Hey friends 👋
Happy Monday! Hope you had a good thanksgiving break with family and/or friends! Thanksgiving isn’t part of my tradition, but is one I have adopted over the last 15 years of living here. I typically celebrate it with my sister, but this thanksgiving was special:
It was the first time my parents were here (they don’t do thanksgiving in India),
We celebrated my sister’s newborn 👶🏽, and
We were 20+ people across 3 generations.
The house was buzzing and I couldn’t be more thankful 🙏!
Outside of being with loved ones, thanksgiving is a time to express gratitude, something I often forget to do. We’ve had a rollercoaster of a year from the highest inflation in 40 years to the Russia-Ukraine war to rapidly increasing interest rates to falling markets to the crypto winter to layoffs across tech, and so much more. The Fed hinted at a slowdown in rate hikes, but no promises. It’s easy to feel like there isn’t much to be grateful for this year.
On the contrary, times like these warrant reflection and gratitude more than ever. Here’s a few positive nuggets for you.
We’ve benefited from 15 years of ~0% interest rates, which (not surprisingly) coincided with the longest bull run in history.
S&P 500, Nasdaq & DJIA are up ~21%, 20% & 19%, respectively since January 2020.
U.S. household wealth increased ~31% since the start of the pandemic ($135.78tr, Q2 2022 compared to $102.64tr, Q1 2020).
The last point is staggering. $33tr increase in U.S. household wealth in 2.5 years 🤯. Granted this is partly driven by the $5tr stimulus injected into the economy during the pandemic, which is part of the reason we are in this high inflation environment today. It’s still a sizable increase. To put things into perspective, U.S. GDP was $23tr in 2021.
Millennials have historically struggled to grow wealth. The Great Recession had lasting effects, including fewer jobs, decreased savings, and a reluctance to purchase homes. As a millennial, I experienced this firsthand. When boomers were around the same age as us, they held roughly 22% of the nation's wealth compared to millennials' 6.4% in Q2 2022. However, the tide is turning. Millennials almost doubled their wealth to $8.64tr (Q2 2022) since the turn of the decade. And that’s just the beginning.
We’re in the midst of the largest wealth transfer in history from boomers to younger generations. Millennials will be the biggest beneficiary of this transfer. By the end of the decade, millennials will be the wealthiest generation in the U.S.
Can’t help but ask:
How do millennials want to manage their wealth?
Will it differ from their predecessors?
What innovations are we seeing in Wealth Tech to meet changing preferences?
This newsletter is the first of a series where I will focus on answering these questions. Before we jump into it, in the spirit of thanksgiving I’d like to thank you for your continued support. Beyond grateful for your time and attention!
Innovation over the last decade democratized access to public markets
Scars from the 2008 financial crisis were still fresh in 2010. Everyone was skeptical of the financial system. Millennials, particularly, formed a severe distrust of the system after watching their parents lose their homes and seeing the market free fall. It was hard enough to find a job let alone think about investing in a market built on an unstable foundation.
High trading costs and sub-par customer experience didn’t help. After graduating college in 2011, I was looking to sign up for a cheap brokerage that had a good reputation and was easy to use. At an average of ~$10 per trade, commission fees were expensive especially for a new college grad. I opened my first brokerage account with Scottrade (acquired by TD Ameritrade in 2017). At $7.50 per trade, they were cheaper than everyone else. Opening an account wasn’t straightforward. Getting setup took weeks and included printing paperwork, filling it out, sending it to Scottrade’s office via post, and confirming my details over phone once they received it. I lost money on my first trade, plus $15 in commission fees. There goes lunch… Brutal!
Advancements in mobile and cloud computing technology changed everything. Fintech startups challenged the status quo by reducing costs, removing minimum deposit requirements and providing better customer experience. Robo-advisors, digital brokerages and micro-investing platforms over the last decade transformed how people managed their money.
Robo-advisors, like Betterment, disrupted traditional investment management with an extremely low-cost, automated alternative
Digital brokerages, like Robinhood, eliminated trading fees and provided an unparalleled user experience
Micro-investing platforms, like Acorns, enabled customers to periodically make very small investments through fractional investing
Opening a brokerage account today is as simple as downloading an app on your smartphone and providing a few details. Executing trades is now free after Robinhood eliminated them and the industry followed. A world of a difference from my Scottrade experience.
These companies democratized access to public markets. They appealed to young investors who were previously skeptical or price sensitive. By 2020, individual investors accounted for 19.5% of the shares traded in the U.S stock market, nearly double the level from 2010.
While these have been important developments, they are effectively mainstream at this point.
