Pursuing the self-directed investor

About Us Press Room Contact Us BISM Library Pursuing the self-directed investor Featured Article - Summer 2013 By Gina Lauer IS IT TIME for banks to start extending a welcoming hand to do-it-yourself investors? After all, the self-directed market in the United States reached a little more than 40 million investors in 2012, according to figures from Celent. Yes, many financial institutions already offer an online trading platform to customers, but should they enhance those capabilities and encourage more participation? And how do they integrate online investing into their wealth management strategy? These are questions that more financial institutions are grappling with, particularly as players increasingly crowd the discount brokerage marketplace and provide more robust and advice-related offerings. Scott Stathis Scott Stathis, managing director and COO of BISRA, argues that providing online investing for clients is a necessity for banks, not a choice. And he points to a lot of dynamics that make it clear banks need to embrace this channel. One, many bank customers from the mass affluent to the high net worth already engage in online trading. In the same context, Stathis says, the majority do not exclusively trade online. They have a high regard and they value a personal relationship with an advisor they trust. The goal is for self-directed account holders at the bank to grow their assets to the point that they migrate to the services of an advisor or wealth manager. For a high net worth client who already works with a bank advisor, an online platform helps keep more of that client s assets with the bank and away from a discount brokerage, hopefully. In addition, self-directed investing platforms will help attract and retain the business of Generations X and Y the most important demographic to banks, says Stathis. Why? Because unlike the baby boomers who view banks as a place for savings, checking, and loans, and keep their investments with a brokerage firm, the younger generations have a different perception of banks. They grew up in a world where banks always sold investments and insurance, and they re much more likely to consider a bank for investments and insurance, Stathis notes. As Gen X and Yers build their assets through jobs and inherited wealth, how will they want to invest? They do not just want but demand online trading, Stathis says. And banks can t afford to lose the investable assets of Gen X and Y, which are expected to grow from $6.4 trillion in 2010 to $18.3 trillion in 2020, according to a LIMRA study. Also, a 2011 Bank of America/Merrill Edge survey of more than 1,000 mass affluent customers found that 75 percent of 18- to 34-year-olds are avid users of online banking and investing. Customers are increasingly expecting banks to break down their traditional segmentation models and essentially reach out to the end client with the channel that they prefer. Alex Camargo, Celent The key to the online offering is that it can t be separate and distinct from the full-service offering. It has to be fully integrated, meaning the ability for the advisor and client to work collaboratively extends to the online environment, Stathis says. That means changes made to accounts, investments, plans, documents, etc. in either the live or online environment flow through to both. bisa.site-ym.com/resource/resmgr/a_singer_bism_2013/self_directed.html 1/5

