The Unstoppable Rise of the Digital Investor: the coronavirus crisis will accelerate digitalisation in wealth management

The market of self-directed retail trading has already been in the hands of online brokers for a long time. In the last few years, investing in general has moved increasingly online, including step by step part of the advisory and discretionary business. The forced lockdown currently in place in most countries across the world has placed huge stress on communications between clients and their advisors, just at the time when they need it most. These circumstances could be a major factor of digital acceleration, with many players likely to rethink and/or adjust their digital strategies, and with online investing that will increasingly become the new social norm. Recent research from the deVere Group seems to support this idea; so far in this period, the coronavirus crisis has triggered a 72% rise in the use of fintech apps.

The enormous growth in new customers for online brokers confirms the trend towards a further increase in self-directed investors, including less active and less experienced people.

The importance of ‘digitalisation’ in wealth management, as well as in other sectors, will only increase because of this crisis. I start by illustrating this with the further increase in self-directed investors. This time we are not talking (only) about the usual suspects – such as day traders or very active investors – but rather ‘normal’ banking customers, who are more and more intrigued by investing online in mutual funds and trackers, rather than visiting a bank branch to do so.

When I was CEO of Bolero – one of Belgium’s online retail trading platforms – we knew that moments of crisis were often – if not always – seen as buying opportunities by self-directed investors (DIY/Do-It-Yourself). Whether it was Brexit or the Ukrainian crisis, DIY investors were always on the lookout for the opportunity of a lifetime during these periods; whether they were right or wrong is less relevant. What is relevant, however, is their beliefs. Such is the nature of the self-investor. Every crisis and – in particular – shortly afterwards, has proven to be a time when online brokers could often count on a spectacular inflow of new customers.

Two weeks ago, my doctor – a typical private banking client – requested my help to open an account with an online broker. He was by far not the only one. In Belgium, in March, Bolero enjoyed a 700% increase in new account openings. BinckBank, owned by Saxo Bank, realised a tenfold increase in the same period in Belgium, together with a 400% increase in transactions at Bolero and a 100% increase at both Keytrade and BinckBank. Intriguingly, many of the orders placed were ‘buy’ orders, i.e. 70% buy versus sell orders for both BinckBank and Bolero. Stocks were the favourites, accounting for 70% or more of all transactions. A lack of time is often quoted by would-be self-directed clients as a key obstacle to starting their investing activity; the fact that most people are forced to stay at home as a result of the coronavirus crisis overcomes this obstacle by substantially increasing their time available to engage in investing.

The Belgian newspaper De Tijd reported in its 4/5 April weekend edition that most retail banks in Belgium did however not notice a significant difference in terms of new clients or transactions. Like many other commercial banks, they are not yet seriously engaged in the online investment market. Given the changing social norms, the attractiveness of exchange-traded funds (ETFs) – offering the possibility to invest in fully-fledged discretionary or advisory online offers, as well as the development of investment platforms for self-directed investors – may be augmented by many players in the coming months and years.

The rise of the ETFs is inevitable. Whether their performance is better or worse than mutual funds is another matter, but the appeal to retail investors is obvious: very low costs, decent performance, easy to buy online, transparent and – in normal times – very liquid as they are traded on the stock markets. The attractiveness of ETFs is further supported by the rise of automated advice or robo-advice. Whereas B2C roboadvisors did not disrupt the market as predicted a few years ago, more and more financial institutions are launching their own automated advisory services. Online brokers such as Charles Schwab and Fidelity in the US, Keytrade in Belgium, and Nordnet and Avanza in the Nordics were among the first to add roboadvisory services to their banking and brokerage business. In Belgium, KBC’s roboadvisor – Matti – helped to realise a 700% increase in ETF transactions.

