Tens of millions of new, do-it-yourself investors opened accounts at DIY retail brokerage firms in the past three years, their expectations high and firms happy to accommodate them.
Now, reality has set in for both parties, according to a study released Tuesday by J.D. Power.
“Pandemic-era investors who entered the financial markets during a real gold rush period of heightened expectations, significant disruption and extreme volatility represent a unique set of challenges for retail brokerage firms,” Michael Foy, senior director and head of wealth intelligence at J.D. Power, said in a statement.
“First, they constitute a huge segment, which has accounted for about 25 million new accounts since 2020. They also tend to be younger, less financially secure and more apt to experience problems that are not currently being addressed effectively by their brokerage firms.”
Foy noted that most firms are falling short when it comes to delivering the level of tailored customer experience that will help them convert these new investors into loyal and profitable clients.
The study, which was fielded from November through January, is based on responses from 4,888 investors who make all their investment decisions without the counsel of a full-service dedicated financial advisor.
Attrition Risk Factors
The study found that newer investors who opened accounts in the past three years were more likely than longer-tenured investors to experience problems, especially with website malfunctions and processing transactions.
Nineteen percent of pandemic-era investors experienced problems in the past year, compared with 13% among more tenured investors. Among newer investors, 84% of those problems were solved vs. 92% among tenured investors.
Pandemic-era investors are more than twice as likely to switch brokerage firms than are investors who have had their accounts for three or more years, according to the study.
Just 24% of newer investors said they definitely will not switch providers, down 11 percentage points from a year ago. This compared with 50% of more tenured investors who said they definitely will not switch providers.
The main drivers of attrition risk: lack of satisfaction with products, services and tools, and recommendations from friends and relatives to switch providers.
Only 39% of pandemic-era investors can be classified as financially healthy, compared with 72% of more tenured ones, according to J.D. Power.
Researchers observed specific financial vulnerabilities among the pandemic-era segment, including challenges paying bills on time, difficulty managing debt and insufficient savings to cover six months of living expenses or more.
In addition, the more financially vulnerable clients reported significantly lower satisfaction with their brokerage firm. J.D. Power said this suggests that firms need to do a better job of delivering content, tools and services that can help clients more effectively manage investments in the context of their overall financial lives.
Ineffectual Hybrid Model
Besides do-it-yourself investors, the study also looked at those investors who are not working with a traditional dedicated financial advisor, but do interact with their firm’s financial professionals for advice — for example, through a call center-based pool of advisors.
J.D. Power noted that the industry has been focused on how to make this scalable advice model work for the very large mass affluent market that is often not an ideal fit for a full-service advisor.
It found that average satisfaction with their firm among this segment is lower than it is among either do-it-yourself or full-service investors. This suggests that the promise of hybrid offerings has not yet been widely realized.
“With trading fees no longer being a significant revenue driver, the big opportunity for retail brokerage firms is creating loyal clients who will deepen their relationships to include revenue-generating services that address their broader financial needs for things such as advice, cash management and lending,” Foy said.
“Right now, that’s precisely where many firms are dropping the ball. They are struggling to meet their clients where they are at this point in their lives and deliver the type of personalized advice, educational tools and problem-free experiences they need to grow with their firms.”
See the gallery for the DIY brokerages firms that ranked above and below the industry average for overall satisfaction among DIY customers and customers seeking advice.