The rise of the retail investor continues – here’s how the financial system can accommodate them

It’s been a wild ride for financial markets in 2023 so far. Even so, retail investors — non-professional individual investors — have continued to invest in record numbers.

In the US, individual investors contributed roughly a fifth of stock-trading volume even after a volatile year. Markets are listening to the power of this investor group, with many large companies rethinking strategies to become more retail investor friendly.

Choosing the right advisors or engagement method isn’t simple. As part of the Future of Capital Markets initiative, factors to consider have been mapped out for retail investors, depending on the needs of the individual.

Over the past two years, the World Economic Forum’s Future of Capital Markets initiative has examined the rise of retail investing and considered how to improve individuals' participation in capital markets.

In collaboration with 35 financial services organizations, the initiative has considered ways to empower individuals to invest responsibly through improved access, education and enhancing trust in markets.

You can watch more on the Future of Capital Markets here.

Here are three key factors shaping the future of capital markets and retail investing:

Technology and social media have broadened our access to information — for better and for worse — and its impact on retail investing has been no exception.

Social media has made financial topics more engaging and accessible, increasing access to financial literacy and advice for many people. This also, however, comes with significant risk, particularly due to the dangers of false information, misleading advice, a lack of regulation and inconsistent quality.

Industry and policymakers must balance the benefits against the risks. In addition to turning to social media for information, the mechanisms for personalised financial advice are varied and evolving.

The World Economic Forum and BNY Mellon 2022 retail investor survey found that almost 80% of current investors felt being able to speak with a financial advisor is important to make investment decisions — yet less than half of them actually work with a financial advisor. From robo-advisors and investment portfolio subscription services, all the way through to a traditional (human) personal wealth advisor, there are many choices when it comes to financial advice.

Choosing the right advisors or engagement method isn’t simple — but there is guidance out there that suggests where to begin the search, depending on the needs of the individual.

As the saying goes: never put all your eggs in one basket. The same goes for investment in one type of asset. To balance the risk and reward in a portfolio, diversification will reduce the risk of market volatility. Typically, retail investors are putting their money into stocks, bonds and cash (or cash equivalents).

In recent years, digital assets such as cryptocurrency have also been traded — but access to these products might not be enough to provide a truly diversified portfolio for retail investors.

Access to alternative assets such as private equity, private debt, real estate, and infrastructure has historically been restricted to institutional investors and the very wealthy individuals. Expanding the access to these products responsibly could provide more diversification options for the right retail investor and be an avenue to benefit from the returns that these assets provide.

At the same time, there are unique risks for individuals and markets with broadening access to private markets. This must be done in a responsible manner and with proper educational support. It also requires product innovation and careful consideration of the industry shifts needed to accommodate this. None of these are easy problems to solve, but they will be a focus of the next phase of Forum’s Future of Capital Markets research.

The way companies and policymakers are currently approaching financial education is not resonating with retail investors.

The World Economic Forum and BNY Mellon 2022 Retail Investor Survey found that over three quarters of current retail investors would invest more if they had more opportunities to learn about investing. And less than 10% learn about investing in early schooling. We need to drastically rethink how we empower individual investors with the knowledge they need to secure their financial future.

Financial literacy skills must be imparted from a young age, and education must tie basic financial health with more advanced investment and retirement actions. Financial education also needs to be offered side-by-side with investment offerings — and we need innovative and effective ways of doing this.

We can’t get there alone. Policymakers, industry players, educators, civil society all need to collaborate to rethink financial education and planning in a way that is holistic. We need to share best practices and enable greater collaboration across the ecosystem. Only then will retail investors be able to capitalise fully on the opportunities in financial markets — and the markets benefit from their cash in turn.