Online platforms a growing threat to traditional advisers

Two reports show growing popularity of web-based personal finance startups and discount brokerage platforms in wake of 2008 crisis.

Online personal finance startups and discount trading platforms are not just for the do-it-yourself crowd anymore — and that poses a threat to traditional financial advisers, new reports from Corporate Insight and Cerulli Associates Inc. show.

The Corporate Insight study, released Wednesday, takes note of more than 100 investing and personal finance startups with great appeal for younger investors. Nearly twice as many U.S. retail investors are using direct-to-investor platforms offered by discount brokerages such as The Charles Schwab Corp., Fidelity Investments and E-Trade than in 2008, when the financial crisis hit, according to the Cerulli report, released Monday.

“As a member of Gen X/Y, I find obfuscated fees, wrap programs and commissions are a huge turnoff,” Bill Winterberg, a certified financial planner and publisher of the website FPPad.com, wrote in an e-mail. “The direct providers largely operate in this clear and simple pricing realm, so they’re poised to win more and more business.”

While discount brokerages have long appealed to do-it-yourself investors, their improved tech platforms and financial planning services now also appeal to mass-affluent investors who lost trust in big banks during the market meltdown. Add to that the growing popularity of online startups, and it’s clear that traditional financial advisers must now work harder to capture investors’ assets.

Corporate Insight’s report, “Next-Generation Investing: Online Startups and the Future of Financial Advice,” examined more than 100 investing and personal finance startups and found that they are redefining how investors get financial advice with scalable, low-cost solutions.

Among these startups are Jemstep, which offers automated “buy” and “sell” recommendations for client portfolios; Covestor, which allows investors to mimic the trades of professional investment managers; and LearnVest, which offers online-only personal financial adviser relationships without any face-to-face interaction.

To be sure, not all of these startups will succeed.

“The reality is that I looked at 130-odd startups and some of them will fail,” said Grant Easterbrook, a Corporate Insight analyst and the report’s author. “There is an attrition rate, especially as they are tied to the market. If the market tanks due to the euro or the Middle East or quantitative easing, customers will flee to the sidelines.”

Mr. Easterbrook added, however, that the proliferation of startups highlights the longer-term trend of baby boomers being replaced by Generation X and Generation Y investors.

“When you look at those Gen X and Y investors, they’re not as interested in face-to-face meetings, and they have a lot of negative perceptions about the major financial institutions,” he said. “These people don’t trust the big wirehouses.”

According to the Cerulli report, “U.S. Retail Investor Product Use 2013,” of the roughly $27 trillion in retail investor assets, $4.3 trillion now is on discount brokerage platforms — twice as much as in 2008. The advisory channels account for $15.4 trillion of that total, while channels such as non-adviser-sold retirement plans account for $4.5 trillion.

At $5.2 trillion in assets, wirehouses still control the largest slice of the advisory segment, but their influence is slipping. “The four firms that comprise the channel have lost overall market share in the last several years, but remain the most concentrated asset bases in the retail investing world,” Cerulli reported.

As online tools become more popular, however, assets will move away from wirehouses toward independent advisory channels, as well as direct distribution platforms, especially for mass-affluent investors with assets in the $500,000 to $2 million range, the Cerulli report predicted. Among the channels, registered investment advisers have seen “the most appealing growth” in the past four years, the report noted.

“The results, to me, signal the ongoing trend that began nearly 15 years ago — the ongoing rise of discount brokerage platforms [as they] continue to commoditize the core elements of creating and implementing portfolios,” Michael Kitces, partner and director of research at the Pinnacle Advisory Group and publisher of The Kitces Report and Nerd’s Eye View, wrote in an e-mail. “Advisers who are relying on generating commissions or fees from simply implementing basic passive, strategic portfolios, and regularly monitoring them, will be under increasing price pressure and competition. For most of them, the way out is to provide a deeper level of customized advice.”