2020 saw an explosion in retail investing, With this, people across the globe saw trading on the stockmarket as a means of getting rich quick. The bull market in the NASDAQ, the astonishing rise of ARK ETFs and the mind-boggling increases in volumes in crypto-assets have all been fed and facilitated by DIY investors who are hungry to join in the latest craze. But what does it mean for the advice profession?
This week Gamestop shares rose over 50 times from their low in 2020, this phenomenon was orchestrated by retail investors: 56% of all Robinhood users had Gamestop stocks. This article is not about the Short/Gamma play informed by good fundamental research and spearheaded by r/wallstreetbets, it’s about the trading apps that facilitate retail investments, and how financial advisers have an opportunity to thrive in this current climate.
Quick and Easy
For many of today’s DIY investors, their first access point to investing is through trading apps. They’re quick and easy to access and the lure of commission-free trading of equities, commodities, currencies, and more is, undoubtedly compelling. The facility to practise using a virtual account means that users can find their way around the app before they proceed to using real money.
The most popular trading app in the US is RobinHood, which saw over four million trades a day on average in June 2020.
Statistics are hard to find for the UK equivalents, such as Trading 2-1-2 and eToro, although if their presence on social media and google search volume is anything to go by, they prove very popular platforms indeed.
There are many who have fair concerns over the use of these trading apps. In particular, contracts for difference and glossy advertising standout. However doing away with gatekeeping fees and increasing access to investments is, overall, an undeniably good thing.
That said in this climate of do-it-yourself investing in amidst the bull market returns of 2020, and now 2021, one thing seems conspicuously sparse – namely, sound financial advice.
That is not to undermine the rise in financial literacy we have seen over the last year or so. For all the suspect mentoring courses out there, there is equally as much informative content, though perhaps not as seductive.
What can we learn?
IFA Magazine has been talking to a variety of experts, including advisers, planners and investors to hear what they have to say about DIY investing, the rise of trading apps and how advisers can find a place in such an environment.
For years, the advice profession has been criticised for failing to resonate with younger clients – as well as with those who do not have a large amount of investible assets. It’s the old chestnut of the “advice gap” and how we can close it. A key theme that came out in these conversations is the need for advisers to take a leaf out of these trading apps’ book. Advisers and planners need to level-up their accessibility, create and share engaging content on social media, and compete with scamming influencers on their own terms, if they are to appeal to a new audience. It is an audience that can clearly benefit from the sound guidance and advice that the profession can deliver. So what can be done?
Good and Bad
I spoke to Martin Bamford, Chartered Financial Planner and creator of Bamford Media a boutique, content-marketing production agency and digital publisher, in the financial services industry. I got in contact with Martin after he shared a video on Twitter. The video was posted by Twitter account called ‘TikTok Investors’, and showed a couple giving absurdly bad ‘financial advice’. Check it out for yourself here.
Bamford, who is an extremely experienced adviser himself, started by acknowledging how the explosion in DIY investing has both good and bad connotations.
He commented: “A growing number of people, especially younger people, who are investing for the future should help to build levels of financial resilience. However, where investing activity is being fuelled by the notion of getting rich quick or beating the markets through day trading prowess, it is inevitably doomed to failure.”
The bull run of 2020 has been historic and certain stocks with immediate name recognition did very well, think Tesla. Bamford worries this may have lulled some into a false sense of ability and confidence in getting rich quick.
“Newbie investors who have done well in the past year need to separate any assumed skills from their stock selections from the luck of getting started during a bull run.
“For the overwhelming majority of retail investors, picking and trading stocks is a strategy doomed to fail. History tells us that these investors would be better off opting for a low-cost index tracker fund and topping this up each month to benefit from pound- cost averaging and compounded returns.”
The question remains, are many new investors actually aware of this? Bamford has a simple yet pragmatic solution to this problem, ‘we need to go where the investors are.’
He continued, “A dark side of the growth in retail investing is the prevalence of scammers, especially on social media platforms. Instagram, TikTok and Twitter in particular have become havens for investment scammers, selling a fake lifestyle to lure their victims into buying ‘trading signals’ services or managed portfolios, where money is ultimately stolen.”
Bamford argues that investor education needs to be ramped up to match these investors “demand, he continued, ‘financial planners are well placed to deliver this, but that means creating and sharing engaging content on social media. We’re in competition now with the ‘influencers’ who view the financial markets as a lucrative place to make money from their affiliate links and brand deals.”
Everything is instant
Neil Blankstone is the Senior Director of Business Development at Blankstone Sington. Blankstone Sington just won Growth Investors ‘one to watch ’award for 2020. I emailed Neil a day after the topic of retail investing was discussed at the firms ’regular roundtable, so he was particularly primed for a response.
I asked Blankstone, as someone who has spent their career advising people on their finances, what his thoughts were about the explosion of retail investing using trading apps.
He started by highlighting an important backdrop to the whole thing. “Millennials have grown up in a completely different environment. One in which ‘everything is instant, if they want to transfer cash/pay for something at 4am, having been on a night out they can! The growth in technology, internet, and access to information mean ‘if they get an idea and they can almost instantly see how they can put it into practice.”
I asked how he believes the advice profession may attract younger people with savings. Neil responded by first outlining, “the fact it is called “retail investing” as against say “retail saving” highlights one danger. Stockmarket investing into individual companies ’shares is a risky business. Using stockmarket investment as part of a wider saving plan isn’t.”
Blankstone pointed out a cultural difference between the US and the UK, “We have bookmakers/casinos to hand. In the US you have to either do it online or travel. The stockmarket in the US can become an extension of gambling, the UK has a danger of developing that way.”
