First off, sorry I’ve been so quiet as of late. It’s not for lack of ideas — I’m just putting the finishing touches on a book I have coming out in June. I’ll write more about that later but needless to say, I vastly underestimated the amount of time and energy that was required in putting the whole book together. Looks like things are quieting down now and I’ll be back to posting more regularly.
Interesting article on on RIABiz regarding a report that originally came out in December 2009 from the Aite team entitled, “The Direct Business Ambush: Advisors Not Seeing the Threat”.
The research seems to say that financial advisors continue to underestimate the threat that online brokerages pose to the future of their businesses.
- According to the study which polled 402 advisors, when asked what kind of firms they lose the most business to, online brokerage firms were chosen 23% of the time — the most frequently chosen category.
- But when asked who they see as the biggest threat to their businesses, over 70% of advisors say they see no threat.
It’s this contradiction that leads Chip Roame at Tiburon to say:
“I am glad someone gets it and admits the truth, so kudos to the study. There is a segment of consumers, bigger than nearly every advisor-centric person believes, that prefers to do things themselves, trusts few, and/or sees little value in financial advisors.”
I tend to agree that online brokers are a growing threat but all of this needs to be viewed in the context of what’s happening on a demographic level. People with money are typically older. Do-it-yourselfing may make sense when you’re 30 and have 35+ years of earning, saving, and investing ahead of you. But retirees and those on the cusp of retiring face different issue, specifically, providing a stable income stream in retirement. See what my partner, Aaron Katsman, said about this issue in a recent panel on Seeking Alpha.
So, why do advisors, while admiting to losing business to the E*Trades and TD Ameritrades, not give the online brokers props?
Couple of ideas:
- fight against commoditization: online brokers have commoditized trading, the transactional part of the investment process. Financial advisors have to continue to provide value at the advice level. From the advisor’s perspective, automated services and call centers don’t impinge on their advisory value-add. It would be hard to look in the mirror and say, “I’m not really providing any value.”
- diverging client sets: Many advisors believe it’s only the low-end, high-maintenance client that turns to self-service. The data shows that this isn’t necessarily the case, as high-net worthers also are turning to do-it-yourself investing.
- service demands: Advisors are witnessing baby boomers retiring. Many of these retirees used to manage their own portfolios. As they get older, they neither have the time, energy, or drive to manage their own portfolios. In some sense, these clients need professional advice. Also, I personally think that given what’s happened the past 3 years, passive indexing for retirees has been proven a sham and that there is a skill to deriving income in retirement.
- obliviousness to technology advances: I’ve written about some of the professional-grade, automated toolsthat E*Trade has developed. It’s not rocket science but it gives investors with experience at a full-service shop the look-and-feel that they’re receiving personalized advice as it blurs the line between full service and DIY investing. More of these tools are in development and may chisel away at client assets. Because they don’t use these retail tools, advisors aren’t seeing the threat.
Not sure I see online brokers as trumping the need for professional advice. What I do see is that advisors must continue to up their game and continously provide value and communicate that to clients and prospects. The same holds true, by the way, for the online brokers — they must continue to provide new services to compete and stay ahead of the commoditization train.
