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Millennials are not saving enough for the future — but a series of new apps are promising to nudge them into making a start.
Micro-investing — the act of saving very small amounts of money regularly — is touted as a way to make investing manageable for young people on low incomes or with few assets.
The idea is that by linking to a debit card, micro-investing apps can suck virtual “spare change” from their pockets and funnel it directly into an investment portfolio almost without anyone noticing.
The under-35s may not feel they are earning enough to invest in funds or shares. But digital advances could make it possible to “round up” the £1.80 purchase of a cup of coffee on their contactless bank card to a £2 charge — with the excess 20 pence seamlessly diverted into an investment fund.
Over time, regular small investments will build up into something larger — 20 pence a day builds into £6 a month, or £72 per year. That doesn’t sound like much, but it’s better than nothing — and industry advocates of micro-investing hope it will start a habit that will grow alongside millennials’ earnings.
Small is beautiful
This explains why BlackRock, the world’s largest asset manager, has such a large interest in micro-investing.
It may seem strange that a global investment behemoth with more than $4.5tn of assets under management should be interested in obtaining an investment of just 20 pence — but the mantra of “it’s better than nothing” applies here too.
Research by a group of asset managers — led by BlackRock — found that more than 80 per cent of the UK population don’t save regularly because they don’t have a disposable income.
And according to The Money Charity, 9.61m households in the UK have no savings at all. If people aren’t saving, then it follows they’re not investing — and that becomes an issue for companies in the business of selling funds.
A further problem is that people find talking or thinking about saving and investing boring. Mintel, the global market research group, found that about a third of UK consumers either have “low” or “extremely low” interest in financial management.
Troubled by this situation, the Tax Incentivised Savings Association (Tisa), a lobby group for companies involved in making or selling savings and investment products, has set up a working group to think about the UK’s “financial wellbeing”.
The group includes banks Lloyds and RBS and building society Nationwide, along with insurers such as Aviva and asset managers including Threadneedle and Schroders — all of whom are working together to increase the amount people save.
Micro-investing is its solution. “One of the primary challenges the industry faces is reigniting the savings culture by making it easy for people to save very small levels of money frequently,” said Carol Knight, operations director of Tisa.
But it faces a lot of challenges. First, making an investment is commonly viewed as a decision that will involve conducting hours of research and filling out of paperwork, which many people don’t want to do.
Second, people’s expectations have changed. Digital advances mean people expect online services that deliver exactly what they want, exactly when they want it. By contrast, the process of setting up an investment and putting money into a fund is quite complicated.
A digital micro-savings culture would need to overcome obstacles in the current system — such as minimum investment levels and the higher cost of making lots of small transactions as opposed to a few big ones — not to mention the bother of moving money from one account to another.
But the demand is there. About 90 per cent of people say they would be comfortable “using technology to manage their finances”, according to Tisa research, and 90 per cent of millennials look at their smartphone within 15 minutes of waking up, says Deloitte.
Whilst we have a plethora of apps to track our sleep patterns, order pizza immediately or to tell us where the nearest bus stop is, there are very few apps to help people save, or make micro-investments. But this is about to change.
Last November, Tony Stenning, head of retirement for Europe at BlackRock and chair of Tisa’s savings and investments project, set out the group’s main solution to the savings problem to an audience of fund managers.
There should be, he said, a digital passport for finance. It would hold information about investors across banking, insurance and fund products and it would have all of the information that a fund manager might need to put an investor’s money in a fund — meaning anyone could invest at the tap of a screen. No paperwork needed.
Best of all, said Mr Stenning, such a thing would “definitely enable micro-saving”.
“You can go to Starbucks, buy your coffee for £1.90 and then add an extra 10p to your savings,” he said. In time, savings accounts could be linked to funds to let people invest their loose change without even thinking about it.
“It’s just nudging people to put money away even when they’re not really thinking about it and not having to write out big cheques,” he added.
Nudging — the act of giving someone a small push into doing something beneficial — is at the heart of the micro-investing revolution.
The UK financial regulator recommended using “nudge theory” to increase savings and investments in its recent report on the financial advice market.
Mr Stenning believes that a digital passport allowing banks, building societies and asset managers to share information with each other will give rise to the kind of app that will see the principles of the nudge movement swing into action.
“If we get open standards on the digital passport that identifies you and allows you to go across the whole of financial services, then we can get some really smart people who can come in behaviourally and say — ‘right, what do you need? How can I help you get it?’” he said.
“For example,” said Mr Stenning, “when you’re buying your coffee it could be your third one of the day. The app will know that, and it will say ‘do you really want another one?’ That’s a little Nanny knows best, but you start to get people by nudging.”
The new wave of apps
Asset managers — and high street banks — are woefully behind other consumer-facing businesses when it comes to offering their customers digital options.
In the US and Australia, a company called Acorns allows people to round up their spare change and invest it in one of five portfolios built from low-cost ETFs.
The app — which charges a management fee of $1 per month on top of the cost of buying the funds — allows customers to round up any purchases on their bank cards and automatically invest their virtual “spare change” in an ETF.
In the UK, a new equivalent — called Money Box — is set to be launched shortly. “We wanted to find a way to help people put their money aside regularly, but into something better than a savings account,” said founder Charlie Mortimer. “We’re targeting millennials, 18-35-year-olds.”
“People are not setting money aside in a structured way because they’re intimidated by investing and they think you’ve got to have loads and loads of money to get started,” he said.
The app offers a choice of three low-cost index funds, run by Vanguard, BlackRock and Henderson. “The global equities fund is nice because even if you’ve only got a pound you can invest in Facebook, Apple and Google,” said Mr Mortimer.
