Investment is finally in the hands of the 99 per cent. Apps and online wealth management means that anyone can put their money to work – no financial advisor required. Fintech startups have long-promised the democratisation of big finance but now the very incumbants they seek to unseat are starting to catch up. Now the 99 per cent can play the investment game, do we stand any chance of winning?
Like travel agents and typing pools before them, financial advisors are going the way of the dodo. The likes of Nutmeg, Betterment and Wealthfront are approaching finance with a technologist mindset. In the blink of an eye, fintech startups have made it cheaper and easier for anyone to try their hand at investment.
Click over to Nutmeg, and it’ll ask you the basics: age, income, and your financial goals, such as saving for a house, retirement, or simply for a rainy day, all starting from £500. Choose how much risk you’ll accept using a sliding graph and your automatically generated portfolio will pop into life in a series of easy-to-read pie charts.
Could these robo-advisors help the rest of us edge closer to the one per cent? Or are they simply another way for the rich and in-the-know to get further ahead? Can an app democratise investment or are we just slapping a new interface on the same old capitalism? And, selfishly, the question most of us actually want answered: can it help me get a down payment on a house more quickly?
That’s asking a lot from any app, but this new breed of financial tools does have some benefits over calling up a human financial advisor: they require less initial investment, cut costs, and reduce the knowledge burden.
“For most people, the face-to-face bit, isn’t an option,” says Nutmeg’s head of user experience Jono Hey. “You can go speak with your bank, but if you actually want proper financial advice and wealth management, you generally speaking have to be looking to invest a good sum of money.” How much? Tens of thousands of pounds or even hundreds of thousands of pounds, he says. Fintech apps like Nutmeg let you get started for £500 initial investment and then £100 a month. But while a lot of its clients follow just that pattern, the company has investors with millions of pounds invested, so even on such platforms most of us will remain small players with our £1,200 a year.
But at least now we can join in the game. Most traditional investments are the preserve of the over-50 crowd, says Adam Nash, CEO of Wealthfront, but 90 per cent of his company’s customers are younger than that. Half Nutmeg’s customers are first-time investors with an average age of 35 years old.
Some are younger – in 2014 Wealthfront signed up an 18-year-old client – but Nutmeg’s Hey says most are “one or two steps into their career, have a bit of money” and are beginning to hit life stages such as marriage, buying a house or getting knocked up. “That prompts you,” says Hey. “I need to get my shit together; I need to have my finances in order.”
Read more: Profit isn't everything, you need purpose too
Fintech apps are changing who’s investing but also what they’re investing in. “A larger global trend we’re seeing is the secular trend towards passive investing over active investing,” says Nash. “Our clients are younger than you'd typically see in the industry and most of them have lived through not one but two market crashes already. This has made an impact on how they view investing. They generally don't believe that there is a magic approach to beat the market.”
Automated technology also makes it easier to lump financial products together by theme, meaning people can pick a portfolio based on their values, according to Nutmeg’s Hey. That encourages “socially responsible investing” that may centre on being “sharia compliant, or clean energy, or sustainability”, he explains. Look at Motif: that investment startup lets users pick and choose “baskets” of funds based on themes as varied as “robots” and “gay friendly”.
But as much as we’d like to score points for causes close to our hearts, the other side likely hasn’t even noticed our preferences: robo-advisors as a whole make up less than $100 billion of the total assets under management in the US, compared to a total market of $30 trillion. A third of a percent isn’t going to sway big finance to favour “friendly” stocks.
In the end, fintech apps may not do much more than add a few more lightweight investors on the bottom rung of capitalism, but simply getting in the game has another benefit: at least we can finally learn the rules.
With the majority of first-time investors unlikely to know the ins and outs of the financial world, the real innovation in Betterment or Wealthfront isn’t in fees or investment piles, but information architecture. Such tools are simple to use while standard investments are frustratingly complicated. Wealth management apps make it possible to invest without having to understand WTF an ETF is (it’s an exchange-traded fund).
“All of this is going to reduce information asymmetry,” says Robert Wardrop, executive director of the Cambridge Centre for Alternative Finance. “The big issue in financial services is information asymmetry. A lot of the fintech technologies coming in are disintermediating and in the process reducing that information asymmetry.”
“That’s what’s going to impact the financial industry – they had all the information, they’ve been sitting in the middle,” says Wardrop. “This is about taking information to the end user in a transparent, comprehensible way and that’s quite key.”
When someone signs up to Nutmeg, for example, they’re hit with standard warnings that investment involves risk and the past is no indicator of future performance. Before someone can invest, they’re given a Buzzfeed-style quiz to assess their comfort with risk, rating how much they agree with statements such as: “I'm comfortable with uncertainty when investing my money” and: “For me, part of investing is experiencing the ups and downs.”
Once a user receives their rating level, they’re given a breakdown of how much they could lose (and make) and are asked to tick a box confirming their standard of living won’t be materially damaged if the worst-case scenario holds true. Only then are they allowed to set up an account.
“People appreciate that we explain things in their terms,” says Hay. The company’s approach, he continues, is to employ the “iceberg principle”, sharing the key ten per cent and leaving the rest for later. “We make things simple but we don’t dumb it down.” But holding so much information back could be problematic.
