Technology not converting self-directed investors into advice clients

For the past decade, firms have invested millions in building digital client-facing tools to lure self-directed investors to their advisory service.

It’s not working.

That is the conclusion of Cerulli Associates, which found that from 2006 through 2019, the self-directed investor segment has remained stagnant around 37%, according to the firm’s June report on retail products and platforms.

While firms continuously launch new products like robo advisors, digital financial planning or online retirement calculators to attract new assets, these products frequently go misunderstood or ignored by investors, says Cerulli director of advice relationships Scott Smith. Rather than helping firms stand out from the competition, these technologies are now just “table stakes.”

Smith compares the decision to work with an advisor to hiring a mechanic. Anyone can change a car’s oil themselves and some will never pay for it, but most people prefer to outsource the labor to a professional.

“We’re all running this ongoing algorithm in our head,” Smith says. “What’s worth doing myself, what’s worth paying someone else to do it for me and what’s not worth doing at all?”

Firms should focus on building what Smith calls “path-of-least-resistance access” to financial services at key life moments. Not everyone will turn over their portfolio to an advisor, but everyone encounters certain milestone events — such as getting married or needing to rollover an account after leaving a job — where they need guidance, Smith says.

More than 55% of affluent investors say they would prefer to work with a single firm that can handle the bulk of their financial needs, Cerulli’s research shows. Of those, only 27% said they are doing so, opening a huge opportunity for firms trying to build all-in-one financial hubs, Smith says.

Several large firms are working on this. For example, Morgan Stanley acquired a footprint in workplace stock plans with Solium, and in online brokerage with E*Trade. By putting the purchases together with its traditional wealth management platform and its new digital advice, Morgan Stanley plans to serve people at any stage of life.

Goldman Sachs and Bank of America Merrill Lynch are working on similar all-in-one platforms.

“Comprehensive wealth management is not a differentiator any more,” Smith says.

That doesn’t mean banks have a clear advantage. Clients can be myopic in their perceptions of providers, and many aren’t even aware that banks can serve their investing needs, Smith says.

And banks may have to overcome some negative associations.

“The firm that hit you up for overdraft fees in your 20s is not going to be the firm you bring your millions to in your 50s,” Smith says. Even if the overwhelming majority of experiences are good, “you don’t remember the 99 times it went fine, you remember the one time it went wrong.”

This leaves the door open for brokerage firms, individual advisors and even technology startups to offer their own paths of least resistance. Robo advisors, for example, are expanding into banking services while firms like Vanguard and Fidelity are making it easier to digitally rollover retirement accounts.

With the 33 million households with investable assets, there is plenty of room for everyone, Smith says.

“Either pick a niche and crush it, or be a scale provider that everyone knows,” he says, adding that even the largest firms won’t totally dominate the market. “You’re not going to be like Apple, and that’s okay.”

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