Article by Aurélie Meyer, Head of Compliance & Risk Birdee. When we launched Birdee - our B2C robo-advisor- in 2017, one of our main goals was to get market insights first-hand from our customers. With the feedback and insights of real users, we are able to build better solutions and offer live-tested technology to our B2B customers. In a series of articles, we focus on some interesting statistics that could help other companies when starting an online advisory service.
In our previous article, we shared with you the impact of the COVID-19 crisis on investor behavior. In this article, we would like to reflect on another aspect regarding investor behavior, namely the effect of lowering the minimum investment threshold. To make this more concrete, let’s have a look at some data related to the change that Birdee adopted in June 2020. At that moment, we significantly lowered the minimum initial investment amount that was required to open a securities accounts, reducing it from 1,000 to 50 euro. This minimum threshold is one of the lowest in the market.
Why did we do so?
This move may seem surprising, but it is part of a well-set business decision. It is perfectly in line with our ambition to make sustainable and responsible investment available to anyone. Everybody knows that getting your feet wet for the first time is the trickiest part in the investment process. To get rid of this obstacle, we introduced the concept of “virtual portfolios”, enabling people to test the portfolios and their behavior by investing virtual money before getting to the ‘real thing’.
But after 3 years of operation, we noticed that our younger audience, mainly students and young professionals, were still quite reluctant to make their first investment move. However, the number of virtual portfolio’s was constantly growing, indicating a sincere interest in the service.
These young people were not only interested, but also proactive. Many of them did not hesitate to ask us questions on a wide range of topics such as responsible investment, tax impact, performance… But the question remained: why didn’t they take the first step?
To find it out, we organized various "mini-surveys". They showed us that it was the €1,000 threshold that kept them from going ‘all the way’. The reasons were diverse and generally of a personal nature: fear of a stock market crash, lack of savings or concern about an urgent need for cash.
But young people were not the only ones who had cold feet. Trust is one of the main attributes when it comes to investments. The fact that Birdee is a new and relatively unknown brand is important in that respect. Although some people had a strong interest to test a digital platform such as Birdee, entrusting 1,000 euro at once to a new entrant on the market, remained a too large step to take.
Trust is one of the main attributes when it comes to investments
Time to act
So, we decided to act on it. We sat down with our partners, searching for ways to lower this threshold without compromising the quality of service or increasing the costs. A key requirement was the splitting of ETFs ¹ .
By June 12 th, we were pleased to introduce this new service to our customers. And we went even further by offering this extremely low investment threshold without any additional conditions. Indeed, after the initial payment of 50 euro, no minimum amount is required for additional payments.
Young and not-so-young clients can now save money and invest little by little, for projects that are important to them.
Other profiles
The profile of our new users has changed somewhat compared to our existing clients. The average age of a Birdee user declined from 41 to 33 years old. So, we succeeded in attracting younger clients. And we also observed a second trend: the percentage of female investors has increased from 14 to 20%.
In addition, we noticed a greater diversity in the risk profiles of our investors. As the minimum investment amount should no longer be an obstacle, people who were more risk-averse, are now more willing to invest as they are able to limit their exposure to smaller amounts of money. This has led to an increase in the opening of defensive portfolios, which in the past had been less popular.
We will go deeper into the risk profiles of our investors in a future article.
Although some people had a strong interest to test a digital platform such as Birdee, entrusting 1,000 euro at once to a new entrant on the market, remained a too large step to take.
The impact on Assets-under-Management
Gaining new customer is great, given the significant acquisition costs. But as we all know, the total assets under management are also a very important criterion for an investment tool.
In our case, the drastic lowering of our minimum investment limit had an undeniable effect on the average assets under management and therefore on our income per investor. Although the barrier has been lowered for people who could not afford or were not keen to invest, it could not make up for lower investments made by the people who could have invested more. Over time we will be able to evaluate the lifetime value of new customers, based on the amounts that they are willing to invest over multiple months and years.
This commercial approach must therefore be combined with other levers, in order to optimize the volume of the investor base and compensate for the decline in average assets under management. These levers include but are not limited to marketing strategies.
Indeed, investor loyalty is key. A satisfied client is a loyal client and is more prone to invest on a regular – weekly or monthly - basis. These inflows of funds have an essential impact and enable us to set up an optimal investment strategy (we will come back to this later).
Finally, a loyal client will tell his friend and family about the service. No marketing campaign can beat the word-of-mouth from satisfied customers.
Over time we will be able to evaluate the lifetime value of new customers, based on the amounts that they are willing to invest over multiple months and years.
Conclusion: was it worth it?
Our recommendation to other investment platforms is to weigh the pros and cons of introducing a small initial investment amount, and to adapt it to the target audience. In our case, the initial amount is a crucial aspect in the decision-making process, as we operate within a retail environment that includes a lot of young customers and specifically target younger customers. For services targeting more wealthy customers, this might be less of a constraint and the impact of a lower investment amount might not outbalance the advantages.
As for us, we achieved our main goal: making investing accessible to all, without exception. There should be no entry barriers to this ambition. We obviously take this mission to heart. And we practice what we preach: actions rather than words!
¹ The splitting of funds (ETFs in this case) consists of being able to buy a fraction of one fund. Indeed, when one wants a diversified portfolio of - let’s say - 10 funds totalling only 50 euro, and thus 5 euro per piece, it is crucial to be able to buy a fraction of that fund.