The age of new finance
The newest generation of young people have the bleakest fianancial and environmental future ahead of us. Nonetheless with a slew of new app-based fintech companies I have been wondering whether the new is simply a snazzier version of the old.
The newest go tech companies Robinhood, Monzo, Revolut are poised to take on large incumbents in their respective fields.
Robinhood, by focusing on younger generations, has built a following that is convinced of its ability to seamlessly and flexibly buy into the stock market. Whilst Robinhood represents only a tiny share of the asset under management compared to large companies including Charles Swabb and TD Ameritrade, the increasing wealth of its young will grow. But what is on offer. At the moment the big offering is flexibility and ease in buying stocks. Nonetheless one wonders about novelty of stock purchasing and whether a policy of effortless stock picks is savvy investment for a generation with the least amount of wealth.
The heart of this question is one about active vs passive management and the role of choice in our financial future. It has become almost trite to say it but active management simply does not have the staying and earning powers that the wider market and passive management can provide especially through lost cost ETFs.
We should therefore expect that new finance prioritises the safety and financial well being of its users. And that is best aided not by encouraging active policies of picking winners but hewing to the market herd and low cost ETF (not ruinous gambling but portfolio management).
On first glance companies like Robinhood, Etoro, Etrade are simply more of the same. A way for retail investors to lose returns relative to the market trying to chase winners be it technology or otherwise (meme stocks aside). Covid-19 has shown that when it comes to true surprise, active management is simply incapable of ensuring returns to investors. Yes there were stock that rose following with lockdown that swept the world but even those were not enough to help active management entities beat the market.
Even as Bloomberg truimptly proclaims the win of “Wall Street jockeys” vs the incumbents. The true test will be whether those returns can be maintained or will simply be lost in the next wave of animal spirits.
The active policies in play by millennial retail investor would be innocuous enough were it not for a much smaller wealth share and large negative downside risk to future earnings in response to climate change, ageing societies, and pandemics.
As millenials, we have a much smaller wealth share than our parents or their parents did. This means that sustained losses have a disproportionate impact on us as opposed to our very wealthy parents in the hedge fund investing realm earning mediocre returns. New technologies should enable good choices not repackage poor old ones for an unsuspecting cohort.
Consider the difference between Nutmeg a new wealth manager and Vanguard. Nutmeg claims to utilise the latest AI technologies to deliver a more affordable wealth management option. It prices its marque service at 0.75%. In contrast, Vanguard is nowhere near as savvy online or via app offers services as cheap as 0.2% of assets under management with comparable returns.
Nutmeg pitches itself as an affordable way for younger, less wealthy investors to access the best active wealth managers even though it is clear that active management doesn’t work.
Over a 40 year time horizon and assuming that the stock market will average a conservative 7%. The net return minus fees for Nutmeg vs Vanguard equate to 6.25 and 6.8 respectively. On 10000 pounds invested that translates into a nearly 26000 pounds lost due to fees paid to the “affordable” new entrants vs the stodgy old incumbent.
In finance newer is not necessary better (see the ruin brought about by new financial derivatives).
So too with Monzo. One of its first moves towards monetizing its substantial number of customers was to offer overdrafts with fees currently 39% apr. This more expensive than Barclays at 35.0 % apr and nearly twice the fees of the average credit card 25.3% apr. One would have thought that technology could have been used to help people get on when they are cash strapped without ripping them off at twice the interest of a credit card. The “new” offering is much the same as the old with the same downsides and higher interests: missed payments leading to large debt burdens.
The rush to digitise has meant that the business structure of new fintech companies will end up losing younger investors money even as wealthier old clients make return off of our earnings through private equity and venture capital. Or perhaps, highlighting the distributional aspect of today’s wealth inequality, this wave of innovation only benefits the young white males who lead non too innovative companies.
Just as the promise of the tech guard Google, Apple has faded leaving behind monopoly and stilted innovation, so too today younger investors will be disappointed to learn how new technological solutions do not represent the cheapest offering to maximise returns.
And we can least afford it!
Today’s young investors need to learn the lessons of the old. Sometimes it is better to do nothing. Investing less frequently, in globally diversified assets, with low fees is the way to go. So too younger people shouldn’t obtain overdraft in new fintech but should pursue older credit cards that are cheaper and actually help to build credit scores.
In sum when it comes to finance less sexy, more passive with an eye to fees is much better than new and expensive.