The Rise and Rise of the Self Directed Investor

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Empowered by low cost and accessible information and technology, the volume of wealth being managed by self directed investors (SDI) has never been greater.

But it’s not just technology fueling this boom. A change in attitudes is driving a growing belief that individuals can do a better job than experienced and educated experts. As this report from Edelman highlights, we are living in an era of backlash against authority, where trust in politicians, business leaders and economists is waning. As a result, increasingly, we dismiss expert opinion. It’s fair to say that we’re now seeing this shift in personal finance, too.

This shift in technology and ideology is a direct challenge to advisory and discretionary mandate. Brokers, advisors and wealth managers (WMs) are confronted by a competitor they have never faced before: the client. How they respond will define the future of financial advisory.

Defining an SDI

SDIs are investors who manage their own portfolios, carry out research, make investment decisions and execute trades as and when they see fit, usually using low-cost trading platforms.

Most SDIs keep things simple, buying tracker funds and limiting their portfolio to foundation investments that they believe will perform over time with more interesting, ‘satellite’ investments around the edges. Given the rise of ETFs, SDIs can now run balanced, low-cost portfolios from the comfort of their home office, all set up by clicking a few buttons.

SDIs split roughly into 3 segments. The largest is made up of investors who take a traditional approach and rarely trade but monitor their position as they invest for the long term. At the other end of the scale are active traders, who invest over 10 times per month. In between are active investors, who trade between 3 and 10 times per month, and tend to use a wide range of tools and sources for tracking and engaging with the market.

Whatever method of self determination is employed, however amateur and, potentially, high risk, self directed investing removes friction and lowers costs. It presents a huge challenge to the traditional financial advisory model.

Explosive growth

Given the rise of technology, such as mobile, and the development of offerings and platforms, such as robo-advisors, growth in the SDI sector has been astonishing.

SDIs now make up one third of the global wealth management market, as a new generation of investors move away from the advisory model of traditional investing. This change is being driven by shifting demographics and, as technology improves and costs fall, the sector will grow.

 

Firstly, Generation X (born in the ’60s and ’70s) Generation Y (born in the ’80s and ’90s) are getting richer, holding 36% of financial assets in 2010, a figure that will grow to 70% in 2030. A further boost to the SDI sector will come in the form of millennials, who are set to get extremely rich thanks to an explosion in the value of UK inheritances that will more than double over the next two decades. This generation is affluent (although it might not feel it right now) and comfortable with technology.

Trust is crucial. Not only will investors of the future have capital to invest, they also will have grown up with providers and platforms handling their private and personal data. Trust in technology will see SDIs win market share from the wealth management and advisory sector.

Critically, the generation who grew up during the credit crisis need trust to be restored if they are to allow traditional providers to invest and protect their wealth again. This is especially important now that they have the option of using secure, low cost providers on their own.

A much-needed response

Given the booming SDI sector, brokers, advisors and WMs must educate themselves about this threat. But that threat is an opportunity for individuals and institutions willing to work with a growing sector, offering SDIs a broad and high-quality range of solutions and services. Brokerages and banks need to respond fast, but the only response is to accept that SDIs are here to stay. This acceptance leads to the opportunity that this new pool of wealth offers.

To compete, it’s important that brokerages and banks focus on aspects of their business that differentiate themselves from the low cost platforms that SDIs use. For example, low cost, execution-only trading platforms don’t provide actionable insights as they are too expensive and they don’t have the expertise.

Traditional institutions can respond, too, by building improved execution-only services that give all clients the option to become an SDI if they wish, whilst keeping assets in-house. By building digital offerings, with outstanding, low cost, friction-free trading capabilities, WM and advisory businesses can offer their clients an experience that will retain their business for the long term.

Understanding the segments of the SDI market can lead to opportunities, too. For too long, 2 segments, traditional and active investors, have been perceived as lower value and often overlooked by brokers seeking commissions from active traders. But with zero-cost platforms giving active traders the option to trade for free, there is little value in this approach. A smarter approach is to target high-value traditional and active investors with high-quality products and advice. Whilst not as active, these segments will be looking for opportunities to give them an edge. Thus, brokers and advisors can get ahead in this uber-competitive environment by targeting the right SDIs. This approach can lead to deep relationships and good business outcomes for all involved.

How Arkera can help

Our app is designed to surface relevant content, creating an experience that is unique to each user. By learning from clients’ behaviour, we can deliver actionable insights that keep them engaged and receptive to trade opportunities.

Arkera prides itself on providing brokerages and banks with an opportunity to differentiate versus low cost trading platforms by offering clients a truly exceptional level of service. This will be critical in the fight to gain market share from the ever-growing SDI sector.

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This article was created in association with Arkera, a revolutionary, AI-led app that connects real-world events to unique investment stories for your clients, giving them the confidence to invest more. 

Edward Playfair