A new era of investing: strategies for changing investor needs

Executive Summary

Over the past ten to fifteen years, the investment world has become an increasingly complicated space, with a seemingly never-ending stream of new investment possibilities. What was already a complex ecosystem has seen the addition of a slew of new options rooted in technology (think cryptocurrency or non-fungible tokens), securitization (such as artworks and rental units), and more. It’s a phenomenon that has both fed and been fed by a new class of often first-time individual investors. Indeed, between 2010 and 2020, retail investors doubled their share of US equity trading volume to 19.5% (Investopedia). 

A survey released in August 2021 found that more than a quarter of investors polled began investing within the previous 18 months, with 60% of investors aged 18-34 years having begun to invest in 2020 or later (as opposed to 21% of those aged 34-64) (CNBC | Momentive Poll).

As a result, two clear groups of investors have emerged: generally first-time investors early in their careers and new to the investment space, and more experienced investors motivated by the preservation of wealth. Understanding these two groups, learning from industry leaders, and leveraging the right technology tools in your operation is key to moving forward with success in this quickly evolving space.

You are what you invest in

It all began in the early 2010s, when digital investment advisors like Betterment and Wealthfront took the investment world by storm, offering fully-managed solutions that made investing accessible to a whole new set of consumers—while requiring limited knowledge of the space. In time, a clear appetite emerged amongst many of these investors to better understand the underlying assets that made up their portfolio, giving way to more active investing that allows for the selection of individual investments alongside an automated bundle. 

A big part of this shift—particularly among Generation Z investors—stems from changing motivations. Whereas the first wave of investment fintechs were aimed primarily at helping investors grow and retain wealth over time, the latest class of fintechs is fulfilling a more social desire, turning the act of investing into a cultural movement.

For a wide swath of Generation Z, conversations around investing, stocks, and companies of interest have become commonplace—much like pop culture, sports, or health and wellness. In fact, a third of new investors use social media to research investment ideas (CNBC | Momentive Poll). Apps like Public.com and Commonstock have grabbed hold of this phenomenon, transforming the “single player” experience of most investment platforms into a “multiplayer” one that build relationships, communities, and interpersonal exchange.

Indeed, fintechs are making discussion of personal finances, investments, and general money matters that were once considered taboo not only acceptable but interesting and exciting. Take SoFi, their original membership model hinged on offering a safe space to talk about student loan debt payment and optimization—creating a connected community. The company has since been able to harness that user trust to layer on additional financial services such as crypto trading and active, automated, or IPO investing.

Impact investing is another phenomenon driven by today’s new investor profile. Historically, many advisors tended to steer away from socially responsible investments, as such investments seemed incongruent with the priority of maximum growth and profit. But this is changing. First, because Millennials and Gen-Z care more about their carbon footprint and the environment than any generation before (Pew Research Center); second, because more options for socially responsible investment have arisen in parallel—meaning more potential for profit. Last year, for example, 75% of the environmental, social, and governance (ESG) funds tracked by Morningstar finished in the top half of their respective investment categories (Arizona Republic). And new options are popping up more and more frequently. Daffy, for example, is a donor-advised fund accessible to everyday investors who want to make philanthropy a part of their portfolio. Betterment as well, now offers its customers nuanced ESG portfolios that have attracted significant assets under management since they debuted in 2017.

A lack of education

While these positive innovations and trends are encouraging, there’s reason for concern as well—specifically, given the lack of education among new investors. Easy digital access to the investment space via retail platforms is clearly getting consumers investing earlier in their careers, but requires little to no education. The result is more ways than ever to lose wealth in an unsustainable way. According to a Qualtrics survey in 2021 of over 1000 US consumers with an investment account, two-thirds of investors have regretted impulsive or emotionally charged investment decisions—with Gen Zers (85%) and Millennials (73%) the most likely to make regretful moves (Magnify Money).

Crypto is a perfect example. At once a sexy and widely held investment, it’s also incredibly difficult for the average retail investor to fully understand (Forbes). Nevertheless, it remains a popular choice given its thus far positive overall trajectory, often quick return, and constant movement—providing investors with immediate gratification. 

But ​​unlike stocks, which often have a longer track record of success (or failure) during economic downturns, crypto simply hasn't existed long enough for anyone to know what might happen when the broader market encounters turbulence—or worse. The current market, including the S&P 500’s 87% rise between March 2020 and April 2021, can be seen as an extension of the bull market that began in 2009, following the financial crisis (Barron’s). Aside from the short interruption in early 2020 (induced by a health crisis, rather than a financial one), Generation Z investors have yet to truly weather anything but an upward trend. It remains to be seen how they will react when faced with a negative outlook and financial losses, or how well digital investment advisors will fare at offering responsible crypto portfolios and ensuring they stay the course—a key factor in long-term wealth creation.

