Where your young boomers prospects are going for advice

Investors across all wealth tiers are more accepting of online advice models, such as self-directed platforms, Cerulli reports

Mar 13, 2014 @ 12:59 pm

By Joyce Hanson

With nearly half of young baby boomers now using self-directed investment platforms, the traditional advisory model used by wirehouses is facing a dual threat from discount brokerages and electronic registered investment advisers — the so-called robo-advisers.

Indeed, investors of all ages and across all wealth tiers are increasingly willing to get their financial advice either from direct platforms or from eRIAs, global research firm Cerulli Associates Inc. said in a report Thursday.

Fully 49% of boomers 50 to 59 report that they are self-directed investors, according to data compiled by Cerulli and Phoenix Marketing International. This compares with 41% of investors under 30, 43% between ages 30 and 39, 42% between 40 and 49, and 40% between 60 and 69.

(See also: Robo report: Traditional advisers may be biggest market for online investment services.)

Direct advice providers such as Fidelity Investments and The Charles Schwab Corp. and eRIAs such as Wealthfront Inc. and Betterment may present a substantial threat to wirehouses, but firms in this traditional channel are beginning to see an opportunity to adapt their business models, according to Cerulli senior analyst and report author Patrick Newcomb. He pointed to Merrill Lynch's launch a few years ago of the Merrill Edge platform for midtier investors.

“Is this disruption or convergence? Direct broker-dealers and eRIAs can be seen as a threat to the traditional model, but there is overlap between all of these business models,” Mr. Newcomb said.

So far, eRIAs and direct broker-dealers have been using scalable technology to reach underserved clients without enough investible assets to fit in most wirehouse service models, Mr. Newcomb said. In addition, discount brokerages and eRIAs both are increasingly using technology to replicate many traditional advisers' core service offerings, he said. These services appeal to higher-end investors as well.

Though wirehouses are now picking up on this opportunity, the Cerulli report warns that wirehouse home offices seeking to offer their own version of Merrill Edge risk competing with their own advisers, instead of simply offering an additional service to a new set of clients.

But there is hope if wirehouses tread carefully, Mr. Newcomb said.

“Traditional advisers are using the direct model in a new way to bring on younger [clients] or smaller account sizes, and then as those accounts grow, they can eventually be handed off to a traditional adviser,” he said.

For now, the Cerulli report suggests that discount brokerages pose a greater threat to wirehouses than robo-advisers. Unified managed accounts in 2013 comprise 22% of the assets in the direct channel, up from only 1% of assets in 2010.

In comparison, though eRIAs are seeing rapid growth, it's only from a small base of assets.

“eRIAs are in their infancy and growth rates such as 200% may only present $100 million in new assets,” according to the Cerulli report.

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