Americans’ saving, investment product savvy improves, study finds

American consumers are more knowledgeable about their saving and investment products than at any other time in the past decade, according to a new market intelligence report by Hearts & Wallets.

A decade ago, product awareness was in the doldrums, with only 45%, or 55 million, U.S. households able to identify the saving and investment products they owned in 2013, the survey said. Today, 86%, or 113 million, households can identify the products they own. In 2013, awareness of asset class was higher than of products, at 60%, but has remained flat at about 77% of households nationally for three years. The gap between product and asset class awareness, which has been shrinking for years, has now fully reversed.

So why is it important for investment advisors to be aware of their clients’ growing knowledge of the saving and investment products they own?

“Products are one of the only ways to provide scalable advice to the mass market, which often can’t afford the high minimums of full-service advice,” explained Laura Varas, CEO and founder of Hearts &Wallets. “Packaged multi-asset class products are a very scalable way to deliver advice to lower-asset households.”

How to better serve clients

And how can investment advisors use this knowledge to better serve their clients?

“Emphasize products that provide suitable asset allocation over services that fill in asset allocation target with suitable products,” Varas said. “Better knowledge of saving and investment products helps everyone – both clients and advisors – who can now speak a common language. Hearts & Wallets research has shown that U.S. households struggle to define common financial terms like ‘passive investing,’ ‘exchange traded fund’ or even ‘mutual fund.’ ”

More online brokerage accounts

The survey also found that today over half (67 million) of U.S. households have online brokerage (OLB) accounts, which is up 40 million from 27 million in 2011. Most upper-asset households – 79% of $1M-plus households and 66% of households with $100,000 to under $1 million – have OLB accounts. Of the 67 million households with OLB accounts, 48 million make trades with over half (54%), or 26 million households, trading 1 to 5 times per year. And about 12 million households trade 12-plus times a year.

Options trading and margin loans

Now that stock and ETF trades are free, options trading and margin loans have become important sources of revenue for OLB platforms, the survey added. 16%, or 21 million households, made 1+ options trades within the past year. Younger households are much more likely to engage in options trading than older households. And margin loans are used by 1 in 4 households, and another 40% are interested.

“Stock and ETF trades were once important revenue sources for OLB platforms,” Amber Katris, Hearts & Wallets subject matter expert and report co-author, said. “With the race to the bottom for ‘free’ trades, options trading and margin loans now affect competitive industry structure and consumer behavior. But how wise are these offerings for younger consumers? And how wise is it for companies to offer online brokerage as ‘free’ when it has operational costs?”

Impact of online brokerages

Online brokerage is really an essential capability today, said Varas, as she explained its impact. “If your platform doesn’t offer it, you are at a serious disadvantage to competitors who do. Today, over half of U.S. households have online brokerage accounts (OLB). The majority of upper-asset households – 79% of $1 million-plus and 66% of $100,000 to under $1 million – have OLB.”

OLB empowers consumers with all kinds of features and access to many investment products, and it plays a role in growing awareness of investment products, added Varas. Households with OLB are more likely to know the investment products they own.

Advisors should pay close attention to clients who are involved in options trading and margin loans, Varas said. “These two areas can help provide needed revenue for OLB platforms, which has been impacted by ‘free’ stock and ETF trades. But the key is helping clients execute these activities in a responsible manner.”
“Hearts & Wallets research leads us to believe that more advised than unadvised households are involved in options trades; so, advisors may be educating their clients about options trading and getting them involved, added Varas. “Options trading certainly holds broad appeal for households under age 55, although how viable it is for households under age 35 is another matter.”

Varas added that the incidence of options trading is relatively flat by assets. However, when households with $3M+ trade options, they tend to place more trades than less wealthy households. “The key with both options trading and margin lending is for advisors to provide education,” Varas said.

 

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