As more self-directed investors enter financial markets in earnest, the demand for formal financial advice, and the willingness to pay for it, is on the rise.

Robinhood and other retail platforms have made it easy for young professionals to start investing. Many are now discovering multiple ways in which they can engage with financial markets. This, coupled with the volatility seen over the past year, has led more first-time investors to consider seeking advice, according to new research from Cerulli.

The appetite for short-squeeze investing seen in the GameStop saga generated an average of 15 billion trades a day in January 2021, up from roughly 11 billion daily in 2020, a 12-year high, the Boston-based consultancy group said. When trading hit a one-day record of 24 billion in late January this year, Robinhood accounted for more than 25 per cent of trades.

On the back of this momentum and changing behavior, "self-directed investors are increasingly interested in formal financial assistance and willing to pay for it," Cerulli director Scott Smith, said. But he cautioned that the “meme stock” craze that engulfed the first quarter carries lessons for advisors.

“While these niche stocks accounted for less than 0.1 per cent of market activity at the time, it highlights the need for advisors to keep tabs on how their clients consume and act on financial information, particularly on forums like Reddit,” Smith said.

This media-fanned behavior was in full view again last week when Tesla founder and Twitter power-user Elon Musk hosted Saturday Night Live. Musk stoked his upcoming appearance on the famous sketch show on social media and the fate of the “joke” cryptocurrency Dogecoin, leaving traders speculating whether Musk would endorse the currency on air or not. The maverick is no stranger to running up crypto prices and moving markets, including his own bitcoin trading. As it turned out, Dogecoin fell sharply during the show, after Musk conceded trading it was a bit of "a hustle."

The more general takeaway for wealth managers is the need to stay on top of the investment behavior of enthusiastic Millennial and Gen-Z DIY traders - their potential wealth clients of tomorrow.

A quarter of US Millennials will soon be non-US-born, which makes it a “phenomenally interesting generation” to grapple with, Gartner technology sector portfolio manager and analyst, Chuck Thomas said. Working with senior executives in private banking and wealth management, most of his work revolves around helping businesses transform before they get disrupted.

If nothing else, the GameStop/Robinhood episode demonstrated the collective power of DIY investors and the folly of underestimating Robinhood's ability to cut through to new business lines such as wealth and financial planning to keep these investors in their own wealth chain.

Charles Schwab was created for do-it-yourself trading and is now moving into wealth management and private banking, Thomas points out. “Is it going to be Robinhood or Betterment? I don’t want to pick on any of these. There will certainly be a niche that wants to do that."

But any transition won't be easy.

"Once you step outside of your main services and get into planning, real estate, long-term healthcare, trusts, those firms can’t deliver that today," Thomas said. "But they may. Who knows where Goldman is taking Marcus?" he said.

Thomas believes that Robinhood will move up in scope, in terms of wealth services, but not without changing the scope of those services.

However, for platforms that plan correctly, these clients are a source of growth. “They might be your banking clients if you are a large bank and have a retail operation. Then it becomes, ‘Why can’t I use this technology with modifications to turn my savers into investors?'” Thomas argues.

Cerulli points out that while this so-called “democratizing of finance” taking place on challenger platforms is a net positive for engaging average investors in the stock market with few barriers, it is not without risk. Smith suggests that DIY herd activity should not be about advisors dissuading clients from making high-risk investments, but rather putting these market swings and "influencer" machinations into the context of financial history and the client’s long-term goals.

“Keeping abreast of the influences and influencers shaping discussions in public forums can help advisors frame these conversations on the clients’ terms while ensuring that the best laid financial plans are not squandered by a temporary craze,” he said.