Fidelity, Schwab and E*Trade—firms that made a name for themselves in the world of online trading—are branching out. They've moved into the advisory arena and now court advice-seeking investors in addition to the do-it-yourselfers.
The transformation has happened gradually as online brokerage firms fine-tuned their advisory service offerings. Today, their services are robust enough to mimic those from traditional, full-service advisors at banks, brokerage firms and other channels, says Katharine Wolf, associate director at Boston-based research firm Cerulli Associates.
The new challengers offer everything from computer-generated asset allocations to managed account programs that provide ongoing investment management-often delivered through assigned representatives-for an asset-based fee.
At the highest levels, clients receive auxiliary services such as financial, estate and tax planning delivered by on-staff lawyers and accountants. And to top it all off, they're typically paired with certified financial planners.
The goal of the "direct providers" is to replicate the experience clients might have with traditional financial advisors, says Wolf.
By most accounts, they're doing a good job of it. In the past, investors who opened modest Fidelity or E*Trade accounts to trade for fun may have looked elsewhere for advice. But now with the new managed account service offerings customers are beginning to give direct providers their business, according to Cerulli.
"In my view, direct firms have a number of tailwinds for their managed account programs, not the least of which is that their model allows them to profitably offer advice to clients at lower cost than many other advice providers," Wolf said in a press release.
The new contenders for advisory clients have made steady gains in market share over the last decade. Direct providers account for 7.1% of the overall managed accounts industry, or $169 billion in assets as of the end of 2011, according to Cerulli. By 2013, they're expected to have 9% of the market. That's up from just 2.4% in 2001.
Fidelity and Schwab are by far the biggest players in the space, commanding $102 billion and $59 billion in managed account assets, respectively. Other providers, such as E*Trade, TD Ameritrade and TIAA-CREF, are in the nascent stages of advice delivery, with less than $5 billion in managed account assets apiece, says Cerulli.
With these steady gains in market share, should traditional advisors at banks and other channels be worried? Absolutely, says Sophie Schmitt, an analyst at Aite Group, an independent research and advisory firm.
Online brokerage firms have attracted people with the most wealth, particularly Baby Boomers who view online brokers as their primary investment provider, Schmitt says. Plus, investors across the board increasingly are demanding online trading and self-service capabilities. In the wake of the 2008 financial crisis, investors want more control of their investments and greater transparency over investment fees and performance, she says.
Not surprisingly, the financial crisis has made investors push advisors much harder on fees. They want to "pay less for advisors when returns aren't strong," according to Schmitt.
On this score, direct providers have a leg up: Their fees are lower.
A Glass Half Full
There is still good news for traditional financial advisors. Even though investors of all ages and wealth brackets want more online capabilities, they still value advice, Schmitt insists. "Advice is a scarce commodity," she says.
On top of that, traditional providers still offer more robust services than their counterparts in the direct channel, according to Cerulli. Their flexibility to personalize advice-particularly investment management portfolios and financial plans-is second to none. Direct providers, in contrast, have little if any room to personalize their service as advice is standardized and determined at the home-office level.
Personalization, of course, is not always the answer for everyone, especially for clients on the lower end of the wealth spectrum. "It's not always a good thing," says Wolf. "It's likely not necessary for a client with less than $5 million in investable assets."
Still, the level of personalization that traditional advisors are able to provide is what sets them apart. Advisors can further differentiate themselves from their new rivals by creating a personal brand linked to serving client niches, such as dentists, teachers or senior executives, says Wolf.
Their biggest trump card, though, is hidden in plain sight: their presence in the community. Unlike direct providers, traditional advisor channels have local offices, which enhance advisors' ability to develop and deepen personal relationships with their clients. Advisors can socialize with their clients on a regular basis and hold client gatherings, such as wine tastings, something that direct providers are unable to do.
"The appeal of an advisor they can golf with will continue to attract certain clients to the traditional advisor channels," says Wolf.
Despite these strengths, full-service wealth management providers will nevertheless need to beef up their technology, says Schmitt. They will need to develop a way for advisors to "provide real good advice, meet face-to-face, develop rapport with the use of technology where financial advisors have visibility into [the clients'] financial information."
One way to do that is through client portals that connect clients and advisors online. The portals will give investors more control and greater visibility into their investments, while giving advisors the ability to view their clients' information online. Another way is through web-based business applications for investors, particularly financial planning applications, to improve advisor productivity and investor engagement.
"The portals will not be replacing the face-to-face meetings," Schmitt insists. They will supplement the meetings and allow advisors to more effectively service and provide the expert advice that investors value.
Indeed, traditional advisors whose firms launched a separate self-directed channel reported increased opportunities. In an Aite survey of 402 financial advisors last year, more than one in three found that the self-directed channel created opportunity for referring some of their smaller clients to the new channel.
The world is gravitating to a hybrid online/full-service business model, and "firms need to start experimenting," says Schmitt. "They need to innovate, set up little R&D teams and test things out."