The U.S. retail direct channel is growing at the expense of of advisor-sold channels according to new research from Boston-based global analytics firm Cerulli Associates.

According to the report, The Retail Investor Product Usage 2012, assets in the direct channel grew from $3.4 trillion in 2010 to $3.7 trillion in 2011.

“As direct providers continue to increase their advice and guidance services, they have been able to acquire and retain clients who may have sought advice in the advisor channel. These additional services help direct providers acquire rollover dollars as they guide clients with larger balances,”stated Cerulli senior analyst Roger Stamper.

“Direct providers were largely unscathed by reputation issues facing their advisory counterparts during the market downturn, and therefore have not faced the same level of client distrust,” stated Scott Smith, director at Cerulli Associates. “Direct firms have the ability to serve clients with a scalable, multi-channel approach, which allows them to efficiently manage millions of client relationships.”

Smith added that “compared to advisory firms, direct firms are more advanced in their client portals as well as online and mobile client access. Direct clients are able to complete the majority of their requests and transactions online or over the phone themselves, which provides an advantage in maintaining a greater number of client accounts.”

Some more insights from the Cerulli research include:

Cerulli’s retail investor sizing splits retail owned assets into three segments: advisor intermediated ($13.9 trillion), direct to investor ($4.2 trillion), and other intermediated channels ($4.3 trillion), to total $22.4 trillion in addressable assets.

Despite marketshare losses in recent years, wirehouses continue to make up the largest distribution channel, accounting for nearly 19% of all retail investor assets. Since 2008, investors have expressed reduced trust in advisory firms, but the advisor-intermediated segment continues to control the vast majority of retail investor assets. Though investors may not fully place their faith in the firm that employs their advisor, they generally believe their advisor continues to put the client’s interest first. While Cerulli anticipates that traditional advisory channels will lose marketshare in aggregate over the coming years, the segment will not soon be dethroned as the premier outlet to reach retail investors.

The rollover assets of aging Baby Boomers have long been anticipated as an oncoming flood of assets into the retail investor market. Direct providers are especially well positioned to capture these assets. Many direct providers, such as Fidelity and Vanguard maintain substantial 401(k) recordkeeping businesses, and therefore, already have established relationships with millions of investors. Additionally, direct providers generally steered clear of many of the negative headlines that have troubled their traditional advisory peers in recent years. As a result, these firms are more likely to maintain a positive reputation in the perception of potential rollover candidates. Finally, direct providers are set to benefit from a growing willingness to transact business online or through call centers, which allows these firms to provide scalable and consistent financial planning and investment advice to investors. However, despite these circumstances, opportunities remain for traditional advisory firms to gather assets if they are able to focus investor attention on the degree of personalized service they are able to provide in comparison to their direct channel competitors.

Mutual funds account for the largest portion of retail investor assets at nearly $7 trillion. Despite recent asset gains, the mutual funds segment faces a variety of challenges moving forward. First, investors remain skeptical of the overall health of the U.S. economy and will be measured when buying long-term investments. Additionally, in recent years advisors and investors have expressed a preference for lower cost offerings in general, and exchange-traded funds (ETFs) specifically, which gathered inflows of nearly $112 billion in 2011. In contrast, open-end mutual funds experienced net redemptions in excess of $72 billion during the same period. Cerulli expects increased marketshare of retail investor assets for the ETF segment as more investors and advisors focus on asset allocation and minimizing expenses, instead of security selection as portfolio foundations.

Contact Cerulli to purchase the full report.  

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