February 10, 2014

According to a new report, “Extend Your Wealth Management Business with Online Brokerage" commissioned by Scivantage, fewer than 35% of the top 50 US banks by deposit customers and less than 25% of the top 100 currently offer stand-alone, self-directed brokerage platforms. Due to trends in next-generation preferences, this percentage may rapidly increase.

Jim Goodwin, CEO of Riperian, which was commissioned along with Aite Group for the report, explains the Generation X (ages 32-46) and Generation Y (ages 21-31) customers are happy to invest a portion of holdings in a mix of managed and self service brokerage accounts, but they are looking for the convenience of an all-in-one.

The report found that currently most bank brokerage and traditional wealth management firms do not yet support an independent self-directed channel. This shift in service preferences naturally comes as a threat to the established wealth management model. If not careful, customers may start to take their business elsewhere.

Interest in self-directed channels, explains Goodwin, has picked up in the 3-4 years following the financial crisis, and had been gaining extensive market share over the traditional full service brokerage firms, or wire houses.

According to the report, "Banks and brokerage firms that do not offer a self-directed trading platform are leaving money on the table and exposing themselves to the risk of seeing their client assets depleted, particularly as baby boomer clients draw down on assets to fund their retirements and younger clients invest or bank with firms that offer online brokerage capabilities."

It concludes that financial institutions serious about providing wealth management services to existing and next-generation customers should consider investment in a self-directed brokerage platform. "They will not only gain direct revenue from this new service but also benefit from increased revenue in their traditional business as more clients come to view their financial institution as their primary financial services provider."

Bridging Brokerage with Banking

Where to begin? Sophie Schmitt, wealth management senior analyst at Aite Group says institutions looking to support a self-directed brokerage channel need to first consider differentiating features for their clients. Should the platform be highly complex, middle of the road, very low cost?

In integrating the online banking channel to the brokerage, the white paper recommends many things commonly associated with the next generation user experience like single sign-on, one click funding, all-in-one display of account balances.

According to Goodwin, banks that start to display broker balances in online banking platforms have jumped 20-30% in the past two years. He adds that it is one of the most difficult parts of the integration but when banks get to that point, customers are more likely to use that channel to fund and trade rather than starting another account from scratch.

The report adds, "The leading online brokers enable online transfers from and to their own banks (e.g., Schwab Bank), but the majority of customers do not bank with their online broker and do not benefit from this integration. Banks that provide simple transfers are leveraging a competitive advantage over most online brokers. With this capability, banks have a chance of competing with leading platforms (HD platforms) in the area of convenience."

Becca is Senior Editor for Wall Street & Technology. Becca is writing in-depth news articles with a focus on big data and compliance in the capital markets. Becca regularly ...