Read more: History is being locked away. Google's museum is changing that
Robert Forbes, a chartered financial planner with Stadden Forbes, suggests more information is necessary. “They [wealth management tools] provide a quick, attractive way of investing but with limited capability for comprehensive planning and the nuances you only really get with talking through issues.” But the prevalence of such apps means we may never have those chats, once again leaving new investors out in the cold when it comes to real knowledge or solid advice.
That’s because, despite the robo-advisors moniker, finance apps actively avoid giving the same advice a financial planner would. “Most of the time these guys are trying to dodge formal advice,” says KPMG business development director Chris Mills. “There’s a bit of a dance at the moment. Most of these robo-advisors are trying to ensure that they’re not seen to be providing advice.” So where does that leave Nutmeg’s quiz, isn’t that formal advice? Companies working on robo-advisors say no, and so far regulators agree – but that could change. “There is a risk that they will be held up [and told] to all intents and purposes you are providing advice,” says Mills. “As you can see with PPI, there’s not a time limit for that to come back and bite you.”
Keeping things simple isn’t necessarily bad – it could help level the playing field in another way. Mikhail Ismail, project lead at the Chartered Institute for Securities and Investment, thinks investment has been made unnecessarily complex, with too many “barriers to entry”. Compare it to sales: before eBay and PayPal, setting up shop was complicated, but now anyone can do it. “Now you can argue the same thing for [investment],” he says.
But while eBay ripped up the world of retail, the same may not follow with finance. Online investment tools are expanding who can engage with finance, but they’re still very much part of that world. Mills compared the changes in finance to manufacturing and sales. “These apps are all in the business of easing distribution side of the business and many of them are focused on providing a better customer experience,” he said, suggesting they’re little more than a new way to sell existing financial products.
Two years ago Nutmeg won investment from Schroders, the second largest asset manager in Europe – it “makes” the financial products, and lets Nutmeg “sell” them to a new audience, happily gathering data about what those new customers want. For Mills, this suggests nothing has really changed at the core of finance, it’s just gotten better at sales and marketing. “I think they’ve fundamentally changed the thinking around distribution but they haven’t changed any of the manufacturing.”
All of this means that personal wealth management apps might help people save for a mortgage more quickly, but widespread disruption to the state of capitalism is some way off – we’re too small and too poor to beat big finance at its own game playing by its rules. For some, a future of peer-to-peer lending, crowd lending and funding and blockchain offer more promise.
Read more: 29 reasons to love PowerPoint
P2P lenders such as RateSetter and Zopa are helping people fund anything from a holiday to a small business, all while cutting out banks and the wider financial system entirely. These services aren’t the preserve of young digital natives – 55 per cent of lenders are over the age of 55, and a full third are over 65, according Bryan Zhang, director at the Cambridge Centre for Alternative Finance.
Zhang gives the following example: an 87-year-old Briton who spread £1,000 across 100 P2P loans, giving him a “bit of money coming in every month”. P2P funding offers him higher interest rates than traditional bank plans and are more flexible, letting him diversify with small amounts. While it may seem risky to loan over the internet to someone you’ve never met, startups often have provisional funds to back the loans – if it defaults, your principle and interest are returned. Such systems could in theory leave out the wider financial system, especially when managed via blockchain or paired with bitcoin for transfers.
That’s true of crowdfunding, too. Most of us use crowdfunding to pre-order a product we want to exist. Equity crowdfunding sites such CrowdCube work on the same model, giving funders a slice of a startup in return for investments as low as £10.
Of course, it could take time for that investment to pay off, as companies take years and decades to grow. Zhang pointed to WeFund as an example of a decentralised crowdfund that tracks each transaction via smart contracts on a blockchain, using the ledger tech to manage each slice of equity. “That will not only offer lower fees, but it is much safer and more secure. That will help to mitigate some of the potential risks in the sector, namely who is borrowing money and for how long, and how do we store all those transactions,” he says. “Equity crowdfunding can run through ten or twenty years before exit, and who is checking equity shares?”
Plus, by using the blockchain to track equity ownership over the longer term, it allows those assets to be traded, creating an entire new class of investment sitting outside the existing financial system. “Those new providers and those new intermediaries really represent the emergence of an alternative circuit of capital,” says Zhang.
But don’t start celebrating the financial revolution quite yet. While innovation will force existing players to be more open, Zhang cautions that it won’t mean the one per cent are going to be overthrown. If we can all see how such systems could benefit us, so too will the people with all the money. “The institutional investors and the incumbents are also taking notice,” says Zhang, pointing to Nasdaq’s use of blockchain as one example.
“Rewiring of capitalism is happening,” he continues, leading to more transparency and individual empowerment – but it’s only an infrastructure shift. “Capitalism isn’t only about structure, but who controls that structure. The fundamental change in infrastructure doesn’t mean the power balance and the hegemony of the incumbents will shift, because we’re still playing the game of capitalism, and the incumbents have all the power they need in terms of capital.”
Such innovations mean more of us can play the game – but that doesn’t mean we’ll win it.
This article was originally published by WIRED UK
