After several years of steady increases in the number of consumers working with financial advisors, the rise of “free” digital trading apps over the past 16 months may begin to turn the tide.
Engagement with a traditional advisor fell 4.3% among U.S. investors in 2021, according to research by Parameter Insights. For investors who use an online brokerage, the presence of a financial advisor dropped by 11%.
Meanwhile, the use of self-directed investments continues to grow. A separate FINRA report found that over 10 million new accounts were opened in 2020 at discount brokerages like Robinhood, Charles Schwab, Fidelity Investment and E-Trade.
New investors feel more empowered than ever to manage their finances on their own with a wide selection of easily accessible and affordable trading apps, while consumers who are already working with an advisor are using online brokers to test the value of professional investment management, says Parameter Founder and CEO Josh Book. Taken together, these behavioral changes could suggest a coming shift in the role of financial advisors.
“There are plenty of alternatives… It’s pretty easy to build a portfolio with a few ETFs,” Book says. While it’s too early to tell what this means in the long term, it’s a sign that companies need to get serious about how they engage digitally with retail investors, he adds. “The sophistication of the online brokerage experience is only getting better and happening faster than traditional advisory channels are modernizing to create more perceived value for increasingly tech-savvy cohorts of customers and comfortable with digital.
Discount brokerages and new startups aren’t the only ones putting pressure on traditional wealth management. Citigroup became the latest to enter the fray in July with the launch of a DIY service called Citi Self Invest, which offers free trading of individual stocks and ETFs to checking account clients. Bank of America Merrill Lynch and JPMorgan Chase already have a significant presence on their self-managed trading apps and are getting better at cross-selling clients on full-service and digital advisory offerings. And the acquisition of E-Trade by Morgan Stanley has brought important new assets for the company’s wealth management activity after retail activity “off the charts”.
“Some companies do a really good job of thinking about on-ramps and exits between consumption channels,” Book says. “There’s still so much that’s siled, especially among full-service businesses, but the better they understand their customers, the better they’ll be at helping those people in the most appropriate channel.”
Refinitv, a financial markets data and infrastructure provider that was pushing to develop in wealth management, sees it as an opportunity to help others keep up. The company’s new active investor provides white-label technology to medium and large brokers and banks to launch their own self-managed trading applications.
Active Investor uses HTML5 to integrate with a company’s current digital infrastructure, which means that self-directed trading can be offered alongside brokerage capabilities and use existing order management systems for trade execution. says Charles Smith, head of digital solutions for Refinitiv’s wealth management team. Active Investor can include Refinitv’s data and analysis to meet the needs of more sophisticated investors, and be customizable to offer a simplified version for newcomers, he says.
While not providing specific names, Refinitiv is rolling out self-directed investing to two companies and is in talks with several others, Smith adds.
“Clients want to manage some of their investments themselves, which gives them a channel to do that,” Smith says. “[Advisors are] probably miss some of those customers or those dollars that go to some of those other channels.
Keeping these self-managed assets in-house can have other benefits, such as giving advisors insight into how clients are trading and providing them with more opportunities for advice. And by using the company’s existing brokerage, custody and clearing infrastructure, it’s easier to move money, Smith says.
“If you really want to be a one-stop-shop for your wealth management clients, having a self-managed channel is really the way to go,” he says.
Despite the increase in consumer demand for self-directed commerce, Smith disagrees that the need for advice is diminishing. Advisors still have a role to play; it just continues to move further away from investment management and closer to the idea of “holistic financial wellness”.
“It’s not about what I should buy and sell, but how I manage my entire financial lifecycle,” he says.