The Individual Investor Explained

A Conversation with Edward Jones and Broadridge

The face of the individual investor is changing.

In part one of this two-part podcast, SIFMA president and CEO Kenneth E. Bentsen, Jr. sits down with Ken Cella of Edward Jones to discuss how financial advice is evolving alongside the changing investor and why it is more critical than ever to work with a financial advisor. In part two, Bentsen and Broadridge’s Dan Cwenar dive into the findings from an unprecedented new study on the retail investor and share some surprising insights.

Transcript

Edited for clarity

Ken Bentsen: Thank you for joining us today for this episode of The SIFMA Podcast. I’m Ken Bentsen, SIFMA president and CEO.

I’m joined today by Ken Cella, a notable leader in the private client wealth management industry who currently leads Edward Jones’ Client Strategy Group. We have the pleasure of working with Ken on many issues important to the wealth management community and the individual investor at large in his role as the chair of our Board-level Private Client Wealth Management Subcommittee.

We’ve been talking a lot recently about just who is invested in America’s capital markets. It turns out that it’s a wide universe of retail investors. U.S. capital markets are where people individually and collectively through pension funds and mutual funds invest their savings to seek of return. By putting their capital work in our markets. They invest in companies that drive innovation. They also invest in state and local infrastructure like roads, schools and hospitals, combined their savings fuel economic growth, job creation and their financial futures.

I’m excited to have Ken with me today to talk about who these investors are and how our industry serves them. So welcome, Ken. Let’s dive into today’s podcast the individual investor explained. So Ken, let’s start. Start with a few questions.

SIFMA Insights recently published a report, Who Owns Stocks in America, that showed a wide universe of Americans today or invest in stocks. Who are they? And do you find this diversity in the average client at Edward Jones?

Ken Cella: Thanks, Ken. It’s great to be with you and this is the right question to start with. Edward Jones clients own stocks within a framework of diversified portfolios. This is really how we do business. We align these portfolios to their personal goals, and each individual’s comfort with risk. This is supported by our investment philosophy that is based on quality, diversification and a long term perspective. You know, Ken, our clients own stock in a variety of ways: mutual funds, ETFs, individual securities. The democratization of stock ownership is really alive and well in our country today. Exposure to equities through funds enables investors to gain diversification across geographies, sectors, and certainly within companies and within a single investment. And that’s really key. Owning individual stocks allows investors to further tailor their portfolio to a particular situation and needs that they might have as an investor, including considerations like dividend income, as well as preferences about how they want to invest according to values, which is really important today. More broadly, stock or equity ownership, if you will, is an important part of a portfolio and investment strategy that can help investors achieve growth that they need to reach their long term goals. That’s really the key: growth to achieve their long-term goals.

Appropriate allocation to fixed income, though, is also very important. These fixed income investments can help reduce risk within a portfolio. While an allocation to equity, or stocks, if you will, is a bit higher risk and offers opportunities for potential longer-term growth and price appreciation. equities also offer the potential for rising dividend income, which is really key, as well as combating the impacts of inflation over time. We know that ownership of equities really does a nice job in those areas.

I really think that when you ask the question, who are they, it’s America today that’s invested in equities and the growth that they need for their financial futures to be responsible for their own financial well being.

Bentsen: That’s really insightful and that last point, incredibly important. Last year, SIFMA commissioned research from Cerulli Associates exploring the relationship between individual investors who in this survey were defined as households with $100,000 to a million dollars of investable assets and their financial advisors. You were very involved in that process. What did we learn about investors in this bracket?

Cella: Yes, absolutely. As a SIFMA board member, I haver go to tell you, one of the things that I have really enjoyed about being part of SIFMA and in that capacity is the unrelenting focus on the individual investor. And that’s exactly what this research was after – to really understand the impacts of our industry and the work that we do every day on individuals.

We’ve learned a lot through this research. We learned that investors control nearly 23% of investable assets in the U.S. and over $11 trillion. I should say investors in that 100,000 to $1 million in investable asset range that you cited. We also learned that 78% of these investors use a professional advisor which was really gratifying to hear.

Another statistic that really popped off the page is, by and large, the majority of the people that we surveyed are very satisfied with their advisor. Nearly 75% would recommend their advisor and just 1% report being dissatisfied. That was shocking.

The primary service they receive, according to the survey is retirement planning. Already retired individuals rely on personal investments for nearly two thirds of their retirement income. So again, Ken, I think this just reinforces the work that SIFMA does to make this kind of growth and future possible for Americans.

