Number of DIY investors is on the rise

Can a robo-advisor help you retire?
Can a robo-advisor help you retire?

A six-year bull market led more investors to shun financial advisors and invest in the markets by themselves, a shift that looks likely to continue despite the recent market volatility.

Since 2011, more affluent investors have been using self-service financial firms such as Charles Schwab, E-Trade and Fidelity, according to a new analysis by retirement research firm Hearts & Wallets. And a growing segment of that group are combining self-service providers with full-service firms, such as Merrill Lynch, Edward Jones and independent financial advisors.

"We have been seen in the past that do-it-yourselfers seek out advisors when the market goes south," said Chris Brown, principal at Hearts & Wallets. Still, he expects the number of people using both self-service and full-service firms to continue growing this year.

"A market correction provides financial advisors an opportunity to persuade self-directed investors to give them a shot," he said. "But self-directed investors are less likely to close their accounts at discount brokerages. They will keep them as a hedge against their advisors."

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Hearts & Wallets estimates that 33.4 million U.S. households with $35.4 trillion in investable assets use both full-service and self-service financial advisory firms. It also noted that the percent of assets being self-directed by investors jumped from 40 to 46 percent between 2011 and 2014. (See chart below.) The analysis is based on annual surveys of more than 3,000 households with between $100,000 and $5 million in investable assets.

Brown said investors view the combination of full- and self-service platforms as a "diversification strategy," adding, "They want to see how they do in the market and compare their performance to their financial advisor's performance."

Investors' behavior doesn't always match their stated preference, however. Hearts & Wallets found, for example, that among investors who say they are self-directed, 7 percent actually used a full-service broker, and 30 percent of investors who said they liked to delegate their financial decisions used a discount broker.

Part of the reason for this may be that the lines are blurring between self-service and full-service firms. For example, clients at self-service firms, such as Schwab and The Vanguard Group, can also get financial advice if they pay for it.

"But we don't really know why investors say one thing and do another. There's a disconnect," Brown said.

Robo-advisors, which provide automated investing advice, could also shift the balance between do-it-yourself investors and delegators. Management consulting firm A.T. Kearney estimates that assets in these services will grow significantly over the next five years to about $2.2 trillion.

These companies, such as FutureAdvisor, Wealthfront and Betterment, will push established financial firms to cut costs and provide more online services, said Uday Singh, a partner in A.T. Kearney's financial institutions practice.

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In fact, that's already happening. Schwab and Vanguard offer robo-advisor services. Each firm has about 25 percent of the early adopters of robo-advising services, according to estimates based on an A.T. Kearney survey. That is more than any venture-funded start-up, such as Wealthfront and Betterment.

"The real point is that money in these big firms will migrate to robo-advisor services at those firms," Singh said. "The money will stay at the big financial brands that have spent decades building credibility with investors."

Singh expects large financial companies to move toward merging robo-advising services with human advisors. Brown agrees, but said that there will always be a need for humans, especially when there's a lot of money involved—and particularly during times like these, when the market turns bearish and many investors seek solace from professionals.

"Ultimately, people want a financial advisor for the big questions and needs," Brown said.