How online trading is driving investors to human advisers

As self-directed investors have been experiencing the ups and downs of the financial markets, the more established financial planning industry is starting to catch some of the fallout in the form of investors realizing there are limits to what can be gleaned from most trading apps and digital platforms.

“We’ve found that some of the early adopters of Robinhood are moving on to more stable and legacy systems like Fidelity and Schwab,” said Scott Smith, director of advice relations at Cerulli Associates.

According to Smith’s research, the growing popularity of Robinhood and other trading apps has spawned a new community of potential advisory clients, including self-directed investors who have seen their accounts grow to levels that now command more professional advice, and investors who have been whipsawed by the meme stock frenzy.

“If you’ve been investing recently, you’re definitely sitting on a bigger pile of money,” he said. “And the good thing is, people are looking for help before bad things happen.”

On the meme stock craze that was exemplified earlier this year with the extreme rise and fall of GameStop Corp., Smith said investors learned lessons the hard way. “While these niche stocks accounted for less than 0.1% of market activity at the time, it highlights the need for advisers to keep tabs on how their clients consume and act on financial information,” he said.

Even before the January GameStop saga, self-directed investors were acknowledging the potential benefits of some human advice. According to the results of a survey of 3,500 individual investors, Cerulli found that 31% said they are willing to pay for financial advice, which is up from 25% in 2019.

That same survey showed that 34% of respondents acknowledged needing more financial advice than in the past, which compares to 28% in 2019.

As a wealth adviser at Bridgewater Advisors, Ian Harvey is not surprised that self-directed investors eventually come around to the notion of wanting some help.

“This speaks to the importance of defining the interconnectedness of our clients’ lives and their investments,” he said. “While many can invest on their own, how those investments tie to their ability to achieve goals, are weaved into tax and estate planning, and pair with proper risk management tools are important considerations not yet handled in concert on digital platforms.”

Diane Pearson of Pearson Financial Planning is also not surprised that self-directed investors are recognizing the limits of digital trading platforms.

“I primarily provide hourly and project-based financial planning services, and I find many clients find the digital platforms do not provide enough flexibility,” she said. “Therefore, they are looking for a planner who can.”

Jamie Ebersole, founder of Ebersole Financial, said the growing appeal of human advisers could be a sign of investors becoming more concerned with stock market valuation levels.

“We are seeing more and more younger clients coming to us looking for advice specifically related to today's market conditions,” he said. “While many DIY investors are comfortable investing with minimal advice while the markets and the economy are performing well, in times of turbulence and uncertainty, like today, they are looking for someone to provide insights and guidance so as to avoid making big mistakes.”

Ebersole said, since the middle of last year, he has seen a “significant increase in new clients seeking help with portfolio decisions as the pandemic has unfolded and the economy has moved through its various phases of recovery.”

“Throw into the mix the talk of increased taxes and fiscal stimulus, emerging inflation and it's not hard to understand why clients are seeking to speak with live professionals,” he said.