Investing: Making Money Moves
Part 3/4 of Roadmap: Fintech for a New Generation
co-authored by Robert Li and Francis Wilson
Despite possessing significantly less cash on hand than generations past, millennials and Gen Z have found ways to grow their wealth while flexing their financial muscle in the public markets. The violent price action earlier this year in stocks like Gamestop and AMC has been attributed to young traders, many of whom, galvanised by online forums and chat rooms, are dipping their toes in the markets for the first time.
During the 1st quarter of 2020 alone, popular retail brokerage Robinhood saw its user base grow by 3 million users, with new downloads peaking at 600k on a single day. Average time spent on these trading apps jumped 80%. A survey by Deutsche Bank revealed that half of respondents between 25 and 34 years old who use brokerage platforms planned to spend 50% of their stimulus payments on stocks. While the speculative activity of young retail traders has captured the spotlight of media attention this year, we want to focus on some of the secular trends we identified beyond the hype. We believe that social investment communities, financial education apps, and digital money managers are the dominant themes of how millennials and Gen Z treat investing.
Social Meets Investing
Given that 75% of millennial purchasing behaviour is influenced by social media, it’s hardly surprising that novice traders turn to TikTok and Reddit instead of Barron’s and Wall Street Journal to research and discover investment ideas. By February of 2021, Tiktok videos tagged under #personalfinance racked up more than 3.5 billion views, elevating content creators to the status of financial advisors with large public followings. However, most influencers are not qualified or licensed to provide sound investment advice. There is a market need for trustworthy investment advice and tooling that are appealing to millennials and Gen Z while also being attuned to the social nature of how these age cohorts prefer to make wealth management decisions. This is an intersection that venture capital firm a16z considers to be the “holy grail of social+finance.” Some new platforms we’ve seen that are turning investing from a single player game to a multiplayer one include Finary (social investment community + trading), Commonstock (making top investors social influencers), MyCheres (social investment community + content), and Public (social network + trading).
The Peril of Financial Illiteracy
As much as some daring investment enthusiasts make YOLO stock and options bets, there is still a large contingent of Americans who lack basic know-how when it comes to investing and wealth management. The root cause may be that the American school system does a ruefully inadequate job when it comes to educating the student body on personal finance: only 1 in 6 high schoolers are required to take at least one semester of a standalone personal finance class to graduate, and 30.7% of high schoolers attend schools that do not offer any personal finance curricula. As such, a TIAA survey found that only 16% of millennials are able to correctly answer a sample questionnaire of basic finance questions. Without proper judgement, young and financially illiterate Americans are particularly susceptible to social media influence, for good or bad. What is particularly troubling about this phenomenon is that millennials are collectively due to receive one of the largest wealth transfers in history. By 2030, they will have inherited an astonishing $68 trillion from their boomer parents, and would need the skills and tools to adroitly manage that capital. Young people represent a historically underserved customer base when it comes to investing and wealth management products, so acquiring them cheaply today, winning their loyalty, and adapting as their needs change and their wealth accumulates is the path to a lucrative CLTV opportunity.
Handholding and Automation
We think the market is ready for applications that make financial education engaging and accessible for someone just beginning to grow their money. For example, Alinea is a brokerage app that simplifies stock trading with curated, thematic baskets of stocks and bite-sized insights meant to hand-hold novice investors through their trades. Startups such as Invstr and Zogo Finance make financial education palatable by turning it into a game. The teen finance platform Greenlight, now a unicorn, caters to kids who are just starting to learn how to manage their own money, and even provides a commission-free fractional stock investing product for them to participate in the stock market under their parents’ supervision.
For those millennials and Gen Z who remain doubtful about their personal ability to invest or are uninterested in doing so, digital wealth management solutions exist to serve them. We’ll be closely following set-it-and-forget-it robo-advisors such as Acorns and Stash, consumerised active investment managers like Pave and Titan, and even those that are democratising alternative investments previously exclusive to the wealthy, such as Carl (Quant hedge funds), Moonfare (Private equity), and MoneyMade (Alternative assets).