Bentsen: So Ken, what are these investors seeking? Why do they come to you, to Edward Jones, and to your competitors in the private client space to invest their savings?

Cella: Exactly. Because in the information age, they can go anywhere, there’s information, that’s available on the internet and do it yourself investors, we hear about it all the time, right? Ken, what we are finding is that we when client’s needs are ever-changing like they are and becoming more complex, that’s when they want advice, that’s when they really need to seek someone that has an opinion that can help them. Oftentimes, what we find is that they come to Edward Jones because of the expertise that we’re able to lend. What they expect and need from us is raising the bar for what good and financial advice looks like.

There is a service component to this and in the information age that we live in, where companies like Amazon create this environment where the last great experience is the new minimum expectation for all of us, when we deal with any kind of company. Sometimes this looks like financial advice that is, I’ll just say, advice about well being because as we get into these more complex situations and really start to understand what a client’s goals are, we understand that they’re looking for a financial advisor who can contribute key knowledge and empathy to deliver on what that client needs in a very personalized way. Because every client situation is different.

Clients and financial advisors who understand the way that they’re thinking about the “now” of their goals and needs, and the longer-term picture, as well, that’s really what we’re doing. We’re finding that there’s both of those elements is to balance current needs and longer-term needs and the complexity of all this is the value that a financial advisor brings.

Bentsen: You recently published a study with a nine-month investigation into what it means to live well in retirement. What is the new definition of retirement? And can you talk about the four pillars? the study outlines?

Cella: You bet, Ken. This was great research. What we found was that retirement is really being redefined. So what may have been a view of retirement that was brought forward many decades ago, where someone would go off into later life and be more reserved and relaxed sitting on the front porch in a rocking chair has changed. People today realize retirement can mean very different things. Rather than being a time to wind down, retirement is increasingly been a time of new choices, often new freedoms. We really are hearing that people want to discover their purpose in retirement. And we know that there are challenges as people enter this phase.

So what we found through this study is that there are four central pillars for living well, in this new retirement. They are health, family, purpose, and findings. And if you think about the order of those, it makes sense, right? We all have concern for health, our family always comes first. Most of us want to understand how our purpose can make an impact in the world. And oftentimes the question is, how do we use our finances to do that? Each of these is important and must be tended to in its own way. But there’s an awful lot of overlap between these four pillars. Maintaining your health in return, for example, requires that you also tend to your finances, and having purpose and a meaningful, I’ll say endeavor in one’s life – benefiting one’s community, the society at large in the way that they do that – those are all goals that we’re discovering that people have.

Ken, I’ll just say this. These are the increasingly complex conditions today that financial advisors are helping their clients navigate through and plan for as they do the important work with each client to understand their personal goals.

Bentsen: I just think that’s fascinating. Looking the other direction on this, retirement can seem far away off for our younger generations. I think about it as a parent of soon to be 30 year old and another 20 something year old. They’re at the front end of their careers and which will probably have multiple changes over time. How is your firm developing its next generation of financial advisors and leaders to serve these investors?

Cella: Ken, we’re doing a lot of research in this space, too and we’re learning that younger investors are very digitally engaged – not a big epiphany there. We’re investing in technology and digital acceleration to meet the needs and expectations of the younger generation in that regard.

At Edward Jones, we did a survey on the digital client experience showing that 95% of the investors polled feel it’s important that their financial advisor use the latest technology – and I’ll just underscore “latest” – in tools when advising them. But despite the digital shift brought on by COVID-19, which we’ve all experienced, more than four of five respondents or 83% noted that they would prefer to work with a human financial advisor, compared to just 17% who say they would prefer consulting with a robo advisor. So we know that there’s still a place a very important place for so many investors, and even the younger investor population, to seek professional advice.

Emerging issues like sustainable investing are also a key priority for these investors. We can help younger investors understand the options available and the risks associated with them so they can do sustainable investing that’s based on good fundamentals and that’s really important.

Bentsen: Taking the technology theme, digging down a little deeper on that – we have talked about this at the board level, on the private clients subcommittee level, at industry conferences – around how financial advice is evolving in a more connected and virtual world. So you were just hitting some of those points. How do you see this next generation of advisors changing this landscape?

