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Digital Advice Adoption Shortchanged by Lack of Client Understanding

Industry Trends and Research

While many younger investors are highly receptive to digital advice from their brokerage firms, a lack of understanding of how the technology manages their portfolio could be hindering wider adoption, a new study suggests.  

According to J.D. Power’s 2023 U.S. Self-Directed Investor Satisfaction Study, that lack of understanding could pose challenges for firms trying to establish longer-term relationships with younger, do-it-yourself (DIY) investors. 

“Digital, or robo-advice, presents an ideal platform to provide value-added services that can help grow and develop higher value relationships over time. But firms need to do a better job explaining how that digital advice works and articulating a clear value proposition for investors,” explains Craig Martin, executive managing director and head of wealth and lending intelligence at J.D. Power. “Right now, investors are interested, but if they are going to stick around for the long haul, they need to understand the value of the service they are receiving,” he adds.

Not surprisingly, Millennials and Gen Z are highly receptive to digital advice. Younger self-directed investors within the DIY segment are hungry for advice and the majority are receptive to the idea of receiving digital, or robo-advice, the study notes.

Currently, 86% of Gen Z investors and 79% of Millennial investors are interested in receiving robo-advice. During the past three years as market conditions have become more challenging, those numbers have increased by five percentage points and three percentage points, respectively, according to the findings.

Meanwhile, despite strong interest in digital advice, very few users of the technology understand how it works. Just 22% of investors who currently use robo-advice offerings from their brokerage firm say they “completely understand” how the technology manages their portfolio, J.D. Power notes. As a result, so-called Net Promoter Scores decrease significantly when investors say they are unsure how the digital technology works, the study notes.

Consequently, human support remains a key variable. When it comes to onboarding, answering technical questions and resolving problems, self-directed investors are still looking for that human connection. Human support also plays a key role in providing greater transparency and trust in digital advice, the firm adds.   

As to overall rankings, J.D. Power reports that Fidelity (704) ranked highest in self-directed investor satisfaction among investors seeking guidance, followed by E*Trade (698) and Charles Schwab (695).  

Vanguard (734) ranked highest in self-directed investor satisfaction among DIY investors, followed by T. Rowe Price (724) and Charles Schwab (717).

Now in its 21st year, the study evaluates key satisfaction drivers and firm performance among both investors seeking guidance (those who don’t have a dedicated financial advisor but do have access to interact with a registered investment professional) and true DIY investors (those who do not interact with professional advisors).

The study measures self-directed investors’ satisfaction with their investment firm based on seven factors (in order of importance): trust; digital channels; the ability to manage wealth how and when I want; products and services; value for fees; people; and problem resolution.

Fielded from October 2022 through January 2023, the study is based on responses from 5,165 investors who make all their investment decisions without the counsel of a full-service dedicated financial advisor.