Self-Directed Brokerage: Diversification is the Name of the Game

By Alexander Camargo, Analyst, Wealth Management at Celent

Bio: Alexander Camargo is an analyst at Celent with the Securities & Investments group and is based in Celent’s New York office. Mr. Camargo’s current research focuses on wealth management technology in North America and in Europe. Mr. Camargo has covered topics extensively on digital strategies for wealth managers, wealth management trends, retail brokerage, financial planning, client reporting, and cost basis regulations/technology. Mr. Camargo’s expertise in behavioral analytics informs his analysis of the retail investor sentiment and trading preferences. Mr. Camargo has been quoted regularly in the media, including Thomson Reuters, Bloomberg, Dow Jones, Barron’s, Wall Street & Technology, Financial Planning and the Financial Times. He has received a B.A. from Yale University, received a post-baccalaureate at Columbia University, and earned a Master’s of Science at City University of New York.

When we talk about diversification in the self-directed market, we tend to think about firms expanding their asset class support. However, there are a number of ways in which the self-directed market has become more diverse. Traders have access to new asset classes (such as FX, futures, and international equities) and platforms, more women and Gen Y’ers are becoming investors, and new service models are emerging.

In 2012, Celent conducted a study on the self-directed market. One of the main findings of this study was that although equities, mutual funds, ETFs, and fixed income products are most commonly traded, options and retirement products have become increasingly common. Investors were also asked which products they would like access to, if currently not available through their broker. The results illustrated that investors are looking for greater access to international equities and FX. Such demands have driven the development of new platforms and tools for the investors.














In addition to more products, we are seeing demographic changes in the self-directed population. Over the past 18-24 months, the population is getting younger and has a greater proportion of women. This increase in female participation has occurred among both married and single women. The married group tends to be worried about retirement and is very much involved in family finances and supplementing incomes, whereas the single group is concentrated in the 25-35 age range. Additionally, the new group of younger investors is driven partially by macro-economic realities. Many Generation Y’ers have watched their parents delay retirement due to the Great Recession and inadequate savings. As such, they are hoping to learn from these mistakes by setting more cash aside. However, this age group has spent the majority of its adult life with near-zero interest rates on savings accounts, and therefore must invest (and invest early) to see any return and avoid their parents’ dilemma.

Most disruptive to the market has been the increasing diversification of service models. Driven by retirement planning demands and a desire to protect themselves against lower commissions  and trade volumes, self-directed brokers have expanded their offerings to include related banking and investment solutions such as checking, money market, and savings accounts. There has been a particular emphasis on retirement (both products and tools/services), and on fee-based managed account services among the larger online brokerages. The expansion into managed accounts represents an important shift in the online brokerage world. Alongside pure play self-directed accounts, several online brokers are now emphasizing financial expertise and advice. As such, firms are able to offer pure play, discretionary, and “hybrid” versions of service.

This “hybrid” service model, targeted specifically to the mass affluent customer segments, allows investors to solicit financial advice from experts while maintaining self-directed accounts. Advisors create or validate portfolio analyses and asset allocations, or make investment recommendations via phone or branch, to supplement the investor’s self-directed tools. These advisors also highlight or market fee-based services around education and retirement planning.

On the other hand, many bank brokers are enhancing online trading tools to stem asset outflow to discount brokers. Thus, we are seeing a “great convergence”—whereas many large online brokers are now adding banking, managed account, and hybrid advisory services to their traditional online brokerage tools, bank brokers are coming from the other end of the spectrum. They already offer banking, full service advisory, and managed account products, and are now looking to enhance online brokerage offerings. Ultimately, online brokers and bank brokerages will enter the same market from opposite ends; both types of brokers hope to offer a low cost channel of service for the mass affluent customer who is predominantly self-directed, but who also requires some guidance. Given that mass affluent and high net worth (HNW) clients often have more than one type of account, these firms will focus on cross-selling into various accounts and service models. In essence, these new models of service are breaking down traditional segmentation models, pushing firms to be where the customer is.

With so many new product demands, demographic changes, and service models, the self-directed market is a constantly evolving one. Having a clear strategic vision and leveraging technology will be vital to success.

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