We are in the midst of the most significant shift of power in the finance world of the past decade and this is being shown in major trends all across the industry. The rise of the self-directed investor, fueled by new services, consumer trends and technology is changing the face of finance and forcing the industry to rethink how they engage directly with consumers.
This is not just a fad or trend but an intergenerational shift which means it’s likely to stay. According to a study by KPMG, Gen X & Y held about 36% of financial assets in 2010 and will hold around 70% by 2030. They want to be in control of their finances, are cost conscious and 79% prefer using non-bank aligned indirect channels such as online research. A global study by The Guardian found that the disposable income of Australian Gen Y is growing faster than any other generation with a median household income of $268,000. From an investment perspective, these are the generations that grew up with access to online share trading, internet banking and Google. They’re used to making purchase decisions based purely on the collation of expert and peer recommendations from online sources and they’re now starting to invest into a finance world that is stuck in a time warp of intermediated products through high cost, low service channels.
This is all playing out through new solutions delivering advice, product and access to markets. The following trends are the key markers for both individual investors and the industry to keep a close eye on.
More accessible advice
In the advice space the most obvious disruption that is starting to emerge is robo-advice. What we’re seeing in the market now is only the very beginning of this trend. Robo-advice platforms such as Stockspot, Quietgrowth and Six Park essentially match a client’s risk profile to a model portfolio of Exchange Traded Funds (ETF) and then provide the ongoing maintenance of that fund including rebalancing. They do all of this at very low costs compared to the traditional channels by passing on the cost savings of having an automated investment solution. Do they replace an advisor? Of course not; or not yet. These solutions will disrupt complacent advisors that charge a premium fee for the same outcome but ultimately, these offerings service the 70% of consumers that don’t know who to trust for financial advice, many of whom end up seeking advice from friends or online.
When this space really starts to get interesting is as the breadth of the advice starts to increase. Coupled with the growth in machine learning and big data insights, robo-advice has the potential to progressively grow into a much wider proposition that can help investors navigate insurance, tax and estate planning as well as consideration of total wealth holdings. This starts to truly disrupt the established industry and has ramifications for banks, wealth management firms and technology providers to this space.
Better access to products
Taking the asset allocation discussion one step further, a fully self-directed investor may choose to design their own portfolio which is now made easier through Exchange Traded Funds (ETF). The existence of ETFs isn’t as telling as the growth. The below chart plots the number of ETF’s listed on the ASX from just 5 in 2005 to 207 in 2016 as predicted by ETF trends.
Another telling tale is search volume in google. When comparing just the core term ‘Managed Fund’ (blue line) with ‘ETF’ (red line) in google trends we see the following:
Source: Google Trends
Exchange traded funds aren’t the only way that investors are taking control of the products they invest in directly. The ASX has launched mFund, which allows unlisted managed funds to be bought and sold in a similar way to shares through participating brokers. This is the early sign of an industry moving forward as the predominant servicing model for direct consumers is currently through forms, fax and post. I wish I was kidding.
Going back to the KPMG report, Gen Y’s prefer to save now and invest later giving rise to a new type of investing; micro-investing. Acorns is the leader in this space and provides a solution that enables users to invest their spare change into a model portfolio of ETFs. It is robo-advice meets micro-investing and is revolutionary for consumers.
To explain, the cheapest ETF on the market right now is around 70c per share however to buy one of these will cost me around $15 from my online share trader leaving me with a debt of $14.30 and a 100% asset allocation towards that ETF. Through Acorns that 70c goes into my account and once my spare change reaches $5 it is invested in my model portfolio. The total per annum fee (for balances below $5000) is just $15, or the cost of just one trade through my broker.
It’s important to note that this isn’t investment advice. ETFs are considered by ASIC to be complex financial products and some types of ETF are more complex and risky than others. Click here for ASIC’s Moneysmart website for more information on ETFs and risks associated with them.
New markets to invest in
Previously the playground for private equity and venture capital, fundraising for businesses has now been opened up to individual investors as a way of generating more sticky money and brand advocates. Venturecrowd and Equitise are two of the notable Australian players in this space, giving investors access to a mixture of early stage, privately funded and pre-IPO businesses. The value of these companies is hard to determine making this type of investing not appropriate for everyone. Even professional private equity managers only achieve a 25% chance of getting a return on investment according to research from Harvard Business School.
The closer these companies get to a regulated environment, such as the ASX, the less risky they become (still far from risk free) which is where On-Market BookBuilds comes in. When companies list on the ASX they employ the services of a lead broker to do the bookbuild who would first exhaust all ‘preferred’ funding channels (ie: existing clients both retail and institutional) before exploring a wider public offering. The On-Market platform, via the lead broker, gives retail investors access to these opportunities during the bookbuild phase, prior to listing on ASX.
The trend in new markets is not limited to just business funding though, retail property has also become increasingly more accessible through fractional property investing. DomaCom is the leader in this space with Brickx looking to re-enter the space in the future. In the past, investors needed to purchase a whole house in order to invest in bricks and mortar; these platforms allow you to invest in a share of a house while still being in control of choosing a property. Being able to drive past your investment has a certain psychological benefit for many investors which is why this type of investing may have a wider appeal than REITs.
Another major new market that has opened to investors is through P2P lending. Retail banks make their money from the margin between the deposit and lending sides of their books. Individual investors can now loan out their funds to borrowers through a P2P lending platform which may either match your money to a specific person, group of people or central fund. The advantage of this type of investing is that you can get the rate premium that consumer lending (think personal and car loans) gets with the ability to diversify across a number of ‘risks’ (people) and with relatively short payback periods. This market is both maturing and evolving due to the growing consumer demand and continually changing regulatory environment. MoneyPlace, RateSetter and SocietyOne are notable examples in the Australian market.
More disruption to come
A generational shift in wealth and consumer expectations coupled with the stubbornness of the incumbent industry to change will lead to a lot more disruption to come. The FinTech movement is almost like a revolt within the industry feeding off the friction from progressive leaders being bound up by the existing frameworks of the finance industry. Many of the examples above are still in their early days with a long runway of potential. How these trends grow and evolve will be fascinating to follow over the coming years. What seems certain is that investors want greater control of their finances and that’s a trend that’s not likely to change.
The underlying impetus for this trend is the move by consumers towards being self-directed investors (SDI). First seen in the rapid adoption of online share trading, investors are increasingly expecting to be able to take control of their investments, leaving advice channels as a fall back should they need it.