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The Retail Revolution: Four Phases of Investing in America

  • February 05, 2021
  • Noah Weidner
Retail Revolution - Four Phases of Investing in America

In the last 50 years, the financial services industry has been flipped on its head. However, so much of that change has come just in the last few years with the advent of zero-commission brokerage apps, fintech apps, and robo-advisors. With radical access to resources, data, and analytical tools, retail investors are starting to take charge of their finances. 

The democratization of the financial sector has happened in stages, but it’s still changing. To break down this transformation, let’s take a look at the four phases of investing in America:

First Phase: The Bankers-Only Club

People have always been able to invest, but they haven’t always been able to do it on their own terms. For the vast majority of history, wealth accumulation has been a luxury restricted by banks. Most people would have to rely on pensions, bankers, and brokers to grow their wealth. After all, an MBA means something, right?

So you’d hand brokers your money, they’d charge you a high fee (like 1% of your balance), and they’d buy mutual funds and stocks that they like. If you had a pension, it was out of sight, out of mind. In this phase, a few players made all the shots. However, this paradigm was about to be disrupted.

Second Phase: Rise of the Internet

About 30 years ago, the Internet began to reinvent the financial services industry. Trades, which used to almost exclusively be made by brokers with access to the exchanges, began to take place online. Suddenly, the stock market was becoming more accessible – but it was still costly to access resources and tools, so people still preferred the bankers.

Mutual funds and actively-traded funds remained the biggest source of movement on markets. Bond and stock funds both found meaningful places in portfolios. The stock market was still a mystifying thing for most people, but a handful of innovators and keen eyes began to slowly imagine ways to democratize the markets for the masses.

Third Phase: Rise of the Index Fund

At the turn of the century, passively-traded fund managers such as Vanguard and Blackrock began to challenge our ideas about the best way to invest. In the former two phases, MBAs and credential-critical people made all the calls. The rise of the low-fee, passively-traded index funds began to challenge the actively-traded strategies. After the 2008 financial crisis, that trend accelerated as index funds began to outperform active funds. 

In this era, fees for financial planners and banking services fell. Brokerage services lowered – but did not eliminate – the cost or commissions for purchases of stocks and mutual funds. Consequently, more investors began investing on their own – beginning the rise of so-called retail traders. Maybe some of them were a bit deluded, thinking they could beat the suits and brokers with their MBAs. However, this early-class of prognosticators began to use the wealth of information that the Internet made available. This is an era of many Motley Fools and lots of dumb money.

Fourth Phase: Retail Investor Revolution

It turns out that Vanguard, Goldman Sachs, and other established financial institutions now have competition from two sides – the retail traders and the people selling them pickaxes.

The beginning of no-commission trading on broker apps like Robinhood began the start of a new era. Fintech apps burst onto the scene, minimizing the cost of trading stocks, options, and other financial products. The Internet has emboldened investors by offering peak access to tools, resources, and information – most of which used to be proprietary and exclusive. In a sense, we now live in a Many-Motley-Fool society; many people and sites are talking about stocks. It has become a part of our zeitgeist, creating a new and social angle for investing, personal finance, and saving.

As a result of all the newfangled competition, fees are being slashed in a race to the bottom. Banks, brokers, and CFPs are in competition to have the cheapest product, and they’re competing with robo-advisors, neobanks, and the computer science majors that program them. Almost all of the high-fee products come from RIAs, actively-traded strategies, and financial planners who charge too much. 

Even though index strategies mostly outperform actively-traded strategies, a handful of retail investors and retail-minded funds like ARK Invest beat them. In some cases, they outperform markets by miles by capitalizing on trends, momentum, ESG-centric strategies, and themes.

The retail crowd is starting to realize how powerful they can be. Their dollar is a vote of confidence in companies, or a lack thereof. 

Where are we going next?

There are lots of desirable things about the retail revolution and the effects it’s having on markets. For one, the millions of new investors are changing the power dynamics of markets. Investing decisions used to be made by a handful of MBAs in corporate settings. This is redefinining what is deemed valuable by people in aggregate.

On the other hand, the increased volume of trading from the retail crowd means that there are millions of new traders who may or may not know what they’re doing. This retreat from fundamentals has put a lot of wind in the sails of growth, momentum, and socially trendy stocks. However, that might not be all so bad – since value is relative.

But, with all of this market volatility and examples of extreme or impulsive investing, new investors need a way to cut through the noise and see intelligent investing strategies.  In the past, this used to be a financial advisor or a broker. Today, it might be YouTubers, reddit communities like r/WallStreetBets (please, don’t YOLO), or fintech apps. Front is a different breed, meeting investors where they’re at, complementing any strategy with data-driven stock analysis. It’s not another trading app – it helps investors navigate markets. If you’re looking for a stock screener that offers you a bird’s-eye view of stocks you’re thinking about buying, check out the free Front app and start making more strategic investment decisions. 

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