Many investors categorized by advisory firms and investment managers as “self-directed” still frequently look to their providers for guidance, according to the J.D. Power 2016 U.S. Self-Directed Investor Study.
The new survey matches other recent research showing there is an increasing division in the use and meaning of the word “robo adviser,” with the result that many of the clients who receive automated portfolio management still seek out in-person advice at various times.
According to the research, “only 61% of self-directed investors in 2016 follow the traditional self-serve, or entirely do-it-yourself (DIY), approach to managing their investments, down from 66% in 2015.” At the same time, a subset of self-directed investors J.D. Power calls “validators,” or “those who want to make their own decisions but still have access to an adviser for support and as a sounding board for big decisions,” jumped to 25% in 2016 from 21% in 2015.
The research points to other client personas that complicate the self-service camp. For example, there are the “collaborators,” those who interact regularly with an adviser and depend on that guidance for investment decisions, although they still actually utilize an automated platform to hold accounts. This group grew slightly in the last year, J.D. Power says, to 14% from 13% of the self-service population.
According to J.D. Power researchers, the growth in validators mirrors a similar trend among full service investors, “of which an increasing number are using dedicated advisers as sounding boards but not as final decision-makers. The growing number of investors seeking a middle ground between the traditional full service and self-directed models is forcing investment firms to develop a hybrid service model that seamlessly combines human interaction and technology.”
“The convergence of self-directed and full service models produces both significant opportunities and threats to established firms in this space,” adds Mike Foy, director of the wealth management practice at J.D. Power. “A perfect storm of new technology, such as robo-advisers; new regulations, such as the Department of Labor’s (DOL) fiduciary standard; and demographic changes, such as the rise of the Millennial generation, is dramatically changing the value proposition traditional firms provide.”
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The J.D. Power research goes on to argue that individual investors “crave hybrid investment advisory models.” This is evident in the 25% of self-directed investors who indicate they want on-demand access to an adviser as a sounding board, and in the performance of firms that have made strategic changes in their business models to offer more investment advice to clients in this way.
Part of the momentum comes from Millennial investors entering the markets for the first time. While nearly half (47%) of investors overall are interested in robo-advice when their firm offers it, interest varies quite widely by demographic group. Notably, 72% of Millennials and just 25% of “Pre-Boomers” (those born prior to 1946) favor robo-advice. Among investors not interested, top reasons include a preference to manage their own investments; desire for personal interaction; lack of trust; and personal potential for bias.
Considering the likely impacts of the DOL fiduciary regulations, J.D. Power predicts the rulemaking will “create an opportunity for self-directed firms to capture share from full service firms,” based on the fact that 46% of full service Millennials and 33% of Boomers who are dissatisfied with fees express a willingness to switch to self-directed accounts, should these prove to be cheaper.
Related findings show the percentage of investors using mobile devices to regularly manage accounts has increased 4% during the past four years (18% in 2016 vs. 14% in 2013), but both satisfaction and trade activity among these users has increased significantly.
“Self-directed firms are often focused on highly active traders who are critical because their transactions generate significant revenue, but these firms all have a large segment of less active clients who are looking for guidance and may currently lack the wealth or desire for a full service adviser,” Foy concludes. “Technology makes it possible for self-directed firms to meet the needs of these clients and retain them as their wealth grows.”
More information about the J.D. Power U.S. Self-Directed Investor Study is here.