After the Retail Distribution Review the two main reasons why people took to DIY investing were cost and control.
The introduction of pension freedoms was another catalyst for the exponential growth we’ve seen in DIY investing.
When introduced in 2015, one in three pensioners went into drawdown without the help of a professional adviser, compared with one in 20 before the overhaul, according to the Financial Conduct Authority.
After a slight blip following 'Woodford-gate', which particularly affected Hargreaves Lansdown, we’ve seen an even bigger increase in DIY investing since the pandemic.
Consumers with more time on their hands and experiencing the boredom of lockdown have opted for the DIY retail investment route because of its ease and user-friendly investing experience.
The internet and YouTube are awash with blogs and videos providing 'how to' guides on DIY retail investing. Social media sites such as Reddit are a hotbed for DIY investors. It has provided a community for like-minded traders to move stock market prices.
A recent case in point was the meme stocks stampede, involving the US video games retailer GameStop earlier this year.
In the US, trading app Robinhood is the gateway to the stock market for many young investors. It now has 18m customers and around $100bn (£74bn) of AUM. We have seen similar success stories of brokerages making inroads in other financial markets, in the UK and elsewhere.
Further to Hargreaves Lansdown, Interactive Investor and AJ Bell Youinvest, we’ve seen the addition of the likes of Wombat, offering investors more functionality such as fractional share dealing and access to US stocks as well as to those listed on the London Stock Exchange, and also Trading 212, which has seen an exponential growth in a year of trading.
The company claims it has added 1m customers to its platform and stock trades have risen from 15,000 a day to 1.5m. It now has AUM of £2.5bn.
What is interesting is that the profile of these investors is younger, and they are trading because they recognise that the potential returns are better than saving rates offered by banks.
What these younger investors expect and want in terms of functionality, user experience and interface design, and content is somewhat different from that expected and wanted by the savvier, self-directed investors using platforms such as Hargreaves Lansdown, Interactive Investor and AJ Bell Youinvest.
For instance, they expect the content to be relevant, relatable, personalised, impartial and peer-verified. They also expect the tech to be slicker and the costs lower. To some extent, the demand has been buoyed by a period of rising markets, which could turn sour.
Irrespective of this, the DIY platforms and apps are an appealing acquisition for large global brands, because the latter all have similar challenges:
- How to diversify their revenue stream and move away from a heavy reliance on distributing their products through either the intermediated market and/or institutional market, by accelerating penetration of the D2C market;
- Where they have a D2C book, how to attract younger customers to help reduce the average age of their ageing book of business, which is on the decline, because their existing customers are either retiring or dying; and
- How to ensure their brand continues to be relevant among retail investors of all ages for generations to come.
For some, the easiest way to overcome these challenges is to acquire an established D2C brand. Aviva’s acquisition of Wealthify was one of the earlier ones, and more recently, we’ve seen the acquisition of Nutmeg by JPMorgan Chase as well as Lloyds Bank’s decision to buy Embark.
Lloyds said this was driven by a desire to cater to the broader financial needs of its customers and to retain "more of the circa £10bn assets under administration which customers invest with third parties each year".
Antonio Lorenzo, Lloyds’ wealth and insurance chief executive, said he wants to use the Embark acquisition as a springboard to rival Hargreaves Lansdown. Furthermore, we have recently seen reports of Abrdn’s interest in Interactive Investor.
As the trend in D2C investing continues to grow and the existing platforms continue to grow their customer base, we will no doubt see an increased interest from other established brands in this space.
Some will be acquired for their AUM and number of clients and others for their tech and proposition.
Whatever the reason, it would be interesting to see how sustainable these valuations will be in the future and whether those acquiring will be able to extract the value they hoped to achieve.
Janine Menasakanian is investments consulting director at Altus
