The Future of Capital Markets: Democratization of Retail Investing

By World Economic Forum: In collaboration with BNY Mellon and Accenture

The Future of Capital Markets: Democratization of Retail Investing

By World Economic Forum: In collaboration with BNY Mellon and Accenture

INSIGHT REPORT

August 2022

In order to enable the new wave of retail investors to grow long-term wealth while fostering a responsible retail investing ecosystem globally, understanding the market implications of democratization is key.

To inform this report, BNY Mellon and the World Economic Forum led a global survey of individuals in nine countries. The survey was fielded by Qualtrics and sought to identify the driving factors on which investors and non-investors base crucial decisions. This report uses the insights derived from the survey to shape its key considerations and outcomes.

Investing in the capital markets could enable individuals to grow their wealth over the long term, more than savings alone can do. Participation in the capital markets enables people to take ownership of their financial future, not only to ensure retirement and long-term financial resilience, but also to improve their socioeconomic status. In the last few decades, retail investors across the world have been flocking to financial markets in greater numbers as the value of assets has trended upwards and the opportunity to grow wealth has been made available to a broader population. New companies are using improved technology, platforms and innovative services and products to widen access.

 

Despite these gains, crucial gaps persist in investor protection, reliability of information, personalization and financial literacy. Both developed and emerging markets can enhance retail investor participation in a responsible manner to realize the full potential of wealth creation via capital markets. These efforts will require collaboration within the capital markets ecosystem, including public-private partnerships.

 

This report was initiated in January 2022 at the peak of a favourable macroeconomic climate, and over the course of its writing, significant volatility and market headwinds have arisen, raising questions as to how retail investors will navigate this period of volatility and what the capital markets industry can do to support retail investors during this turbulent time.

 

This report introduces opportunities for reimagining the retail investing ecosystem by evaluating the critical components of access, education and trust.

Research Findings

The rise of retail investing, and potential headwinds

 

After the global financial crisis of 2007-2009, sustained growth and digital advancement culminated in a surge of retail investing during the 2019-2021 COVID-19 pandemic. An entire generation of investors, particularly millennials and Gen-Z, have experienced buoyant markets but had seen past financial crises at an arm’s length. Given the present-day market uncertainty, urgent steps must be taken to maintain retail investor engagement and trust in the capital markets.

The impact of past and potential market events


Forbes

Now is the time to re-think retirement plan conventional wisdom
Jun 30, 2021
 

Pensions shift to defined contribution


The seven largest pension markets – Australia, Canada, Japan, the Netherlands, Switzerland, the United Kingdom, and the United States – make up 90% of total pension assets worldwide.

 

Australia, the UK and the US have experienced the most significant shift in private-sector pension plans from defined benefit to defined contribution, leaving individuals with a greater personal responsibility for saving and investing.

 

Without the safety net of government-sponsored pension plans, it is critical that individuals be aware that they are responsible for their own financial futures and are given the necessary tools and knowledge to ensure their welfare. Otherwise, today’s young may have to contemplate life without retirement.

 


 

The New York Times

No end to whiplash in meme stocks, crypto and more
Nov 8, 2021
 

Retail investors show their influence with “meme stock” effects


In January 2021, retail investors following a popular online message board decided to wield the power of social sentiment and caused the stock of several companies to soar more than 400%. The retail investors involved in this meme stock* movement influenced prices across the globe from the US to Germany and beyond.

 

The fallout of this meme stock* trend was felt most acutely by professional investors who had bet against those businesses. The situation highlighted the newfound power that retail investors wield in the global investment ecosystem, but also the distrust that retail investors may have towards the financial system and its traditional big players, questioning whether they are working for the greater benefit.

 

 

* The term “meme stock” was coined to represent shares of a company that have gained a cult-like following online and through social media platforms.

 



The Conversation

Rising food prices hit poor people the hardest: a close look at inflation in South Africa
Jun 13, 2022
 

Pensions shift to defined contribution


The seven largest pension markets – Australia, Canada, Japan, the Netherlands, Switzerland, the United Kingdom, and the United States – make up 90% of total pension assets worldwide.

 

Australia, the UK and the US have experienced the most significant shift in private-sector pension plans from defined benefit to defined contribution, leaving individuals with a greater personal responsibility for saving and investing.

