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Investors who opened brokerage accounts in 2020 are younger and more racially and ethnically diverse than existing account holders, according to a study released Feb. 2 by the
“We see that their investment knowledge is low, but their confidence is not in many cases,” says Olivia Valdes, a researcher with the FINRA Foundation and one of the authors of the report. “So there's a disconnect in what they know and what they think they know.”
NORC and the FINRA Foundation polled 1,291 U.S. taxable account owners between Oct. 26 and Nov. 13 and divided them into three groups: Investors who didn’t open any new brokerage accounts in 2020, existing investors who did open new ones and entirely new entrants. The new investors comprised 38% of the sample, with 43% of it coming from holdover account owners.
While the researchers designed a representative sample, the study doesn’t estimate the total number of new investors. More than 10 million new accounts opened in 2020 through six major discount brokerages including Robinhood, Charles Schwab, Fidelity Investments and E-Trade, according to a different study in December by analyst Devin Ryan of JMP Securities.
For wealth managers, the brokerage account owners remain something of an untapped opportunity. Only 48% of the holdover account owners made their investment decisions after speaking with financial professionals, with tapering levels among the other two groups including just 23% of the new investors, according to the study by NORC and the FINRA Foundation.
And it’s the untried market entrants who may most need the guidance. Of the new investors, 50% described their investment knowledge as average, with 12% saying it was high or very high. Still, the group only answered an average of 1.4 out of five investment knowledge questions correctly, according to the study. By contrast, the holdover owners got 1.8 out of five correct, on average, while the experienced entrants got 2.25.
The experienced entrants — which had the largest representation of Latinos — emerged as the most “savvy investors” of the three, based on their scores and the fact that they tapped the benefits of creating a new account alongside existing ones, says Angela Fontes, director of NORC’s Behavioral and Economic Analysis and Decision-making program.
Latinos also comprised a higher percentage of new investors than holdover account owners. The same was true of Black investors, who made up 17% of new investors compared to 7% of experienced entrants and holdover owners. At least 62% of new investors were 18 to 44 years old, while only 29% of holdover owners and 48% of experienced entrants were 44 or younger.
“The No. 1 source for information is friends and family for these new investors, and they're about twice as likely as folks who are not new investors to use social media,” Fontes says.
Learning by doing?
One key finding of the study jibes with wealth managers' oft-stated aim to serve new generations of investors and to bring aboard more clients in general. Black and Latino investors most often cited being able to open accounts with a small amount of money as their reason for opening an account in 2020; indeed it was the only one appearing in each of the top 5 reasons among white, Black, Latino and Asian-American investors. Lower or nonexistent account minimums could be having their intended effect of expanding the base.
At the same time, more than a third of the entrants said their goal in opening their brokerage account was to learn about investing, notes Christine Lazaro, director of the Securities Arbitration Clinic at the St. John’s University School of Law.
“The literacy level suggests that they may not fully understand what they're doing,” Lazaro says. “There’s a lot of discussion right now about democratizing markets. The investor literacy angle is the really important piece of this that doesn't get discussed.”
Since the most popular goal across the 1,300 investors for their taxable, non-retirement brokerage accounts was retirement savings, FINRA Foundation’s Director of Research Gary Mottola says members of all three groups may not understand the tax benefits of IRAs. Wealth managers could make inroads with each group.
“Getting reliable, credible information in front of these new investors could go a long way towards ensuring that they're not just investing now, but that they're investing five and 25 years from now,” Mottola says.
The study also showed that two-thirds of new entrants invested $2,000 or less, which means that they may not be at risk of falling into financial straits if they lose it all, according to Mottola and Mark Lush, a behavioral scientist at NORC. In order to understand why they’re not working with wealth managers in large numbers, Lush suggests looking at their information sources.
“The friends and family are saying, ‘Hey, you should begin investing,’ but they didn't say, ‘Hey you should go talk to a financial advisor about investing,’” Lush says. “Friends and family hold sway, but it's what they're recommending that’s the big disconnect.”
