As clients get more affluent, educated and confident about their financial know-how, more financial advisers are discovering separate brokerage accounts in which clients are managing portfolios on the side.
The trend, which has been building over the past several years, is redefining the traditional industry breakdown of investors who delegate to professionals and those who do it themselves.
“We're finding that the delegator-versus-DIY investor doesn't really fit anymore, because there's such a huge discrepancy between what kind of investors people say they are and what they are really doing,” said Chris Brown, partner and co-founder of Hearts & Wallets, a financial research platform. “Investors tend to bucket their money, and the more wealthy they are, the more they will bucket their money.”
In a research report released Friday, Mr. Brown takes the traditional industry view of delegators and do-it-yourselfers among affluent households, and adds the hybrid of investors working with an adviser while also managing some of their own money, and a fourth category of investors working with banks, insurance companies or directly with money managers.
By digging into the data of households with investable assets of between $100,000 and $5 million, he found that almost half of those investors who identified themselves as delegators working with an adviser are actually also managing their own accounts through a separate brokerage account.
CHALLENGE AND OPPORTUNITY
For financial advisers, this kind of data suggest both challenges and opportunities, because one of the fastest-growing categories is represented by those clients working with an adviser and managing a self-directed brokerage account.
That segment now represents 25% of the affluent investor market, up from 18% two years ago.
“This tells advisers that there's more business and more assets that clients have, and as they get older, if they start to consolidate, the odds are they will consolidate with the advisers,” Mr. Brown said.
The fully self-directed segment is the largest at 49% of the affluent market, up from 40% two years ago.
Those two categories are growing at the expense of the segment working directly with banks, insurers and money managers, which has dipped to 11% from 19%.
The full-service only category, which was the traditional delegator segment, has fallen to 16% from 19%.
Most financial advisers have learned to accept the fact that some clients will want to manage some of their money on their own, but that doesn't mean the adviser is completely ignoring the assets.
“I understand that some of my clients like to trade their own accounts, and frankly some of them are good at it,” said Tim Holsworth, president of AHP Financial Services.
ASSETS COME BACK
“Having been in the business for more than 30 years, absolutely we're seeing this, but the
consolidation also happens,” he added. “More times than not those assets come back to us because the client no longer wants to mess with trading his own account or he has the audacity to die and his widow shows us the brokerage account.”
Theodore Feight, owner of Creative Financial Design, estimates that a small percentage of his clients are trading in their own brokerage accounts.
“I ask them what they are going to do when we have the next
recession, because we use stop-loss orders to get them out of the market,” he said. “I ask them what they will do in their self-service account.”
When Mr. Feight discovers a client is also working with another financial adviser or broker, he challenges the client to compare performance for five years, “then give the best adviser the money.”
“I have moved over $750,000 this year from that idea,” he said.
Rose Swanger, principal at Advise Finance, believes the appeal of self-directed brokerage accounts is just an attempt to try and save some money on advisory fees.
“From what I can see, people in the self-and-full service category want to save money, but they are doing so at the expense of future bigger savings,” she said. “Without working with an adviser, by choosing the wrong investment advice or wrong
withdrawal order in retirement, investors may end up paying a hefty price.”
