Democratizing wealth: how do we encourage people to invest?

The spread of fintech has opened up new opportunities around investment, giving occasional investors the chance to invest their savings for the first time. According to a Gallup poll from earlier this year, a staggering 58% of Americans have money invested in the stock market either through individual stocks, a mutual fund, or in a self-directed 401(k) or IRA. This number has picked up in recent years, with a noticeable increase since the start of the COVID-19 pandemic – although curiously it’s still a couple of percentage points lower than at the turn of the century. In the UK, just a third of Britons own shares, according to a 2020 survey by financial comparison website Finder, with 2.2 million people subscribing to a stocks and shares ISA.

Fintech investment platforms have made it easier than ever for consumers to invest in stocks from their smartphone, breaking down barriers to entry and helping to democratize wealth management. Banks have been particularly instrumental, bringing investment tools and managed funds to a larger customer base than ever – one that is often curious about investing but lacks the confidence to jump in at the deep end.

Incumbents bring investment to their large bases

According to James Hewitson, Head of Wealth and Investing at HSBC UK, banks have been successful in attracting new retail investors because they have focused equally on simplifying both the digital journey and the product mix.

“Presenting stocks in a very simple, accessible way has been a key pillar of our strategy in terms of democratizing wealth,” says Hewitson. “But it’s just one example of a range of solutions we’ve developed to combat barriers people face when starting their investment journey.

“One of the biggest drivers of growth in our entry-level investor base has been our investment in digital, creating a journey that is accessible on the go directly through the mobile app. In December 2021, we launched ‘Funds on mobile’ and we now see that two-thirds of our total customer base invest through this journey. Since launch, we have seen a huge increase in newbies. In September 2022, the number of customers joining our investment platform more than doubled compared to the same month last year.

“Another big priority for us is to ensure that the investments are affordable. We have reduced the entry point to invest to £50 to create an accessible entry point for more people. We know that one of the barriers to investing is the perception that it is for the wealthy, and that a lump sum is required to get started – this is what we want to combat.”

Yumika Brewster, COO of retail investment community Finimize, sums up the progress towards democratizing wealth management: “Commission-free trading, fractional shares, app-based platforms – all these features mean investments are smaller for high-net-worth individuals, who can call the broker every time they want to buy something . But you need access to the knowledge to start, and unfortunately it is still much more prevalent in privileged and wealthy groups.”

How important is education to popularize investment?

“Education is 100% key to getting more people economically engaged,” Brewster continues. “I see investing as a way to catalyze your financial prosperity. Leaving your money in a low-interest savings account—or worse, current account—means your money literally loses value with inflation where it is, but if you “If you’re not exposed to these principles and philosophies, it can be so overwhelming that you don’t even know where to start. Engaging education is really the only way you can take people on their journey to financial freedom.”

There is a feeling in investtech circles that, although fintech has given consumers funds investing, there is still a knowledge gap when it comes to “everyday” retail investors. Clearly, the appetite is there – eToro, Robinhood, Stash and Investing.com have amassed more than 20 million downloads on iOS and Android in the past 12 months, according to app intelligence company Apptopia. Despite having the means to invest, many consumers feel they lack the confidence or expertise to make informed investment decisions.

Jason Hollands, CEO of Bestinvest, agrees that education is hugely important. “For most people, investing is not an abstract hobby. The purpose is to achieve something real such as to retire comfortably, pay off a mortgage or finance the children’s university fees. A big part of what our coaching team does is help educate clients on how to become better investors. They provide knowledge, hints and nudges so that they can be more confident in their approach. This also helps to avoid common mistakes such as overreacting to short-term market noise or buying investments that have been tipped in the media without having an overall strategy or taking an inappropriate level of risk.”

Will algorithms and robo-advisors replace humans?

As we look to the future of retail investment platforms, it seems inevitable that the evolution of technology will continue to change how and where we invest. But will the investment space become a race to the bottom? Where asset management firms once clamored to have the best human investment manager, will investment fintechs race to develop the most accurate algorithm or battle to create the best performing robo-advisor?

HSBC, for one, doesn’t think so. In the UK, the bank has launched a live chat feature as part of its existing advice service, called My Investment. The aim is to allow users to have on-screen conversations with ‘wealth engagement officers’, who are specially trained to discuss issues relating to wealth management and insurance. The human touch, driven by demand from hesitant retail customers, is at the heart of this.

“While many people are happy to use online services to explore and educate themselves, the majority are uncomfortable with the concept of data-driven financial advice,” argues Bestinvest’s Jason Hollands. “On an emotional level, there’s a big difference between booking a flight or ordering a case of wine online, and deciding what to do with your retirement fund. People want the reassurance of talking to a knowledgeable person as part of the process .

“Pure ‘robo-advice’ is quite limited in scope,” he adds, “essentially providing a decision tree to choose an investment strategy that meets a particular risk profile and objective, such as income or growth. This almost always ends up with a investment strategy that uses low-cost, passive funds that track general market movements rather than seeking to select stocks and shares that can provide superior returns.There is indisputable value to this, but it simply does not meet the broader needs of the client, who only will be flushed out through a discussion with someone knowledgeable.”

Finimize’s Yumika Brewster agrees: “I don’t think robo-advisors will ever replace people who want to be hands-on and involved. It can cannibalize other passive forms of investment, but what I think our audience finds exciting is understanding what’s going on, understanding it and seeing the opportunities come out of it.”

“Human advisors will not become obsolete – far from it”

Instead, technology will continue to play an additional role in investment decisions, but there will be little transition between the sporadic and institutional ends of the investment spectrum. Hollands continues: “Human advisors will not become obsolete – far from it. But the way they deliver advice and interaction with clients will – and is – changing. For example, even within traditional, face-to-face wealth management businesses, the pandemic forced companies to adopt virtual meetings. It accelerated the pace of change by several years. While many of their customers now prefer to go back to meeting in person, the option of virtual meetings continues to be part of the way business is done, due to convenience.

“Similarly, wealthier clients who want a highly tailored and personalized experience rightly expect to be able to access information about their investment portfolios 24/7 through apps and online portals. Better use of technology like this, cutting out the mundane and manual processes, may mean that traditional asset managers focus more of their time on advice and relationships and less on administration.

“We do not see digitally led services competing with traditional asset management, other than in the margins. The latter services are mainly aimed at high net worth individuals with more complex tax affairs, who require a more tailored approach to the management of their investments. What the new generation of digitally led hybrid services can bring to the table is the democratization of “advice”. It expands access to wealth management for the wider population because technology can improve efficiency, affordability and is scalable. We think this is powerful and exciting, because it will provide a benefit to society as well as a commercial reward for the companies that succeed.”