Trends in bank brokerage Are banks expanding their online investing offerings? To a degree, says Stathis. Some banks, such as U.S. Bank, are pursuing self-directed investing for customers more aggressively. Bank of America and Wells Fargo have also been forging ahead with their online platforms. (Bank of America s platform is Merrill Edge and Wells Fargo has WellsTrade.) I would say the range of maturity in the bank brokerage space as it relates to self-directed [investing] is quite wide, says Alex Camargo, securities and investments analyst at Celent, a financial services research and consulting firm. Some offer self-directed brokerage simply as an accommodation, while other firms are starting or attempting to use it as a primary differentiator. He, too, makes mention of U.S. Bank, Bank of America and Wells Fargo, as well as USAA, which has good self-directed capabilities. The technology force behind several of these banks (Bank of America, Wells Fargo, U.S. Bank, Bank of the West, to name a few) is Scivantage, which provides investment platforms that serve the wealth management and self-directed online trading businesses. The solutions serve advisors as well as self-directed investors and traders. One of our largest clients in our first few years of existence was Bank of America and their self-directed investment platform, so we ve certainly seen and been at the cusp of that emerging business model, says Chris Psaltos, vice president, product management, at New Jersey-based Scivantage. Bank of America saw online trading as a cross-selling opportunity. They were the first ones to really grab it and have success with cross-selling their bank customers into their brokerage. That kind of paved with way for the acquisition of Merrill, and the integration of Merrill, Psaltos says. But not all financial institutions are convinced that making a push into self-directed investing is a viable proposition, although they still want to provide the service to interested customers. It s certainly not an area that we expect to grow or emphasize at this point, says Keith Pipes, speaking of the online trading platform offered through Wescom Credit Union. But it is a service the institution wants to offer. At Wescom (Pasadena, Calif.), providing a trading capability was a legacy carryover service that the institution began providing to membership in the 1980s, says Pipes, the credit union s executive vice president of lending and financial services. At the time, the credit union was segment-based, serving telephone employees, and a special purpose broker/dealer was set up to provide a discount brokerage operation. It was strictly for trading, and it was done over the phone, he says. In the 1990s, online trading was made available. We ve had a number of different vendors that have supported that activity from the 90s until today, which included firms like e-trade and others, he says. So when the credit union selected CUSO Financial Services, L.P. (CFS) as its third-party broker/dealer, it was important that they offered a self-directed brokerage service. Chris Psaltos, Scivantage Many of our existing member base is still telecom-based, and they have some stocks that they had through options, etc., that they want to retain with us, Pipes explains. So it really became a service that we want to be able to offer our members, but it s not a bisa.site-ym.com/resource/resmgr/a_singer_bism_2013/self_directed.html 2/5

want to retain with us, Pipes explains. So it really became a service that we want to be able to offer our members, but it s not a core part of what we do in terms of investment services. Wescom s investments program focuses on full-service advisory investing, he says. It became a service that we want to be able to offer our members, but it s not a core part of what we do in terms of investment services. Keith Pipes, Wescom Credit Union Has there been any overlap or meshing of the two investment channels? We have tried, says Pipes. And we have found that it s limited, but there is some opportunity. In general, members who use the self-directed service seem to be more comfortable investing on their own and opt not to reach out for financial advice from advisors although there are some instances of that occurring. For the most part, we ve found that s a market segment that prefers to do things on their own, he says. CFS s electronic trading platform, called evision, allows members to place their own stock, option and mutual fund transactions at discounted commission rates, according to information on its website. It is effective as a starter program for credit unions not ready to establish a full investment program, or as an addition to an already robust and successful program. In Pipes experience, those using the platform are generally some of our older members that have been using the service for an extended period of time. He says he thinks the reason they ve continued to use the service through Wescom is that they want to keep their assets in one place. We provide a consolidated statement, so there are some advantages to having their investments held with us. Of Wescom s approximately 15,000 investment clients, an estimated couple thousand are online investors. And that number hasn t changed much over the years. Impact on advisors Has the online offering created any concerns for financial advisors? Pipes says he hasn t found any conflict and he asked the question early on when he started at the credit union 11 years ago. The members using the online channel have done so for a fairly long time. It s been a very stable member base. We don t add many people to it, he reports. Nor have there been issues with members meeting with an advisor and then opting to open a self-directed account with the credit union. Keith Pipes, Wescom Credit Union Sentiment seems to be mixed when it comes to the question of whether online investing is a friend or foe to bank investment programs. BISRA s Stathis says a group of bank brokerage executives was asked, Do your financial professionals/consultants view the online investing channel as a tool to generate new business or as a competitive threat? The responses were split 50-50. That doesn t surprise me, says Pipes, on hearing the response breakdown. Looking at Wescom s program, I see it less of a threat, but not really a huge business development opportunity either. He says advisors are aware of members with high balances in selfdirected accounts and have reached out to them. It s been difficult over time to switch them over because they (members) feel they re capable of making their own investment decisions, and that s what they prefer to do. But isn t an online offering important to attracting and keeping Gen X and Y members and investment clients? Pipes acknowledges that those younger clients and members do prefer e-commerce channels but they appreciate advice as well. Even the Gen X and Gen Ys appreciate the fact that if they can see there s value added in getting advice from somebody in terms of their overall performance, then it s probably going to be worth paying for. Scivantage s Psaltos addresses the possible fears of advisors by saying, Advisors they re not going by the wayside. Investors in a self-directed environment still need validation. They re still looking for that helping hand. He notes: Statistics show that the most successful advisors work well with a self-directed offering within the same firm. Indeed, findings from a Kehrer-LIMRA [now BISRA] study show that bank brokerage firms that offer customers a self-directed bisa.site-ym.com/resource/resmgr/a_singer_bism_2013/self_directed.html 3/5

