Surges in interest from retail investors are presenting an opportunity for financial planning firms to engage with new clients on their long-term future, argues Dan Brocklebank, UK director, Orbis Investments.
The financial planning community has always had a fundamental challenge: how to get humans engaged with finances soon enough to make a difference. On one hand, we all know that those who start investing early will benefit the most dramatically from the power of compounding. On the other, for most people, thinking further than a few years down the line feels intangible and distinctly far away. Finance professionals live with the simmering suspicion that many people would rather opt for a visit to the dentist than sit down for a serious discussion about money.
The recent GameStop saga has shown that there is at least some appetite among younger, tech savvy people to engage with investments and financial matters. At its peak early this year, the now-infamous Reddit thread r/WallStreetBets – held responsible for the surge in the trading of stocks such as GameStop – received almost 400,000 comments per day and had an impressive six million subscribers.
Trading platforms in the UK have seen similar surges in interest from retail investors. Apps offering commission-free stock picking, such as eToro and Trading 212, have witnessed a boom. eToro added 500,000 users in 2020, and Trading 212 was the most downloaded app in the UK at the end of January 2021. The boom is not confined to trading apps either. Hargreaves Lansdown reported a 60% increase in the number of new clients signed up to its site last year, while AJ Bell increased its customers by 30%. Both have also seen the average age of customers drop. Hargreaves’ average client is now 37, down from 45 in 2012, and more than half of AJ Bell’s new users are under the age of 40.
While encouraging, the uptick in interest is concerning for two reasons. Firstly, it appears that for a significant proportion the focus is only on making a quick buck in the hope that this time next year they will be ‘millionaires’. The incredible volatility of the likes of GameStop does not appear to deter many. The first challenge for planners trying to harness this surge in interest will therefore be in stressing that investing is far from a get-rich-quick scheme, no matter what a Reddit thread might claim.
A second concern is the revolutionary sentiment that gripped the likes of WallStreetBets, and the belief that access to easy, commission-free trading is in some way “democratising” investment, whatever that means. For many retail investors, there is the distinct feeling that the financial system simply does not work for them and by trading they are reclaiming it. This frustration has deep-seated roots that can be traced back at least to the 2008 financial crisis. Earning this trust back will not happen overnight. However, commission-free trading platforms, which are clearly not truly free, are not the solution and these arguably have done little, other than turn parts of the stock market into a casino.
Nonetheless, this new generation of investors does have a key strength – their ability to embrace a new way of doing things. History shows that successful investors are never afraid to defy the consensus, and this should be something that is second nature to a member of the ‘Reddit generation’. For a financial planning firm looking to help those newly interested in finance, this needs to be harnessed. In practice, this is likely to mean seeking out fund managers that may not be part of the mainstream, or those who genuinely align their interests with those of their clients through innovative fee structures, as well as simply avoiding stale industry dogma.
One example of that dogma today: the 60/40 asset allocation approach. While it has worked well in the past, too many investors are now holding blindly on to what they view as a tried and tested formula despite its inherent dangers. Today, the average 60/40 portfolio is trading close to its most expensive valuation ever, and high starting prices imply lower prospective returns with far greater risk of permanent loss. For clients fresh to the scene, it will be far easier to avoid such old-school groupthink.
With this upsurge in interest, planning firms have an opportunity to reach a whole wave of new potential clients. The challenge will be to marry their maverick and even revolutionary perspective with education on the basic behaviours required to be successful investor (e.g. adopting a long-term outlook, saving regularly, and having lots of patience). The good news is that if these newbie investors can be self-motivated enough to research the intricacies of hedge funds and a short squeeze, then, surely, they can be motivated to look to their long-term financial future.
The Orbis Investments Global Equity fund, Global Balanced fund and Global Cautious fund OEICs are now available through the 7IM Platform.