Discount Trading Platforms Transform Into Comprehensive Advice Providers



Direct-to-investor assets have nearly doubled in the four-year period ending in 2012. The growth rate has outpaced advisor-intermediated investing as discount trading platforms popular with do-it-yourself investors move into the advisory space, a new report finds.

At the same time, the number of investors who acknowledge that they rely primarily on an advisor for their investing needs dropped to 32 percent in 2012, down from 36 percent in 2008. This comes even as investors are willing to pay more for financial advice.

Discount trading platforms like Charles Schwab & Co., Fidelity and Etrade Financial, once valued mainly for their low-cost transaction capabilities, are transforming themselves into “comprehensive advice providers.”

“Formerly considered the tool for do-it-yourself investors, these firms now provide a suite of services to investors across wealth and service tiers, providing legitimate competition to their traditional advisory peers,” said Roger Stamper, senior analyst with Cerulli Associates.

Direct-to-investor channels differ from advisory channels in that the firm is responsible for investor-level marketing, finding prospects and generating advice. In traditional advisory firms, individual advisors bear those responsibilities, Cerulli said.

At the end of last year, U.S. retail investors controlled more than $26.6 trillion in what Cerulli calls “total addressable investment assets.” The advisory channels account for $15.4 trillion, direct channels for $4.3 trillion, and other intermediate channels controlled by non-advisors, such as insurance agents, $4.5 trillion.

While advisor-intermediated investing retains the largest market share among U.S. retail investors by far, the direct-channel firms have been “able to implement industry best practices, significantly leapfrogging their advisory counterparts,” Stamper said.

Encouraged by the inexorable march of technology to cut costs and trading commissions, investor assets are expected to continue their migration away from traditional wirehouses such as Morgan Stanley and Merrill Lynch toward independent advisory channels and direct-distribution models, the Cerulli analysis also noted.

The findings are detailed in “The Cerulli Report: U.S. Retail Investor Product Use 2013: Impact of Change in Investor Risk Appetite,” which was released last month. They offer a window into the market share battles waged by retail distributors as the financial markets regain the ground they lost in the Great Recession.

Investors also appear to have a deeply “conflicted” view of their advisors. On the one hand, investors said they relied less on advisors in 2012 than they did in 2008, yet the number of people indicating they were willing to pay for advice rose from 35 percent to 37 percent.

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More information has enabled consumers to exert more control over their portfolios at the expense of advisors, the Cerulli report said. At the same time, this has meant more “real or perceived volatility,” and that has sent clients, particularly those with higher net worth, to “seek out paid advice to complement their own findings.

“The overall result of these trends has been a moderate shift of investors away from traditional advisor models and into more flexible advice arrangements,” provided by the Fidelitys, Schwabs and ETrades of the industry, the report said. These companies have added advice components to address customer demand.

To compete, traditional advisors need to “reinforce the value of comprehensive planning through personalized advisor relationships,” the report said.

The report, which also analyzed the perception of different products in the marketplace, found annuities faring well. Positive perceptions of annuities – income generating products – were highest among investors with household investable assets of more than $5 million.

“Expectation of purchasing an annuity in the next year correlates highly with investable assets, peaking at 20 percent of those with more than $5 million,” the report said.

A total of 30 percent of respondents with more than $5 million in investable assets said annuities are a good way to generate income, while 22 percent of respondents with income between $2 million and $5 million said so. They are still perceived as too expensive, though, particularly among high-net-worth investors.

Households with more than $100,000 in investable assets all had net favorable impressions of annuities, the survey found.

Investors, the report said, have a “relatively paltry interest in aggressively growing wealth unless it is framed within the construct of securing their retirement income.”

Baby boomers with between $500,000 and $2 million in investable assets, and who are approaching or already in retirement, are more interested in stability than growth. They remain chastened by the terrible downturn in 2008, which occurred just three years before the leading edge of the baby boom generation began to retire.

is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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