How to Capture New Retail Investors
Understanding the compounding shift of investor mindset and behavior as well as the opportunities they present for financial services brands
The consumer attitude and expectations towards financial services are changing rapidly. From digital goods like NFTs, to meme stocks to DogeCoin, the way that younger generations are approaching personal finance management is marked by a distinct mindset shift away from conventional investment vehicles.
Meanwhile, the rise of digital-native alternatives led by neo-banks and fintech services, combined with the rise of the creator economy, is further changing consumer behavior and expectation around personal finance management.
For financial brands, this compounding shift of mindset and behavior spells great opportunities as well as enormous disruptions. To capture this new generation of retail investors and build a long-term relationship with them, financial brands will need to double down on fintech integration, embrace new investment channels, and focus on empowering customers to make the best decision for their money.
A New Generation of Investors
If the past 15 months has shown us anything — it’s that the old ways of managing personal finance and investments are no longer working for many young people. Equipped with stimulus checks, they are increasingly empowered and motivated to try out new ways to invest. A large chunk of the retail investing crowd started during the pandemic, a recent Schwab survey shows. Based on an analysis of about 500 investors, the brokerage found that 15% of current retail investors began playing the market in 2020.
15% of current retail investors began playing the market in 2020.
Dubbed “generation investors,” they have demonstrated their willingness to take a chance on new investment options from NFTs to cryptocurrencies, under the advisory of fellow retailer investors instead of financial advisors. This is especially true for the high-net-worth segment of the younger generations. Nearly half of millennial millionaires have at least 25% of their wealth in cryptocurrencies, according to a recent CNBC Survey. More than a third of millennial millionaires have at least half their wealth in crypto and about half own NFTs.
Non-fungible tokens (NFT) are digital assets that represent a wide range of unique tangible and intangible items, from celebrity-backed digital arts to collectible basketball cards. In early 2021, they broke out of the crypto crowd and became a popular investment tool for digital arts. Total NFT sales reached $2 billion in Q1 2021, with a seven-day peak of $176 million on May 9, per NonFungible.com. NBA Top Shot, a platform created by Dapper Labs for sales of digital collectibles of NBA highlight moments, has generated more than $230 million in sales by the end of February. Even the elusive world of fine art has gingerly opened its door to NFT-based digital art as well, evidenced by the multimillion-dollar NFT deals that prestigious auction houses like Sotheby’s and Christie’s have facilitated.
NFTs exploded because they present an investment opportunity for a new breed of art collectors, who have no inclination in learning about the opaque, exclusionary world of fine arts, and would rather start over and chart their own territories in the digital world. They have no problem embracing digital art and collectibles, because they understand that true value stems from social construct and collective belief, rather than a tangible, physical presence. Backed by blockchain, NFTs play by a new set of rules of security and transparency. For example, because each owner of an NFT is clearly logged on the public ledger with each transaction, past ownerships are easy to verify and, in some cases, may factor into the value appreciation of the NFTs in question. This method of tracking provenance is arguably more transparent and reliable than that of the physical artworks.
If the NFT craze has illustrated the appetite this digital-native generation of investors has for new investment vehicles, then the GameStop saga is an undeniable demonstration of how they are empowered by crowdsourced information and peer advisory. Instead of following the suggestions of financial establishments, the collective minds of “WallStreetBets,” a subreddit community where users exchange ideas about high-risk trades made in the stock market, went against the hedge fund investors who drastically shorted the GameStop stocks. After some momentum-building in 2020, GME skyrocketed in late January. The stock’s meteoritic rise made national news, and the extensive media coverage funneled more opportunistic investors to join WallStreetBets and become part of the community. As of Mid-June, the subreddit has grown to nearly 10.6 million members.
The GameStop saga showcased the power of retail investors coming together online to form a hive mind and becoming a force to reckon with. The investment advice has been crowdsourced and implemented through digital groupthink, with memes as their primary language. In fact, nearly every single new investment opportunity that popped up in the last 15 months was able to spread quickly and hit a critical mass because they are essentially memes. That’s the way that investment works — if you can get enough people on board to invest in the same thing you’re investing in, the price will go up. And there’s no better way to spread that rallying message than memes, especially when they are amplified by a celebrity entrepreneur like Elon Musk or Mark Cuban. For example, Elon Musk’s meme-savvy support of DogeCoin has sent the joke of a cryptocoin soaring in value by 20,000% since May 2020.
Nearly every single new investment opportunity that popped up in the last 15 months was able to spread quickly and hit a critical mass because they are essentially memes.
