Millennials are the least invested group in history. Digital investment applications seek to solve those issues. Regardless of these reasons, digital investing is here to stay.
Sure, most aren’t focused on investments. With a race to the cheapest fees and to the top in gamification, most companies aren’t winning. Why? No matter how free and accessible investment gets, the problem of Millennials not investing is simply growing worse.
Over the last ten years, five meta trends have defined the digital investment or the Robo-advisory sector.
1. Freemium Trading
Digital investing took an intense turn with our young audience. The end of trading fees crowned Robinhood as the free trading app for Millennials. There have more than 4 million investment accounts, 80 percent of which are Millennials.
Only a minimal service is free in the Freemium model, which confines the user to several trading restrictions. Bit works for first-time traders who want to learn for free. Then you may establish margin accounts trade crypto, and options.
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2. Digitizing the Portfolio Management Process
The first was the arrival of technology, which digitized the investing process. Companies like Personal Capital are making wealth management easier for the public. This paves the way for digital investing.
Wealthfront (formerly KaChing.com until pivoting) and Betterment were among the first to offer Robo-advice. They lower advisory costs to a fraction of what they were previously.
Asset allocation is the name of the Robo-advisory game. It allows everyone to have access to a diversified portfolio that is tailored to their financial situation.
It’s like pacing your eggs among a stock basket, bond basket, and commodity basket.
If you have baskets that monitor thousands of stocks or bonds simultaneously, this is a lot easier to execute. These are like ETFs (exchange traded funds).
Goal-based investing is a new type of Robo-investor that combines asset allocation with particular goals. Maybe you want to buy an electric car in five years or take a vacation to Europe.
Selling asset allocation is difficult since it is a commodity. As an undergrad Finance major, you can duplicate nearly any portfolio offered by these Robo-advisors in an Excel spreadsheet. It’s no surprise it sells for pennies on the dollar (.0025 of assets under management). It’s fantastic for customers but awful for business.
Lots of Robo-Advisor Competition
Since the inception of Robo-advisors, hundreds more have sprouted up in the United States alone. Major financial institutions like Charles Schwab and Vanguard have taken a promising lead despite entering late in the game.
Betterment currently offers a hybrid digital-human service and is on a mission to “grab coffee” with its clients. Just bear in mind that everything beneath the hood is the same engine.
3. Social Investing
The fourth kind of digital investing is social investing. Groups of investors communicate investment-related information with one another. This already happens on social media. Just look at places like Reddit.
Although social investing (on digital platforms) has failed in the past, today’s leaders include StockTwits, eToro, and Sum Zero. Before pivoting, Wealthfront was KaChing, an innovative social investment platform that was ahead of its time.
Before being acquired by Interactive Brokers and transitioning to a professional marketplace, Covestor was a social investment platform that democratized wealth management.
Why Social Enterprises?
So, why is it the right moment to invest in social enterprises? Thanks to technological advancements, the financial services, and brokerage industries have never been more intertwined than they are now.
Multi-broker APIs enable communities of investors to trade together like never before behind the scenes. Alternative trading methods have emerged. This allows sites like eToro to pool trades from numerous traders who wish to duplicate the same transaction and trade them as a single block.
Regardless of portfolio size, fractional shares allow less wealthy investors to proportionally reflect more affluent individuals.
Social investment applications are available in a variety of flavors, each tailored to different sorts of investors with varying levels of experience. Sum Zero is for value investing in a professional setting who have a thorough grasp of stock valuation.
StockTwits, on the other hand, uses a Twitter-like stream to distribute stock news. Advanced traders can duplicate each other’s deals on eToro.
4. Thematic Portfolios
The next trend is the gamification of digital investing, which involves developing theme-based portfolios that connect investment decisions with personal values and interests.
Environmental, social, and governance (ESG) investment became popular among socially concerned Millennials as a result of this idea.
It turns out that investing may positively impact, and Robo-advisors such as Swell Investing and OpenInvest are betting on it. Align your assets with values like socially responsible investing, anti-tobacco and anti-firearms legislation, and workplace diversity.
Themed portfolios are a solid part of the digital investing strategy.
