Demand for advice rises as not all investors go it alone

Growing demand for advisory services in the wake of the pandemic has ignited a race among asset managers to acquire customers needing help to navigate volatile markets.

New share trading account openings have surged over the past year, against a backdrop of strong market gains and central bank support stimulus measures that have kept interest rates low — all of which have increased the risk tolerance of some retail investors. But the investment climate has also spurred demand for financial advice, via pure digital or “robo” services, as well as more hybrid models that combine technology with a human touch.

“Times of uncertainty are usually a trigger for people seeking advice,” says Brian Concannon, head of Digital Advisor, which is Vanguard’s online professional money manager service. “A common reason for why people seek advice is that, over time, their wealth increases and they recognise there is a need to be more thoughtful about investing.”

His analysis suggests that this year’s surge in share trading account opening will result in the more successful investors boosting demand for advice in future. However, there is evidence that many investors seek professional help after making their own first foray into markets for other reasons, too.

“Risk does play a role here,” says Awaad Aamir, wealth management analyst at Celent. “A lot of self-directed investors start off with all guns blazing and, if they lose money, it motivates them to seek advice.”

Recent trends towards commission-fee share trading services, easy ways of buying fractions of highly priced stocks, and a profusion of online financial literature also explain the surge in account opening.

The number of new US investment accounts increased from 35m in 2016 to 63m by the end of last year, according to Celent. It forecasts that the figure will reach 75m by the end of 2021 and 115m by 2024.

Brokerage Charles Schwab coined the term “generation investor” earlier this year to describe the surge in new retail investor accounts in 2020, despite a “global pandemic, economic uncertainties and market volatility”. Schwab found that 15 per cent of all US equity investors started out in 2020, with a median age of 35.

But Schwab’s survey of these new investors noted that “this group is not all short-term risk-takers,” and “they want to make informed decisions backed by education and professional guidance”.

If they [self-directed investors] lose money, it motivates them to seek advice

That is why the likes of Vanguard, Schwab and Fidelity are intent on providing hybrid advice that spans both digital and human platforms. Others, like JPMorgan, have bought advice platforms such as Nutmeg in the UK, while Vanguard has also launched an advisory service for UK investors.

“Accessibility, affordability and awareness are the three factors driving the demand for advisory services,” explains Concannon.

An upsurge in demand for professional help from this swelling tide of investors has broader implications for financial products, too.

Financial advisers have long steered clients towards exchange traded funds as they have lower costs and are more tax efficient for investors than mutual funds. This trend is expected to accelerate as ETFs become a more important element of model portfolios — whereby advisers select a diversified mix of equities, bonds and other assets to meet a range of risk and return profiles.

“Advisors continue to be a strong user of ETFs and model portfolios are seeing increasing adoption,” says Matthew Bartolini at State Street Global Advisors. “Building wealth for a client’s portfolio requires minimising fees and being tax-efficient in order to preserve wealth.”

Assets held in the US model portfolio market are expected to more than double from $4tn over the next five years to $10tn, according to BlackRock. The asset manager forecasts half of the new investor inflows for its US ETF arm, iShares, will be directed by model portfolios, up from around a third in 2020.

Martin Small, head of the US wealth advisory business at BlackRock, says that delivering a service for “the portfolio of the future” means providing clients with access to ETFs, mutual funds and separately managed accounts (SMAs) that help harvest tax losses from securities.

According to Small, US households invest some 70 per cent of their funds in managed products, led by ETFs, low-cost mutual funds and SMAs. “In order to really help the client, you need to give them a range of products that can help them achieve their financial goals,” he says.

Another burgeoning trend is that of financial advisers being pushed by clients beyond traditional investment styles such as quality, momentum, value and growth.

Nowadays, environmental, social and governance metrics are becoming increasingly important. New platforms that provide a customised approach — also known as direct indexing — are seeking to help financial advisers meet that demand. “Advisers are looking for a way to differentiate themselves and connect with clients,” observes Doug Scott, chief executive at Ethic Investing, a provider of direct indexing strategies for some 80 financial advisers across ESG with $1.2bn of assets under management.

In the past, only the wealthiest of investors sought advice but, now, as the barriers fall, advisers are mindful that they need plenty of options to satisfy a broader audience in order to win and retain customers.

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