Democratising wealth: how do we encourage people to invest?

The proliferation of fintech has opened up new opportunities around investing, 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 stock mutual fund, or in a self-directed 401(k) or IRA. This number has picked up in the last few years, with a noticeable uptick since the beginning 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 Brits own shares, according to a 2020 survey from financial comparison site Finder, with 2.2mn people subscribed to a stocks and shares ISA.

Fintech investing platforms have made it easier than ever for consumers to invest in shares from their smartphone, breaking down barriers to entry and helping to democratise wealth management. Banks have been particularly instrumental, bringing investment tools and managed funds to a larger customer base than ever – one that is frequently 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 in equal measure on simplifying both the digital journey and the product mix.

“Presenting stocks in a really simple, accessible way has been a key pillar of our strategy when it comes to democratising wealth,” Hewitson says. “However, it is just one example of a range of solutions we’ve designed to combat barriers people face when beginning their investment journey.

“One of the biggest drivers of growth in our novice investor base has been our investment into digital, creating a journey that’s accessible on-the-go directly through the mobile app. In December 2021, we launched ‘Funds on Mobile’, and we are now seeing that two-thirds of our total customer base invest through this journey. Since the launch, we’ve seen a large increase in novice investors. In September 2022, the number of customers joining our investment platform had more than doubled compared to the same month last year.

“Another big priority for us is ensuring investing is affordable. We have reduced the entry point to investing 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 a lump sum is required to get started – we want to combat this.”

Yumika Brewster, COO at retail investment community Finimize, summarises the progress towards democratising wealth management: “Commission-free trading, fractional shares, app-based platforms – all these features mean that investing is less for high-net-worth individuals, who can call up their broker everytime they want to buy something. But you need access to the knowledge to start, and that, unfortunately, is still much more prevalent in privileged and wealthy groups.”

How important is education in popularising investing?

“Education is 100% the key to getting more people financially engaged,” Brewster continues. “I view investing as a way to catalyse your financial prosperity. Leaving your money in a low interest savings account – or worse, your current account – means your money is literally losing value with inflation where it is, but if you don’t get 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 the journey of financial freedom.”

There is a sense within investtech circles that, although fintech has given consumers the means to invest, there is still a knowledge gap when it comes to ‘everyday’ retail investors. Clearly, appetite exists – eToro, Robinhood, Stash and Investing.com have amassed more than 20mn downloads across iOS and Android in the past 12 months, according to app intelligence company Apptopia. Yet, despite having the means to invest, many consumers feel they lack the confidence or expertise to make informed investing decisions.

Jason Hollands, Managing Director of Bestinvest, agrees that education is massively important. “For most people, investing is not an abstract hobby. The purpose is to achieve something real like retiring comfortably, paying off a mortgage or funding their kids' university fees. A large part of what our coaching team does is help educate customers on how to become better investors. They provide knowledge, hints and nudges so they can be more confident in their approach. This also helps avoid common mistakes like 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 towards the future of retail investing platforms, it seems inevitable that the advancement of technology will continue to change how, and where, we invest. But will the investing space become a race to the bottom? Where, once, asset management firms clamoured to have the best human investment manager, will investing fintechs race to develop the most accurate algorithm or jostle to create the best-performing robo-advisor?

HSBC, for one, doesn’t think so. In the UK, the bank has launched a live chat function 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 in discussing issues related to wealth management and insurance. The human touch, driven by demand from hesitant retail customers, is at the heart of that.

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

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

Finimize’s Yumika Brewster concurs: “I don’t think that robo-advisors will ever replace people who want to be hands on and involved. It might cannibalise other passive forms of investment, but what I think our retail investor audience finds exciting is understanding what’s going on, making sense of it and seeing the opportunity come out of it.”

‘Human advisers won't become obsolete – far from it’

Instead, technology will continue to play a supplementary role in investment decisions but there will be little crossover between the occasional and institutional ends of the investing spectrum. Hollands continues: “Human advisers will not become obsolete – far from it. But the way they deliver that advice and interact with clients will – and is – changing. For example, even within traditional, face-to-face wealth management businesses, the pandemic forced firms to adopt virtual meetings. It accelerated the pace of change by several years. While many of their clients now prefer to return to meeting in person, the alternative of virtual meetings continues to be part of the way business is done, because of convenience.

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

“We don’t see digitally led services competing with traditional wealth management, other than at the margins. The latter services are predominantly aimed at high-net-wealth individuals with more complex tax affairs, who require a more bespoke approach to the management of their investments. What the emerging generation of digitally led, hybrid services can bring to the table is the democratisation of ‘advice’. It widens access to wealth management for the broader population because technology can improve efficiency, affordability and is scalable. We think this is powerful and exciting, because it will bring a benefit to society as well as a commercial reward for the firms who are successful.”