senior vice-president and managing director of wealth management solutions,
In order to stay competitive in todayâs 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 fullâservice firms in both 2009 and 2010 in the US, while most types of fullâservice 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 selfâdirected solutions by fullâservice firms remains low. More than half of US financial advisors surveyed state that their firm does not offer a selfâdirected channel.
Over the next decade, wealth management firms will provide investors with several multiâchannel offerings to appeal to investorsâ growing appetite for online access to information and tools. Firms that provide a selfâdirected 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 preâcrisis 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 fullâservice firms either lost or maintained market share over the last two years, with the exception of RIA firms.
There are many reasons behind wealthy individualsâ 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 selfâdirected advice tools, many of the online platforms offer a rich feature set that might include a multitude of financialâplanning calculators and portfolioâreview capabilities and services. In addition, the recent advances in consumerâoriented technologies have further played into the hands of online brokers. While fullâservice 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 consumersâ assets.
Embracing the selfâdirected investor
The US wealth management industry has begun to recognise the importance of offering online brokerage and selfâservice tools to investors since the crisis years. The pioneers in this space among fullâservice 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 selfâdirected trading capabilities.
Banks have yet to capture their massâaffluent clientsâ investment assets. For example, according to the Aite Group report (3), 13 million of Bank of Americaâs affluent customers do not have an investment relationship with the bank. Younger generations, including the children of highânetâworth and ultraâhighânet 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 costâeffective. 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 massâaffluent customers. Adding new products and services to the direct channel is likely to be more cost effective than distributing new offerings through fullâservice 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 massâaffluent customers, a selfâdirected platform allows firms to generally better satisfy the needs of highânetâworth investors for selfâdirected trading and/or selfâservice 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 selfâdirected platform.
Multi-channel benefits for all
By providing a selfâdirected offering, fullâservice 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 selfâdirected investing option will well position them to capture the investment assets of their large existing massâmarket and emergingâaffluent bank customers. The online channel is particularly well suited to customers in these segments who require standard products and advice. By offering a selfâdirected 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 selfâdirected investments to better meet the needs of their wealthier client base for webâbased access to portfolio information. These web capabilities are increasingly sought after by highânetâworth and ultraâhighânetâworth investors.
Advisors across the industry struggle with how to handle clients that do not officially qualify for their services. By offering a selfâdirected service, firms provide financial advisors with a platform that they can feel good about offering to their smaller clients. Migrating unprofitable clients to the selfâdirected channel frees up advisorsâ time to focus on profitable clients, which should lead to deeper and even more profitable client relationships. Adding a selfâdirected service also allows advisors to attract or retain clientsâ selfâdirected 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 fullâservice wealth management provider are now able to access a full set of products and advice tools/content through a selfâdirected platform. For existing fullâservice clients, the addition of a selfâdirected 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 clientsâ assets.
Fullâservice wealth management firms will need to determine whether the mass affluent market is a worthy investment. If not, the need for a selfâdirected platform is obviously less urgent. But, as selfâdirected offerings grow in sophistication over time and baby boomers retire and transition their assets over to their children, firms without a selfâdirected platform may see a significant erosion of market share.
Fullâservice 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 highânetâworth and ultraâhighânetâworth investors, these web capabilities will suffice. But these selfâservice 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 selfâdirected investing platforms. Selfâservice 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 highânetâworth investors the latest tools designed to improve their financial lives. For firms that cater to the massâaffluent market through an inâpersonâonly offering, adding a selfâdirected 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