The changing investor and investment adviser relationship

How many people have given you investment advice? How many do you know that can offer genuine tips and pointers as to where you should place your money for the best returns? The chances are it’s quite a few. What if ‘the guy next door’ could match Goldman Sachs’ advice?

The breakdown of the one way relationship between adviser and investor, whereby the investor is hamstrung by the offers and rates presented to them, is becoming increasingly evident. As financial technology (fintech) has taken off, openness to alternatives to traditional models is increasing; including awareness of digital-only alternatives that might not have a bricks-and-mortar presence on the high street.

The changing of the guard

Traditionally, investors have trusted the solidity and presence of financial institutions with a network of offices. People seeking to invest their hard-earned savings wouldn’t think twice about appointing a trusted financial ‘expert’ to manage their investments. It’s not necessarily that investors were previously unaware of the inefficiencies and unfairness within traditional investment models. Perhaps there just wasn’t an alternative.

Which brings us to the toxicity of the term ‘expert’. What makes an expert? Who awards the “expert” title? More to the point, who pays this alleged expert? The traditional system is open to abuse because there is no real way for the customer to monitor opportunity cost: did his or her expert manage as much as could be achieved within the individual’s investment constraints?

Similarly, transparency was sorely lacking: customers have no real way to uncover which benefits the said ‘expert’ might enjoy behind the scenes by promoting a specific investment or portfolio. For example, investors may be forced into buying doomed shares; simply because they have been bundled in with a product that the advisor has been urged to sell that serves interests other than the customer’s.

This gap doesn’t just affect bricks and mortar. Arguably even robo-advisor platforms such as Nutmeg and Wealthfront, which are heralded for their transparency, flunk some key criteria. After all, who programmes the algorithms powering these platforms? They might sport a very intuitive interface, but how different are the “experts” behind their algorithms from the systems and processes that the banks transact.

What if the best are among millions of individuals actively managing their savings could outperform them? Perhaps this would re-define the term “expert”, introducing a much needed meritocratic approach.

The sharing economy, applied to finance

Airbnb has been a significant success because rather than setting up yet another undifferentiated hotel, it empowered the crowd to create experiences that leveraged under-utilised assets: properties.

How about the shared economy, applied to finance? The democratisation of finance is a trend that is sweeping the sector, from peer-to-peer (P2P) lending to crowdfunding. We’re also gradually witnessing the rise of “people power”, ultimately destabilising traditional organisations and structures.

We are in a world where individuals have come to realise that advice by financial institutions might not be their best investment option, but could instead lie with “amateurs” managing their own funds, with a keen interest and a savvy investing or trading technique. Just as travellers leverage homeowners’ assets via Airbnb, social trading platforms serve as the vehicle for real-life traders to share their methods within a regulated environment.

Extending the offering

In addition, technology makes new business models possible. Collective investment, for example, is an Industrial Age legacy; largely because packaging investments for mass use was costly. There were compliance requirements to consider, manual technology needed to manage the product and then bricks and mortar branches to sell. With this set-up, the more assets by the same manager the greater the economies of scale.

However, technology changed the game. Exchange-traded funds (ETFs) revolutionised passive management, but what if new crowdsourcing platforms could now revolutionise active management? Much like in the publishing world, where no-one would think of building Amazon to publish a Kindle, active managers may well join online platforms to offer their investment strategies to the public; thereby reaching a perhaps long-tail niche – but certainly keen – audience.

Gone are the days when investing was ‘one size fits all’. Robo-advisors already provide an alternative to passive investors, but are still plagued by the very issues afflicting traditional investment advisors. As with everything important in life – particularly all things pertaining to personal finance – transparency, control and performance are key; meaning that crowd-sourcing investment strategies could tick all the requirements. Investment advice has always been around, and this will likely continue. However, whether it’s still provided by a financial institution as we understand it today, is another matter.

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