Concerns are mounting that millennial investors face a widening savings gap. The challenges of a low-growth economy, potentially diminishing job opportunities, rising student debt and the end of highly rewarding final salary pension schemes mean individuals must bear more responsibility for their retirement income.
This is the new age of responsibility where the onus has shifted from government and companies to the individual. Young people might remain aspirational but the Intergenerational Foundation, which gauges generational disparities, believes young people face a bleaker future than their parents before them. It warns unless urgent action is taken, millennials will be locked further out of home ownership, bear the pension costs of a rapidly ageing population and face a diminished financial future.
On the bright side, pension funding will be improved by a planned increase in the level of auto enrolment, but there is some way to go in terms of plugging the savings gap. Even the 2019 auto-enrolment figure of 8% is merely poverty prevention according to pension consultant Redington, which has campaigned for a 15% national savings target to fund a living pension. And even this does not address shorter-term concerns such as saving for a house deposit or building up a flexible savings pot.
So where does the answer lie?
The good news for millennials is the UK has the savings and investment infrastructure to build a brighter financial future. ISAs (and the incoming lifetime ISA) and SIPPs provide flexible and tax-efficient saving vehicles. Engagement, however, remains a major problem. Unfortunately, a large section of the wealth management industry, by concentrating on larger investors, has alienated or failed to engage with millennials or people with more modest incomes.
We believe the answer may lie in the world of micro investing, where new platforms are transforming the saving and investment landscape for young investors.
In the world of the micro, investors incrementally buy company shares or low-cost passive funds (typically ETFs) to grow large pots over time. It taps into the age-old regular saving discipline of pound-cost-averaging and the extraordinary effect of compound interest.
The micro world is also the world of the robo-adviser, or robo-investor, where risk modelling or portfolio management online is provided with minimal human intervention. These new models appeal to millennials and those with lower incomes who want low-cost access to simplified advice via smart and easy-to-understand digital interfaces. They also link into the concept that ‘virtual change’ can be funnelled into saving accounts following online purchases.
Increasingly, we have been working with new generation platforms such as Wealthify, and Moo.la to transform the micro investment world. These online investment services aim to be savvier around social media and digital engagement to resemble some game-changing companies in different industries. For example, Strava, the fitness network, encourages positive behavioural patterns around exercising. These new saving interfaces are essentially the fitness trainers of the investment world, encouraging clients to exercise their saving muscles.
And while these companies offer jargon-free, simplified advice, under the bonnet they offer sophisticated solutions in terms of investment strategy and risk management. For example, Moo.la taps into the investment expertise of BlackRock, whose iShares business has been working for several years to widen the choice of asset classes available to investors through low-cost ETFs.
Removal of fractional share barrier
With all of this in mind, why hasn’t the world of micro investment caught fire? One of the main barriers to the growth of these platforms has been the thorny issue of fractional shares. However, we believe these small slices of securities are about to make big waves in the investment world.
A fractional share is simply a share of equity that is less than one full share. Previously, micro investors could not buy a stock like BP or an ETF fund if the unit price was over the cost of the regular contribution, leaving a diminished investment universe and inefficient portfolio rebalancing.
Fortunately, along with firms like BlackRock, we are assisting the new wave of platforms to add fractional share dealing services allowing micro investors to invest into securities with as little as one penny, rather than a whole share, across a range of asset classes.
Ultimately, we believe fractional share dealing services will help more platforms to build wider investable universes for micro investors and encourage saving. It will also help address the growing intergenerational wealth inequality by unlocking the power of investing a little often and early.
Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest.
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