Cella: Certainly, we’re seeing an increased interest in the use of digital technology and investing. So that’s one emerging trend. It’s important to note that according to the Million Dollar Roundtable study, nearly 90% of Americans want tech to accompany not replace a human financial advisor. At Edward Jones, we’re making a $500 million investment to develop technology and digital innovations that will serve as a guide to our clients, and enable, importantly, our financial advisors to deliver an incredible experience because we know, that’s what every one of our clients wants. When we do this, our financial advisors deliver in a way that is consistent with what clients are anticipating, before they even know they have a need, or able to discover that need and beat them to the punch in terms of that level of experience and satisfaction. These offerings that we’re working on will lead to greater flexibility, simplicity, and optionality while helping financial advisors, grow, serve and lead their practices.

Bentsen: Stepping back and taking a look at a more holistic – what philosophies do you think are important to share or have retail investors consider as they map out their financial future?

Cella: We consistently focus on three key elements when it comes to investing. First is the amount of money invested. This one’s pretty straightforward. The more you invest, the better your chances of reaching your financial goals. So we find that that’s often a place that we have to have a critical conversation, helping our clients to understand what’s necessary and to maybe stretch to make that additional investment rather than buying something additional. And that’s a tough choice sometimes.

The second idea, you know, and really what we think that, you know, is a key element number two is timing the market. We stress the importance of staying invested through ups, downs, sideways markets, all kinds of markets. When investors take the time out from the markets, they lose opportunities. So staying invested is key.

The third element is returns. We don’t promise high returns at Edward Jones. That’s not what we’re about. But what we do talk about are the types of returns a client might need to achieve in order to accomplish a specific goal such as retiring early, for example. Closely related to this conversation is conveying the importance of diversification in reducing risk while providing appropriate growth opportunities at the same time.

So it really comes down to those three elements, Ken: amount of money invested time in the market and then the returns that are suitable to reach goals.

Bentsen: So clearly, the message needs to be loud and clear that individuals of all income levels should be able to get started in investing, invest for the long term and consider working with financial advisor. How can we encourage that?

Cella: It helps to understand the reasons why we are so strongly recommending that everyone, regardless of their current financial position or investment picture, work with a financial advisor.

Let me let me just share some statistics around this that I think might be really helpful. Three of four U.S. consumers who work with a financial advisor said that they were more confident in their financial future as a result of this relationship. Consider this fact: professional financial advice can add between 1.5 to 4% to portfolio returns over the long term. That’s compelling. And the third statistic that I’ll share, Ken, is that individuals who receive advice, have a minimum of 25% more assets than non-advised individuals. So if this isn’t a case for advice, I don’t know what is.

Bentsen: Those are really compelling statistics. To close, what is your biggest piece of advice for someone considering whether to invest their money?

Cella: You bet, Ken, it’s pretty simple. Don’t wait, start today. Start as small as you need to, to start, but it’s important to get the habit of setting aside money as soon as you possibly can. And then a good financial advisor can help you take those initial steps, and really help you understand all of your options so that when you do start to invest, it’s based on your personalized goals.

Bentsen: Great. Well, Ken, it’s always good to talk to you on these issues and I thank you for participating in today’s podcast.

Ken Bentsen: And now we continue our conversation on the individual investor with insights into an exciting new study on the U.S. investor. I’d like to welcome our next guest, Dan Cwenar, who is the president and general manager of the data and analytics business for Broadridge and whose team produce the study. Dan, welcome to The SIFMA Podcast.

Dan Cwenar: Hello, Ken. It’s quite an honor to be part of The SIFMA Podcast series and I really appreciate you for taking the time. Thanks for having me.

Bentsen: So this study is literally hot off the presses and very exciting information. Maybe to start, and we can go back and forth, maybe just lay out the scope of the survey. What were you all at Broadridge trying to accomplish? The data is just incredible that’s in there.

Cwenar: Yes, thank you. We are very, very excited about the study. The Broadridge study is quite novel and I would call it an evidence-based study and compare and contrast it with your traditional survey. And so what we didn’t do was go to the mall on a Saturday afternoon with some clipboards and ask people questions and hope they remember things. What we did do is analyze billions and billions of data points. The data behind the study represents about 44 million U.S. households, which equates to almost a third of all U.S. households. And so in those households, we see about 67 million investors. And so these are investors that specifically invest in mutual funds, ETFs and equities, and collectively they have about $7 trillion in assets. And so these are investors specifically who invest through financial intermediaries held in taxable accounts and IRAs.

Yes, I think that’s important. A lot of studies you see, importantly, focus on sort of the broad investment portfolio, including defined contribution accounts, like 401ks, 403bs and the like, which are important. But sometimes that gets lost in discussions over the discretionary investment or taxable investment accounts that are out there. You also looked at in the study, you looked at different groups of investors. So you looked at it mass market, mass affluent and high net worth. And then you looked at different generational trends. So maybe go into some of that.

