The self-directed investor – an opportunity for the wealth management industry

7 November 2011

By Joe Stensland,
senior vice-president and managing director of wealth management solutions,

In order to stay competitive in today’s tough economic environment, the wealth management industry is looking to new markets for revenue streams. The recent growth of the self-directed investor client segment has presented an opportunity. Several successful online brokerages have emerged to service this growing customer segment, but there are some full-service wealth management institutions that are still weighing whether they should fully invest. Online brokerages cater almost exclusively to self-directed investors and have been able to gain market share from the traditional full-service firms. In fact, they have gained a three per cent market share from full‐service firms in both 2009 and 2010 in the US, while most types of full‐service firms either lost or maintained market share, according to a recent Aite Group research report (1). Despite the gains of online brokerage firms, the adoption of self‐directed solutions by full‐service firms remains low. More than half of US financial advisors surveyed state that their firm does not offer a self‐directed channel.

Over the next decade, wealth management firms will provide investors with several multi‐channel offerings to appeal to investors’ growing appetite for online access to information and tools. Firms that provide a self‐directed investing solution will hold an advantage over firms that do not, as they will be better positioned to capitalise on the latest consumer technologies and online investing innovations.

Changes in investor behaviour

Following significant portfolio losses realised in 2008 and 2009, investors have become more cautious with their portfolios and increasingly sensitive to the cost of working with a financial advisor. Many clients have shifted assets to online brokerage firms in search of lower fees, greater control over their investments and the latest investing tools. These behaviours explain why online brokerage firms have been gaining assets at the expense of financial advisors over the last few years.

This approach will help firms retain assets and meet the changing needs of clients across wealth segments. Today, online brokerage firms manage 19 per cent of US retail investment dollars and have surpassed their pre‐crisis asset levels by approximately 12 per cent, according to the Aite Group report. Strong net inflows to online brokerage firms have more than compensated for market volatility and the falloff of trading volume in recent years. By contrast, many full‐service firms either lost or maintained market share over the last two years, with the exception of RIA firms.

There are many reasons behind wealthy individuals’ interest in online brokerage offerings. For one, the online players have continuously built out their platforms, going well beyond their initial scope of providing online trading capabilities. When it comes to self‐directed advice tools, many of the online platforms offer a rich feature set that might include a multitude of financial‐planning calculators and portfolio‐review capabilities and services. In addition, the recent advances in consumer‐oriented technologies have further played into the hands of online brokers. While full‐service brokerage firms struggle with how to leverage online capabilities, including access to client portfolios via mobile phones or social media, their online rivals are well prepared to take advantage of the latest consumer cravings for gadgets by integrating the latest technologies into their platforms, thereby capturing these consumers’ assets.

Embracing the self‐directed investor

The US wealth management industry has begun to recognise the importance of offering online brokerage and self‐service tools to investors since the crisis years. The pioneers in this space among full‐service firms have been the larger banks that have recently acquired or invested in wealth management businesses. These players have recognised the importance of providing robust online, mobile and self‐directed trading capabilities.

Banks have yet to capture their mass‐affluent clients’ investment assets. For example, according to the Aite Group report (3), 13 million of Bank of America’s affluent customers do not have an investment relationship with the bank. Younger generations, including the children of high‐net‐worth and ultra‐high‐net worth clients, favour online tools for account information, education, communication and investing. If institutions hope to retain these assets, they will need to provide a multichannel offering - through phone, branch and online - as younger investors have grown accustomed to accessing and purchasing products and services both offline and online.

In the near future, more wealth management firms will invest in a direct business model to cater to the needs of customers in a way that is scalable and cost‐effective. One technology platform can serve the needs of many different types of customers. The platform also allows firms the chance to offer more choice in products and services, particularly to mass‐affluent customers. Adding new products and services to the direct channel is likely to be more cost effective than distributing new offerings through full‐service advisors who need to be trained and who need to take additional time to profile customers for these offerings.

In addition, to better meet the needs of mass‐affluent customers, a self‐directed platform allows firms to generally better satisfy the needs of high‐net‐worth investors for self‐directed trading and/or self‐service tools. Firms that can leverage one platform across their lines of business and client segments will be able to realise the economies of scale necessary to justify ongoing investments in a self‐directed platform.

Multi-channel benefits for all

By providing a self‐directed offering, full‐service wealth management firms are better able to address the needs of clients across wealth and technographic segments. For banks in particular, coupling their offering with a self‐directed investing option will well position them to capture the investment assets of their large existing mass‐market and emerging‐affluent bank customers. The online channel is particularly well suited to customers in these segments who require standard products and advice. By offering a self‐directed service to clients with lower balances, advisors can spend more time delivering the customised advice and solutions that their most profitable and affluent clients often require. In addition, wealth management firms can leverage their self‐directed investments to better meet the needs of their wealthier client base for web‐based access to portfolio information. These web capabilities are increasingly sought after by high‐net‐worth and ultra‐high‐net‐worth investors.

Advisors across the industry struggle with how to handle clients that do not officially qualify for their services. By offering a self‐directed service, firms provide financial advisors with a platform that they can feel good about offering to their smaller clients. Migrating unprofitable clients to the self‐directed channel frees up advisors’ time to focus on profitable clients, which should lead to deeper and even more profitable client relationships. Adding a self‐directed service also allows advisors to attract or retain clients’ self‐directed dollars. Capturing these assets presents benefits, such as the decrease in client attrition and an increase in the stickiness of assets.

In addition, clients who previously could not receive investment solutions from a full‐service wealth management provider are now able to access a full set of products and advice tools/content through a self‐directed platform. For existing full‐service clients, the addition of a self‐directed channel enhances the value provided by the firm by allowing investors to gain more control over their investments and financial lives by consolidating assets and by enhancing the value of financial advisors. The latter are better able to provide advice on a larger share of their clients’ assets.

Looking ahead

Full‐service wealth management firms will need to determine whether the mass affluent market is a worthy investment. If not, the need for a self‐directed platform is obviously less urgent. But, as self‐directed offerings grow in sophistication over time and baby boomers retire and transition their assets over to their children, firms without a self‐directed platform may see a significant erosion of market share.

Full‐service firms are no doubt likely to enhance their website and add mobile capabilities in order to deliver better and more frequent information and statements to investors. For a percentage of high‐net‐worth and ultra‐high‐net‐worth investors, these web capabilities will suffice. But these self‐service capabilities will have trouble keeping up with the latest innovations in consumer technology, which are not subject to the same level of competition as are self‐directed investing platforms. Self‐service tools are not significant revenue generators, but are instead part of the cost of servicing clients. Firms that enter the business of providing online brokerage services directly to investors will be technology innovators and better able to offer their high‐net‐worth investors the latest tools designed to improve their financial lives. For firms that cater to the mass‐affluent market through an in‐person‐only offering, adding a self‐directed solution is now essential if they wish to cater to the needs of this diverse segment with an appetite for online information.

1. Blurring The Lines: The Impact and Importance of Self-Directed Investing in Wealth Management

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