Yet, the matter of fact is that all these new investment vehicles are still very volatile. Just this week, China’s crackdown on cryptocurrencies caused a 12% stumble for the crypto market. Dogecoin, in particular, has dropped more than 30%, to 17.6 cents, taking a huge fall from its stratospheric high of 70 cents in early April. Most of the new investors are aware of the high risks involved, but they have bought into the belief that cryptocurrencies and crowdsourced stock trading are the future, that in the long run they will prevail, despite the high fluctuations today. One in five US adults say they own crypto, per a new report from Morning Consult. If enough people are to hold on to that belief, it will become a self-fulfilling prophecy, for value is rooted in socially constructed, collective belief.
The impending generational wealth transfer will make this group of new investors even more powerful. Boomers are expected to transfer $30 trillion in wealth to younger generations over the next two to three decades. And it seems reasonable to assume that a significant fraction of that $30 trillion will be poured into meme stock trading or crypto-based investments. If you’re a financial services brand, it is time to rethink where you stand in the value chain, how you can adapt to the new market reality, and how your service can best empower people to take control of their finance and investment.
Distributed Source of Influence
To be fair, investment advice has always been readily accessible. Analysts and market pundits have been offering their professional opinions on which stocks to buy and which ones to dump on finance-oriented TV channels like CNBC for decades, and more recently, proselytizing on websites like The Motley Fool or Seeking Alpha. There has not been a shortage of free advice on how to invest your money, but what’s changed in the past year or so is the main source of influence in financial markets.
As with many other industries, the internet has fundamentally shifted the source of market influence from top-down to bottom-up. Empowered by no-fee trading apps and crowdsourced peer advisory, everyone with a smartphone can now become a semi-pro investor, for whom financial gains are only part of the motivations. Market influence has been distributed throughout social platforms, from Twitter to Reddit, from Discord Groups to TikTok, all connected through memes and meme-fied lingo.
Because of their crowdsourced roots, most of the new investment vehicles share an anti-establishment, populist streak, and feeling like they are “sticking it to the man” is a powerful sentiment to rally people around. For many WallStreetBets members and DogeCoin investors, a big part of the fun is also about being part of a community that is “gaming the system,” as they band together to rebel against the status quo that has not worked for them in a long time.
For many WallStreetBets members and DogeCoin investors, a big part of the fun is being part of community that is “gaming the system.”
As a result, market analysts and institutional financial advisors now have to contend with the army of hobbyists and amateur investors pooling together their ideas and resources to rally the community of plugged-in retail investors and gain enough leverage to influence the market. For decades, Wall Street firms and analysts have dictated the narratives that shaped the stock market; now, everyone gets to add their hot takes into the mix, and the ones that are most fluent in the language of the internet wins.
Of course, as with any type of user-generated content, the quality of financial advice on social media tends to be very uneven, if not downright misleading. Yet, thanks to algorithmic filtering and the upvote-based ranking system on Reddit, people can easily sort out the crowd-tested ideas and feel like they could believe in the wisdom of the crowd. The warnings of Warren Buffett may hold more weight than a top comment on a Reddit post, but it is just one institutional voice drowned out in an abundance of financial advice readily available everywhere online.
In the old model of top-down influence, the best investment deals used to be reserved for the wealthy, who have the resources and connections to get in on the next big thing before they take off. Regular investors generally don’t get the chance to invest in promising startups before they go public, or have enough capital to invest in high-value assets like real estate or fine arts. Interestingly, as fractional ownership becomes a more popular concept, startups like Masterworks offer regular people an accessible way to invest in expensive, rarefied fields that are typically available only to the mega-rich.
For existing players in the financial market, plugging in to the distributed network of influence is the best way to directly reach new investors. On one hand, we see venture capital firms trying to extend their sphere of influence, as evidenced by the Future.com site recently launched by VC firm Andreessen Horowitz. With this publication, the firm can now cut out tech media as a middle-man and directly engage with investors to hype up the area of interests that they are investing in.
On the other hand, companies can now directly engage with their investors, who may also be their best customers. AMC is another meme stock ordained by the WallStreetBets crowd, which has sent the stock of the movie theater chain up more than 1,400% in the last five months. The company said it had 3.2 million individual shareholders as of March 11, who collectively owned about 80% of the 450 million shares outstanding. Despite the theatrical exhibition industry being in jeopardy, AMC was able to get enough individual investors on board without a rosy long-term prospect.
Seizing the sudden influx of retail investors, the company not only raised $587 million to avoid bankruptcy, but also launched a new platform to directly engage with the new investors. Aptly dubbed AMC Investor Connect, the platform provides these shareholders with exclusive promotions, like free or discounted items and invitations to special screenings, as well as direct communications with CEO Adam Aron, aiming to establish a long-term relationship and turn them into loyal customers.
The shifting source of influence means that financial service providers need to start to diversify their media channels in order to effectively reach today’s digital-native investors. Whether it’s Reddit, Discord or TikTok, your brand should show up where the new generation of investors is gathering. Tapping into various investment communities in an organic and authentic way is a must, and so is understanding the role that memes play in the communication process. Only by bringing true value to the table and directly engaging with them can financial brands earn their trust.
