Social Trading: A Key Tool in the Democratisation of Finance
The main problem brokers have always had when it comes to converting and retaining clients is that, whether they like it or not, trading has a pretty steep learning curve. At least initially. Brokers have always known that if you can help beginners overcome this hurdle, and keep them engaged for long enough, then many of them will eventually learn to take care of themselves
Social Trading: A Key Tool in the Democratisation of Finance
The main problem brokers have always had when it comes to converting and retaining clients is that, whether they like it or not, trading has a pretty steep learning curve. At least initially. Brokers have always known that if you can help beginners overcome this hurdle, and keep them engaged for long enough, then many of them will eventually learn to take care of themselves. For this reason, over the years they have employed a variety of strategies to help newcomers get over that initial hump until they start to feel more comfortable with how it all works.
Simplified trading has been a very popular approach to solving this problem, and for obvious reasons. If the issue is the complexity of the platforms, with all those complicated options that beginners don’t understand, or even the counter-intuitive nature of how margin works, how currency pairs work, how going long and short works, then simplifying the interfaces and reducing all the options that are sources of confusion could help.
But however hard brokers have historically tried to simplify trading for absolute beginners, whether it be to strip down the trading platforms to the bare essentials, or to actually simplify the instruments themselves (as they did with binary options a decade or so ago), the learning curve remains and it still takes out the bulk of newcomers pretty quickly.
Why? Because a simplified form of trading only helps that specific group of traders who are overwhelmed by the confusing nature of the trading platforms we use in our industry. For this group a simplified interface is an ideal solution. For the rest of beginners though, whose real issue is how to put all the new things they are learning together, a simplified interface can’t really help with this.
Another approach that many brokers have tried in order to solve this problem, is to focus their resources on education. The logic behind these efforts is clear. Provide the client with answers to every conceivable question about markets and trading that they might have.
Make it easy, make it accessible, make it multimedia so that you have the maximum opportunity to reach a potential trader who could grow to be a lifelong customer. So, brokers embarked on developing large and elaborate education centres and trading academies featuring educational material in text, image, audio, video, and animation, hoping that this would solve the learning curve problem.
Did it help? Yes. Did it solve the original problem? No. Why? Because just like the simplified trading approach, it only addresses a specific kind of newcomer. Most people are not dedicated enough to teach themselves something new, they need more help than just providing them with an encyclopedic resource. After all, they already have the Internet! The education centres in our industry have been very useful for the contingent of a brokerage’s clients who have the ability, the will, and the discipline to embark on a learning journey all on their own. The rest? They continue to drop off.
Social Trading is a Broader Solution
In a previous article we made the demographic argument for Social Trading with quite a bit of evidence. It went something like this:
The younger generations that brokerages will be competing to reach in the coming years (now Millennials but increasingly Gen-Z), think completely differently and approach risk and decision-making in a completely different manner to their parents’ generation.
They are a much more risk-averse generation that crowd-sources its opinions and makes consumer and investment decisions with a great deal of influence from their broader online communities. If brokers don’t find some way to introduce this social dynamic to their offerings, then younger traders will turn elsewhere (as they have been doing with Robinhood and WallStreetBets).
The democratic argument for social trading continues logically from the above argument. This is because it says that if the demographic trends reveal that sooner or later most of your potential clients are going to be of a different mindset, then addressing that mindset directly is the broader solution that brokers have been searching for.
Just catering for self-driven learners (like educational efforts do), or clients overwhelmed with your platforms (like simplified interfaces do) only deals with the problem for a certain type of client. Social trading may not have ticked all the boxes for the previous generation of traders 10-20 years ago, but as social media continues to dominate the world, the time is coming where the social element may be the single most important effort a brokerage can make. But, as we will see below, social trading may not just be for the young traders
It’s not just about Millennials and Gen-Z
Mobile is eating the world, not many people would argue against this. A really interesting fact that many aren’t aware of, is that it’s actually changing the way even older generations engage with media as well! The pandemic has obviously had an massive influence in this respect, but even on the other side of the lockdowns, there’s evidence to suggest that the older cohorts of Generation X (those born between 1965 and 1980), and the Baby Boomer generation (those born between 1946 and 1964) have fundamentally changed the manner in which they engage with these newer digital technologies since the pandemic.
According to WeAreSocial:
“At the time of lockdowns, baby boomers passed a major milestone. Q2 2020 was the first time they considered mobiles to be more important than PCs/laptops. Plus, the gap between this group and Gen Z/millennials, in terms of saying they favour this device, has almost halved since 2015. In the past, when we spoke about the rise of the mobile, we often had to mention age differences as a caveat. But today, whatever impact smartphone usage is having on our online lifestyles, it’s being felt across the age spectrum.”
“Given popular apps like Instagram and WhatsApp were developed with the smartphone in mind, heavier reliance on this device is associated with higher levels of social media engagement. For Gen X and boomers, the pattern holds: they spend over an hour more using their mobile on a typical day than they did in 2015, and nearly half an hour extra on social media.”
In other words, the generational divides related to people’s engagement with smartphones and digital media may not be as set in stone as the other deeper-rooted generational differences observed by demographers. Technology is, in some way, changing us all, which means that the right social trading solution (whether it be copy and paste crypto trading for the youngsters, or older traders copy-trading the positions of expert stock pickers) may end up actually appealing to a far wider demographic than initially expected. It certainly seems that the time for social trading is now.
The Democratic Argument, in a Nutshell
The democratic argument goes as follows: smartphones and social media have fundamentally changed the way we do everything. There’s evidence to suggest that it’s not just the younger digital natives that have been affected by this process. Technology is changing us all, albeit perhaps at a different pace for different generations.
What social trading offers, is a way for brokers to solve the steep learning curve of trading by allowing experienced traders who’ve already made the leap, to make their insights and trading styles available to those newcomers, in a manner that they’re already very familiar with from practically all the other apps on their homescreens!
To put it simply, it’s beginning to look like social trading may just be the one-size-fits-all solution that brokers have been looking for all these years. And they didn’t even have to do anything about it, technology changed both trading and the culture at large, so what you effectively have now is a potential client base from all walks of life that has been sensitised to markets and trading, and also happen to be increasingly more social in their decision making.
To put it even more simply:
Social is the new mobile. Don’t be left behind.