What Went Right

Only a decade ago, many observers of the financial services business openly questioned how many advisors, brokers and other third-party intermediaries could survive in a world where information and choice were proliferating like rabbits. Could they add enough value to justify their fees and commissions? When the Internet burst on the scene in 1995, the questions started to mount.

I can remember hearing an executive at a load-fund company argue that his competitors at similar companies should stop whining and simply accept the inevitable loss of market share they were expected to experience. Like the British Empire, they were supposed to simply sit back and gracefully accept their diminishing status. When financial products ranging from equities to insurance became available from online sources, these new distribution channels captured more than their fair share of business for a while and marginal brokers and insurance agents were forced to look for new careers.

But the real story of the last decade is how the direct investing business never morphed into the unstoppable juggernaut it was supposed to be. What went wrong? For starters, as the bull market accelerated in the late '90s, many direct investors became bored with the 20% or 30% returns that mutual funds were offering and started to purchase individual stocks in which they frequently could double their money in six months or a year.

The commonsense message from independent financial advisors that held so much appeal in the early '90s–and in the current environment–did not resonate when the bubble was expanding at full throttle. I can remember several highly professional advisors who refused to succumb to client demands for tech stocks saying in early 1999 that if the bull market continued for several more years, they might be out of business. They stayed in business, but lost a few clients.

In many ways, the challenge from direct marketers proved to be a blessing in disguise. Advisors were forced to focus on their value propositions, upgrade their professional skills and compete effectively at a higher level. To be sure, not everyone survived. But those who did are in the catbird's seat today. Indeed, one of the great ironies is that many of the no-load fund companies that originally thought they could compete successfully against advisors and other intermediaries now are pinning their future growth plans on doing business with them.

A survey of investors recently conducted by OppenheimerFunds reveals that 84% of individuals who use an advisor believe the advice is worth paying for. Significantly, 92% of people who rely on advisors think they will be comfortable in retirement, compared with only 36% of direct investors. Only 18% of investors who use an advisor say they may have to delay retirement, versus 65% of direct investors who say they expect to work longer.

Several years ago, research performed by Charles Schwab & Co. argued that the true direct investor market was only 10% of all investors. But the Oppenheimer survey has produced some remarkable evidence about how little the direct crowd has learned from the worst bear market in their adult lifetimes. Specifically, 94% of investors who use an advisor believe it is important to have a diversified portfolio, compared with only 22% of direct investors. That one left me stunned.

This remarkably favorable confluence of forces and trends should be enough to make many a reader feel good, if not outright cocky. But it would be perilous to start gloating about it. The gloaters always get paid back in spades.