The adviser for millennial investors? Themselves

bobarmour November 29, 2021
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When I logged onto LinkedIn earlier this week, I stumbled across a Wall Street Journal piece that profiled how younger generations of investors have been making a big shift to self-directed platforms. They assert that “wealthy young investors don’t see much use for the wealth-management firms their parents rely on.”

This trend is no surprise to us. We’ve been seeing this take place for a while, as nearly half the M1 Finance user base is made up of millennials.

Advisers and platforms (like ours) have been making a case for why their route to financial wellness is the best one. Millennials have responded by taking control of their financial future and their hands-on approach is changing the future of money management.

The shift from advisers to self-directed investing

One stat that popped out from that Wall Street Journal piece highlighted the movement towards self-directed investing.

“About 70% of households with a net worth of $500,000 or more headed by a person under 45 had an investing style that was either strongly or mostly self-directed in 2019.” This is a 13% increase from 2010, according to an analysis of Federal Reserve data by research firm Aite-Novarica Group.

So, why are we seeing such a heavy shift towards a hands-on investing style? Let’s break down the major reasons.

Low cost, high accessibility

$0. That’s the amount you’ll pay in commissions or markup on trades at M1. Other brokerages have followed along with similar fee-free policies.

This allows the new wave of investors of all kinds to access stocks, ETFs, and a variety of other investments. The emergence of fractional shares has also let investors get a piece of some stocks that may have previously been unattainable.

Self-directed investors have never had as much accessibility to no or low-cost high-quality wealth-creation tools, research, information, planning resources, and markets (established and emerging) as they do today.

These investors frankly may not need a financial adviser who will charge additional basis points on assets every year (potentially for decades) to do essentially the same thing.

Advisers’ risk tolerance might not align with younger investors

According to a survey conducted by CNBC, nearly half of millennial millionaires have at least 25% of their wealth in cryptocurrencies. In another recent survey, Piplsay found that 49% of millennials polled own cryptocurrency.

This comfortability with cryptocurrency investments may not align with what financial advisers have in mind for their younger clients.

This may be because younger investors are more willing to take on new types of investments that have high risk and high upsides. This could make advisers uncomfortable due to a lack of knowledge, tradition, or regulation. This clash of visions can be off-putting to younger investors who have done their research and want to put their money into these investments.

The pandemic ushered in a digital shift

Chase Bank also took a look at the growth of self-directed investing earlier this year. They found that the digital shift caused by COVID-19 is impacting investing as the pandemic prompted a 72% rise in the use of fintech apps.

“With the pandemic, people shifted to interact with the world more digitally – from online shopping to socializing interactions. Many also re-evaluated their financial position and chose to manage their money differently,” said Christine Etheredge, Managing Director and Head of Online Investing Product at JPMorgan Chase. “There are many drivers for the increase in online investing.”

As Christine noted, this trend isn’t unique to investing. We’re seeing similar secular trends towards self-serve/self-directed behavior in real estate purchasing, mortgage applications, personal loans, auto loans, insurance, and on and on.

You can now get mortgages through online avenues like Rocket Mortgage or Better. You can hop on Zillow or Trulia and take an entirely virtual tour of homes and purchase them. You don’t have to put on a tie and shake hands with bankers and realtors anymore.

At M1, we see more trends in these spaces, especially related to banking, and we see an opportunity to continue changing the way people do these things for the better.

Six positive habits for self-directed investors

The ever-expanding accessibility of investing has demystified (and dare I say, democratized) investing and wealth creation for people of all ages and net worth. Here are a few fundamentals of durable wealth creation that every young investor should understand and follow.

1. Invest regularly in a diversified portfolio that fits your risk tolerance and values

With diversification, you can lower your risk by spreading money across a variety of investments. Be sure these investments fit your personal risk tolerance. Learn more about your risk tolerance.

2. Avoid unnecessary over-trading

Frequent trading can result in big tax bill due to short-term capital gains tax.

3. Automate repetitive activity

Use tools such as recurring deposits and Smart Transfers to automate your movements and take extra work out of investing. This will allow you to stay regimented and disciplined in your investing.

4. Keep costs low

This one is simple: find a platform that doesn’t charge any commissions or markups on trades.

5. Take advantage of tax-advantaged accounts.

Learn as much as you can about traditional and Roth IRAs and utilize them. These accounts provide a tax advantaged way to save for retirement.

6. Play the long game and don’t try to time the market

While it can be fun to try to find the hot stock picks and flip them for profits, it can be a risky a game to play with your financial future. Remember that a vast majority of day traders lose money.

Younger investors will continue to carve a new path

Financial advisers will continue to have a role to play for investors. However, their business model won’t be tethered to asset value over time but rather to a fee-based approach for specialized or complicated needs such as tax or estate planning.

As we look to the future, these trends will likely continue increasing with millennial investors and their Gen Z counterparts. A Deutsche Bank survey found that more than 50% of Gen Z respondents increased their investments in stocks over the past year, and 45% were first-time investors.

Due to new technologies, the pandemic, social attitudes around investing, and a variety of other reasons, we have a new cohort of investors. They’re self-directed, well-educated, and primed to keep building the new future of investing.