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DIY Platforms Are Gaining the Mass Affluent

DIY Platforms Are Gaining the Mass Affluent

Pressure to serve only the wealthiest, wirehouses are ceding the mass affluent to the independent, DIY brokerage platforms. Indeed, “direct” brokerages are beginning to offer more advice.

The industry’s brigade of low-cost direct brokerage services is on the move. That’s right, they’re gathering assets, opening new accounts, gaining market share—and it’s squeezing wirehouse advisors as never before. From online platforms such as E*Trade and TD Ameritrade to other giants such as Charles Schwab and Fidelity Investments, they’ve played the game well since the advent of discount, do-it-yourself brokerages in the mid-1970s. They’ve steadily made gains at the expense of established full-service wirehouses.

But the latest attack is raising the game to a whole new level, and full-service advisors are not about to roll over and play dead. Chuck and Co. won’t exactly eliminate your career, Mr. or Ms. Financial Advisor.  The big four—Merrill Lynch, Morgan Stanley (now without the Smith Barney name), Wells Fargo Advisors and UBS—have done just fine given recent history of meltdowns and bailouts mostly caused by their geniuses on the institutional side of the house. (FA wirehouse productivity has also been steadily rising.)

Pressure Drop

Nonetheless, what’s causing some of your restless nights are the shifting and uncertain sands. Wirehouse advisors are facing more pressure to lure clients with higher minimums and more household wealth. “The $100,000 to $1 million segment today is tough for full-service firms to serve as profitably as much wealthier segments,” says Alois Pirker, an analyst at Aite Group. That’s the reality as the industry’s direct brokerage platforms mature and grab market share from middle-class investors. In other words, Chuck and Co. is making your career path
more challenging.

“The mass affluent have not gotten the attention they’ve wanted,” says Pirker. “The wirehouses are moving their models upmarket, serving wealthier clients who are more profitable. And the less profitable mass affluent are now getting even less attention from them.”

To be sure, the direct platforms have not launched a full-scale assault for the assets of the ultra-rich, says Katherine Wolf, an analyst at Cerulli Associates. But the direct firms are competing more aggressively for middle-class investors. It’s hardball hell. “They are increasingly making a play to retain wealthier and mass affluent clients,” says Wolf.

“The wirehouses have largely abandoned that segment,” adds Jay Lanstein, CEO at Boston’s Cantella & Co., an independent broker/dealer and RIA.

John Eidson, a spokesman for Fidelity, operator of one of the largest direct platforms, does not mince his words. “I can tell you that Fidelity is committed to serving the financial needs of investors at every asset level,” he says.

The direct channel’s combined slice of the $13.4 trillion U.S. wealth management pie? Huge. And it’s growing faster than the full-service, wirehouse slice, analysts say. Cerulli says the direct channel accounts for $3.68 trillion of that pie by its most recent calculations; the DIY channel has enjoyed a compounded growth rate of 19 percent in the past two years. That compares with 14 percent for the wirehouses. Cerulli projects the direct market will reach $5 trillion by 2014. 

Meanwhile, Aite Group estimates the “pure play” direct platforms have a 19 percent share of U.S. wealth management assets. (For such firms, online and discount brokerage is their core business. Think Fidelity, E*Trade and the others. Merrill Edge and similar competitor platforms are therefore excluded.) The four wirehouse giants, says Aite, had a combined market share of 38 percent last year, down almost one percent from 2010. Pirker says the direct platforms could tip 20 percent by year-end. In fact, their assets expanded by about $900 billion in 2009 and 2010 through asset appreciation and client inflows.

Now consider: As the wirehouses move upstream— chasing the highly affluent—the direct platforms are picking off the low-lying fruit. It’s an every-investor-is-welcome approach. Their typical account size is a fraction of the wirehouse average—about $115,000, according to Cerulli, versus $900,000 or so at Morgan and Merrill, Aite says. Because of that, the direct platforms are trimming their sails. They have an army of financial consultants and retail associates. They have new products and services. For example, TD Ameritrade recently introduced Benzinga, a “full-service” news and media company specializing in real-time news, commentary and trade ideas. It will soon add a more robust sectors and industries section on with access to premium research from providers such as Credit Suisse and Standard & Poor’s.

