The rise of digital investors

Democratisation of investing unleashes the power of a tech savvy generation

The surge in social media usage during Covid-19 lockdowns and the bull run in the US and other markets in 2020 have accelerated growth of digital investment solutions around the world.

Zero-commission electronic trading platforms have enabled anyone with internet access and some spare cash to invest not only in stocks and bonds but also options and futures and, more recently, cryptocurrencies. A Financial Times report last November estimated that more than 100 million people around the world invest and trade online.

This development came to the fore and shocked the world with the GameStop frenzy early this year when we saw thousands of small investors on Reddit’s WallStreetBets forum coming together and trading through Robinhood and other platforms against Wall Street hedge funds, and upend the latter. 

The astonishing episode hogged the headlines of financial news media for days. Many commentators likened it to an epic battle of David against Goliath. Others described it as Occupy Wall Street 2.0. A majority of the investors were millennials and Gen-Z. “The median age of Robinhood’s customers is 31 and many of them are new to investing,” the company’s Chief Executive Officer Vlad Tenev said in a CNBC interview in January. 

Robinhood was established with “the aim of democratising finance and making it more accessible to young and less affluent investors”, according to the company’s website. Its app currently has over 13 million users.

The frenzy not only involved investors in the US but also from other regions. And Robinhood-like trading platforms such as Tiger Brokers in Singapore and Futu in Hong Kong saw a spike in new accounts opening when the episode was unfolding. In the UK, Trading 212 was the most downloaded app. 

A combination of retail investing, online forums, gamer culture, and a desire to ‘stick it to Wall Street’ made the whole episode fascinating to follow, giving us a glimpse of the behaviour of the new generation of democratised investors. 

Millennial and Gen Z investors are also significant drivers of digital investment platforms such as robo advisers. Millennials are twice as likely than young baby boomers to consider using a robo adviser for investments, according to survey findings by US manager Vanguard published last August. Their exposure to the internet, social media, mobile systems, artificial intelligence (AI) and automation at an early age makes them the first generation to grow up in a hyper-digital world.

In Asia, the rise of robo advisers in recent years has provided retail and the mass affluent segments with the ability to make long-term investment using AI-driven algorithms for constructing personalised risk-based portfolios. 

Singapore-based StashAway in January crossed the US$1 billion mark in assets under management, within 42 months of its founding in 2017. It reached this milestone faster than Betterment and Wealthfront, the world’s largest digital wealth managers. StashAway offers investment solutions with 12 different levels of risk exposure. It has expanded its footprint by opening offices in Hong Kong, Thailand and the United Arab Emirates.

In China, Ant Financial teamed up with Vanguard and rolled out a robo-advisory service in April 2020 accessible through Alipay - Bang Ni Tou (which translates to ‘Help You Invest’). It uses AI to recommend mutual fund portfolios to customers with as little as 800 RMB ($125) to invest. More than one million users had signed up for the service in less than a year, according to a news release from the joint venture in March. 

Driven by technology

These digital platforms currently account for less than 5% of Asia’s total wealth management wallet. But their low fees, minimal investment amounts, easy access, and the ability to fund or withdraw money from accounts at almost any time have drawn many first-timers into investing. 

 Democratisation of investing has become one of the most significant social and economic developments globally in recent years. Apart from online retail trading and digital investment, other examples include crowdfunding, peer-to-peer lending, angel investing, micro venture capital investment. Each of these was developed for a different purpose but they all aim to make investing more inclusive to the broader population. Through these offerings, small investors are now able to gain access to more sophisticated investment products that were previously only available to high-net-worth individuals.

Technological advancement has been the enabler of this democratisation process. Big data, AI and blockchain, combined with high-speed internet, the ubiquity of mobile phones and the proliferation of social media, are transforming the delivery of financial services and their accessibility.

Many asset classes are now available for small amounts of investment. The secret to Robinhood’s success isn’t just about a slick and user-friendly online platform and its zero-commission model. In 2019, it launched fractional share trading allowing traders to invest in stocks and exchange-traded funds with as little as $1, regardless of the price of the shares. This has made it much more affordable for anyone to trade.

Similarly, robo advisers enable small investors to invest regularly for fractional ownership of a diversified portfolio of exchange-traded funds and mutual funds, which would otherwise be prohibitively costly for an individual. Investors are only charged a fixed fee of less than 1% per annum of the asset value.

Blockchain technology has pushed this to yet another level with asset tokenisation, by securitising assets into digitally tradeable tokens. Small investors can now purchase and sell tokens representing fractional ownership of alternative investments such as hedge funds and private equity, or illiquid assets such as fine art, precious metals, real estate and commodities. 

Meanwhile, the digitisation of financial services allows investors to trade on their mobile phones and tablets and access global capital markets around the clock. There are currently more than 2.5 billion smartphones in the world. 

There is a huge amount of market information and financial data available on the internet as well as social media chat groups and communities, despite an often prevalence of rumour and misinformation being added to  the mix. The information advantage that professional investors have historically enjoyed is disappearing.

At the same time, big data and AI have enabled analysis of unstructured data from multiple sources, evaluating the risks and opportunities and building predictive models for investments. Their impact is especially felt in the surge of robo advisers and other AI-assisted trading and investing applications that help investors construct portfolios and implement trading strategies.

Interestingly, technology is also being used to turn investment into fun and thrills. Robinhood has been accused of ‘gamifying’ trading. For example, a new user signing up is offered a stock to be selected from three face-down golden cards. Instead of picking a card, the user scratches it like a lottery ticket, after which the stock is revealed with affirming congratulations and a screen full of confetti. Commentators and financial authorities frown on these game-like features, but the fact is that the new generation of investors does not like investing to be boring and dry.

It is startling to witness how the forces of technology and social media are shaping and driving opinion. We have seen this at work previously with social initiatives such as the Ice Bucket Challenge, the #MeToo movement, in political elections, and many other areas. But it was an eye-opener see them develop into the driving force pitting retail investors against Wall Street. 

Social media often feeds on emotion, fervour and hype – fundamentally not very different from how market rumours spread and push stock prices up or down. But the speed at which things can go viral on social media and produce an impact is astounding.

It’s an oversimplification to say that the new generation of young investors don’t know what they are doing. They are not a monolithic group of investment amateurs who view the stock market like a racetrack or casino, unlike the previous generation. They are a diverse group that includes highly-sophisticated individuals who can rival the best analysts in the market, momentum traders who can judge which trades to jump into and when to jump out, and retail investors who want to make a point with their investment. There are a lot of lessons to learn, and they will learn very quickly. 

Democratisation of investing has come of age. The financial industry has to reckon with the power of the new generation of millennial and Gen Z investors. There are new business opportunities as well as challenges. This will require new thinking in terms of business models, products, service delivery and relationship management.

*This article was published in Asia Asset Management’s August 2021 magazine titled “Coming of age”.