Signs of a new social norm: Just Eat Takeaway, Amazon, Deliveroo, Netflix; a new virus called ‘digital technology’

The stock market took a beating. Stock prices will likely remain very volatile for the time being and beyond, dealing with the risk of a sustained recession. However, stocks like Just Eat Takeaway, Amazon and Deliveroo are performing much better or are already recovering. Amazon even raised its target for new hires to 175,000 bringing its total workforce over one million.

In the last few weeks, Netflix has already attracted – not surprisingly – a record number of viewers. At Nextdoors, the hyperlocal social media network, daily active members were up 80 percent globally from February to March. In addition, while already long in use by start-ups and tech companies, the world at large has started to become more familiar with apps like Zoom, Google Hangouts, Miro and Slack. Madison Darbyshire wrote in her colomn in the FT (weekend edition 18/19 April) that her love life has been flourishing under lockdown. Seems that of others too. She reports that Tinder has seen a 20 percent in conversations since end February, and March 29^th was the busiest day ever for ‘swipes’. On the other hand, other tech companies like Airbnb and Booking.com face harsher times for obvious reasons. The latter had to raise $4bn to get it through the coronavirus crisis, but still announced lay-offs. The Financial Times reported in its April 18/19 edition that Booking.com’s rival Expedia already laid off 3,000 staff in 2020.

Will this be a new way of working from now on? Will business travel return to its old levels? Retailers around the globe are suffering and many will declare bankruptcy if not rescued by the government bailout. The relatively good stock market performance of companies like Amazon is a sign of the times – a sign that the coronavirus crisis will only further accelerate the wave of digitalisation across industries.

Building further on the dating theme, Darbyshire points out that in lockdown, online dating has become anything but impersonal. ‘A conversation with someone sitting in their kitchen, living room or bedroom is intimate in a way that a first drink in a loud bar can never be. We see the pictures on their walls and the pile of laundry they thought they tucked out of the frame.’ An interesting example of a possible new ‘social normal’ is her observation that ‘instead of hoping that a strong physical connection will lead to an emotional one, we are forced to do the reverse.’ Video chatting as a first date is such an efficient way so maybe this practice will continue after the lockdown? Can that type of behaviour offer some food for thought in the world of wealth management and private banking? “Show me what you got – via video call - to offer before I come to your office.”

‘What the “new normal” looks like after this crisis is not clear yet, but we do expect enduring changes in consumer behaviour — with consumers being even more health- and environmentally aware, and digital becoming even more paramount and consumer pathways migrating even faster from offline towards online’, says Sarah Willersdorf, head of luxury at Boston Consulting Group in the FT Weekend (11/12 April 2020).

Simon Chandler, a London-based tech journalist, describes in an article for Forbes (30 March 2020) how the long-term effect of the coronavirus will facilitate the spread of another virus known as ‘digital technology’.

Imagine you are on a plane that is heading towards turbulence. Most of us are reassured by the captain or steward announcing that the plane will enter turbulence – the well-known phrase ‘ladies and gentlemen, we are entering turbulence. Please fasten your seatbelts’. While going through the turbulence remains unpleasant, we are not surprised because we have been warned and are, therefore, mentally prepared, and we feel taken care of. This is exactly what investors need in times of turbulence. Investors picked up their phones trying to reach someone for advice in the full heat of the coronavirus crisis, but how many felt they received relevant information and the required level of communication in a timely matter?

Recent research from FactSet demonstrates that timely communication matters more than ever. Its research found that weekly or daily reporting is becoming more desirable among various investor demographics. ‘Out of the survey respondents under 35, 30% expect managers to be evaluating risk profiles on a weekly basis, while 16% expect daily reviews. Roughly 40% of those with more than USD10 million in investable assets expect at least weekly reassessments of their risk profiles. This shift also appears to be part of a wider move toward delivering a better client experience’.

