume, with levels 30 percent higher than the first three months of COVID-19 and more than twice the peak trading volume for a typical registered retirement plan season the first two months of the year. During the spring COVID peak months, volumes were twice higher than the typical months and 66 percent higher than the RRSP season peaks.

The last big surge in trading to hit broker websites was in 2018 when investors jumped into cannabis stocks. What is different today is how the excitement about stocks attracts newbies to investing online.

According to InvestorLine, the new account applications will run 2.5 times as high as last year, and the requirements for transferring money to InvestorLine accounts are five times higher than before COVID. In the first nine days of January InvestorLine processed more transfer requests than in all of January 2020.

Part of the burden on brokers can be explained by the new client background. « Many of the new customers that have come to us are also new to investing, » said Stroescu. « There is obviously a learning curve – an educational component. »

As part of its cooperation with online brokers, the American consultancy Dalbar Inc. checks the quality of the conversations between customers and representatives at online brokers. Anita Lo, vice president of Dalbar Canada, said a recent exchange highlighted how green some investors are.

The call came from a person who had made a big gain on a particular stock and wanted to take profits. « He didn’t understand that he had to sell some of his shares, » said Ms. Lo. « The rep said, » Sir, you need to sell some stocks. « The customer said, » No, I just want to take out some money. Just send me a check. « 

Agents also phone existing customers who want to get more aggressive by trading options or using money borrowed through margin accounts. They also answer calls from people who want a status report on their account transfers.

Mr. Stroescu said that InvestorLine will soon have 40 new employees ready for phone calls (they now have 183 full-time employees) and that more new employees will be added. What took so long The process of introducing this new cohort actually began last October. It takes so long to recruit, hire, train, and license a live representative.

Brokers could and should do better at connecting clients to their accounts and their employees. However, what is happening today is as much an investor problem as it is a broker problem. Too many people trade stocks instead of investing wisely.

It’s all very similar to the 1999 conditions when a tech stock craze attracted small investors and overcrowded brokers. The burst of the tech bubble in 2000 ended this problem in a hurry.

It is common nowadays that COVID-19 is an amplifier for social trends and personal emotions. COVID has juiced the stock market, in part by keeping people at home and needing distraction.

The obvious question for online brokers: what if COVID is still available at the next stock market correction? Let’s hope brokers plan this alarming opportunity better than they did when preparing for today’s trading frenzy.

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Why do most investors fail?

Within a year 25%
In over a year 31%
never 44%

What shouldn’t you invest in?

Types of Investments New Investors Should Avoid

  • Mutual funds with high expense ratios or sales loads.
  • Any type of derivative including stock options.
  • Any single inventory for which you cannot answer multiple questions.
  • Complex private companies to minimize taxes.
  • Junk Bonds and Foreign Bonds.

What percentage of investors are losing money?

According to popular estimates, 90% of people lose their money in the stock markets, and this includes both new and experienced investors. Isn’t it shocking? But it’s a fact. The reasons why investors lose money in the stock markets are innumerable.

What percentage of investors are successful?

It is estimated that only 20 percent of investment professionals are successful investors. Success could be defined as a return that is as good or greater than the average profit on the stock market.

Which economic concept tries to explain why investors behave irrationally?

Which economic concept tries to explain why investors behave irrationally?

Behavioral finance could be said to have arisen to rationally explain the irrational behavior of markets and investors, or, as one recognized economist put it, finance from a broader social science perspective, including psychology and sociology.

How does representativeness affect financial behavior?

Representativeness heuristics can mislead investors. For example, investors may be tempted to predict future earnings based on the brief history of high earnings growth observed in the past. These estimates are then used to value the company’s shares and therefore may result in overvaluation.

What are the behavioral finance concepts?

Behavioral finance is the study of the influence of psychology on the behavior of investors or financial analysts. This also includes the following effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own prejudices.

What are the four market behaviors?

Consumer behavior can be broken down into four key categories: awareness, preference, engagement and advocacy. Each of these phases is important to the marketer.

What are two common behavioral biases that affect investors?

What are two common behavioral biases that affect investors?

7 behavioral biases that can affect your investments

  • Loss aversion. People often feel the pain of loss more than the joy of gain. …
  • Confirmation failure. People are often drawn to information or ideas that confirm existing beliefs and opinions. …
  • Mental accounting. …
  • Illusion of control bias. …
  • Timeliness bias. …
  • Hindsight failure. …
  • Herd mentality.

What are the 5 types of bias?

We’ve listed the 5 most common types of distortion:

  • Confirmation failure. Occurs when the person performing the data analysis wants to demonstrate a given assumption. …
  • Choice bias. This occurs when data is subjectively selected. …
  • Runaway. An outlier is an extreme data value. …
  • Overfitting and underfitting. …
  • Confusing variables.

What are the 3 types of bias?

Three types of distortion can be distinguished: information distortion, selection distortion and confusion. These three types of distortions and their possible solutions are discussed using various examples.

How do prejudices affect investor behavior?

They define abbreviations or heuristics that save time but can dissuade them from thinking rationally and long-term. By avoiding behavioral bias, investors can more easily make impartial decisions based on the data and logical processes available. more about individuals’ financial decision-making processes.

What are the behavioral biases?

Irrational decisions and behaviors rational decisions. Such prejudices can be cognitive, emotional, or reflexive. They are either individual or collective. … They are biased in this regard, but they cannot be called a fault.

Are Investors Irrational?

In fact, people often act irrationally – in counterproductive, systematic patterns. 80% of individual investors and 30% of institutional investors are more sluggish than logical. These deviations from theoretical predictions have paved the way for behavioral funding.

Why do investors show too much confidence in their traders?

Pompian (2006) mentions the errors that usually arise due to overconsciousness about investing in the financial markets. (1) Overconsciousness can result in investors not actually engaging in excessive trading based on the belief that they have specialized knowledge, (2) …

Investor behavior is a big reason why the online broker service is so bad
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