Throughout college and in the years since, I've devoted considerable time to exploring and discussing financial technology and the stock market with friends. It’s something I seriously nerd out on. I'm always interested in learning how others invest their money and enjoy exploring and experimenting with new financial products as they come across my desk.

With this in mind, I've made a point of continuing to discuss money management with my friends. About a week ago, I texted 25 of my friends “how do you invest?”. I purposely left this open ended to see how they responded. This article summarizes my takeaways from those responses.

TOC:

Survey Highlights

What drives this segment of population

What they are doing now

What they are going to do

Where to build & invest

Survey Highlights

First off, let’s look at some numbers.

• 25 respondents

• Average age is around 25

• Average income is around $100k

• All are college-educated

• 8 live in NYC, 10 live in Charlotte, rest are scattered amount the east coast

• 23 are FT employed, 65% still with the first job they got out of college

Now, take whatever grains of salt from this that you would like, you always should when reading articles like this. The people I am friends with could easily represent a small population that may not move a needle in the overall market.

However, I believe I asked the right people, got a wide range of economic conditions, and feel the results represent a pretty good sample of the market.

What Drives Them

I first want to look at what drove them to get set up in investing in the first place. 70% because of company, 20% on own intuition, 10% because of parents.

For most, the first job out of college really set them up in the investing world. This wasn’t to say they weren’t doing some type of investing before hand, but it wasn’t to a meaningful degree.The 401k was their first step into the broader markets (60% of people mentioned a 401k got them set up). The funny thing is, as people keep making money and spending, most are realizing they have extra and don’t know what to do with it. Some contribute to a Roth (70% of 401k holders do this), others choose to try to find another route to invest, and some just keep a pile of cash in a low-yield savings account. The last option makes me sick, especially in this high yield environment.

Now, outside of company 401k influence, many also feel pressure from parents and friends to invest. Parents of this generation play an important factor in influence because they were one of the first generations to experience online brokerages. They used the Vanguards, Fidelitys, and Charles Schwabs of the world since the 1990s. This is also what companies end up using to manage 401k’s, so as you can guess, 65% of respondents used one of these brokerages.

Talking about finances is fairly open topic among our generation, so there is always opportunity for people to be influenced by their friends our peers when it comes to investment strategies, stocks, or platforms. Any product that does extremely well in this market, will gain a lot of users from WOM.

What they are doing now

Alright, let’s talk about what everyone is doing nowadays. 90% of people mentioned a 401k at the start of describing how they invest. 60% of people who mentioned a 401k also mentioned they contribute the max amount that would be matched by their company. 70% of people who mentioned they had a 401k also mentioned they had a Roth IRA and 50% were actively investing before their first job. This means they had invested in either individual stocks or crypto before they started their first job. All this to say, almost everyone is using and leveraging the traditional retirement products that they are offered, with only a handful taking control and making their own investment decisions.

What are they investing in? Well, that is pretty consistent too. 90% of people explicitly responded that they invest in ETFs and mutual funds, and 50% of people say they have invested in individual stocks as well. About 20% of these individual stock investors would classify as active investors in the market. A few (10%) have an FA, but they are mostly passed down from their parents, no one has their own personal FA. A shocking amount, around 25%, say they don’t even look at their investments. They contribute, but don’t care to check on them. These people mostly hold mutual funds in their 401ks.

In the more interesting side of things, around 20% of people have crypto investments, and around 30% express the desire to know more about the current investment & money management market. In other words, they want to do more, but don’t know where to start. The latter statistic stood out the most to me. Now more than ever, people are aware of the financial markets and the wealth creation stories that come along with it. So to that, they consistently want to make sure they are learning and optimizing what they are doing.

What they are going to do

Most people, roughly 65%, are likely to continue investing through their traditional methods. The rest expressed interested in wanting or looking to do more. What that exactly means? It’s complicated. People can grow in their investment habits in a few ways. By far and away, friends, peer pressure, and social media will be the leading ways in terms of influence for someone to dive deeper into their personal investment management. Parents and family could also play a factor.

Opening a new account, or joining a new app, will be rare event for many. Unless one of the above factors influences them, there is little chance that anyone puts real money into new strategies. People prefer to see a human face behind their money management. This is why the financial advisor/wealth management industry will likely remain a staple and be difficult to fully replace with technology.

On the FA topic, one of the more interesting quotes from this experiment came from my friend. When ranting about why he doesn’t like investment apps (Wealthfront, Betterment, etc), he said “I don’t like them because I can’t blame anyone when I lose money. I can’t attach a face to the loses”. Maybe this says more about their personal psychology than the broader peer group I talked to, but I think it was an important indication that money management will always remain a mostly person-to-person business.

To wrap this section up, I think this is where most people venture when they grow older, and I think it is where many of my friends will go as they get closer to 30. In the years until then, I am confident that most will still mature in their investment habits. Crypto will continue to evolve and start to become more and more accepted. Social media will continue to drive more adoption to different strategies and apps. Overall, people will get smarter and will continually do more, the question just becomes at what speed and frequency that occurs.

Where to Build & Invest

Now for the fun part, where should VCs be investing and what should founders be building? That’s a mixed answer. Consumer is a really hard segment to build for, fintech consumer is even harder. The one thing I have learned is whatever product, app, or strategy you want to build, build it with trust at the core. Building trust with users is the most important thing for a fintech product. Money is the one of the most important things to people, you have to convince them that you should be the one to hold it and grow it.

This is one of the reasons Vanguard, Fidelity, and Charles Schwab continue to be the top brokerages in the world. They have decades and decades of service under their belt, people know they can trust them. Users are much less likely to trust the new kid on the block, no matter what the guarantees are.

With all that said, the wealth management industry in the one place where consumers have gone to trust someone with their money. The industry has the opportunity to become a lot more efficient on both the backend and the frontend. From the way these wealth managers work, to the way consumers interact with them. It has largely remained the same. Now, we are starting to see new technology and AI come on the scene and start to improve some of these processes. The problem with the industry right now is that they are too expensive for most 25 year olds. Is it possible to lower the cost and introduce wealth management to a younger demographic?

Another option would be to look toward the niche and small products. What are some really small bootstrap-like ideas that could help build trust with small segments of consumers? This likely comes more in the form of a studio or a lab that works to find a few small hits, then builds a larger application. What the folks are doing over at Delphia is similar to this.

Crypto is another interesting market that could play a factor in the coming years. I haven’t seen anything that leverages crypto into money management, and that makes sense. No one trusts crypto yet. But, the technology is what is really exciting. The value doesn’t come from being a crypto business, the value comes from the technology in crypto that you can build on.

Final Note

Like I said in the beginning, this is a topic I can talk about for hours. I have spent time building, exploring, and investing in this space. It is endlessly evolving and will always go through it’s highs and lows, but it will never bore me. If you want to chat more, feel free to reach out.

-Tom Lombardozzi

thomas.lombardozzi@gmail.com