Every major asset manager now offers robo-advising leaving Betterment as the only stand-alone robo-advisor
Robinhood launched 9 years ago and is now a public company with numerous competitors
The pandemic supercharged adoption
The unique circumstances created by the pandemic combined with cheap, easy-to-use trading apps led to a massive increase in retail investors. According to a survey conducted by Charles Schwab, 15% of all current U.S. stock market investors began investing in 2020. JMP Securities estimated the brokerage industry added roughly 10 million new clients in 2020. More than 6 million of those clients started investing through Robinhood.
With a surge in tech stocks, crypto and the market in general through 2021, new retail investors were unstoppable. Or at least that’s what it felt like. Many became stock gurus and the belief that the stock market “only goes up” gained steam. It seemed plausible at the time. Since the pandemic-induced bottom in April 2020, stocks and crypto went “to the moon 🚀🚀🚀”.
2022: A “crash” course for new investors
Tell me and I forget. Teach me and I remember. Involve me and I learn.
- Benjamin Franklin
Experiencing the 2008 market crash from the sidelines was not enough for young investors to learn that the market can indeed fall. And when it does, it happens fast. The memory wasn’t recent enough. The experience wasn’t firsthand. The rapid rebound of the pandemic crash in April 2020 didn’t help.
The S&P 500 is down ~20% and the Nasdaq ~28% this year. According to the Financial Times, retail investors were down ~44% by the end of October. Macro-economic forces came at us fast. Supply chain shocks, government stimulus, and the Russia-Ukraine war led to rapid inflation. The Fed had no choice but to hit the breaks on economic growth by rapidly increasing interest rates.
The best way to learn is to experience the pain firsthand. Every generation has had their fair share of lessons. There have been 11 recessions in the U.S. after 1948 alone and each one has made a more resilient investor. For new investors this year has been a crash course on the effects of inflation, monetary policy, war, and supply-chain issues on the market, to name a few. We will come out stronger. Or at least that’s the hope.
New wealth, new preferences
Today, young investors are in the process of inheriting majority of the wealth in the U.S. and have learned a number of important investing lessons over the last year. To protect against downside risk they are looking to diversify outside of publicly-traded stocks and crypto. And they are more open to receiving advice.
In a nutshell, young investors want:
A comprehensive financial picture to manage their financial lives. They want to integrate banking with wealth management to track their net worth, the ability to manage self-directed portfolios, and to get holistic advice from experts.
84% of Americans would rather work with a human financial advisor to invest their money compared with 16% who would prefer to use a robo-advisor, according to a survey conducted by NerdWallet in 2020.
Access to alternative investments (private markets, venture capital, hedge funds, etc.) that were previously only reserved for the wealthy.
McKinsey’s study highlights that investors’ appetite for alternative investments is as high as ever, with the young leading the way: about 35 percent of 25-to-44-year-old investors indicate an increased demand for alternatives.
CNBC reported that the top reason for alternative allocations was to “reduce exposure to public markets” and 66% aimed for “volatility dampening” and “downside risk protection”
Hyper-personalized solutions (e.g., equity compensation advice, real estate advice, tax optimization, ESG portfolios, etc.) that are in-line with their profile and goals.
What’s next in wealth management?
The world is rapidly changing. Artificial intelligence is no longer something we only see in Sci-Fi movies and blockchain is no longer only applicable to crypto. These technologies are experiencing widespread adoption across all industries. OpenAI has made generating images from a text prompt (DALL-E) and generating realistic human text (GPT-3) a reality. Blockchain is also being used outside of crypto to take advantages of the benefits around transparency and efficiency.
We are seeing a ton of innovation in wealth management built on these technologies. The next generation of Wealth Tech startups is already working on solving for changing customer preferences. Venture capital funding into Wealth Tech increased in 2020 and picked up significantly thereafter till Q2 2022.
These startups are focusing on one or more of the following:
Wealth Advisor Software: Tools to help wealth advisors provide transparent and holistic advice.
Alternative investment platforms: Access to non-traditional assets like private equity, hedge funds, venture capital, real estate, art, crypto, etc.
Personalized services: Hyper-personalized services around equity compensation, tax optimization, retirement, etc.
Asset tokenization: Converting financial or physical assets into digital tokens via blockchain technology, providing the infrastructure for companies and investors to more efficiently issue, track, and trade assets.
Below is a rough map of the next generation of startups in the Wealth Tech space. I will update it over time as the industry evolves. Future posts in this Wealth Tech series will dig deeper into what’s being built and how these companies are changing our approach to future wealth management.
Thanks for reading!
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