Online brokerages and self-directed investment platforms had a strong showing across generations in a recent study by Boston-based research firm Aite Group.
The survey measured the investment tendencies among three groups with over $25,000 in investable assets: retirees, pre-retirees more than 10 years away from retirement and pre-retirees less than 10 years away. Results showed that while reliance on advisors generally increased with age, roughly 85% of pre-retirees were "extremely self directed," and that number is on pace to last into their retirement years.
"As these tools improve and continue to bind themselves to actual retirement savings activities, this self-directed tendency is likely to continue among pre-retirees through retirement as a life stage," the report stated. "Consequently, advisor firms must continue to address investor online services that speak to this strong self-directed tendency."
According to Greg Cherry, a senior analyst at Aite who authored the report, it is hard to say exactly why the demand for online brokerage firms is so high because of the lack of comparative data. He suspected that they may in fact have gotten a boost from the fall-out of the 2008 financial crisis.
"It's one of those situations where I wish I'd had this picture as of 2006 or 2008 or January of 2010. Having this picture now, it's not surprising - given the tilt, but would have liked a historical perspective," Cherry said in a phone interview. "One hypothesis would be that it maybe got a bit of a bump from '08, reflecting dissatisfaction from the 2008 experience."
Another factor is that many of the larger firms have set a minimum of investable assets at $250,000, which means that many wirehouses are "somewhat hamstrung by the percentage of people who can actually play there," according to Cherry.
Younger generations and those more than 10 years from retirement are the most dependent on self-directed strategies. Sixty two percent of those more than 10 years away from retirement had an advisor compared to almost three-fourths (74%) of retirees who enlisted help from a wealth manager. Many begin to incorporate or rely more heavily on an advisor around age 50, he said.
However, the focus on self-directed strategies has left many pre-retirees at all levels without a concrete, written plan for their retirement. According to the report, a written retirement plan existed for less than 50% of respondents among all levels. Combine that with the fact that those pre-retirees more than 10 years out have high expectations to retire early (50% plan to retire before 65) and a majority (68%) lack pension access, and advisors are looking at a sizeable pool of potential clients, Cherry noted.
"Such a low penetration shrieks opportunity for firms seeking to attract these assets, and such low planning rates overall speak to a greater need for firms seeking to provide value and attract assets," the report said.
Firms will be best positioned to take advantage of that if they can tailor an online offering that can attract clients regardless of levels of investable assets. Firms that can match online services with face-to-face or telephone consultation will be strongly positioned, Cherry said.
"Large brokerage firms wishing to gain share will have to lead with a financial planning-centric proposition," he explained in the report. "Unless large brokerage firms and their financial advisors are serious in engaging these needy clients based on their many planning needs, these clients will go elsewhere."
The report points to a few specific programs, such as Merrill Edge and LPL's NetWise as online offerings that can help to lure in clients early on, even when assets are below $250,000. The goal is to bridge planning with self-directed investment, "to work with the mass market while offering financial planning capabilities."
Some product offerings may likely change as well. The focus on online investing has boosted the popularity of low-cost products available through an online platform. Only two products, mutual funds and stocks, enjoy usage rates of over 50%, according to the report. However, other services, such as ETFs, are expected to see a boost in demand.
"Growth opportunities continue for producers of exchange-traded funds as their low-cost value proposition is expected to continue to resonate with price- and overall value-conscious online brokerage customers and financial advisors," the report observed.