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How Do You Define ‘Investor’?

We explore what our research findings mean for advisors

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.. Nearly a quarter of investors are younger than 37, 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?

These findings demonstrate a few key things:

  1. The growth of investing. This is a good thing, as participating in the engine of the U.S. economy—through investments in stock and bond markets—has helped many investors grow wealth and prosperity over time. Despite its ups and downs, investing sure beats a savings account; the expansion of investing means more people are participating in this engine of growth.   
  2. An increasing need for good defaults and quality, unbiased information. T he growth of investing doesn't mean income and wealth is spread evenly throughout the country, nor that all households are investing at the same level, of course. There is a massive range of wealth among investors, as recent articles have discussed. This is why good defaults and information are so valuable: Whether someone has exposure to the markets through a small workplace plan or a sizable nest egg, thoughtful investing can help them do better with what they have. 
  3. Personalized advice is essential. Because many of these newly minted investors might not even view themselves as investors, you can highlight your value as an advisor by talking about this diversity with clients and helping 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. 

As investing comes to represent the vast diversity of our country as a whole—whether it be economic, ethnic, gender, or otherwise—more people can benefit, and long-standing investors of any background can share their lessons about the many challenges and pitfalls along the way.

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.”
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