Whether it’s Reddit, Discord or TikTok, your brand should show up where the new generation of investors is gathering.
Financial Infrastructure Upgrade
A new generation of investors naturally demands a new set of financial infrastructure that meets their preferences and needs. While high-net-worth individuals typically pay for financial managers to sort out their investment portfolios, this new generation of investors are leaning on mobile-native financial services and products to do it themselves. New platforms that make it easier and cheaper for retail investors to get involved in the market have in part fueled the boom. After all, this is the generation that makes stock trades on the same device that they browse Reddit and scroll through TikTok. If your service is not accessible digitally and optimized for mobile, it might as well not exist for them.
If your service is not accessible digitally and optimized for mobile, it might as well not exist for them.
Take crypto-trading for example. Many consumer-facing fintech companies, such as Venmo, PayPal, Sofi, and Robinhood, have been quick to integrate crypto-trading into their flagship app over the past year or so. Yet crypto-trading options are nowhere to be found on the digital touchpoints of traditional banks or investment firms. Options trading is a risky, long-term investment strategy that is often overlooked by amateur investors. Yet, apps like Gatsby are removing the barrier to entry for options trading with their simplified version of the practice.
Or consider the normalization of cryptocurrency as part of the investment portfolio. Although cryptocurrency is coming to some small retirement plans courtesy of a 401(k) provider called ForUsAll that primarily serves small-to-medium-sized businesses, the major 401(k) providers are still far from ready to jump on the crypto train just yet.
The digital-native banks saw significant growth during 2020, as more unbanked people found the need for banking services so as to access an increasingly digital economy during lockdowns. Neobanks, the digital disruptors of the fintech world, will see the number of US account holders reach 20.2 million by the end of 2021, more than double the number just two years ago, according to the inaugural eMarketer forecast for digital-only banks.
Neobanks will see the number of US account holders reach 20.2 million by the end of 2021.
Meanwhile, the pandemic pushed the creator economy to new heights. A combination of lockdowns and worsened unemployment has sent creators searching for new ways to earn a living while at the same time giving people more time to hunt for content, as they for ways to fill in their increased leisure hours. More than 50 million people worldwide now consider themselves to be creators.
With the rise of the creator economy and influx of small businesses coming online, there’s a surge in demand for next-gen financial services catered to individuals that are looking for an integrated solution that serves both their personal financial goals and business finance objectives. So far, no one has come close to launching such a product that could cater to this growing demand for integrated solutions, but some latest developments point to emerging possibilities.
For one, the idea of “Embedded Finance” has gained traction. Nonfinancial companies, spearheaded by retailers and ecommerce platforms, are increasingly embedding basic financial services into their customer offerings, as they look to roll out transactional accounts, merchant accounts, and cards to make spending with them more rewarding and holistic. T-Mobile launched a mobile wallet with a checking account feature in late 2018, followed by the likes of Google, Walgreens, H&R Block. If one of the creator platforms, say TikTok or Twitter, were to partner with a neobank and roll out their own embedded financial services, they could theoretically provide the creators with a one-stop solution for their finance needs while eliminating a big portion of their customer acquisition costs.
For another, it’s hard to miss that most creator platforms are owned by tech companies. Facebook, for one, owns Instagram and has seemingly cornered the VR market, yet the firm has been slow to enter the finance market. Although it had some early-than-most ambition to launch its crypto-currency, Libra, and an accompanying digital wallet, that initiative was doomed from the start by Facebook’s lack of consumer trust, not to mention that it arrived two years too early to take advantage of the current hype surrounding cryptocurrency. That being said, there’s nothing stopping Facebook to try again at establishing its own suite of financial services. The same goes for Google (which owns YouTube) and Amazon (which owns Twitch).
In the brave new world of digital finance, the new generation of investors are eager to take all the help they can get, but unlike the previous generations, they are also doing their due diligence and checking around to get a crowdsourced opinion. For the new generation of investors, it is clear that the slower-moving incumbents are losing the level of trust that older generations may place in them; Instead, they’d be more inclined to place their trust in the agile, digital-native newcomers that better suit their habits and demands. Given time, this gradual reversal of trust placement in incumbent financial institutions versus fintech upstarts may start to influence more consumer segments and reshape the financial service market.
For financial service brands, this means now is the time to build and retain trust and assist them in the due diligence process. Not every investment app needs to integrate trading options to digital arts, crypto assets, and fractional ownership, but these emerging investment vehicles should certainly be part of the conversation.
Although the source of influence has shifted for the finance markets, financial services brands still have a good shot at leveraging their existing brand equity to help educate new investors on the dynamic marketplace today and empower them to make smart decisions that can turn short-term gains into long-term growth. This is a necessary resource for many investors that struck their first pot of gold in 2020.
