Managing assets: new model looms
CROWDSOURCED INVESTING: CUT OUT THIRD PARTIES
In this ‘trade sharing’ platform, people trade on their own account. Anyone who likes what they’re doing can pay them to replicate it. Moneyweb
Disintermediation is one of the biggest themes in the new, sharing economy. This means creating ways people can transact directly with one another without needing a third party.
Growing interest in cryptocurrencies and innovative fintech offerings are highlighting how traditional banking has work to do to stay relevant. So far asset management has largely been unaffected. The potential for a sharing model in this industry is emerging.
Trade sharing
Currently, asset management works on the principle that the client deposits money with a firm that manages it on their behalf. This is highly regulated, with protections to ensure firms that look after other people’s money don’t make off with it.
But what if you could get access to investment expertise without having to give anyone else your money?
What if you could keep that money in your own brokerage account, but benefit from the skill of someone else?
This is the model offered by “trade sharing” platforms like Collective2.
These allow anyone with a brokerage account to link it to another trader so it mirrors what they’re doing. Whatever trades they make are automatically also executed in any linked account.
Anyone can make their services available. Since they don’t actually handle anyone else’s money, they don’t need to have a licence. They’re simply trading on their own account; anyone who likes what they’re doing can pay them to replicate it.
In a sense, it’s the perfect free market as there are no barriers to entry, apart from the cost of a brokerage account.
Competition will separate those who know what they’re doing from those who don’t.
Not so fast
The model does have flaws. Firstly, it’s currently geared towards trading rather than long-term investing.
It’s therefore unlikely to worry traditional asset managers too much in its current form.
But the potential is there to rate traders on long-term rather than short-term metrics.
Since users have the ability to change who they’re following with a click, chasing performance might become pervasive. Investor education will be a high priority.
Those wanting to attract users to follow their trades may also take very risky positions in the hope of making very large returns, and thereby get noticed. Being aware of risk is going to be very important.
Finally, this also only works for a single asset class – listed equities.
However, since exchange-traded funds and exchange-traded notes now give anyone access to a range of asset classes, this may not be so much of a problem. It’s possible to build multi-asset portfolios using these tools.
However, as this is still a largely untested field, its popularity will need to be established, but it certainly does have interesting potential.