A year and a half ago, I was invited to a private banking and wealth management gathering in Zurich. The theme was trends and digitalisation. I offered to look at the fashion industry for inspiration. Both the fashion and wealth management industries are, arguably, targeting the same type of client. Both are – or were – seen as businesses that require human interaction and could not be done online, like buying (cheap) stuff on Amazon. The fashion industry has moved on since then, however. There are pure high-end, internet-based luxury companies, together with all major brands that have moved online. It is also relevant, in this context, to consider the communication and connection aspects.

Private banks and wealth managers target (rich) millennials. This generation is increasingly used to being connected with brands through social media – in particular, Instagram. They are constantly engaged; that is their social norm. How are they, and other, elder clients being taken care of during these times of social distancing? Brands like Loewe (an LVMH company) are rolling out new types of content via Instagram, including, for instance, a series of digital events called Loewe en Casa, whereby artisans demonstrate their practices via workshops and participate in live interviews. Sarah Willersdorf believes that the increased focus on connection and community building will remain as stores start to reopen. Adam Wray writes in the FT Weekend that those brands that were able to forge genuine connections with customers at the pandemic’s nadir will stand to benefit.

How well has the wealth management and private banking sector – traditionally focused on human face-to-face interactions – connected and communicated timely with customers during the crisis? Is it way to differentiate? Some early adopters are already paving the way.

Ever since May Day in 1975, online brokers have been the masters of the universe when it comes to digital investing for self-directed investors. The arrival of the internet in the nineties drastically fast-tracked online investment becoming the new norm. Going to brokers or banks to place orders became largely a thing of the past.

The iPhone also contributed to the emergence of a new social norm: an increasingly online everyday life and notable shift towards a mobile-first world. Using the internet to order books, food, DVDs, travel, and even buying luxury items and expensive clothing has become part of our daily lives. Experiences provided by Amazon, Spotify, Deliveroo, Net-a-Porter, etc. are significantly altering our lifestyles; not always necessarily for the better.

The deVere research demonstrating an increase of 72% in the use of fintech apps is, indeed, another indication that the long-term legacy of coronavirus will result in an ever more digital and online society.

It is fascinating to notice that different sectors of financial services became part of the new social norm during different waves. Online brokerage, payments and lending were the first. Players, like Ant Financial in China, have completely taken over the mobile payments market. In Western Europe, it is somewhat different because banks typically have a reasonable to strong mobile presence when it comes to basic services, making it less obvious and more difficult for challenger banks to disrupt them.

In the world of savings and investments, incumbent banks have shrugged off the threat of B2C roboadvisors. Some challenger banks, which started by offering basic banking services, but are now increasingly adding ‘investment services’ features, may turn out to be a different animal. Definitely not all of them. But take Nubank for instance, a Brazilian fintech founded in 2013 for instance, and which has now more than 20 million customers and counting. The real threat, however, may come from the FAANG companies partnering with giants like Blackrock or Vanguard that complement each other with their solutions. Consider the collaboration between Ant Financial and Vanguard; in April 2020, they announced their roboadvisor that can recommend a portfolio from a selection of 6,000 mutual funds, and users can access the service through the payments apps, Alipay and Ant Fortune (Ant Financial’s wealth management platform that has teamed up with more than 80 asset management firms to deploy its AI-powered capability to offer a tailor-made wealth management service).

Firstly, the digital transformation journeys of wealth managers and private banks will only gather speed, meaning that advisory and discretionary management will also increasingly move online, whether in full online mode or a hybrid, at least for a certain segment of customers with assets under management (AUM) below one million euro for instance.

Secondly, retail banks, challenger banks and even private banks may consider developing a digital offering to address the needs of their current and potential new clients, with an appetite for self-investment. In my experience, private banking clients have many different ‘faces and appetites’. Some of them wish to invest (a small) part of their money directly on the stock market. In particular millennial clients. These type of clients exist and have a need, and may go elsewhere if this need is not met. This has already happened with stock trading and may happen again for mutual fund investing, fuelled by a growing desire to invest in funds and trackers online.