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Zero-commission trading and seamless app interfaces with advanced functionality are great for retail investors’ next trade – but a new study reveals that a deeper, more visceral connection is the key to building long-term relationships, especially with some demographic groups that have been historically hesitant about investing.
Commonwealth, a national nonprofit focused on wealth building and financial security for people with low-to-moderate incomes, just released the results from a year-long research and pilot program following the journeys of more than 850 beginner investors to gain insights into how cultivating an ‘investor identity’ can empower new investors earning low- to moderate-income (LMI). The idea is to help people overcome initial feelings of doubt, discomfort, or not belonging, and start investing to tap into long-term wealth-building opportunities.
Informed by the results of the research, Commonwealth developed a toolkit with recommendations to help investing platforms unlock investor identity in first time investors. For financial platforms, unlocking investor identity can attract a new subset of potential customers with disposable income and a desire to invest, while these households build a more sustainable financial future. The Commonwealth pilot program, supported by a grant from the Nasdaq Foundation, partnered with investing platform partners Ellevest, Public, and Stash to conduct the observational research.
Traders Magazine caught up with Paula Grieco, Senior Vice President at Commonwealth, and Jailan Griffiths, Nasdaq’s Global Head of Purpose and President of the Nasdaq Foundation, to learn more.
How new is the concept of investor identity?
Paula Grieco: This investor identity research and pilot program are truly transformative; it moves beyond hypothetical by enabling actual participation in capital markets for people earning low- to moderate-income.
Commonwealth’s earlier national research survey showed a significant intention/action gap among investors earning low- to moderate-income; specifically, two-thirds of working women earning LMI reported wanting to invest in capital markets, but fewer than 40% actually were doing so. To close this gap, we sought to understand and address key barriers that held people back from taking action to invest.
What we found is that access, while important, wasn’t sufficient to close participation gaps by income, race, and gender. Investor identity—perceiving oneself as the kind of person who can or should invest and the feeling that one belongs in the investing community—emerged as critical to taking action.
Jailan Griffiths: Our initial research with Commonwealth identified four key barriers to market participation for women and people of color: resources, market access, actionable knowledge, and investor identity. While numerous studies have examined the other barriers, the concept of investor identity is often overlooked. We wanted to take a closer look at this under-researched barrier to capital markets participation and really understand how investor identity develops in new investors, particularly from demographic groups that have been historically had lower levels of market participation.
What we believe is truly exciting and innovative, is that this research will help investing platforms think of the concept of investor identity not as something static and binary – you either are an investor or you are not – but as something that can be built over time with the right support and education.
Is industry awareness of the need for more investor programs like this increasing?
Jailan: Investing platforms are starting to gain awareness that there is a large population of potential investors out there who have the means and desire to begin investing, but just don’t know where to start, whether that’s due to lack of awareness around potential resources or feeling a lack of belonging to the investing community.
The fact that we had three investing platforms sign up as partners for this year-long survey is a testament to investing platforms’ willingness to identify ways they can better attract and retain first-time investors.
Paula: As we share our research with industry stakeholders, we are finding significant interest in not only understanding, but also addressing the needs of beginner investors. Investing platforms have an unprecedented opportunity to foster investor identity by explicitly representing participants in messaging and images, focusing on embedding learning tools and opportunities into the investing experience, providing opportunities for social connection, and adding features like emergency savings pockets. Our pilot program demonstrated that even small increases in investor identity are tied to positive actions and experiences, such as higher ratings of participants’ experience, adding more funds to their investing account, and recommending investing to friends.
What was the most significant finding from the research? And what are the most important ingredients needed for platforms to help attract and retain new investors earning LMI?
Paula: The most significant, overarching finding is that investor identity—a feeling of belonging in the investing space—can be cultivated and developed over time. And even an incremental increase in investor identity results in positive investing actions.
Building on that, we identified the five key elements that go into that sense of identity in the first year of investing: Belonging, Connection, Learning, Agency, and Confidence. These five elements work together as interlocking pieces.
Other top-line research findings were:
- The six-month mark is a critical turning point in investor identity and fostering a sense of confidence;
- Growth in investor identity is associated with greater investor satisfaction, a higher likelihood of recommending investing to a friend, and increased deposits;
- Connecting with others improves the investing experience;
- Representation is key to retaining new investors and creating a sense of belonging; and
- Emergency savings matters more than income for retaining new investors.
Jailan: While there are many factors that play a role in cultivating investor identity – whether that’s time spent actually investing or the ability to connect with others in a way that makes new investors feel like they’re a part of a community – there is one particular area where I think technology can play a critical role.
Active learning was the most-cited reason participants gave for feeling like they belong in the investing community, and the second most common reason for not feeling a sense of belonging was a lack of understanding.
Technology can play a massive role in furthering active learning, especially when you factor in the potential of generative AI. Many investing platforms have educational tools, but there’s a real opportunity for them to embrace generative AI tools and leverage capabilities like chatbots to provide new investors with a non-judgmental sounding board. This would help deepen users’ practical understanding of investing by providing resources geared towards newer and smaller-balance investors, as well as enhance their comfort level for investing.
In addition, we know that those first six months are critical for engaging and retaining new investors, With the power of AI, investing platforms can better customize the onboarding experience, helping new investors to better understand their risk tolerance and financial goals while serving up tools and resources better matched to users’ values and priorities.
Nasdaq and Commonwealth are working to aid financially vulnerable/under-resourced communities through education, innovation, and partnerships. What is the impact of these efforts thus far? What kind of change do you hope to see in five years?
Jailan: Nasdaq’s Purpose is to advance economic progress for all and we know that investing is one of the primary wealth-building pathways available to those in the U.S. By partnering with Commonwealth, we have been able to take a much deeper dive into the barriers preventing under-resourced communities from investing in capital markets and building a more secure financial future for themselves.
We hope that the Nasdaq Foundation can help other organizations to equip those communities, especially those that have been historically excluded, with the tools and financial knowledge needed to share in the wealth that the capital markets can create and empower them to have more control over their financial future.
Paula: The Nasdaq Foundation and Commonwealth came together with a shared interest in exploring wealth-building opportunities through capital market investing for those who have been traditionally excluded. This shared goal to unlock greater market participation by changing the investing experience to be more welcoming, inclusive, and attuned to beginner investors’ needs and concerns, led us to this work focusing on investor identity as a key barrier to the participation particularly for women and people of color in capital markets.
Commonwealth’s fundamental purpose over the last two decades has remained to create a stronger and more prosperous society where everyone has financial opportunity.
As inclusive investing continues to gain momentum, Commonwealth’s vision is to have more than one million new LMI investors by 2030, and to serve these investors responsibly.
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