Over the last few years, the financial services sector has seen the rise of the DIY investor.
According to Boring Money, in 2020, DIY investment platforms had year-on-year assets under administration growth of more than £100bn ($141bn, €116bn).
There is now a record £329bn held by DIY investors in the UK and customer numbers have increased by more than 20% YoY to surpass seven million.
International Adviser reached out to Prosper Wealth Management, Tenet Group and Strabens Hall to discuss how the rise of the DIY investor can impact the UK advice sector.
Why?
The success of Hargreaves Lansdown, AJ Bell and their rivals, which offer clients a relatively cheap and easy gateway into the stock market, has inevitably sparked interest from competitors who are looking to replicate this success.
But why has there been a rise in DIY investors?
Ben Wright, director of strategic development at Tenet Group, said: “There are two reasons for the rise in DIY investing; time and money.
“Lockdown has meant people have managed to save more. The Nationwide Building Society suggested that the average amount saved during lockdown was £1,085 and if you consider that this is an average including those whose jobs were affected, people who weren’t affected probably managed to save more.
“The second reason is that people have had more time to look around and further their understanding of investing, as well as being bombarded by considerably more advertising from online DIY platforms offering free trading.”
Chris Yardley, client adviser at Strabens Hall, added: “Investors have access to information now which is unparalleled in human history.
“This is thanks to, almost entirely, the rise and proliferation of the internet: with so many people spending time educating themselves on the investment landscape and the actual mechanics of how to make investments, this type of person will seek an outlet for their ideas and energy.
“This fact is amplified by the simplicity of the DIY platform and how an investor can now make an investment with the click of a button, and whilst on the move, which was not possible until fairly recently; with this build-up of demand comes the supply of DIY platforms.”
Sustainable
DIY investing is a great thing from the perspective that it gives everybody access to the financial services sector.
But the longevity of investing on your own can be daunting and depend on luck. The untrained eye may not know what the best thing to do in periods of fluctuation, like we have experienced during the pandemic.
David Barton, chief executive at IWP subsidiary Prosper Wealth Management, said: “For investors with relatively modest means and straightforward requirements, the DIY platforms will remain fit for purpose for many years to come.
“As more competitors enter this space the likelihood is that cost will be driven down further and the investment/research tools on offer are likely to be expanded.
“Over the longer term, however, as investor portfolios increase in size and their planning requirements become more complicated, for example retirement drawdown strategies and/or inheritance tax planning, then the DIY approach is unlikely to facilitate the best outcome for these clients.”
Yardley added: “For the right type of investor, who has the time and inclination, a DIY platform can service their investment needs.
“Of course, care must be taken to select the ‘best-in-class’ platform with, for example, wide investment options, competitive fees and excellent service levels, but for clients who take a proactive and interested approach to their own financial planning, a DIY platform is well positioned to serve them.”
Adviser help
But the DIY investor will likely need help with more technical issues at some stage in their investment journey. This is where the adviser market can help and lending a hand, as evidenced by 19% of advised clients having a DIY investment account.
They may not to build a relationships for life but could drop in and out for a financial health check up.
Tenet’s Wright said: “The key to DIY investing, as with DIY anything, is knowledge. The more you know about your subject area, the more likely it is you’re going to do an okay job.
“There is no substitute for financial advice; for instance, good financial planning around pensions or inheritance tax can save 40% tax on day one without taking any investment risks; you’ll be hard pressed to find an investment which yields such returns.”
Prosper’s Barton said: “There’s a lot more to financial planning than picking funds. The client lifecycle will result in different priorities and needs, and therefore planning strategies around taxation, cash flow and investment risk are incredibly important.
“These ‘advisory’ services would both complement and enhance the service to DIY investors. The year 2020 saw significant economic turmoil which resulted in high levels of volatility. It’s times like this where DIY investors are at risk of making knee-jerk decisions based upon emotion which could damage their financial future.”
Adviser attraction
Entering the financial advice market can be daunting and costly for investors, which may be some of the reasons why people steer away from it.
But advisers can change people’s lives – for example, enabling people to retire years earlier than they thought they could.
Over the last few years, there have been various pieces of research which demonstrate the tangible ‘added value’ that working closely with a financial planner and following a disciplined investment approach can bring.
The issue is getting that message across to prospective clients.
Wright said: “In a recent report from Royal London, 46% of people surveyed said they didn’t seek financial advice because they thought it was too expensive and I think that there are two angles to consider here.
“Firstly, I don’t think that people understand the value of financial advice – yes, there is a fee to pay; but you will get a plan that helps you achieve your goals. As an industry we need to find a way to help people understand that value through better education.
“We need to get financial well-being on the agenda; it should be part of our national curriculum, discussed in parliament and a service offered in the workplace.
“On the other side of the coin, financial advice could actually be too expensive to make it worthwhile for some. Providing financial advice is time consuming and the regulation associated with it means that advisers will have a level at which it’s not commercially viable for them to give that advice.”
Long-term clash?
DIY platforms show no sign of going away. The advice market is necessary.
But this does not mean the two have to clash.
Barton said: “There will always be a space for DIY platforms and they will continue to co-exist with the advised space. The variety of client types in the market means that there will never be a one-size-fits-all solution.
“The advisers who truly engage with their clients are in a very strong position and need not fear the DIY platform option. That said, those offering only a light touch service with no focus upon building a close relationship are likely to feel the heat and could lose market share.
“We regularly engage with clients who used DIY platforms during their accumulation years.”
Wright said: “In the long term, I believe that we will see continued growth in people self-investing, however I believe the number of people getting financial advice will also grow as they get savvier with investing and better understand the importance of long-term financial well-being.
“Clients who have an adviser can also have a part of their portfolio that they invest themselves. It could be that the adviser helps craft the overall financial plan and looks after say the pension, but the client keeps control of their Isas.”
Strabens Hall’s Yardley added: “Whilst DIY platforms can be considered positive for a certain types of investors to implement their own investment ideas and plans, the need for advice remains as important as ever, and should be seen as complimentary.”
