[A revealing retail investor survey with interesting statistics, analysis and recommendations was recently contributed to the Institute. We are happy to have guest financial services innovators and thought leaders contribute and share their thoughts and experiences on topics important to our financial services readers.
This retail investor survey was provided by Institute member David Aferiat, managing principal and co-founder of Trade-Ideas—an award winning A.I. and machine learning infotech firm helping advisors, asset managers and traders to enhance alpha and mitigate risk. The specific task of the survey was to determine the level of satisfaction/dissatisfaction of independent retail investors with online broker services and to identify specific areas for improvement, as well as to identify specific services and their relative importance, one against another.
Based upon recent experiences through the 2020 pandemic investing environment, retail investors have articulated through this survey the services that will likely result in the greatest interest and engagement from this growing class of investors. Trade-Ideas works proactively with advisors and asset managers on how to add and implement AI and machine learning into their investment services mix and client sales/engagement strategies.]
State Of The Industry 2021—What Retail Investors Demand
By David M. Aferiat, managing principal and co-founder of Trade-Ideas
What 2020 Wrought And Brought
Let this sink in: The seismic shifts that have occurred because of the Covid-19 pandemic have affected every area of every life on the planet. This is not an exaggeration. All have felt pandemic—from hot dog street vendors in New York, to global bulge bracket banks.
The pandemic is set against a backdrop of changes that were already in play, which were already impacting the global economy: Brexit, the rise of China as a geopolitical power, the U.S. elections and rising interest in the markets from the work-from-home investor class (the segment of Reddit traders receiving the most recent attention for their GME short squeeze).
Yet there have been paradoxes in the context of the pandemic, that initially were “head scratchers” but became more “oh, that makes sense” as the pandemic proceeded. Patterns begin to reveal themselves.
Among these was the emergence of the retail investor as a key player (and now stakeholder) in U.S. equity trading. Prior to Covid, there were several developments that set the table for this trend. And once Covid hit, a perfect storm of commercial models, technology, and retail investor appetite converged into a retail investor movement, driving markets throughout the year.
2020 saw the emergence of the retail investor as a key player (and now stakeholder) in U.S. equity trading. Prior to Covid, there were several developments that set the table for this trend. And once Covid hit, a perfect storm of commercial models, technology, and retail investor appetite converged into a retail investor movement, driving markets throughout the year. That trend has continued into 2021.
Among these initial, pre-Covid developments was the October 2019 move to zero-based commission trading by Charles Schwab, immediately followed by E*TRADE, TD Ameritrade and Interactive brokers. This development continues to reverberate and forms the basis for many of the insights later in this paper concerning what retail investors now demand.
Hard on the heels of zero commissions was the acquisition of TD Ameritrade by Schwab and of E*TRADE by JP Morgan. With brokerage commoditized, the provision of ancillary services (mostly in performance information and data) becomes critical for these firms. The technology for this delivery to end individual clients also became more important in the hopes retaining new clients and growing assets under management.
Next, the continued rise of Robinhood impacted both the number of investors and the type of vehicles available. Robinhood has some 13 million subscribers (with a significant number of millennials) and allows for the purchase of fractional shares (sometimes as low as $1). This development is a competitive differentiator, which fuels the equity trading picture by expanding the liquidity available in the system—all from retail. It should be noted before pulling the ability to trade certain issues (including GME) and the resulting class action lawsuit it faces, that Robinhood recently paid a $65 million fine for misleading investors around its lack of transparency around payment for order flow commercial model.
The Retail Picture 2020
The numbers around retail investor activity in 2020 are telling of the shift that has occurred. According to an article in the Financial Times (September 25, 2020) retail activity in 2020 became significant enough that institutional investors can no longer afford to ignore it.
According to Brooke Fox, in that FT article: “The total number of average daily trades across big U.S. retail brokerages, E*TRADE, TD Ameritrade and Charles Schwab has increased by three-quarters since January to 6M, according to Sundial Capital Research. In the process, everyday traders have grabbed a greater share of market liquidity.