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Wealth managers can keep self-directed investors by giving them control, not by lowering fees

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Self-directed wealthy investors, defined as private clients, choosing and managing their investment portfolio to a large degree without external advice from banks or wealth managers, are one of the biggest current threats to traditional wealth management firms.

In a new report, “Wealthy and Affluent Self-Directed Investors 2017 – How Wealth Managers Can Win Them Back”, the Swiss Research company MyPrivateBanking estimates that online brokers and retail banks already have a market share of 32 per cent in the HNWI segment. The researchers find that the growth of the self-directed investor (SDI) segment, along with the move away from the advisory or discretionary mandate, reflects a crucial change in the financial services landscape.
 
“According to our survey, the average self-directed investor is over 40, is only slightly more likely to be male than female, and has a household income of between USD 200k and 250k per year,” says MyPrivateBanking’s senior analyst Onawa Lacewell. “Not only is the client segment of self-directed investors here to stay, their wealth continues to grow steadily. The needs of this self-directed investor are becoming more complex, akin to the needs and requirements of a more traditional HNW clientele, and wealth managers have to react to these developments.”
 
Given this shift from advisory to self-directed investing, no private bank or wealth manager has the luxury of ignoring this segment. The report urges wealth managers not to adopt a “wait and see” approach to the self-directed investing trend for three main reasons.
 
Firstly, a growing self-directed segment, even among HNWIs. The MyPrivateBanking forecast estimates that 32 per cent of HNW AuM is self-directed in 2017—representing just under USD 20 trillion in AuM globally.
 
Secondly, the SDI mandate is growing at a faster pace than advice or discretionary investment. Self-directed investment has continued to grow at a greater rate than other mandates. In 2008, 21 per cent of HNW AuM were self-directed, while in 2017 MyPrivateBanking’s estimates put this number at 32 per cent.
 
And thirdly, online discount brokers and new entrants like robo-advisers have the tools, expertise, and innovation mindset to directly target the HNW self-directed investor—and they have already begun doing so.
 
MyPrivateBanking sees real opportunities and tools for wealth managers and private banks to recruit self-directed HNW investors into their ranks. However, this requires a detailed understanding of both the self-directed investor segment and the products and services offered by competitors in the market. To recruit and retain self-directed investors, MyPrivateBanking recommends that wealth managers understand the SDI and give them more control. A MyPrivateBanking survey shows that 60 per cent of self-directed investors choose this investment model because they wish to have control over their own investments, while only 20 per cent stated that fees were too high. Wealth managers need to understand the motivations of the SDI and allow them to retain control.
 
In addition, they need to develop and maintain a cutting-edge online brokerage platform that enhances the client journey. Given that SDIs are especially digitally savvy, these platforms need to be fully functional as well as available across an array of devices and features.
 
MyPrivateBanking also recommends that wealth managers develop a tiered advisory structure—in particular, advisory “lite” services. Many of the online brokers moving into the traditional wealth management space are doing so by offering advisory “lite” services. Wealth managers should consider offering such services alongside their more traditional advisory role.
 
“Wealth managers, banks and brokers should provide investors with the means to participate in, or fully control, their investments in the form of digital investment platforms, advisory “lite” services and other tools for the self-directed investor,” says Onawa Lacewell. “Yet, while these developments may bring disruptions, they also pose new opportunities, especially if wealth managers are responsive and agile enough to understand this investor segment.”

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