Investment advice – moving towards a new model

Juan Colon, CEO and Founder of Darwinex

Chances are, all of us have a few friends who are able to offer us sound investment advice. But have you ever thought that they might actually be able to match the advice from the likes of a Goldman Sachs adviser? Well, the parameters that have formally defined the meaning of this ‘expert’ are now changing.

Investors have traditionally been hamstrung by the offers and rates that are presented to them, with what has thus far been a predominantly one-way relationship between investors and their advisers. With the advent of FinTech however, openness to alternatives to traditional models is increasing – including awareness of digital-only alternatives, completely separate from the traditional institutions.

The changing of the guard

Traditionally, investors have trusted the solidity and presence of traditional firms. Most 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 weren’t previously aware 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 my expert achieve as much as could be achieved within my investment constraints?

Similarly, transparency was sorely lacking: customers have no real way to know what benefits their ‘expert’ may be enjoying 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 serving interests other than the customers’.

This gap doesn’t just affect bricks & mortar institutions. Arguably even robo-advisor platforms, such as Nutmeg and Wealthfront, heralded for their transparency, flunk some key criteria. After all, who programs the algorithms powering these platforms? They may sport a very intuitive interface, but how different are the ‘experts’ behind their algorithms from the systems and processes that the banks have? This begs the question of whether the best of millions of individuals actively managing their savings could outperform them – perhaps this would re-define the term ‘expert’, and introduce a much needed meritocratic approach.

The sharing economy, applied to finance

There are lots of examples of how the sharing economy has brought about beneficial change for consumers. Airbnb has been a huge success, because rather than setting up yet another undifferentiated hotel, it empowered the crowd to create experiences that leveraged under-utilised assets: properties.

So how can we apply this to finance? The democratisation of finance from P2P lending to crowdfunding is high on the agenda. We’re gradually witnessing the rise of ‘people power’ and the de-stabilisation of traditional organisations and structures.

Mind-sets amongst consumers are shifting as they realise that advice by the traditional crowd may not actually be their best investment option. It could well be amateurs managing their funds, with a keen interest and a savvy investing or trading technique. Just like travellers leveraged 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

ETFs (exchange-traded funds) 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, 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 they are still plagued by the very issues afflicting traditional investment advisors. Crowd-sourcing investment strategies could tick all the requirements.

Wanda Rich

Editor-in-Chief since 2011.