channel contribute 13 percent more profit to the retail bank that those without such an investment channel. In addition, revenue per household is 16 percent higher, and deposit revenue penetration is 33 percent higher at those institutions. It s because it is a complementary channel to the advisors, not a competitive channel to the advisors, says Stathis. The trades that bank clients tend to do online are simple trades, which would be busy work for the advisors, he notes. In effect, banks with an online trading channel are able to offload low-level trades to that channel and allow advisors to focus on the more profitable high-end business. Challenges What challenges does launching an online channel pose? From a monetary standpoint, the possible revenue might not be as robust as one might hope, says Camargo, who notes that trade volumes and commission charges are fairly low in the retail space. The costs involved in adding the technology can discourage banks, too. However, Camargo says, clearing firms such as Pershing and NFS also offer self-directed investment portals. Some third-party broker/dealers such as CFS (mentioned earlier) and Cetera Financial Services also provide self-directed options. Cetera s discount brokerage program is called iconnect2invest. Yet another challenge is that the self-directed brokerage space is pretty competitive, Camargo says. You have the Schwabs of the world, the e-trades of the world, and then you have the smaller players as well the TradeKing, TradeStation, Interactive Broker... The new convergence Many of those interviewed pointed to fact that distinctions between the services offered by banks, brokerages, and large online brokers are blurring. In a report co-authored by Camargo, The Race for Self-Directed Investors, researchers point out that while large independent brokers are expanding their services into online banking, fee-based products, retirement tools and quasiadvisory models, bank brokerages (which have traditionally offered advisory products and retirement planning services), are developing their online brokerage tools. That is, they are entering the same market from opposite ends. As Gen X and Yers build their assets through jobs and inherited wealth, They do not just want but demand online trading. Scott Stathis, BISRA Psaltos echoes this sentiment. He has seen quite a bit of activity in the bank brokerage space in the past three years as financial institutions look to extend their self-directed offerings. On the flip side, he s also seen some of the firm s wealth management clients acquire banks to diversify their models. Camargo says that customers are increasingly expecting banks to break down their traditional segmentation models and essentially reach out to the end client with the channel that they prefer. For example, you may have two high net worth clients, both with the similar assets and risk profiles, but one client may want a more full-service advisory experience and the other may want a more self-directed approach. Other changes are occurring in the self-directed channel, too. Camargo points out that we re seeing a lot more 45- to 60-yearold men opening brokerage accounts than in the past. This has been attributed to layoffs on Wall Street and in the financial services sector. These individuals were laid off when they were close to retirement, and because of their financial experience, decided to invest their assets on their own. The percentage of female online traders is on the rise as well, although they still make up a small percentage of the online investor trading base. The report says that by 2015, females will make up about 12 percent to 15 percent of active trader accounts. For financial institutions that are serious about retaining clients from the mass affluent to the high net worth providing a full array of investment model choices appears to be key. Psaltos notes that particularly for the younger generation who will be receiving that generational wealth transfer you have to have something that is compelling, that is online, and mobile. There s no way around that. bisa.site-ym.com/resource/resmgr/a_singer_bism_2013/self_directed.html 4/5

Gina Lauer is a contributing editor of Bank Insurance & Securities Marketing. She can be reached at glauer@bisanet.org. Bank Insurance & Securities Association, All rights reserved. bisa.site-ym.com/resource/resmgr/a_singer_bism_2013/self_directed.html 5/5