Do-it-yourself model gaining ground on advisers

Feb 26, 2012 @ 12:01 am

By Andrew Osterland

When the going gets tough, investors seek help from investment professionals. That is the conventional wisdom, but it seems that the worst economic downturn in the lives of most of today's investors has prompted an unconventional response.

New research suggests that after going through a harrowing investment experience during the financial crisis, investors have emerged ready, willing and able to go it alone.

“The mainstream investor is increasingly self-directed in their decision making,” said Sophie Schmidt, an analyst with Aite Group LLC. “The online brokerages grew assets by close to $1 trillion between 2008 and 2010.”


The consultant estimates that online brokers gained 3 percentage points of market share during that period while the wirehouses lost 1.1 percentage points and other retail brokerages lost 4 percentage points.

Between 2008 and 2010, assets on such direct-investing platforms as Charles Schwab & Co. Inc., Fidelity Brokerage Services LLC, TD Ameritrade Inc. and The Vanguard Group Inc. grew to $3.7 trillion, from $2.6 trillion, according to research released last week by Cerulli Associates Inc. Numbers aren't yet available for last year.

Although that is less than a third of the nearly $12.5 trillion managed by financial advisers, assets at online brokerage platforms grew at a compounded annual rate of 19%, compared with 14% in adviser channels of distribution in that two-year period.”We rank it as the second biggest distribution channel after the wirehouses,” said Katherine Wolf, associate director at Cerulli. “The market is bigger than many people recognize.”

And it will continue to grow. Cerulli predicts that assets in the direct market will grow to nearly $5 trillion by the end of 2014.

The migration of assets in part may be an emotional reaction to the financial crisis.

“I think behavioral finance comes into play here,” said one wirehouse adviser, who asked not to be identified.

“Investors got disgusted with financial advisers who didn't help them in 2008-09, so they've moved assets to self-directed accounts,” the adviser said. “They're jaded and they won't trust anybody else. I fear for the moms and pops who think they can manage their investments by themselves.”

The development of the online platforms is likely giving investors added confidence. The number of mutual funds and exchange-traded funds — increasingly with no sales commission loads — continues to grow on the biggest direct platforms.

Fidelity, for example, has more than 1,000 commission-free ETFs, and more than 30,000 bonds in inventory, according to spokes-man Steven Austin.


The analytics, financial planning tools and research are getting better, as well.

“Our trading tools and research are constantly evolving and improving,” Mr. Austin said.

Fidelity had 13.5 million retail brokerage accounts, holding $1 trillion in assets, at the end of last year, the spokesman said.

The direct-investing firms also are developing a range of offerings with varying levels of guidance and advice.

The E*Trade commercial now on the air highlights the low-cost advice available through the online broker. The firm also will manage a portfolio of mutual funds and ETFs for between 60 and 95 basis points.

Fidelity will manage assets for as few as 25 basis points, depending on the size of the account and whether the investor uses Fidelity fund products in his or her portfolio. For accounts of at least $200,000, it will manage the money for after-tax performance.

Managed-account programs at some of the larger companies may even have estate attorneys on staff for consultation. In general, the fees in such programs are less than 1% of assets.

“The offerings are pretty extensive and can replicate what traditional advisers offer,” said Ms. Wolf, who expects that direct providers will control about $380 billion or 10% of all retail managed accounts by 2014.

Some migration of assets to self-directed platforms is by design — at least from the wirehouses' perspective.

The major Wall Street firms have been raising minimum account thresholds for their financial advisers for years in an effort to improve their productivity. Merrill Lynch Wealth Management, for one, this year lowered payouts to its advisers on accounts of less than $250,000 — in some cases, not paying anything if they have too many such accounts.

Merrill Lynch is hoping to serve those smaller accounts on the online Merrill Edge platform launched in mid-2010.

With the ability to aggregate banking and investment accounts, the platform offers $6.95 trades for equities and ETFs for the true self-directed investor — it is free for accounts above $25,000. For a $125 annual fee, investors can also call financial professionals for advice or visit them in a branch.


It isn't just the lower end of the investor spectrum that is choosing a self-directed path.

In fact, high-net-worth investors, according to Ms. Wolf, have made an even more substantial shift to self-directed investing. In 2008, a survey of 550 investors with at least $5 million in investible assets found that 21% said their investing orientation was self-directed; 36% said they were adviser-directed. In 2011, the proportions were reversed, with 36% self-directed versus 22% adviser-directed. The survey was conducted by Cerulli and Phoenix Marketing International Inc.

About 67% of all households in the country now have a direct account, with about one quarter using it as their primary investment relationship, Ms. Wolf said.

“Some investors want to try out their own ideas and compare them to results they get with a financial adviser. Others are just testing services elsewhere from where they have most of their money,” Ms. Wolf said.

It appears that many investors are hiding those outside accounts from their advisers.

In a Cerulli survey, advisers estimated that 20% of their clients maintained outside direct accounts. However, when Cerulli surveyed investors with an adviser, 76% said that they also had a direct account.

“I think financial advisers overestimate their influence with their clients,” Ms. Wolf said. “They want to believe that they have the bulk of wallet share, and it's difficult for them to admit if they don't.”

It is increasingly hard to deny.


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