Young investors are seen as a bit of a wild card by the investment industry. But look closely and it’s obvious that many young investors are fundamentally cautious due to their financial circumstances, while sympathising to a greater or lesser extent with rebellious social media elements intent on taking the financial industry down a notch or two.
The three young investors appeared a little bit nervous as they were shown their places at an investment conference last week, watched by a room full of clearly fascinated investment professionals. From their biographical details, they probably aren’t highly representative of their generation, working as they do in entry level positions in the Luxembourg financial industry, but clearly more acceptable for the audience than some.
Young people’s investment decisions have had a lot of media coverage. According to the Financial Times, young investors tend to treat financial products like lottery tickets. The GameStop – an American video game retailer - meme stock saga attracted heavy interest from young, social media-using investors. The GameStop stock “skyrocketed” in early 2021, after being as low as four dollars in early 2020, which eventually forced the hedge firm Melvin Capital to shut down its business last June, in what was counted as a coup by the “Reddit apes” who are trying to prove Wall Street wrong.
Instability and low pay
Julie Leclercq, a millennial lawyer with a master in finance and economics from the University of Luxembourg, specialised in investment funds, agreed that her generation sees finance as a way to win a jackpot. “Due to the current situation and the instability all over the world in general, and the fact that the salary is not always enough to cover monthly expenses, I think that as young investors, we want to win the jackpot with just one investment.”
While at the university, Leclercq led an academic research paper on the retailification of private markets, with a focus on private equity funds. Leclercq has just joined Elvinger Hoss Prussen’s fund department.
Millennial Anna Letta, who holds the same degree and works for Luxflag – the Luxembourg Finance Labelling Agency – spoke about the role of “financial influencers”, known in the social media jargon as “finfluencers”. “These people have the power to make complex things look simple, easy,” she said. “This gives the impression to young people that finance is not something serious – they want to show that finance is not anymore reserved to bankers in dark suits.”
Making it a game
Both Letta and Leclercq spoke at a conference hosted by the Association of the Luxembourg Fund Industry about the “gamification” of trading. Letta said that mobile phone trading applications may seem to a young adult as some kind of game. She said that the way that apps are designed, and their reward scheme may feed this impression. She also said that the zero commission trading, which gives access to trading to a very wide public, also may encourage this idea.
The slightly younger Filip Persson, a member of Generation Z, who works as a business system analyst at Northern European investment firm Triton Partners, introduced a darker note. He said that another factor is the “sticking it to the man” culture which he said is very prevalent in the internet forums. He referenced the GameStop short squeeze, which was according to the Wall Street Journal being heavily discussed in Reddit forums. “I think they wanted to portray a message to the hedge fund elites that they should not mess with them.”
Persson said there’s a kind of social justice element in such investment behaviour. “I think the younger generations nowadays feel left out of the good times the previous generations have experienced,” he said.
The darker side of free trading
While Persson said the thought that commission-free trading platforms such as Robinhood is “a great way to get young people to start investing”, he explained a darker side of the business models underlying such platforms, specifically the “payment for order flow” (PFOF) that the Robinhood platform embodies. The transaction data generated by user transactions, he said, “is being used by these hedge funds to create market makers, and they’re using that option to front-run you in the transactions.”
While Letta said she saw some positives to trading apps, she saw a parallel set of risks. Young people risk losing their money, she said. There’s also a risk that the financial system could be distorted due to the influence of social media. She said that trading apps will be used by people who have lost their faith in the financial system, causing them to look at alternative investments such as cryptocurrencies.
In a sign of the level of interest in this topic, following the session, a large number of investment professionals raised their hands to ask questions. Perhaps due to the bright glare in the eyes of those on stage, only one person was allowed to ask her question.