This climate has brought about changes in investor preferences and the firms that serve them: The online investor community is growing, financial advisers have been gravitating toward smaller firms and the large wirehouse firms are making every effort to hold on to market share.
Rise of the Do-It-Yourselfers
The ranks of do-it-yourself-online investors are quickly expanding. According to an Aite Group report, online brokerages added $100 billion of new client assets in 2008; TD Ameritrade alone took on $24 billion worth of new client assets. In addition to other online investment providers that have been operating for years -- including Schwab, Fidelity and E-Trade -- many newer online contenders have joined the scrum, including Zecco, WeSeed, FiLife, Mint.com, MarketRiders, Covestor and Cake Financial, to name just a handful. (For more on a few of these new online investor sites, see related article, page 40.)
According to experts, the investing sites have become more capable and are coming closer to doing the work of a financial adviser. "E-Trade, Schwab and Fdelity have all added amazing capabilities online," such as risk metrics and financial planning tools, says Alois Pirker, research director at Aite Group. "Their offerings have gotten more robust, and that might have helped them get that extra $100 billion."
The increase in online activity appears to be hurting the traditional wealth management firms. The wirehouse firms -- Bank of America/Merrill Lynch, Morgan Stanley Smith Barney, Wells Fargo Advisers and UBS Wealth Management -- lost 2 percent market share in 2008, representing $225 billion in client assets, according to a recent Aite report. From the beginning of 2008 to the end of the first quarter of 2009, Merrill Lynch, Morgan Stanley and Smith Barney saw combined net outflows of client assets reach $150 billion.
"A lot of clients are very angry at advisers," notes Pirker. "They're paying 2 percent in fees and their investments still dropped in value by 20 to 30 percent. They think, 'I can do it myself and drop 30 percent -- why should I pay 2 percent in fees?' "
The Case for Financial Advisers
However, Pirker also makes a case for the value of financial advisers. Aite's analysis found that investors supported by financial advisers obtained better investment performance in 2008 than self-directed investors. The better performance of the financial adviser-assisted investors is due to the fact that financial advisers are more strategic in the way they perform financial planning and asset allocation, whereas online sites' automatic asset allocation tends to be "kick-and-run investing into mutual funds," according to Pirker. "Overall they don't have the same tools to design risk tolerance and design portfolios that the large firms have."
But there's room for self-directed and adviser-assisted investing to coexist, Pirker suggests. The target market for self-service investing tends to be lower-net-worth clients -- a median of $250,000 in investable assets, according to Pirker (versus the multimillionaires coveted by wealth management firms) -- the same crowd that Merrill Lynch sends to its call centers and to which Citi for a time tried to cross-sell credit cards via its short-lived myFI financial planning site (the program, offered to brokerage clients with as little as $50,000 to invest, was shut down in August and its customers returned to the Morgan Stanley Smith Barney fold, although for some reason the site is still live in beta).
Investors in this bracket "are very nervous -- they don't want to lose too much, and they usually like a hybrid model," Pirker asserts. "They want to be able to check on their assets online to see how their portfolios have done. They might seek advice, but they'd be reluctant to pay for it." He points out that the market downturn has added to the pool of do-it-yourselfers. "If you have a $500,000 portfolio that has dropped by 30 percent in the last year and a half, you're pretty much in the self-directed range again," Pirker says.