The boom in retail investing since the Covid-19 pandemic has been widely reported. Two thirds of those investing between 18 to 34 began in 2020, research from the £3 billion investment company Alliance Trust revealed.
However, the next few months could define the next generation’s attitudes towards investing. If things go badly, it could pose a significant risk to the wealth and investment management industry. If new investors run scared at the prospect of losing large sums of money, regaining their trust later on when they may otherwise become clients could prove a difficult task.
So far, it has been largely plain sailing for new investors. Red days have been few and far between since the lows of March 2020 and most portfolios have increased fairly steadily over time.
That appears to be changing.
The S&P 500 and NASDAQ are both down this month, while the FTSE 100 is just about in the green still. Tech stocks, which many new investors piled into due to their significant gains in recent times, are faltering.
How long this turbulence will last is impossible to tell without a crystal ball. However, markets do not like uncertainty – and there is uncertainty in abundance right now. Worries about inflation, tensions surrounding Russia and the Ukraine, and Covid-19 are all unsettling markets.
Given these themes are far from resolved, it is unlikely we have seen the last of market turbulence.
For new investors – many of whom have invested in high-risk assets without fully understanding the risks – this could prove catastrophic.
Without access to advice, some will panic and withdraw their investments at a significant loss. Others will lose money they cannot afford to.
Previously, wealth managers have told me about their fears that investing could essentially “skip a generation” if young people’s first experience of investing goes badly wrong.
If individuals lose significant money in their 20s or early 30s, they may well be more wary of investing their capital when they are in a position to engage a wealth or investment manager.
Oliva Ellis, an associate director at Mirabaud, believes wealth managers have a responsibility to educate clients and protect them from taking on unnecessary risks.
Now this duty seems even more pertinent.
Wealth managers could use the opportunity presented by turbulent markets to reassure panicked investors and gain the trust of their future clients at an early age.
Regulation surrounding what constitutes financial advice does make this more challenging, it should be noted.
The regulators also have a role to play. Still, misinformation and questionable at best financial “advice” litters social media, particularly Instagram and Tiktok.
The impact of this must not be underestimated.
According to F&C Investment Trust, 83 percent of Generation Z investors admit social media has influenced their investing decisions.
The FCA published its first TikTok video as part of its £11 million InvestSmart campaign. It warns about the risks associated with cryptocurrency investments rather than just the rewards which are normally shown on TikTok.
However, little has been done to clamp down on the accounts offering potentially dangerous finance “tips” and get rich quick schemes.
TikTok’s reaction to the backlash surrounding the “advice” on its platform was to ban all paid promotions of financial products.
This means TikTok users can no longer partner with any financial services brand – regulated or not – to promote their products and services in their videos.
However, the ban does not stop all the financial “advice” on the platform. It only applies to sponsored or paid content.
Theoretically, videos like this are still allowed.
While it is unlikely wealth managers will be creating Tiktok accounts to counter this misinformation, an increase in education efforts – particularly those aimed at younger generations – could offer a much needed guiding hand for new investors.
