The Emergence of the Everyday Investor
Written by Koen The on 31 August 2021
Before Lendahand I worked at various banks in their institutional sales teams, which was exciting work. When you sit on the trading floor in the middle of a large transaction with a phone in each hand, it feels like you are part of ‘haute finance’ (Of course most of your time is spent on less sexy activities such as preparing powerpoint presentations, but no one needs to know). In order to get to the actual deal, I would spend time with our research department, the structuring team, a trader or two, risk management, etc. All guys and gals with fancy degrees and titles (and of course smarter than me, the humble salesperson). There are many talented people working in the service of catering to institutional investors. It’s where the action is and thus where money can be made.
Where the TLC goes
It’s not only the institutional investors that get access to a broad range of specialized services. To a certain extent, so-called High Net Worth Individuals (HNWIs) also get the attention and services they require. In my previous blog post I discussed the strange phenomenon that it’s expensive to be poor. But the opposite is also true: it’s cheap to be rich.
For only a tiny fraction of your wealth, you can hire some whizzkid tax advisor who can save you a serious amount of money. You can also have a Private Banker (or Wealth Banker) at your disposal who lets you in on deals that are not accessible to the common person. We’re talking private equity, real estate, inflation-linked strategies, alternative investment strategies, etc. Hey, some of them even get access to popular IPO deals before the IPO pop.
Then there are the mass affluent: people for whom money is not the biggest issue, but they are not super rich either; and HENRYs: high earners not rich yet. The latter are folks that make 6 figure incomes but are not yet considered rich. They are typically older millennials. We Gen X-ers like to say they spend more money on lattes and avocados than on their pensions, but in reality quite a few of them are accumulating wealth at a high speed. Don’t forget that some of them are already grandparents. Yes, you read that right. The mass affluent and HENRYS may not have their dedicated private banker, but they do get access to trading tools and some investment managers that allow them access to specific (mostly illiquid) funds and primary markets. Some get access to concierge services and the bragging rights that come with them. Nothing but Tender Loving Care for these esteemed customers.
It all makes sense
Pareto’s principle certainly applies to individual asset owners: according to the Dutch statistics office, 80% of the assets are owned by 20% of the population. Not only do these richer households have more money, but they also allocate more towards their investment portfolio. Households with EUR 1 million or more typically hold 60% in stocks and bonds, compared to 15% for the non-millionaires.
Of course, if there is an 80/20 rule, there is also a 20/80 rule: 20% of the assets are owned by 80% of the population. In that regard, it makes sense for the financial services sector to make available significant resources, and bring their best investment ideas and tools to the richer households.
While there are fancy names and acronyms for the rich folks, there are none for the remaining group of people. Surely, we cannot call them the bottom-80%? The have-somes? Perhaps it’s easiest to call them everyday investors. Don’t get me wrong, they have a lot going for them. It’s easy to open up a bank account or to invest in ETFs and many open-end funds. But traditional players have not yet been able to serve them like they serve people with more money. Understandable, but also a missed opportunity for several reasons.
The increasing relevance of everyday investors
First, there is going to be an enormous wealth transfer in the coming years from boomers to Gen X, millennials, and zoomers. In the US alone the amount that’s going to transfer from the older generation amounts to $68 trillion in the next decades. I’m not suggesting people should treat people in a certain way because they are on the brink of getting wealthy. I’m just saying that people will rightfully remember the way you treat them today.
The waiter that just brought you your morning coffee may have parents who in the ‘60s stumbled upon this nice quaint house in the middle of the Jordaan in Amsterdam and bought it for 70,000 guilders (equivalent of around EUR 35,000), which he will inherit soon at 20x the price.
Second, information has been democratized. You don’t need a Bloomberg terminal to get the latest scoop, you may get it quicker by firing up your twitter app, or your Snap or IG. I’m part of a whatsapp channel, unambiguously called Crypto, where all kinds of wisdom coming from various fora are shared and curated. The whole Gamestop show even started on Reddit.
Distributed information flow does not only lead to the occasional short-squeeze of hedge funds by everyday people, It’s also a motivation for younger people to start investing. They are used to immediately acting on information. Not only because of FOMO – “did he really book that Maui vacation from his AMC gains?” – but also because people tend to think that they have more or better information than others and want to profit from that. Nowadays it’s easy to find data to support a hypothesis either way. But hey, in the end, the market is not wrong.
Also entering the equation are the ultra-low interest rates. People who had not been active in the capital markets, saw themselves forced to start doing so. Inflation (and taxes) is a strong force.
All of the above is facilitated by rapid development – and adoption – of financial technology. It’s easier than ever to start investing using an app like Bux, which gamifies trading. Also pretty cool are the robo advice platforms. You may even find one that allows you - next to their standard themes such as purchasing power of the Chinese middle class or the ageing population in Europe - to define an investment theme yourself (e.g. the Elon tweets factor). They will then set up a basket of stocks for you to invest in, based on that theme.
Crowd-investing to the lookout
And then there is crowd-investing. A true power-to-the-crowd movement. Why? Because it’s where financial innovation meets technology, to provide everyday investors access to the primary markets. It’s about people investing in other people, in the real economy. In the case of listed shares and bonds, the secondary markets, financial instruments are exchanging hands from one investor to the other. But in primary markets, your money as an investor goes to a company that can build out its business. As a primary markets investor, you are in it for the long term and you should expect to earn nice risk premiums.
Crowd-investing allows you to participate in real estate deals with only a small amount. These many small amounts add up to a significant sum. No job too big, no pup too small. You can also become your own venture capitalist by investing in startups on Symbid or Seedrs. If you are a bit more risk averse, there are plenty of platforms out there where you can provide debt funding to SMEs.
Crowd-investing is becoming a mature market, and this maturation will accelerate as European crowdfunding regulations become effective by the end of this year. All platforms will be regulated, which of course is a good thing. One of the interesting aspects of these new regulations is that it allows for ‘auto-investing’, meaning you can just transfer an amount to the platform and in your account indicate your preferences (e.g. only loans with short tenors to women entrepreneurs in South-East Asia), and then the platform will automatically invest for you over the course of a few weeks. It combines the diversification benefit and ease of investing of funds with the control over the destination of your money that you get in crowd-investing. Every crowd-investor de facto builds his or her own bespoke fund. Pretty cool.
Over to you
We’re building on this crowd-investing movement at Lendahand and would love to have you join us, but even more strategies and asset classes will become available for more people in the coming years. You don’t need to be wealthy to get exposure to a wide range of the market. We are moving from ‘haute finance’ to ‘power to the crowd’. Use those powers well, young padawan.