“The link between investors and business has largely been severed, with Wall Street acting as intermediating force, collecting fees – or rent, in economic jargon – every step of the way.” – Amy Cortese, Locavesting
Re-inventing financial services is important because we need to reestablish the link between the investors or the saving and consuming public and all the companies raising debt or equity.
The World Economic Forum states that “the role of financial services in society is to facilitate efficient allocation of capital to support economic growth”. Unfortunately, the saving public delegates their capital allocation responsibility to the experts on Wall Street.
“When we hand over responsibility to the experts we cause massive problems with our food system” – Michael Polan. The same is true of the financial system. Besides loosing money to the agency cost, we are loosing the value judgment over the kind of impact we want from our investments. Luckily we live in an age where technology is available for massive collaboration that will challenge the authority of the so called investment experts. The challenge we are facing today is that the financial marketplaces which will connect social minded companies that look for social minded employees who want to do good with individual investors are not yet assembled.
The incentives however for hands-on management of our retirement savings have never been stronger. Over the last few decades public sector defined benefit pension plans have became virtually extinct. The shift toward defined contribution pension plans transfers the investment risk from the corporations to the working public. The legacy financial services industry has not and will not offer people practical tools to manage their newly acquired investment risk, and people continue to delegate their capital allocation to Wall Street. We need to re-invent financial services to help people manage their new market realities.
For companies, the post-recession credit crunch limited access to capital from banking institutions. Crowd-funding and marketplace lending is starting to bridge the funding gap and offers an opportunity to reestablish the link between companies and investing consumers. Unfortunately the peer-to-peer promise has been overflown with institutional investors, yes the professionals came in with heir money.
It is amazing that people still believe the myth that capital allocations should be delegated to the “smartest people in the room”. People are told that voting with their dollars at the cash register is the best that they can do. However, once a service or product has been created it is too late, somebody has already made the funding decision. We are all investors and we can improve that feedback loop.
The marketplace change is not happening as quickly as we would like. Even if we, the consuming investors, start thinking in terms of connecting with socially conscious companies that’s not enough. Companies, as they go about financing decisions need to start looking directly for the consuming public for hep, and with crowd funding and peer-to-peer industry moving into mainstream we will get there. Once Companies seeking funds and investors looking for investment vehicles, debt or equity, find a marketplace platforms where they can meet and support each other along the lines of affinity and value, who will need experts?
This idea though is not new. Already in the 80s Peter Lynch was ahead of his time. He taught people that it is impossible to be a credit card carrying consumer without having done the fundamental analysis on dozens of companies. Today we can top that by sharing our consumer research with each other for investment purposes. Thus we do not even need investment advisors.
This vision of new financial services powered by marketplaces connecting investing consumers with businesses will not become the mainstream reality until we stop believing the into the need for delegation to experts. But that is a chicken and egg problem. What will be first, the systems and tools for new finance or our desire for such tools. All new finance products need to converge into an ecosystem that will comfortably fit in the palm of my hand on my smart phone. Once we have access to all the crowd-funded securities in my open-source collaborative portfolio, we will have re-invented finance and disrupted the legacy financial services business model based on centralized allocation of capital by experts.
Why do I believe this will happen sooner than you think? For one there is a pot of gold at the end of this disruption rainbow. And for two we have the technology to do this!