Armed with flashy mobile trading apps and free stock trades, millions of young Americans are opening up brokerage accounts online and putting traditional financial advisers on notice.
The six million people who downloaded trading apps in January alone represent a new breed of retail investor that is younger, earns a lower income and is more racially diverse than any investment cohort the industry has seen. Morgan Stanley & Co., for example, opened more new accounts in the first two months of 2021 than in the last six months of 2020 combined.
Fintech platforms like Robinhood Markets Inc. and the payments giant PayPal Holdings Inc., which recently released plans to offer retail trades, are catering to exploding demand for online accounts with no investment minimums.
If you don’t believe the hype, take Finra’s word for it. The Financial Industry Regulatory Authority Inc. recently released a new study on the “New Investor,” a group that opened accounts for the first time in 2020, trades more frequently and has smaller account sizes than most wealth management clients. “Consistent with the narrative that new investors tend to be younger than their experienced investor counterparts, almost two-thirds of New Investors were under 45,” according to the survey of more than 1,291 households.
These millennial investors are also perfectly happy taking on turbulent markets, and significant risk, on their own. Investments in notoriously volatile digital assets, and cryptocurrency in particular, have accounted for much of the new trading activity.
The downturn caused by the pandemic meant many traders could buy when prices were low and plentiful stimulus checks threw investing fuel on the fire. Two reasons that prompted new account openings, according to the Finra report, were the ability to invest with small pockets of money and dips in the market that made stocks cheap to buy.
As Main Street America has taken a newfound liking to the stock market, financial institutions may need to reconsider their pricing models and client experiences, among other things, as they look to cater to a younger clientele. The good news is that the growing interest in stocks by next-gen investors will likely mean more advisory clients in the coming years when this group has saved up more assets and grown into more complex financial needs.
Their growing influence could also have an enormous impact on established brokerage firms and operations, according to a recent Deloitte report published in the Wall Street Journal. While this may all seem a bit academic, the report recommended practical steps that brokerages can take, like reviewing their customer onboarding processes and determining which investments are suitable for these new clients. Their record keepers will also have to demonstrate that best interest was taken regarding fintech products and services provided.
Some firms may even choose to install more investor protection guardrails, including policies that restrict the use of leverage and derivatives, according to the report, which is something we are already starting to see from the likes of Robinhood, which has come under fire in recent months for a handful of separate issues.
Some advisers may argue the vast majority of do-it-yourself investors aren’t looking for professional advice in the first place and wouldn’t make for profitable clients. While that’s true, this growing demographic should be a wake-up call for advisers that have heard a lot about the coming wave of next-gen investors but have yet to take meaningful steps to address them.
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