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Report: Schwab, Other Discount Brokerages to Be D2C Giants by 2024

Look out Vanguard PAS! Market volatility will likely help hybrid models and the full-service wealth management segment, according to Aite Group.

Even while growth slows, the direct-to-consumer digital investment management business is expected to encompass $1.2 trillion in assets by the end of 2024, according to an Aite Group report. Growth in assets under management accelerated year over year from 2018 to 2019, with growth rates of 15% and 16%, respectively, reaching a total AUM of $298 billion by the end of last year. Notably, most of that AUM was controlled by product manufacturers, followed closely by discount and online brokerages, which accounted for 39% and 38% of assets, respectively. 

But by 2024, according to Aite projections, the leaderboard will shift. Discount and online brokerages will control the largest segment of AUM, whittling away at assets held by product manufacturers. In 2019, for example, Schwab Intelligent Portfolios accounted for the majority of the segment’s asset growth, according to Aite in its "U.S. Digital Investment Management Market Monitor, Q2 2020" report.

In its report, Aite looks at four classes of D2C digital investment business types: startups, like Ellevest, Stash, Betterment and Wealthfront; full-service wealth managers, like Morgan Stanley Access Investing, UBS Advice Advantage, JP Morgan You Invest and Citi Wealth Builder; discount and online brokerages, like Schwab Intelligent Portfolios, Merrill Edge Guided Investing and Fidelity Go; and product manufacturers, like Vanguard Personal Advisor Services, Principal SimpleInvest and TIAA Personal Portfolio.

While AUM growth accelerated overall in 2019, the five-year compound annual growth rate for the digital investment management market was revised down, from 37% to 32%, into the next half decade. That slowdown is mostly a result of slower than expected expansion in product manufacturing.

Alongside those fluctuations, the next five years will see full-service wealth management firms gaining the most market share, expanding from holding of 6% to 23% of AUM, according to Eric Sandrib, research associate at Aite and author of the report. 

Gains in the full-service sector won’t reduce market share at discount and online brokerages, however, which will gain control of D2C offerings by 2024, according to the research. With a projected 10 percentage point increase in market share, the segment will have control of 48% of D2C business going into the midpoint of the decade. Product manufacturers, according to the report, will be the only segment to see a sizable reduction in market share, as the assets held at startups will remain relatively steady. 

“The maturation of the D2C digital investment management space is evident,” noted Sandrib. While still relatively small compared with the overall wealth management business in America, digital investment management has evolved into an “integral component for many traditional firms, increasingly essential as commission revenue continues to decline.” COVID-19-related closures will only further emphasize the importance of digital business, he added.

While high client acquisition costs and long stretches of unprofitability hampered many D2C digital investment businesses, forcing some to shutter even during a bull market, larger companies are better able to maintain a D2C digital investment management model than a stand-alone startup, the research found. That factor, along with less venture capital available for startups, means more new launches are coming from large financial institutions than from bootstrapped startups, writes Sandrib. With fewer new entrants to the startup scene, growth is now “more sustainable” for those that remain. 

While much has been made of recent market volatility causing startups to fail, with one consultant predicting the loss of one in five fintechs tracked by industry observer Michael Kitces—in just a year—Sandrib hasn't gone that far in his report. Certainly the market downturn presents a hazard for startups without cash reserves, said Sandrib. "Venture funding has slowed and it's late cycle. The stars are aligning for exits," he said. But “most” full-service wealth management firms, product manufacturers and discount and online brokerages “rely little on revenue from digital investment platforms currently and should remain stable throughout the crisis.” 

In fact, while the dust is yet to settle from the coronavirus pandemic, 2019’s zero-commission free-for-all served as a “more concrete stressor” for the digital investment management space than COVID-19 to date, added Sandrib. Indeed, Schwab’s announced acquisition of competitor TD Ameritrade and Morgan Stanley’s announced acquisition of E*Trade both occurred after the industry saw a zero-commission carpet-bombing wipe out once-reliable revenue streams. "That spurred a lot of thinking and change within the discount and online brokerage segment," he explained.

Schwab and TD Ameritrade, combined, make up 23% of the overall digital investment management marketplace, according to the Aite report, while Morgan Stanley is looking to grow its digital platform, Access Investing, by 1 million new wealth management clients over the next five years.

Firms are now turning to “freemium” models for growth. For large incumbents with large bases of clients, free investment management and flat fees on human advice can help convert leads into clients. Startups have turned to high-yield cash management offerings as a lure for new clients, building on media exposure as “free advertising.” 

“The key is to have clients on-hand and engaged,” explained Sandrib. “Once clients are engaged, offering adjacent services is possible, given that the firm will have a relationship with the client and, importantly, data on the client to analyze for determining prescriptive revenue-generating opportunities.”

Just as human advisors have turned to niche-specific business models, “accurate and robust client profiles alongside content to reach each cohort,” will be critical to digital investment management firms’ survival, according to the report. Harvesting and utilizing client data is a critical method for capitalizing on financial situations a client may encounter. 

Another no-nonsense conclusion from Aite is that having multiple tools is better than one: A hybrid model, with access to a human advisor for immediate questions, as well as providing empathy, alongside digital investment management “may keep clients from making emotionally driven errors with their finances and ultimately lead to more satisfaction with the hybrid services versus pure digital offerings.”

"Firms want to stem outflows of money," Sandrib added. Clients who have been indoctrinated with long-term thinking and goals-based planning are less likely to draw down assets, helping firms minimize outflows of money, and by extension, revenues. With many digital investment management services in the midst of their first serious economic downturn, all are watching to see who will grow and evolve to face the next challenge.

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