 

Without the safety net of government-sponsored pension plans, it is critical that individuals be aware that they are responsible for their own financial futures and are given the necessary tools and knowledge to ensure their welfare. Otherwise, today’s young may have to contemplate life without retirement.

 

Key questions and themes

 

Given that investing is a critical tool for wealth creation and long-term financial stability, this report addresses questions around how to responsibly grow the retail investing ecosystem and enable a capital markets industry that a wide variety of retail investors can trust.

Figure 2. Defining Trust - in the capital markets system and financial institutions

While retail brokerages and platforms have become seemingly ubiquitous in recent years, significant numbers of people across the globe are not investing. For example, in France, only 6% of the population is considered a retail investor, and in Mexico, the figure is only 1%.1

 

Even in the US, more than a third of adults are missing out on the opportunity to build wealth through investing.2

 

In order to understand what a responsible investing ecosystem could entail, this report takes a diverse view of the ecosystem, including people who are not participating in the capital markets and those who are underparticipating. What types of services and products do current and potential retail investors want? What do they need to be successful in the capital markets ecosystem? Where are the gaps in the current retail investing environment, and the opportunities?

 

This report highlights the biggest gaps and the most promising opportunities for improvement, gathered through the efforts of the global steering committee of the Future of Capital Markets initiative, the industry working group, the BNY Mellon and World Economic Forum 2022 Global Retail Investing Survey and in-depth research. 

 

The critical activities and initiatives that are recommended can be broadly categorized under the levers of access,education and trust. Throughout this paper, these three levers are used as a guiding framework to understand implications and draw out solutions to build a more responsible 

Access, education and trust: The three levers

 

After the global financial crisis of 2007-2009, sustained growth and digital advancement culminated in a surge of retail investing during the 2019-2021 COVID-19 pandemic. An entire generation of investors, particularly millennials and Gen-Z, have experienced buoyant markets but had seen past financial crises at an arm’s length. Given the present-day market uncertainty, urgent steps must be taken to maintain retail investor engagement and trust in the capital markets.

Access

Existing products and services

 

Investment solutions must be outcome-oriented rather than product-focused in order to help incentivize investors to participate.

 

Current solutions are mostly out of reach or too generic, whereas retail investors seek personalized advice.  Instead of creating new products, the industry must focus on building product awareness.

 

Limited retail access to products and services 

 

Access to new and private products (e.g. alternative investments, which may include shares in venture capital or private equity-type funds) should be made available to the average retail investor, but in a responsible manner.

 


Education

Financial literacy skills must be imparted from a very young age, and education must tie basic financial health with more advanced investment and retirement actions. Financial education also must be offered side-by-side with investment offerings.

 

The way companies and policy-makers are currently approaching financial education does not resonate with retail investors. Investors need more general understanding of why and how they should invest.

 

Companies can improve their communication of the value proposition of investing, even if that means paying for fees and services, to help retail investors see the benefits of participating in the capital markets.

 


Trust

Retail investors will only pay for services if they feel that institutions are working for them.

 

All through the survey results, trust in financial services as measured in May 2022 was relatively high. However, financial crises have significant adverse effects on retail investors’ trust in capital markets. The entire industry needs to find ways to encourage investors to have longterm belief in the ability to grow wealth through investing.

 

Investors in developed markets tend to have lower trust in markets and financial institutions than investors in emerging markets, and are influenced by factors such as underperformance, data breaches and high fees.

 

 

1. “Retail Investors Have Grown in Number, Are Younger and Increasingly Use Neo-Brokers since the Covid Crisis.” AMF, https://www.amf-france.org/en/forms-and-declarations/listed-companiesand-corporate-financing/retail-investors-have-grown-number-are-younger-and-increasingly-useneo-brokers-covid-crisis.

 

2. “Mexican Stock Market Investors Grow 217% - Mexico Daily Post.” Mexico Daily Post -, 21 July 2021, https://mexicodailypost.com/2021/07/21/mexican-stock-market-investors-grow-217/.

 

Originally published by World Economic Forum on August 4, 2022. Full report available here: https://www.weforum.org/reports/the-future-of-capital-markets-democratization-of-retail-investing

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