Companies like Swell Investing and OpenInvest face the same issue as traditional Robo-advisors like Betterment and Wealthfront: how defensible are they? They’re also offering asset allocation, but in a package designed to appeal to the Millennials, they’re hoping to attract customers. In reality, most Robo-advisors are following suit and now offer ESG portfolios.
Stash Investing takes this value proposition game to the next level, offering themed portfolios centered on topics that Millennials care about, including marijuana, supporting female CEOs, and anti-Trump portfolios. They are now winning the war of the heart over the mind.
But isn’t that what ETFs are supposed to do? Stocks may be reused by placing them into various portfolios with various names.
Don’t be shocked if you see Apple, Netflix, Amazon, and Google in a number of your Stash portfolios.
5. Accessing Your Unique Asset Classes
The desire for distinctive and alternative asset classes provided as digital goods, including cryptocurrency, private placements, and music royalties, is the fifth and most recent development.
The JOBS Act and Regulation CF, which were passed in 2015, gave regular Americans the same investing possibilities as Accredited Investors (those with a net worth of more than $1 million). Every day Americans now have access to asset classes they could never have imagined.
Today, one may invest in cryptocurrencies, startups, real estate, and tokenized assets on a variety of platforms, the majority of which are based only on speculation (i.e., Dogecoin).
However, dissimilar to public markets, a Vanguard or even a Schwab has yet to materialize, and it is a long way off. Even so, there are still issues.
For most alternative investments, secondary markets are scarce, if not non-existent, due to a lack of liquidity and fungibility, two essential elements of a thriving marketplace. Although blockchain appears to be promising, there is no silver bullet for this problem yet.
JOBS Act Details
Certain sections of the JOBS Act, which went into effect in 2013, spawned a crowdfunding sector for private placements. In 2015, non-accredited investors were allowed to participate.
Since then, many platforms have failed to attract transaction flow, and none have succeeded in establishing fungible secondary markets. This is an excellent application of blockchain technology.
This sector is being disrupted by blockchain, which is simplifying private placements, democratizing alternative investments, and allowing for the creation of fungible secondary markets.
Although no one has yet established product-market fit, there are a number of new projects underway, and an ecosystem is emerging around these use cases:
The music industry’s royalty distribution structure is ripe for change, but it will be fraught with difficulties.
Most artists do not control the majority of their performance rights. There were no commercially defined channels for selling royalties other than selling rights to another individual directly.
RoyaltyExchange is a newcomer to the private placements market. They began as an online platform that auctioned off royalties to the most generous bidder. Interviews with Jeff Schneider, the company’s CEO and founder discuss the difficulties they experienced with that strategy.
Democratizing Specific Finance
They are democratizing artist-and-fan finance and investment. They achieve this by using the Ethereum blockchain and smart contracts to tokenize royalties as an asset class.
The coins can then be exchanged on a secondary market, albeit liquidity will be limited. When trying to buy on a secondary market, it’s unclear how each coin records what actual royalty and how to zero in on which royalty asset a currency is priced under (i.e., no fungibility). Their success is unknown, but it appears to be a practical use of blockchain to disrupt an established business.
Despite this, they suffer the same illiquidity, absence of secondary markets, and lack of fungibility issues. It’s tough to scale. While other platforms like it have captured more transaction volume to supply greater liquidity, it’s a gradual process. A steep educational curve is part of the problem.
The majority of regular investors are unaware of private placements or their ability to participate in them. Investing in private firms is far riskier and less transparent than investing in public companies.
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You can probably see now that being a digital investor is now easier than ever. Most applications allow you to choose between cautious, moderate, and aggressive investment styles. In reality, it’s all about balancing risks and rewards.
Fixed-income assets, such as bonds, money market funds, and loans are included in conservative portfolios. These are nearly definite outcomes; all that remains is patience. You must wait for the investment to mature before collecting your portion as an investor.
These make sense if you want to invest for the long term. You can supplement your children’s education fund or save for your retirement.
Buying equities in well-established firms, generally, large-capital, blue-chip securities, is a sensible investment.
The good news is that you may start investing with as little as the cost of a cup of coffee. You have no excuse not to try this opportunity because the entry barrier is low. Digital investing is now so simple.
The most incredible thing about apps is that they function as planned investments, withdrawing a set amount at predetermined intervals. You can’t forget if you invest this way, and it’s more of an out-of-sight, out-of-mind strategy.