“The global capital markets system is at an inflection point. More than ever, retail investors need a responsible capital markets ecosystem. The industry has an opportunity to address this need, and the time to begin is now.”
The Future of Capital Markets: Democratization of Retail Investing An insight report from the World Economic Forum published August 2022.

The participation and engagement of retail investors in capital markets could be significantly increased if firms—through their financial advisors (FAs)—and their clients would collaborate on access, education and trust across the wealth management sector.

This type of collaboration is even more important as retail investors participate in the capital markets in growing numbers each year, yet many don’t seek or know where to look for targeted advice or more knowledge on best practices. Meanwhile, financial advisors contemplate the best strategy for growing margins in these times of many challenges including a rather volatile market.

A recent research-based insight report from the World Economic Forum (WEF), prepared together with Accenture and BNY Mellon, is showing how this shift in wealth management towards a responsible capital market ecosystem could happen centered on democratization and greater learning opportunities. And both sides would have a role to play in this:

• Clients need a deeper understanding of their investment choices and the impact of goals and timelines combined with specific, personalized advice from a trusted source who knows how to make investing more effective.
• FAs need new strategies to help increase investors’ awareness on how to access knowledge on investing, on the capital markets themselves, and the role of the FA in preparing a professional, personalized portfolio.

Rethinking ways to better serve retail investors

In an effort to gain a better understanding of retail investors, the above-mentioned Future of Capital Markets report presents results of a survey with a large cohort of people who actively participate in capital markets, and with a smaller cohort of those who don’t invest, across nine different countries. In the report, three statistics stood out for me:

• Only 27% of retail investors feel “extremely confident” in their ability to understand financial markets and make sound investment decisions.
• 39% of retail investors no longer invest in stocks and 40% don’t invest in bonds because they think they do not understand these products well enough to invest wisely.
• 34% of retail investors would feel more confident in their investment decisions if they received more personalized advice.

These numbers underpin a key development: the pace of industry change today has led to increased needs and expectations from investors. As investors are facing big life event scenarios involving retirement, housing options and helping with their kids’ college tuition, the industry should focus on better serving retail investors in need of their support, even and especially in the throes of a volatile market. The alternative would be a loss of momentum, a loss of influence and a loss of clientele.

Going beyond advice: experiences matter more now

If financial advisors would shift their focus from rather building their book of business and growing their market share to, instead, focusing to meet clients’ broader needs, the financial advisor’s role could be redefined and enhanced. Working toward concrete goals with the client like saving for retirement along certain timelines is specific, measurable and, as a result, becomes a more achievable experience.

I see the services provided by FAs evolving today toward select categories of holistic advice across assets, liabilities and client experiences that involve highly desirable intangibles such as trust, security and access to exclusive networks. Recent technology developments are creating opportunities to engage with current and new clients in a more scalable way, regardless of the size of a client’s personal wealth. This is broadening the opportunities for wealth managers to include underserved, less affluent segments who have an increasing need and desire for affordable advice.

Making the shift toward a more responsible capital markets ecosystem

As more retail investors enter the capital markets, new challenges emerge for the wealth management sector. But this also provides the industry with an opportunity to help foster a responsible investing ecosystem. Here are three imperatives that should support this:

• Increase access to outcome-oriented products and services to help incentivize investors to participate and see the benefits of capital market investments.
• Working together to offer financial education side-by-side with investment offerings. Our findings show investors need more general understanding of why and how they should invest.
• Build long-term trust and confidence with clients and reassure them that financial institutions keep their best interests in mind to grow their wealth sustainably. Providing sound financial advice, transparency in fees and explaining the sufficiency of data protection are cornerstones of quality, responsible service.

The prevailing line of thought, as noted in The Future of Capital Markets report, is that the investment industry needs to rally around a new approach bearing in mind the preferences of this new wave of investors.

I am open to hearing your thoughts on this blog. Let’s connect and set up a time to discuss.

Special thanks to Sofia Eckrich, Senior Consultant – Strategy, Banking and Capital Markets for contributing to this blog.