Yes, so we had an opportunity to segment the data in a lot of different ways. And we’re pretty excited with some of the results that came out. And in particular, so when you step back there are a couple of things to think about when you look at the results. There are always two things going on and they’re related, but not directly related. And there is what the market does. And so behind the data, the market goes up and the market goes down. And then there’s what an investor and an advisor does either in anticipation of or in response to the market. So there are always two effects that are going on. And so you may see assets rise up. Is that because more money came into the market, or is that because the market was up? So these are things that we put into the background and sort of tried to put everything we did in the context of the overall market.

A couple of things that we looked at were how assets changed over time and the time period that we looked at included data from 2017, ’18, ’19 and then through mid ’20. We’ll be augmenting our data set with a new study coming out about mid-year with the remainder of the 2020 data set. And so we were interested to see how household assets changed and we were also interested to see how the COVID crisis impacted investing. And so when you look at the time period from ’17, through ’20, we looked at median household assets growing from about $56,000 to $59,000. And not all generational segments adapted the same to the COVID crisis. And so if you look at the Boomer and Silent generations in particular, they weren’t at or above their pre-COVID levels, while Gen X, and Millennials still weren’t back to their pre-COVID levels by mid-2020. So these are some things that we really want to watch on a go-forward basis.

Bentsen: Anything you might attribute that to?

Cwenar: You know, it could be, and again, we really hope to drill into this and I think there are a couple of things that come to mind that we’ll be looking at. One, younger people tend to have more aggressively allocated portfolios and so they may have had a portfolio that perhaps moved more in response to the drop in the market early last year. And also, there could be the effect of people needing assets to actually live on if their jobs were eliminated. And so there are a lot of background effects that are going on in addition to simply investing.

Bentsen: What insights can we gain from the different generational segments beyond that?

Cwenar: We were always looking for the “aha” moments and a couple that came out in particular were the increasing importance of Millennials. Millennials have increased over the time period that we studied not only in terms of number of investors, but the actual share of assets that they are investing. In particular, we saw the share of assets double, while small, move from about 2% of total assets we studied to about 4%. It’s a trend line that you have to pay attention to. We were also interested in a very sharp increase in the use of equities amongst Millennials. For example, if you look just at the period from 2019 to mid-2020, we saw equity equities become a significant portion of Millennial portfolios. They rose from about 23% to about 31%. We also saw equity increase in the Gen X segment as well. And so equities are certainly becoming more and more popular.

Bentsen: I thought that was very interesting. The other thing that you point out in there is looking at the trend lines across different asset holding classes or, the differences, particularly looking at what’s happening with the mass market and the growth trends there in the mass affluent markets.

Cwenar: Yes, the mass market is something that that, I think is an opportunity for advisors and broker platforms. And I think that was also another “aha” moment for us was this growing influence of the mass market, we could call it the democratization of investing. We saw the mass market grow in terms of both number of investors and assets defined by the mass market.

So what is the mass market? The mass market was the lowest level of assets that we looked at. Think of the mass market as an investor with less than $100,000 in their portfolio to manage through an intermediary. Whereas the mass affluent were from the $100,000 to roughly a million and in high net worth was a million and over. When we look at the increasing number of participants that fall into this category, we were particularly interested to note that these are new people coming into the market, new accounts being created in particular, but the bulk of that growth is new people coming into the market as investors, which is very encouraging. When you drill into the mass market, we were interested to understand who is the mass market.

We looked at the geography of the mass market, and we found that most of the single largest geographic region of the mass market is the South. If you combine the South with the Midwest, more than 50% of the mass market is located in those two geographies. It’s also interesting to note that it tends to be younger people – more than 50% – when you combine Millennial with Gen X, more than 50% of the mass market fall into those two age cohorts.

Bentsen: It was interesting – with this study being released, the initial 2020 census data has been coming out this week. Certainly, the South has had tremendous growth as compared to other jurisdictions or regions, I should say. Whether or not there’s a correlation there, that is something interesting to think about.

The other thing that I thought was interesting is looking at the investment channels that you found, both in terms of mass market and mass affluent. Also generationally the use of broker-dealers to find his advisor is not part of a wirehouse. But in particular, compared to online, certainly a decent share, but maybe sort of breaking the stereotype out there that Millennials are online-only – the data doesn’t show that at all.