A Blurring of the Lines?

“Consumers have become much more educated about their financial services options,” says Tom Nally, president, TD Ameritrade Institutional. “Self-directed investors see the value in having access to technology, a wide range of non-proprietary, objective investment solutions and independent research available at an investment firm like TD Ameritrade.”

Not quite a full blurring of the lines yet between full-service and direct brokerage. But you get the point.

“One of the big differences is that the wirehouses are taking a more holistic, team-based approach with clients,” explains Aite analyst Sophie Schmitt. Schmitt recently co-authored a report with Pirker that examined the direct platform’s rising share of the wealth management pie.

Cerulli describes three service levels at the direct platforms today. At the ground level, representatives (“financial consultants” at Schwab) identify client needs, recommend an asset allocation and then launch an investor with his portfolio. The next level up provides managed account programs for an asset-based fee with a basic level of advice. At the top, investors have a “dedicated relationship” with a consultant, sometimes too with a certified financial planner. In addition, clients can obtain investment management and other services such as estate and tax planning for an asset-based fee. It is not “full-service,” though these direct platforms encroach on the full-service providers’ territory. “Direct firms offer service robust enough to mimic traditional financial advisor models, and may serve the needs of these clients for many years without the client feeling compelled to seek additional advice,” according to Cerulli.     

Still, the direct platforms are mostly for the “self-directed” who like control. Many like to trade online (and volumes have expanded at the direct platforms even as overall market volume has dipped). Actually, some were once customers of the full-service firms—and now feel alienated from them, according to a new study by Hearts & Wallets, a Hingham, Mass.-based financial research firm.

“Investors have been burned so many times by advisors, they’ll never go back,” says Chris Brown, a principal at Hearts & Wallets, referring to the industry’s recent history of product blow-ups and industry bailouts. Many investors are still unnerved by the financial crisis that erupted in 2008. Many lost confidence in financial intermediaries. “Many are just going to invest their money on their own—and that’s all there is to it,” adds Brown, himself a former financial advisor at Smith Barney.

Of course, some of that money is moving to independent RIAs, a channel with a 12 percent market share today, Aite says. They have seen a 0.9 percent net gain in market share in the two years through year-end 2011. “I don’t have clients saying to me, ‘Bryan, I don’t trust you.’ But they definitely don’t trust the big guys right now,” says Bryan Beatty, an independent RIA at Egan, Berger & Weiner in Vienna, Va. Beatty has $50 million in AUM.

Meanwhile, the direct platforms, the second largest wealth management channel by assets after the wirehouses, have grown assets by 1.2 percent in the same period.

“Schwab is winning our fair share of retail investor assets in motion, including assets from wirehouse firms,” says Michael Cianfrocca, a Schwab spokesman. “Investors see value in what we can offer to a range of clients, from active traders and do-it-yourselfers to those who want periodic advice and guidance, or ongoing professional investment management.”

Mike Murphy, senior vice president, E*Trade Securities Retail Brokerage Services, says: “We give investors more power and control over their finances. The company differentiates itself by providing a full suite of easy-to-use online brokerage, retirement and investing solutions and education that appeal to both self-directed investors and those seeking advice and guidance.”

Some wirehouse FAs are quietly complaining. One major producer, a Merrill Lynch vet, says some of the largest accounts managed by his colleagues were opened on relatively small money years ago. These sums would be scoffed at today. “The firm is discouraging us from opening those kind of accounts,” he says. “You won’t get paid on them. It’s been an evolution in the making.” (Merrill recently has increased client household minimums to $250,000 from $100,000.) One former FA—who toiled at Merrill and UBS but who recently exited the brokerage business—says that the client minimums at Merrill had increased so much, “You could take half of your book out of the wirehouse and make more money as an independent RIA.” This former FA said the drive for higher asset levels at the wirehouses today has made it a more difficult career path for recruits and younger FAs. “The wirehouses are just not as effective as they used to be in gathering assets across all segments,” he says. 

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