When ING Direct announced earlier this year that it was committed to growing online brokerage firm ShareBuilder Corp. despite news that it would have to eliminate 7,000 jobs, some credit unions wondered if they were getting mixed signals.
ShareBuilder had 125 credit union clients when it was acquired by ING in 2007. The relationships dropped to 50 by January as the online brokerage firm made adjustments with its co-branded partnerships. At the time, ShareBuilder said it had set a growth target of at least 20% for this year.
The decline in the availability of advisers may be the top driver of growth within the online brokerage space, said Isabel Schauerte, an analyst at research firm Celent and co-author of the report "Online Brokerages: Technology and the Customer Experience." Fewer people are attracted to sales-based financial services positions, and there is a lack of development and training of new advisers, she noted. Many advisers are retiring, especially with the recent decline in markets and the move to cash. Brokers who are making less than they have in many years are taking this opportunity to exit the business or to make severe cutbacks on the size of their book, she found.
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The remaining advisers are expected to focus on the high- and ultra-high net worth households where they can be well-compensated, either in terms of assets under management fees or activity commissions, Schauerte said.
"This leaves much of the mass affluent and all of the mass market with few choices beyond self-service," she explained. "While there may remain a few major adviser-staffed firms targeting these client segments, their focus on proprietary products and nondifferentiated financial plans may eventually drive many of their clients to a self-service world as well."
For credit unions, Schauerte said collaborations with online brokerages could bring opportunities to grow revenue, especially through investors who choose to and are confident enough to make their own investment decisions.
"By all indications, an increasing number of credit unions are recognizing the signs of the time and jumping on the self-service bandwagon; for instance, by partnering with providers of online brokerage services. We believe those that are willing to invest and adapt, both in terms of online brokerage technology and the client experience, will be well-positioned for the future."
Celent found that active traders, defined as those who trade more than 10 times a month, make up less than 5% of total investors. Firms serving this segment are relatively small compared to those focused on traditional investors when measured in terms of value of assets and number of customer accounts. But due to the frequent trading activity of their customers, these brokers account for a large portion of U.S. online trading volumes.
Schauerte said firms that offer an undefined strategy seeking to be all things to all people will not do as well in the space and will decline into irrelevancy within the self-service world. Firms that determined their target-client segments and created a strong value proposition, by contrast, have done, and will continue to do, well, she noted.
The Generation Y demographic may be among the top segments apt to embrace online brokerage firms, Celent discovered. They are comfortable with online delivery channels and tend to be more self-directed in their investment strategies than other investors. With relatively few investable assets, Gen Yers remain an underserved group for full-service brokerage firms, Schauerte said.
"Generation Y is a demographic cohort that fits very well to the self-service concept underlying most online brokerage business models," Schauerte said. "This is, above all, due to their financial smarts and tech savvy."
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