Why more investors are taking matters into their own hands

Editorial Comment: figures show people are taking greater responsibility for managing their financial future amid changes including the pension freedoms, writes Faith Glasgow.

Ten years ago, who’d have predicted that the number of online accounts belonging to direct investors (those without a conventional adviser) would more than double in three years, and rise by 800,000 – 16% – over the course of just 12 months?

Yet those are the findings of a survey of the direct online investing market recently released by consultancy Boring Money. It found not only that direct investor numbers have rocketed, but that the past year alone has seen a 20% rise in assets under administration (AUA) for online providers dealing directly with investors.

The survey looked across the whole online direct investing landscape, including platforms such as interactive investor, robo-advisers such as Nutmeg, and online services offered by asset managers, banks and life companies. Indeed, that increasing diversity says a lot about why this surge in self-directed investors is taking place.

Regulatory transformation

So what’s behind it? Have we suddenly become a nation of committed, engaged ISA and SIPP investors with a keen interest in the balance, diversity and quality of our portfolios and a well-thumbed copy of Money Observer always to hand? Sadly, no. The reality is that this shift is largely a reflection of changes in government policy and rules.

First came the Retail Distribution Review, the financial watchdog’s overhaul of the way financial advisers work and are remunerated, which led, among other things, to the end of commission-based investment sales.

As a result, many advisers shifted their attention to wealthier clients prepared to pay a fee for investment advice, or closed their doors altogether – leaving smaller investors to fend for themselves or take their chances with the emerging band of online providers offering a simple ‘robo’ advice service based around a choice of passive funds for different risk profiles.

Over the past three years, robo-advice appears to have consolidated its position massively, with growth of 465%.

However, as Holly Mackay, chief executive of Boring Money, points out, that’s “more about how small it was three years ago than how much it has grown”.

Nonetheless, the most successful robo-providers are clearly going some way towards filling the advice gap: Nutmeg, for example, now has 80,000 customers, according to the survey.

Another major governmental driver is the phased introduction of auto-enrolment since 2012, which requires all employers to offer staff a workplace pension. Although in many cases that has taken the form of a conventional occupational scheme, there has also been growth in specialist platforms supporting auto-enrolment.

True Potential, for example, caters for smaller firms with a skilled digital workforce: “They can get the app and manage their pensions like an ISA,” says Mackay.

• We’ve built a calculator to show you what your pension plan could give you in retirement

Meanwhile, the broad direction of travel has been entirely one-way, towards an environment where we all take greater responsibility for funding and managing our long-term future. The pension freedoms of April 2015 marked a step change in that direction, and they have been followed by further measures – the hiking of the tax-free ISA allowance to £20,000 and the introduction of the Lifetime ISA in 2017, for example.

So it’s unsurprising that well-established investment platforms have seen significant growth too, with AUA up 50% over the past three years. That is also where the average account size is largest. 

Two conclusions are clear from all this. The role of traditional financial advisers is likely to become increasingly marginal unless they reinvent themselves in a big way. Yet there’s an ever-greater need – particularly among engaged investors less likely to end up in limited-choice or passive robo-offerings – for informed, impartial, accessible sources of investment information and ideas. Money Observer evidently has its work cut out for the forseeable future.

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