A fresh look at how to empower retail investors

Henry Ford said: “If you always do what you’ve always done, you’ll always get what you’ve always got.” These words have been true for generations. Change is hard. Yet, as soon as one accepts that change has occurred, progress and improvements can come quickly.

According to the World Bank, in 1990, the stock market capitalisation of the United States was about $3.1 trillion, while the population was about 250 million. That equates to about $12,400 in stock value per person. Thirty years later, that figure is over $122,000 in public stock value per person. Yet, also since 1990, productivity per worker has increased by 82%, but inflation-adjusted median full-time earnings have only increased by 15%.

Put another way, the per-capita stock value of the U.S. increased nearly ten times over this three-decade period, while workers' salaries and wages increased by only 15%. Even adjusting stock value growth for inflation, it's multiplied several times over.

With technological advances, however, change and disruption have come to financial services. The average individual now has a growing influence, with everyday investors accounting for 52% of global assets under management in 2021, which is expected to rise to over 61% by 2030. With this comes an opportunity to balance and grow the global economy. But it also illuminates the differences between ‘old school’ and ‘new school’ financial institutions.

Without acceptance from the 'old school,' the opportunity that comes with a shifting investor base could be lost by the industry and negatively impact the growth of the broader economy as well.

The World Economic Forum’s (WEF) August 2022 Insight Report, The Future of Capital Markets: Democratization of Retail Investing, centres on the power of the everyday investor while appreciating the tension between ‘old school’ and ‘new school’ financial institutions. Here, we explore how to capture the opportunity ahead, with a focus on trust, education and access.

Over the last few years, a narrative has formed from the perspective of why and how this emerging customer base impacts the status quo of financial institutions and markets in the short term. The Forum report states: “Retail investors are moving markets, influencing institutional investors and having macro effects.” Further, terms such as 'retailisation' pit investors on 'new school' platforms against the traditional avenues of investment, whether it be mutual funds or advisor platforms. In essence, the non-traditional investor base is often considered an effect rather than an achievement.

Is it no wonder that a global study by the CFA Institute in 2022 found that roughly 60% of their surveyed retail investors trust the financial services industry versus 86% of institutional investors? How can we instead create a two-way street of confidence?

Trust begets trust. In our opinion, financial firms, old and new, should approach all investors as worthy of trust for information and education. Transparency and empathy are key ingredients. From personal experience, many financial firms use obscure revenue models and product selections that do not always seem in customers' best interest. This can exclude everyday retail investors that lack the resources – such as accountants, attorneys and other advisors – that institutions and high net-worth investors have who can advocate for them.

Tangibly, the development of products and services should look to serve customers across the financial spectrum rather than targeting just one kind. Firms should help their clients across the full wealth spectrum, implement a view they recommend through a variety of solutions and avoid incentivising the most profitable for the firm. Firms should also reconsider how financial products are accessed and recommended, particularly those that could be seen as a conflict of interest. Finally, they should be forthright about how fees are earned.

This should build long-term economies of scale for the firms and provide the near-term and long-term needs of a customer base that may grow in wealth over time.

Capital markets can be difficult to navigate, even for seasoned retail investors. In our years serving clients in a traditional institution, we found that learning styles are as different as people themselves. A lack of inclusive education can lead to either underinvesting or overindulging in risky assets – both of which put investors at risk of falling short of their goals.

Historically, education could only be found through access to advice, which still has some barriers to entry. In the Forum report, it states that: “proper investment advice is generally a paid service provided by registered investment advisers, who recommend specific actions based on a consumer’s individual circumstances and financial goals.” This begs the question, can the path to empowerment also vary by person such that education, with or without advice, can arm retail investors based on their personal paths?

Not only should the barriers to advice continue to fall, but education should also be separated from advice. Deliver the knowledge for everyday investors to make decisions without assuming they won’t understand concepts. Platforms should transform to provide empathetic educational and advice-based tools that go beyond delivering cookie-cutter information or assumptions.

Further, many everyday investors, particularly Generation Z, receive their insights from social media. While some findings are anchored in facts and backed by data, a considerable amount is speculative and opinion. Financial firms that successfully lead the charge will meet retail investors where they are. This means engaging with them on these platforms to debunk misinformation and spread helpful insights, building trust and helping the shifting investor base build wealth.

Finally, the Forum report states: “The current investment services landscape is sufficient in terms of the breadth of services offered but is siloed in terms of reach.” We agree that access to capital markets has exploded in recent years, but limitations still exist, particularly within private capital.

Expectations of returns from public markets have fallen, while private markets can provide potential excess return and additional diversification benefits. Yet, the average allocation to private capital makes up less than 5% of individual everyday investor portfolios, compared to 28% for institutions. Regulatory, liquidity and transparency constraints hinder participation, but technological advancements can solve several of the issues.

Building and engaging with digital platforms that provide a secondary market would allow investors to buy and sell private holdings to improve liquidity. Another avenue is to utilise blockchain technology. Assets paired with crypto innovations, such as stablecoins and automated market-making protocols, provide a foundation to expand participation. Innovative approaches to fund structures should also be considered. For example, constructing open-ended private funds, where realised investment returns are (partially or entirely) recycled back into a fund, rather than distributed back to Limited Partners, can open doors to more types of retail investors.

Continued participation is crucial to global economic growth. The financial services industry has been slow to abandon some of its old ways and prioritise less conventional methods to reach the new generation of retail investors. Financial institutions that recognise and embrace the changes outlined will be ushered into the forefront of the changing investing landscape and potential broader economic prosperity.