InvestmentsNov 6 2019

The digitisation of investing

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The digitisation of investing
ByKim Fournais

For example, in the 1980s, the cost of making a trade on the NYSE reached hundreds or even thousands of US dollars, today it can be done for less than $10.

The impact of investment costs and fees can be difficult to grasp but the effects on returns can be profound.

The Danish consumer council has calculated that by shifting your savings and pensions from traditional bank-backed investment solutions to lower-cost investment alternatives, individuals can save the equivalent of four years of retirement over a lifetime.

In other words, many people work four unnecessary years on behalf of their investment providers.

Given that statistic, it is no wonder that more and more people are eschewing traditional forms of investing and turning to online alternatives to build wealth sustainably over the long term and improve their retirement nests.

In addition to price efficiency and diversification, another benefit of online investing is the ability to avoid brokerage bias, a common problem in the past, where brokers were given financial incentives to pass on certain products and instruments to their clients.

Some online providers make sure to steer clear of this bias and focus on clients’ interests and needs.

They also offer a more transparent choice than what is offered by the fund supermarkets, where recent examples show that some of the best-performing funds were excluded from their recommendations.

While online trading does have many potential advantages, it requires careful decision-making to avoid common drawbacks.

Clients need to be well-informed and comfortable with the level of volatility and risk expected in relation to their investment horizon.  

We have also seen established online providers offering excessive leverage on trading instruments, often contrary to clients’ interests.

Of course, clients need to be vigilant about misinformation, steering clear of get-rich-quick schemes, and make sure to stick to regulated providers they are fully comfortable with.

Even savvy institutional investors have fallen prey to financial scams.

More digitisation needed

Far from being stuck in the traditional world of broker-to-broker phone trading (reminiscent of 1980s movies), most large marketplaces today are electronic, and most trading happens on online platforms that should be available to retail investors.

There are some exceptions, with bond markets having been notoriously slow to adapt to electronification, though in 2016 we set out to change this by digitising access to bond liquidity for our retail clients, resulting in much faster execution times and an average improvement of 30 basis points for corporate bonds and five-10bp improvement in government bonds.

Such price improvements can make a big difference to investor returns.

A role for managed investments

Many investors still prefer guidance when they invest through a managed solution. Investing in funds with diversification can be a wise choice for people without the time or desire to pick stocks or other investments for their own portfolios.

The problem is that most managed investment solutions presented to average investors by their providers are frequently too expensive or underperforming – and all too often both.

They also sometimes only include the company’s own funds and products, leaving better-performing solutions outside of the clients’ purview.