Investors Adopt More Hands-On Approach to Advisors, Says J.D. Power Full Service Investor Satisfaction Study
Charles Schwab & Co., Inc. Ranks Highest in Full Service Investor Satisfaction
The full service investment advisory industry is undergoing a historic shift, driven by an actively engaged investor population that is demanding a more hands-on approach from their advisors. According to the J.D. Power 2016 U.S. Full Service Investor Satisfaction Study,SM released today, a steadily increasing number of investment advisory customers have disrupted conventional thinking about full service and self-directed advisory services, favoring a hybrid approach in which advisors become validators, or sounding boards, but not final decision makers.
Rise of the Validator
J.D. Power research has identified three segments of full service investors, which are defined by customer preference for making financial decisions in consultation with a personal financial advisor:
- Validators want to make their own decisions, but still have access to an advisor for support and as a sounding board.
- Collaborators interact with an advisor and depend on that guidance and advice for investment decisions.
- Delegators want an advisor to make decisions on their behalf.
The percentage of full service investment advisory customers who are validators has increased steadily since 2013, and now accounts for 36% of all full service investors. In contrast, the percentage of collaborators has decreased steadily during the same period (to 51% in 2016 from 59% in 2013), while the number of delegators has remained flat. The trend is even more pronounced among Millennials (born 1982-1994), with 64% falling within the validator segment this year.
“The current evolution we’re seeing in investor preferences will likely be accelerated by the further development of new technologies, such as robo-advisors, and by regulatory changes, such as those just issued by the Department of Labor concerning fiduciary standards,” said Mike Foy, director of the wealth management practice at J.D. Power. “Full service firms will need to adapt to these changes by providing more value and transparency to investors, making a clear case for the value they provide vs. lower-cost alternatives.”
Following are additional findings of the 2016 study:
- Investor Satisfaction Remains Flat Despite Challenging Markets: Overall investor satisfaction remains essentially flat year over year (804 in 2016 vs. 807 in 2015 on a 1,000-point scale), despite the worst markets since the 2009 study. More than double the number of investors indicate their own financial situation is better than it was a year ago (29% better vs. 12% worse, respectively). Most (59%) investors indicate their financial situation is about the same.
- Investors Not Getting Goals-Based Advice: Nearly 4 in 10 investors (38%) indicate their advisor did not help them set goals or discuss risk tolerance, and only 42% indicate their advisor met key performance indicators (KPIs) related to setting goals, implementing strategy and ongoing tracking. Performance satisfaction scores are 117 index points higher among investors whose advisor discussed portfolio performance and goal-setting vs. those whose advisor just discussed portfolio performance and asset allocation (783 vs. 666, respectively).
- Confusion over Fees Remains a Challenge: Most investors still do not completely understand their fees (60% in 2016 vs. 56% in 2015), a problem likely to become worse with the proliferation of such low-cost alternatives as robo-advisors and regulatory changes such as the Department of Labor’s recently released rules on implementing a fiduciary standard for all retirement-related accounts.
Charles Schwab & Co., Inc. (837) ranks highest in overall investor satisfaction, followed by Edward Jones and Fidelity Investments (822 each) in a tie, and UBS Financial Services (810).
The study, now in its 14th year, measures overall investor satisfaction with full service investment firms in seven factors (in order of importance): financial advisor (formerly investment advisor); account information; investment performance; product offerings (formerly account offerings); commissions and fees; website; and problem resolution.
The 2016 U.S. Full Service Investor Satisfaction Study was fielded in January 2016 and is based on responses from more than 6,000 investors who make some or all of their investment decisions with a financial advisor.
J.D. Power – 2016 U.S. Full Service Investor Satisfaction StudySM
The wealth management industry is entering a period of significant disruption, driven by a confluence of demographic, technological, and regulatory changes that will significantly change what investors expect from their advisor and their wealth management firm.
The Millennial generation recently surpassed Boomers as the largest demographic group in the U.S. workforce, and they are looking for a very different kind of wealth management experience than their parents. They don’t fit neatly into either the traditional full-service or self-directed investor paradigms, but instead want to play an active role in managing their money and also have access to a trusted advisor whenever they need one.
Technology is in some way disrupting nearly every industry, and wealth management is no exception. The emergence of the robo-advisor phenomenon is not the only way technology is transforming the investor experience, but by enabling the delivery of portfolio management at a fraction of the cost of a human advisor, it does pose the most direct challenge to the traditional full-service value proposition.
Finally, the anticipated Department of Labor rule on the fiduciary standard is likely to have a significant impact; 62% of advisors recently surveyed by Fidelity expect to unload some of their smaller clients who will no longer be profitable to manage under the new constraints1.
What do these seemingly disparate trends have in common? They each reinforce the importance of a trend that’s been emerging over the past several years, what J.D. Power calls the rise of the Validator.
Validators are investors who want to make their own decisions but also want access to an advisor. Nearly two-thirds of Millennials are Validators, but so are about one-third of other full service investors, up from 24% just 2 years ago.
As a group, Validators are much more interested in robo-advisors than other investors, and, as these investors tend to skew younger, they will also likely be disproportionally among those who advisors and firms will increasingly struggle to service effectively or profitably under a more arduous regulatory burden.
Validators also have different needs, preferences, and priorities from their wealth management provider, they care more about value and are more willing to consider switching firms, including to non-traditional providers of investment advice, whether that means a robo-advisor or a retail bank. They also stand to inherit an enormous amount of wealth over the coming decades, so the firms that are best able to understand and meet their needs today are most likely to be the industry leaders of tomorrow. Firms like Charles Schwab—this year’s highest performer—are leading the way.
Market Impact and Economic Outlook
Investor satisfaction flat despite decline in markets and outlook
While market volatility is up sharply and the S&P is down year over year for the first time since 2009, overall investor satisfaction as measured by the J.D. Power 2016 U.S. Full Service Investor Satisfaction StudySM has essentially remained flat since 2014.
Investors also remain relatively sanguine about economic conditions and especially about their own financial circumstances. Just 12% of investors say they are “worse off” than a year ago, and 66% indicate they are more positive than negative about their personal financial outlook, while 48% indicate being more positive than negative about the broader economic outlook.
While the data suggests investors remain relatively confident, 2016 is the first year since 2010 that investors’ personal financial outlook and outlook for the economy had not improved year over year.
Schwab performance underscores shift in both strategy and market needs
Over the past several years, Charles Schwab has focused on going beyond its legacy business as a discounter or self-directed platform to emerge as a leading full service wealth management provider.
By improving interactions with advisors as well as building on its strengths around fees, performance, product offerings, and account information, Charles Schwab has developed an overall client experience that is closely aligned with the evolving priorities of today’s full service investor.
Investor Satisfaction Drives Revenue
Satisfaction drives loyalty, net new assets, and referrals
In addition to improving retention and loyalty, investor satisfaction significantly impacts critical drivers of new business, both increasing share of wallet among existing clients and generating referrals, which remains by far the most important source of new clients.
Average satisfaction scores for firms are clustered within a fairly narrow range between 765 and 837, which masks a lack of consistency at the individual investor level: overall satisfaction among 21% of investors is below 700, while satisfaction among 28% is above 900.
High-ranking firms with business models as different as Charles Schwab and Edward Jones outperform peers largely by delivering a more consistent experience, with just 12% and 14% of their clients, respectively, falling below 700.