This is a hidden column

getTagNameMorningstarCorporate:blog/bigpicture

How Do You Define ‘Investor’?

Our research finds diversity, not stereotypes

Jake Spiegel 

 

Who is an investor? Often when we define investors, we picture a high-flying white-collar executive with a copy of The Wall Street Journal neatly tucked into his briefcase as he discusses trades with his broker over the phone. This mental image is vivid, but the reality is that this figurative investor is not a typical investor. In fact, many ordinary workers are investors, even if they don’t consider themselves to be.

How does Morningstar define investor?

We define an investor as anyone who has exposure to financial markets, such as through a company-sponsored 401(k) plan, and is saving for specific goals, such as retirement. Using this definition, we find that investors are much more diverse than the stereotypical investor we described earlier.

More and more workers are finding themselves as investors. Companies have shifted from the defined-benefit pension plans that were popular in decades past in favor of defined-contribution plans, like 401(k)s. This has thrust many workers into an unfamiliar role. Under defined-benefit pension plans, workers’ decisions surrounding retirement savings were largely made for them. Under defined-contribution pension plans – the most common way that workers currently invest – workers themselves are responsible for deciding how much to save and where to invest their retirement funds. Furthermore, the proliferation of online brokerages, exchange traded funds with no investment minimums, and smartphone apps have lowered the barriers to entry for investors.

Who are investors?

As a result, we see now that investors are an incredibly diverse group of people. One-third of investors are younger than 44, and 40% do not have a bachelor’s degree. The median income of a household that invests is about $75,000, solidly middle-class, and the occupations of investors run the gamut from white-collar professional services to blue-collar manufacturing jobs. Investing may have previously been an exclusive club for old, highly-compensated white collar executives, but it is clear that this is no longer the case.

The shift toward defined-contribution plans and reduced barriers to entry for investing have led to many more people investing compared to previous decades. Today, an investor might have a brokerage account that she uses on her smartphone, alongside several scattered retirement accounts left behind at previous employers.

What does this definition of investors mean for advisors?

Because of the diversity of investors, personalized advice is essential. However, many of these newly minted investors might not even view themselves as investors – a topic I’ll dive into for my next post.

One way to highlight your value as an advisor is to talk about this diversity with clients to help them understand why they need a financial plan that’s as unique as they are. Advisors bring a level of individuality and personalization that’s not easily replicated by robo-advice solutions or even well-meaning defaults like target-date funds, and the true diversity of investors just emphasizes how much individuality and personalization are needed. For the financial industry, this new definition of “investor” affirms that one-size-fits-all investment strategies and approaches to financial plans aren’t appropriate – a new level of personalization is needed to help newfound investors reach their goals.

Download the full paper “It’s Time to Redefine ‘Investor’: How Looking Beyond Investing Stereotypes Can Drive Long-Term Success.”

Get My Copy

Learn more about the Morningstar Investor Success Project and read our latest insights. 

The Advisor Toolkit

Get practical behavioral finance tools to help clients avoid common pitfalls.

The Investor Success Project

Read our latest research on how to help investors.