Human versus technology

So where do traditional wealth management firms and human financial advisors fit into all of this? While it’s true that 63% of those who began investing in 2020 or later use a self-service mobile app—compared to only 20% who began investing before 2019—the full picture is highly nuanced (CNBC | Momentive Poll).

According to the Financial Times, demand for advisory services has grown in the wake of the pandemic, as times of uncertainty generally trigger the desire for financial advice. Moreover, as an investor’s wealth increases over time and life gets more complicated, the stakes become higher. They therefore commonly recognize the need for more thoughtful investing. That’s because purely digital investment advisors are unable to tell individual investors how best to leverage a rental property, set up a will or trust, manage an art collection, or account for taxes—despite fintech’s best efforts thus far.

Thus, a hybrid scenario is emerging more and more, with experienced investors using fintech services for part of their portfolio in conjunction with a financial planner, who handles the more complicated asset management. In parallel, digital investment advisors are penetrating human advisory services with tools which can be harnessed for their clients’ best interests, as well as for their own business growth, resulting in an “augmented advisory” model. This ability to offload portfolio strategizing and market studies, along with back-office and administrative tasks like onboarding and account aggregation, is invaluable to any financial planner. Digital tools allow them to focus on what matters most to stay relevant: obtaining new clients, building trusting relationships, advising them on complicated matters, and helping them build strategies to stay the course. 

While firms like Blackrock and networks like XY Planning have offered these types of portfolio-building services to independent advisors for years, financial planners can get something similar by turning to digital investment options. Betterment, for example, offers Betterment for Advisors, allowing advisors to pick from a number of proposed funds according to what they deem most suitable, while Vise provides a common dashboard accessible to clients and their advisors that keeps both parties on the same page. The platform does so by linking all an investor’s accounts, while letting the advisor add less tangible inputs, such as financial goals, risk tolerance, and family planning.

It all comes down to data

For any of the above solutions to work—be they digital investment advisors, traditional wealth management, or augmented advisory—it all comes down to data. Achieving a holistic view of an investor’s finances is the first step in understanding their full financial picture. Everything from income and cash flow to property assets, debt, and 401Ks is critical to extrapolating even the most simple information—such as how much money is available to be invested each month. 

However, gathering this information via traditional methods puts substantial onus on the investor, who must recall all their financial institutions and accounts, as well as retrieve details on things like securities. Time-consuming and prone to human error, the result is often an inaccurate financial picture—or one that quickly becomes out of date if not refreshed. Without a trusted technology solution, it represents a challenge for advisors trying to build ongoing investment strategies for their clients.

This initial “onboarding” step—so critical to any financial planning—explains why personal financial management (PFM) services have become table stakes across the board, from neo banks and fintechs to traditional financial institutions and even big tech. The problem is that their “add-on” nature often means they only cover the basics—such as bank accounts, stocks, and bonds—without necessarily accounting for one’s full financial picture (think liabilities such as credit card, student loans, and mortgages).

That’s where account aggregation solutions like Plaid’s Investments, Liabilities, and Transactions products come in. Used together, they can help fintechs build a holistic view of an investor’s financial health. This is especially appealing for both PFMs and investment platforms who want to offer investors a service that consolidates their assets, investments, and liabilities all in one place. In turn, human advisors can easily and efficiently gather all an investor’s information, saving them time and freeing up their attention for more complicated matters like ensuring proper diversification—or even potentially bring down their costs to stay competitive in a highly fee-suppressed space. 

Beyond this, Plaid Investments enables advisors—whether digital or human—to see up to two years of a client’s investment transaction history, allowing them to better understand their investing habits and true risk tolerance. It also lets them see the client’s held-away assets so that they can tailor their strategy and investment advice appropriately, as well as offer better options where available, thus growing their assets under management.

Rising tide carries all boats

As the investment world continues to evolve and innovate, so will account aggregation, which is constantly having to solve for new, alternative needs that have yet to be addressed. It’s a gap already being filled by enterprising technology start-ups offering targeted solutions, such as Gem, which offers account aggregation specifically for crypto, or Carta, which helps issue and manage employee stock options. 

Meanwhile, traditional wealth management's financial advisors will need to further lean on technology to adapt their business model to changing times. Think less time collecting and updating their clients’ financial information and more time building relationships that steer their clients towards long-term growth and security. 

The irony is that digital investment advisors are both the competition and the solution, the catalyst for change and the means to finding the way forward. There will always be a space for human financial advising, just as automated solutions are clearly here to stay. The most powerful model emerges when they come together—and because innovation and change spur better products and services, it’s the investor who ultimately wins.