Blankstone continued, “If the adviser industry wants to tap into this space, it will need to adapt how it delivers its advice. If you think of the average adviser model, can you honestly see an 18-25 year old wanting to sit down and go through, face to face, their finances, their risk appetite, what’s suitable as an investment and what’s not, what their long term ambitions are?
“An adviser knows what the client should be doing and should be considering – but the way that advice is delivered and the message that is given needs to tap into the psyche. A good adviser should be tailoring their advice to lead on to/allow for the change in the circumstances that a Millennial will inevitably see over time.”
Kate Holmes is a Certified Financial Planner, and the CEO and founder of Innovating Advice, a podcast and community platform to do its namesake. She is based in the USA and has strong views on the subject of engaging millennials in the arena of financial planning.
I had a great conversation with Kate all the way back in November 2020 and her comments echoed that of Bamford’s.
I started our conversation by confessing to Holmes my own experience of using trading apps and my modest successes making me feel like an investment genius. Her response was to say that “so many people were diving into trading apps during lockdown, we’ve seen this across the world. Because the market has been going up there really is this false sense of genius that’s coming about.”
Holmes related this sentiment to her experience while building an adviser firm following the 2008 financial crash.
“We saw the exact same thing happen during the global financial crisis – people lost their money and thought the world was ending, then immediately there after the markets shot up. When I started my prior business working with millennials, I did talk to a lot of people who said ‘hey my husband or my co-worker is a genius investor so why would I work with an adviser?”
I asked whether she thought retail investing apps could be seen as a threat to advisers. Holmes responded, “I don’t see these platforms as a threat to IFAs. I have long been a fan of the idea of investing becoming commoditised.’ Holmes continued, ‘IFAs cannot control the market, so what IFAs should be focussed on are the things we can control. We can control how much money people save, how regularly they are saving, and what they are investing in.”
Holmes suggests IFAs should be getting to grips with the current zeitgeist in retail investing, “having IFAs understanding how these things work, and coaching clients against the instant gratification of Robinhood-type apps is crucial.” Holmes mentioned how the app encourages customers to place more trades and to invest in some of the riskiest things out there.
With a practical approach, she stressed some small changes which IFA businesses could do immediately. “There are a lot of barriers between the public and IFAs, it’s often very formal, you have to book an appointment and fill out forms, and see if you qualify – that’s miserable.”
“There are such great big opportunities for IFAs to make this more easy and accessible, and to make it a much more enjoyable experience to work with you. When you go to these apps you can sign up instantly. They’re super easy to use, you know straight off the bat if there are 0 trading costs, or if there are any costs, vs going to an IFAs site. If you’re open to adopting small things – put fees on your website!”
Kate, like Bamford, has a popular podcast that covers financial advice. She was keen to highlight the growing numbers of advisers, planners and economists who are already using platforms such as TikTok to engage with new investors, and offering sound advice by taking advantage of social media and taking a different approach.
Ronald W.Chan is the founder of Chartwell Capital in Hong Kong, which has just joined the Group of Boutique Asset Managers.
Chartwell Capital is major player in the value investing community, and Chan himself wrote The Value Investors: Lessons from the World’s Top Fund Managers, which has received a lot of industry praise. Chan can help give a value investing perspective into the current environment we find ourselves.
Ronald Chan started by highlighting how popular trading apps already are in Asia, “Online and mobile trading in Asia are already well established, especially given investment stock trading is almost regarded as a past time here!”
Asked about the role that trading apps have had on investing over 2020, Chan responded, “I think retail trading apps have definitely lead to an increase in momentum investing. Trading apps have provided accessibility which was not previously there, so a whole new cohort of investors have joined the market.”
Asked of his opinion on fee-less trading apps Chan answered, “Overall, I think they are positive, as they are opening up opportunities to new investors and are an important step in improving financial management and literacy. The information and knowledge being shared online is phenomenal.”
Sharing an analysis on the investors themselves Chan continued,
They ‘are less bogged down by ratios and analysis, with a different mindset to more traditional investors. Time horizon is a key differentiator – these traders are more focused on instant gratification rather than the safety of a longer time horizon.”
Chan was keen to separate himself from a debate around investment approaches, after all the approach depends on what the investor is after. In reference to those on the hunt for bull market returns Chan said, “Ultimately, it’s great if you are making money, and importantly, making sure you have a safety net when it doesn’t work.”
Chan also highlighted the positive effects trading apps have had on his industry, “I think they are driving innovation and raising standards in the asset management industry, especially for active managers. There is no scope to get flabby or complacent – managers need to evolve and find their niche which complements the momentum and data plays.”
Something present online in 2020, whether it be on YouTube, or Social Media platforms like Twitter or TikTok, were young people retail investing. Chan touched on this, saying, “Millennials typically like to participate when there is a story. If they feel part of a story and can identify with it, they will go for it. Trading apps offer another form of story telling.”
Chan concluded by saying, “Obviously, the negatives are around the downside risk. There is rarely a thesis behind momentum trading – so what happens when you lose? Being clear on your ultimate investment principles and making sure you can still sleep at night are good anchors.”
“I think trading apps are fine as long as you are making money – it is not a bad habit if it works, but it needs to be sustainable and repeatable.”
Sustainable and repeatable return on investment is where advisers and planners can throw their hat in.
What 2020 has made clear is that there is a renewed appetite for investing among the general population. Ultimately, the major theme that springs out amongst those we’ve talked to is that the rise in interest in investing provides an opportunity for advisers. An opportunity to use the same platforms and ways of communicating that those who are significantly less qualified do so already. Those advisers who are prepared to grasp the opportunity, to adapt and develop the way they communicate their service will have the best chance of closing the advice gap that has for so long eluded the profession.