The app covers its transaction costs by charging a fixed rate of £1 a month on top of its annual management fee of 0.45 per cent of funds invested. The management fee alone is in line with Hargreaves Lansdown, but with fixed annual £12 transaction costs factored in it is hard to make comparisons with other platforms, all of which charge by taking a percentage of what you invest. Nutmeg’s annual management fee is 0.95 per cent — but there are no further transaction costs.
“There are no dealing fees or withdrawal fees,” said Mr Mortimer. “If, on a random Wednesday they have £4 to set aside, we want them to invest it.”
Newcastle-based investment management company True Potential has the only UK app that allows micro-investing, giving savers the chance to put as little as £1 into a multi-asset fund.
“The significance of this is that to save £15,000 into a stocks and shares Isa could take three to four hours with an adviser,” said David Harrison, managing partner at the company. “But to get into £15,000 of debt you just have to phone up a payday lender, and you’ve got the money in seconds.”
Mr Harrison said the average amount of money people invest though the app in one go is £10. “Around 75 per cent of investments are under £50,” he said.
The app allows investors — who have to be signed up with True Potential — to invest in funds managed by Goldman Sachs, Schroders, Allianz and 7IM.
The reason more of these apps don’t exist is because they are “devilishly difficult to build”, Mr Harrison says.
Daniel Godfrey, former chief executive of the Investment Association, is currently an adviser to the makers of the Money Box app, and agrees that it would be difficult for an asset manager to come up with a similar product.
“Tech isn’t just about getting an Apple tool kit and blazing a trail,” said Mr Godfrey. “The existing providers just don’t have time to do it. They’re dealing with [implementing forthcoming European financial regulation] and they just don’t have spare capacity.”
But micro-investing apps such as Money Box are “encouraging people to save by making it easy and making it fun”, he says. “I think there’s a lot of potential for this to engage people with saving.”
“Rounding up” has long been touted as a painless way to save, and coffee — a widely available commodity with a high mark-up — is exactly the kind of discretionary purchase that savings gurus advise consumers to forge.
Lloyds has had such an app, called “Save the Change” since 2010, although it only allowed customers to funnel money into their current accounts, and not into investment products.
“The round-up mentality is a great idea,” said Shaun Port, chief investment officer at online wealth manager Nutmeg, but when it comes to putting spare change into funds he says it is “hard to get the commercials right”.
Nutmeg, like other low-cost managers, offers exchange traded funds (ETFs) which track indices and are bought and sold as shares.
The problem is that you have to invest at least the cost of one whole share.
“Traditionally, private investors have only been able to buy whole shares in a single-company stock or exchange traded funds on UK platforms,” said Joe Parkin, head of retail at BlackRock’s ETF business.
“These shares cost specific monetary amounts, like £43.78 per unit, making it tricky if the investor does not have enough money to purchase a whole share or prefers to invest a fixed sum like £100.”
Also, every time you invest in a fund, you incur a transaction cost.
Janine Menaskanian, head of UK wealth at US group Vanguard, said it was difficult to manage small portfolios in an effective way without fractional dealing.
Even small transactions incurred a trading charge, she said, which “hits investors’ gain”.
Nutmeg has recently found a way around this and now offers investors the ability to buy fractions of funds — and as a result it lowered the minimum investment it required people to make from £1,000 down to £500. But for many millennial investors, however, this will still be too high an entry point.
“The main thing is that it allows us to manage portfolios at a much lower level,” said Nutmeg’s Mr Port. “In theory we could cut [our minimum investment] down to £1. It’s an ongoing discussion.”
Broker Winterflood is hot on Nutmeg’s heels, working with asset managers to allow investors to buy bits of ETFs. It says it will be able to do this from next month.
Asset managers including Vanguard, Fidelity, JPMorgan, HSBC and Liontrust have all been involved in a working group to push forward the idea of “fractional trading”.
“We’ve got to bring down minimum investment levels,” said Mr Stenning of BlackRock. “£50 a month is out of reach of a lot of people; it’s got to come down to £5 to £10 a month.”
It’s clear that if the minimum sum is lowered it will be more possible for those on lower incomes to access the stock markets.
But whether they will want to do so is a different problem. Those in the fund industry hope that by making it as easy to drop money into a fund as it is to buy something on Amazon, more people will see investing as part of their everyday lives.
Look after the pennies . . .
Financial adviser True Potential has been conducting a rolling poll of 2,000 UK adults every three months since 2013 to find out how much they are saving.
The company says that the answer has been that people have — on average — been saving about £100 per month, a figure that has stayed at the same level since polling began.
If this £100 per month was invested in a passive fund tracking the FTSE 100 each month, investors could expect to see their money almost double over 20 years, according to True Potential.
Using the returns generated by the stock market on a monthly basis between 1996 and 2016, and assuming that all of these returns were reinvested, TP calculates that an investor who had put away £100 a month since 1996 would have ended up with just over £41,000 — gross of fees — generated from their total investment of £24,000.
Even if younger investors think that the amounts they can afford to invest are smaller than £100 a month, don’t forget that the same rules of compounding will apply over time. How much they will compound by will obviously depend on market performance — not a lot you can do about that — and the level of fees you are being charged.
Clearly, some of the new micro-investing products will have higher charges (when measured as a percentage of the amount you are investing) than more conventional investments. Perhaps this is a premium worth paying when you’re getting started and only have small amounts to put in, but when you start to earn more, then switching to a more mainstream investment platform may be better value.