The rise of investing platforms has led to a conundrum for new investors due to the demand for simple investment options and the inherently complex nature of investing. A 2021 report by Boston Consulting Group found that “excessive product complexity” was a major deterrent for new investors. In the US, retail investors accounted for one-third of stock market trading in 2020, with 15% being first-time investors. Similarly, 67% of people in the UK have expressed an intention to invest in stocks.
However, even “simple” financial products can be misunderstood by new investors, and complex products have become more prevalent on DIY investment platforms. According to former Securities and Exchange Commission attorney David Gorman, even someone with a Ph.D. in economics can struggle to understand these products. The recent Terra Luna stablecoin debacle highlighted the risks associated with investing in unfamiliar products. To address this issue, it’s crucial to provide general education and coaching on investment principles to retail investors.
Investment Platform Information Overload
New retail investors who use FinTech investment platforms can be overwhelmed with information overload, including jargon and abbreviations. Many new traders resort to YouTube videos for education, but these can be confusing and lack clear guidance. This situation is even worse in the crypto space, where complex technical language and a lack of regulation can create an unsafe environment for new investors.
The Dunning-Kruger Effect, a cognitive bias where people overestimate their knowledge in a domain they have limited competence, can lead to bad investment decisions, especially in the contract for difference (CFD) sphere. Although regulations require CFD brokers to specify how many people will lose money, losses continue to accumulate, leading to new warnings and regulations from the Financial Conduct Authority (FCA).
Despite the fact that people believe they can research anything on their own and 66% of investors under the age of 30 prefer a one-stop digital shop, the solution is not to withhold investment options from them. Instead, educating investors and ensuring they understand the risks and choices available is crucial.
Long-Term Solutions
• Earlier Financial Education In Schools
The author argues that new retail investors who sign up for FinTech investment platforms are faced with overwhelming information overload, including jargon and abbreviations. They often turn to YouTube videos for education, but these can be confusing and lack clear guidance. The situation is worse in crypto, where complex technical language and a lack of regulation can create an unsafe environment for new investors.
The author believes that a long-term solution lies in providing financial education from a young age at authorized institutions. In the UK, a survey by the Financial Times found that “44% of UK adults said they would be in much better shape financially if they had been taught basic money skills.” The author suggests that such education could be taught through apps, project-based learning, and involvement of parents. Continued adult education is also important, as these programs are unlikely to touch on advanced concepts.
• Education At The Local Bank
Financial institutions, including banks and neobanks, can gain an advantage by helping their customers with their first-time investments, as it builds trust and loyalty with the customer. However, a potential barrier to this is the time-to-market for developing a fintech investment platform that fulfills the demands of today’s Gen-Z investors. One solution is to use white-label or investing-as-a-service platforms, which allows banks to focus on developing educational and coaching aspects of their platform. Banks can also leverage their existing account managers to act as advisors and help onboard banking clients as investing clients.
Education can be embedded into the actual investing journey, providing real-time guidance and support. Empowering new investors with education can lead to more competent and loyal investors who feel comfortable putting higher amounts of capital into the platform, knowing what they are doing and trusting the institution behind it.
