New investors have shunned traditional sources of financial advice, turning to online forums, research from Charles Schwab UK has found.
The number of first-time investors joining the market has risen, year-on-year, according to the broker, up 7% versus May 2020 (when the survey was last conducted), with new entrants now making up 23% of all UK investors.
Of this 23% only a third sought advice from a financial advisor, instead turning to the internet for guidance, with more than half citing the influence of online blogs and forums (52%), trading apps (52%), and Google (51%).
Social media was also a big influence on this new cohort, with almost half (49%) those surveyed describing social media content “as an important source of influence”.
Charles Schwab’s report found that: “So-called 'influencers' also have a significant impact on new investors” with 45% of new investors claiming “influencers that specialise in finance [were] an important source of information, and over two-fifths (41%) are influenced by celebrities discussing their investments.”
In comparison more than half (52%) of investors that had been putting money away for longer than a year had sought out professional advice, with only 35% of the whole group using social media as a guide.
Charles Schwab said there was a clear “digital divide” between new and experienced investors, with the former “more likely to be influenced by informal sources of information; friends and family, online forums, and trading apps are each equally as influential as professional fund managers.”
Charles Schwab called this group ‘Gen I’: people who had begun investing since the pandemic started and were operating in this new online-dominant way.
The study found that one of the reasons behind this difference was the demographics of the two groups.
Almost 70% of Gen I were aged 41 or below, with 35% part of Generation Z (born between 1997 and 2012) and 34% falling in the Millennial category (those born between 1981 and 1996). It also found that 94% of new investors were men, with women representing just 6%.
The different sources of where investors got their financial information fed into the second disparity, the types of assets each group holds.
Gen I was much more likely to invest in digital assets than experienced investors, Charles Schwab said. Indeed, cryptocurrencies were the most popular asset class for new investors, the study found, with 57% of respondents holding crypto assets, compared to just 34% of experienced investors.
New investors were also less likely to hold traditional asset classes, such as government or corporate bonds or equities and exchange-traded funds (ETFs), the report found.
The popularity of cryptocurrencies has grown rapidly the past few years, partly driven by a large online following. Many experienced fund managers have warned against holding the asset, including Vanguard, which deliberately kept its popular LifeStratedgy range out of this trend.
Richard Flynn, UK Managing Director at Charles Schwab, said that it was “concerning” that so many first-time investors were “being influenced by informal and unregulated sources of information”.
“Investing always involves risk, which only increases if you take tips from sources on social media sites, such as TikTok.”
He said that financial regulators should consider “intervening if they believe that unregulated advice is causing poor investment outcomes” to help protect all investors from “unsubstantiated advice and unnecessary risk”.
The Financial Conduct Authority (FCA) has previously put out warnings about seeking financial advice on TikTok specifically, advising investors to be wary of individuals promising high returns.
Indeed, as part of its initiative to tackle misinformation, the FCA launched its own TikTok account in 2021, targeting the core audience they felt were more exposed to these risks and spread its own financial advice to this online generation.
While some efforts are being made, regulators are facing a challenge due to the sheer volume of financial information available today, Flynn said, making it “much easier for young investors to trade, and crypto assets seem to be their go-to asset class”.
He added: “Given their unregulated and speculated nature, there is a worry that these investors may be more exposed to market volatility if they only invest in one or two types of assets, especially high-risk assets such as crypto.”
The director said if new investors want to protect against losses, then a “diversified portfolio, balanced across asset classes and sectors is a more sensible, time-tested approach.
“We would encourage any new investors to learn as much as possible about different assets before making any investment.”