The goal of the new direct providers is to replicate the experience clients might have with financial advisors, Katharine Wolf, associate director at Cerulli Associates, explained in an interview.
According to Cerulli, the direct firms offer services “robust enough to mimic traditional financial advisor models.” These services range from computer-generated asset allocations to managed account programs that provide ongoing asset management for an asset-based fee and even certified financial planners at the highest service level, Cerulli notes in the report.
“There’s a decent chunk of change on those platforms,” Wolf said of online trading platforms, noting that they have over $3 trillion in assets, second only to wirehouses.
The greatest threat is to advisors servicing clients with $100,000 to $2 million in investable assets. That’s a segment where direct firms and traditional advisors compete head-on for client relationships, according to Wolf. “Clients who do not want to pay for advice or who have not been approached by an advisor often default into the direct model, as direct firms generally have well-known brands and solid reputations,” she said in a statement.
Moreover, direct firms also are competing successfully for investors who already have financial advisors. According to Cerulli, clients retain multiple financial relationships and often intentionally conceal outside direct accounts from their primary advisors.
“Clients think of their direct accounts as a place to try their own investing ideas or as an emergency fund, which is segregated from their main pool of assets,” Cerulli says in the report.
Advisors naively believe in their clients’ loyalty, vastly underestimating the number of their clients who have direct accounts. Advisors reported that only 20% of their clients maintain direct accounts, which is at odds with what clients reported to Cerulli in a survey. More than three in four clients surveyed (76%) said they owned direct accounts.
It’s not all gloom and doom for advisors, though. Despite the inroads direct account providers have made, financial advisors still offer more robust services and can differentiate themselves by offering more personalized advice, including detailed financial planning, according to Cerulli.
“Advisors can differentiate themselves by creating a personal brand,” said Wolf. They can create a “client niche,” something that would set them apart from what the “bigger, broader firms are offering,” Wolf said.