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Rise of "Instividual" Market Reinforces Need for Advice

The marketplace of investors was once neatly divisible into two groups: institutions (banks, mutual funds, insurance companies and pension funds) and individuals. Today, financial services firms increasingly find themselves catering to a new hybrid: the "instividual" market. According to Peter Starr, a managing director for consulting firm Cerulli Associates Inc., financial services firms seeking to win over this sector will have to meet a wide range of demands for investor education and advice.

Speaking in October at the SVIA Forum, Starr explained that the instividual market consists of individual investors saving for retirement through institutional channels such as 401(k) plans, as well as individuals investing for retirement through Individual Retirement Accounts. While IRAs are ostensibly retail vehicles, the assets they hold are commonly invested in mutual funds run by institutional investors.

By 1999, Starr noted, the IRA market had already grown bigger, at $2.5 trillion, than either the defined benefit plan or defined contribution plan markets. He estimated that between 2000 and 2010, another $4.6 trillion will flow from institutional 401(k) programs to individual retirement accounts as retiring baby boomers "rollover" their retirement assets into plans that give them more control of their assets.

These rollover investors want investment advice, Starr said, but in many cases can't afford the retail cost. He noted that only 3% of rollover IRA investors have account balances above $100,000, while 85% have account balances under $20,000. The former can easily access investment advisors, but the latter generally cannot. While the lower account-balance investors do have access to online investment advice, those services are best suited to the relatively few investors who require little customization of their advice and/or have the interest and ability to manage their money without the help of a human advisor.

The gap between cheap online advice and expensive one-on-one advice is the one that financial services vendors must try to fill, Starr said, but he predicted that the window of opportunity will narrow with time. Among retirees with assets in excess of $250,000, 74% already use an advisor, and among those with assets ranging from $50,000 to $100,000, 62% do. The challenge, of course, is to find ways to provide advice economically to those with modest account balances.

"The large number of rollover investors who will be looking for advice on how to convert their savings into retirement income and on other financial issues facing retirees will flock to providers who are able to offer them advice at a price they can afford," Starr said. The winning firms, he added, will likely find it necessary to implement all or most of the elements of what he calls a scalable advice product and service delivery model. Under this model, financial services firms will offer higher degrees of personalization as account balances go up in size. For example, self-directed investors and those with low account balances ($50,000 and under) might receive mass-customized or online advice; "validators" and mass market accounts ($50,000 to $150,000 in assets) might receive limited advice; and "transactors" and advice seekers, as well as those with high account balances ($150,000 and up) might receive personal advice as needed or on a recurring basis, depending on their directions.

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