Cwenar: Yes, and I think another “aha” moment for us was that you can very easily be led to believe from headlines in the market that young people do everything online. They certainly can be very savvy users of technology but it was interesting to note that the broker-dealer channel was a very significant place. So, it is true that young people work with advisors. They also tend to have accounts on their self-directed platforms. You have to keep in mind that many of these individuals have multiple, multiple ways of managing their money. It’s important to keep in mind that there is still a very important role for the advisor for managing young people’s money, and they’re going to have more money over time.

Bentsen: You mentioned the equity trends, which I thought was very interesting. You also indicated a shift in share class from A classes to institutional shares and then again – probably something maybe not as “aha” – but the growth of ETFs. How would you overall the trend lines you saw there?

Cwenar: There’s an interesting couple of stories that I think come out of that and that is, there is a tremendous focus on cost. And you see that with the use of institutional share classes, and you see that with the trend towards greater usage of ETF products. There are a couple of things to think about there. I think that the fiduciary standard is alive and well. If you went back, perhaps even a dozen years ago, you would see that it was probably mostly high net worth households, that were taking advantage of a lower cost of investing through institutional share classes and we saw growth of institutional share classes at every wealth level, which is wonderful to see that individuals are being able to avail themselves of less expensive share classes. At the same time, there has been a clear drive to greater use of exchange-traded products as ETFs have some tax efficiency, ETFs have some cost advantages, ETFs have a speed advantage, you can buy and sell them like equities. And so these are trend lines that we’ve been tracking for some time, and I think you’re going to see a continued use of those kinds of products.

Bentsen: You touched on this a little bit, going back to Millennials representing a high growth segment, your data shows, obviously the reality of the arc of time. Millennials are coming up at a fairly decent clip as the Silent generation moves along. What do you interpret from the data? Is it an intergenerational transfer of wealth?

Cwenar: Yes, I think we’re starting to see as you look at some of the demographics and shifts, I think you’re starting to see some generational wealth transfer in the data. We’ll be taking a hard look at this when we update our study here very shortly and we’ll be tracking this over time. We’re seeing that just in terms of number investors by segments, we’re seeing assets by segment, we saw both high net worth as well as the Silent generation seeming to trend more towards the assets driving to the younger population. That’s going to be something interesting to track. We’ve been talking about this for decades, I think we’re starting to see it happen and so it’s a pretty important thing for people to be aware of.

Bentsen: What else should we be looking for from the team at Broadridge related to this study and the retail investment market?

Cwenar: So I think you mentioned it already the new census data is out. And so we’ll be applying some of that as background analysis and factoring that in we’re pretty excited to be looking at the second half of ’20. There are going to be a couple of things that you’re going to be seeing here by mid-year. Not only will we have a full set of 2020, which will give us a pretty relevant year over year comparison to continue our trends, from ’17, ’18, ’19, ’20, but we’re going to be comparing the timespan of first half of ’20 to the second half of ’20. When you think about some of the major headlines, COVID hits in the first half, we had an election in the second half and so it’s going to be really interesting to see what happened in a more detailed and granular level. And so that’s pretty exciting. We’re going to continue to look at instrument use, we’ve seen a pretty long time, term trend and focus on cost. And I think you’re going to see the very continued trend line of the ETF growth, I think you’re going to see some more equity growth. And so these are all things that we’ll be exploring in more detail. And you mentioned, again, the generational wealth transfer as well.

Bentsen: That’s great. And the full survey we’ve talked about today, that’s available now on the on the Broadridge site?

Cwenar: That’s correct, you can find that a couple of different ways. You can look for our press release that just came out in announcing the survey, there’s a link to download the survey, you can also go to www.broadridge.com/us-investor-insights, and you will directly get the study. So there are a few ways to get to it. But please take a look and give us some feedback.

Bentsen: Great. Dan, thank you very much for spending some time with us. We look forward to the next body of work that comes out and maybe we’ll be able to get back together and have a discussion about that.

Cwenar: We’d love to. I think there are some interesting, exciting things to come out. Thanks for taking the time today.

Bentsen: Great, thank you. To learn more about SIFMA and all that we’re doing to explore the individual investor, visit sifma.org.

Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, the voice of the nation’s securities industry. He is also chief executive officer of the Global Financial Markets Association (GFMA).

Ken Cella leads the Edward Jones Client Strategies Group, which includes the firm’s Marketing, Products, Research and Trading, and Solutions areas. He serves on the Edward Jones Executive Committee and the SIFMA Board of Directors.

Dan Cwenar is a founding partner of Broadridge’s Access Data, a leading provider of enterprise data management and reporting solutions to the financial services industry.