The key lesson from the GameStop controversy is that retail investors are no longer a monolithic group of investment amateurs who consider the stock market a race track or a casino.

Of course there are still investors like that but in the last few years they have evolved into a diverse group that includes many highly-sophisticated individuals who can read and write company reports to rival those of the best full-time analysts in the market; momentum traders who can judge which trades to jump into and when to jump out of them; and retail investors who want to make money but are also prepared to lose money just to prove a point. These categories may overlap. Gamestop is an American experience but I feel that Asian retail investors are not that far behind, if at all.

Most wealth managers and financial advisers who service the millionaire class and high net worth investors ( HNWI ) don’t pay a lot of attention to this sector which is why the retail investors have to be able to rely on and trust electronic platforms and brokerages for their servicing needs. ( The Gamestop saga showed some of these electronic platforms have obvious conflicts of interest but that's another story )  However, the future millionaires and HNWIs will come from today’s retail investors so it would not be wise to ignore them completely especially after what we saw during the Gamestop controversy. Wealth managers and financial advisers can only ignore these developments at their own peril as the hedge fund managers who shorted GameStop learned the hard way by losing billions of dollars to the retail investors who dared to bet against them.

For the first group, one does not really have to be a trader anymore to understand or learn the technical intricacies of how the market operates in order to make money out of it. ( In Hong Kong, I also see many smart kids like these and work with some of them ). With the huge volume of information and data, as well as computing tools, available on the internet, anyone who's not even a math major, with enough time and interest, can put together an investment model or investment strategy for any particular stock and come out with the same conclusions as any analyst on Wall Street. Or in the case of GameStop, the retail investors on the Wallstreetbets forum came out with the opposite conclusion which worked for them.

This type of retail investors would not really need the services of a wealth manager or financial adviser ( they are their own wealth manager and financial adviser ) but, in any case, a wealth manager or financial adviser who attempts to service them ( when they become millionaires and HNWIs ) should do their homework very well. Otherwise, they are likely to make the same mistake as the hedge fund managers who attempted to short GameStop.

Two categories

The second group of retail investors, the momentum traders, can be subdivided into two categories. The first category covers those who really study the trades and know exactly what they’re doing. The second involves investors who follow others blindly into the trade. Unfortunately, many people in the financial industry, including wealth managers, financial advisers, and even the media, make the mistake of assuming that there is only one category of momentum retail investors, those who blindly follow others into the trade.

In the case of GameStop, this rather condescending attitude was very evident from the news articles and media interviews given by so-called experts who wrote and commented on the controversy. I heard at least one TV anchor comment that he didn’t believe the retail investors who were buying GameStop shares bothered to read analysts reports.

This is the group to whom wealth managers and financial advisers can be most helpful. But bear mind that momentum traders who follow blindly into the trade may have other reasons for doing so and not necessarily because they don’t know anything about that particular trade.( In the case of Gamestop, they say they "love the stock" which may be against the basic tenet of investing but it caused them to inflict heavy losses on the short sellers which was their real reason for investing )

In any case, a wealth manager or financial adviser has to be very discerning when servicing the requirements of momentum traders.  

Power of internet

Perhaps the biggest mistake of the hedge fund managers in the case of the GameStop controversy is failing to recognize the power of the internet and social media in terms bringing together a loose grouping of people ( i.e., Wallstreetbets ) behind a single cause, which is to push up the price of GameStop shares against the short sellers who were trying to drive it down.

And this brings in the fourth important category of retail investors, which are those who believe in a cause and are prepared to lose money just to prove a point. If you read through the posts on Wallstreetbets, many of them talked about how they wanted to make the short sellers pay for what happened during the 2008 financial crisis when their parents lost their jobs, their families lost their homes, etc. ( through no fault of their own ), and they didn't get any help, while the government bailed out the hedge funds ( who caused the crisis ). It’s surprising to see how many they are. Many of these investors bought only one or two shares of GameStop. But the huge number of these investors buying at the same time enabled them to tank the billionaire hedge funds who were short-selling GameStop. ( If there were no limits that were later imposed by Robin Hood on the number of shares these retail investors were allowed to purchase they would have created more damage for the short sellers but again that's another story )

These are a new type of retail investor which I think the market is seeing for the first time. They may have been there before but the GameStop controversy focused attention on them.

For most wealth managers and financial planners who are more familiar with investors whose primary reason for investing is to make money, it may require some work to understand this type of retail investors and how to service them, especially when they become millionaires and HNWIs.