Thoughts from GemCap UK and Group CEO Stuart Alexander on the debate about making private funds accessible to investors, and the importance of advice and seeking professional guidance for investors.
It’s all about advice
I had a great time last week at Funds Congress in London, sponsored by Carne, Dechert’s and PWC. A worthwhile event for all those involved in the funds industry, whichever area you sit in. There were some excellent speakers covering many different topics ranging from geopolitics, regulatory updates, ESG of course and a session on the role of tech in distribution which linked back to an earlier discussion on alternatives. The whole event was very well organised and one not to miss.
However, I left the event somewhat concerned regarding some of the discussions that took place from the panels onstage: debates about private funds, be they debt, venture or just general alternative solutions. In all cases, the conversation centred on the question of how the funds industry gets more investors into these funds, but there were three main issues that I want to address.
Time not timing
One comment I found “interesting” was when panellists were discussing how is it easier to buy crypto or to bet midway through a football game than it is to buy a fund. The examples they discussed were all about phone betting via various sites and the ability to buy and trade crypto on Revolut for example. Now, many of us know about the complexity of investment fund application forms, particularly the length which is legendary. Even I get frustrated with the length of our own forms, but why the heck are we comparing gambling on a football game or “trading” in crypto to investing in a fund. They are completely different. The industry has spent decades telling people to invest, not trade funds. “It’s not about timing, it’s about time” is the old vestige, and it’s still true today as it was when I first heard it 40 years ago. The whole mindset around investing is very different to the way people gamble or even trade crypto, which in my book is often done as a gamble anyway, so why do we feel that investors want to have the same experience as gambling on whether Manchester City will win the European Championship? Gambling is about instant gratification, the buzz, the excitement of the right decision in choosing Man City to win the Cup for example. A little nod to that one by the way!
Investing, however, is a more profound decision that takes investment in time. It involves an in-depth decision process which factors in research around requirements, suitability, timeline, risk & reward parameters, and a host of other elements that go into that decision. It is certainly not a spur of the moment choice, based on a few beers in the pub. The execution of buying investments and the seemingly difficult aspects of that are one thing, but the reality is that people don’t avoid investing because of the application form or how difficult it is to trade, but because they don’t have the skills. Sure, education at school will teach about the value of investing and the rationale for it, but not the different asset classes and geographies etc. That comes from a different source.
If you walk into a bookmaker and place a bet, the only thing you need to provide is the cash and proof that you are over 18. No real ID checks other than age, no suitability checks, no questions about where you got the money. Crypto trading on many apps is a similar process: connect a bank account and off you go. Simples!
With an investment fund there are so many aspects that need to be covered: AML checks, banking details, source of funds and share class types etc. The number of regulatory requirements is mind-numbing, but these have been brought in over the last 40 years to “protect” investors, especially in the ever-evolving technological time. True, ledger development will allow client data to be held in the blockchain and thus could be drawn upon when required, but what about suitability? Is that to be ignored so that investors may be at the mercy of buying products that don’t fit their needs? The execution of placing a trade or buying a fund needs to cover all the various aspects of risk, currency, investor details and bank details amongst others. We will improve the application, but only when we have the ability to share customer information through the blockchain.
One crucial aspect about the debate, which to be fair was more about FinTech than asset management, was the increase in private assets for investors and making them more accessible to individuals. I am not against the principle of making any asset class or structure more accessible to an investor – but let’s remember my earlier point. The decision process is very different for private assets than for traditional funds, and if investors struggle with current structures because of the complexity, how on earth will they deal with private assets? The simple key is advice. Once again, the advice chain is missed out by commentators and time and time again experts talk about investors having access to information and the ability to DIY their portfolios. I am not against that at all, in the same way I am not against someone wanting to fit their own solar panels on their roof or re-wire their house. It can be done, but surely many of us don’t have the expertise, the time or the inclination to start learning the basic requirements, so the job is done after a fashion at best. We bring in the experts following a brief check in the marketplace as to who is good at the job at hand. We should be encouraging potential investors to seek professional help when it comes to all elements of financial advice, yet certain parts of the industry seem to have forgotten what drives most of the fund flows today in the vast majority of markets around the world. Intermediaries whose sole job is to advise investors are a critical element to the added value chain in financial services, and we ignore them at our peril. Whilst I appreciate that the development of technology will be an enabler for investors, the simple psychology of investment will mean we still seek advice from the experts in the same way we seek guidance and work from professionals in all aspects of life.
I welcome technology into improving the way we execute all aspects of our business and I hope that investors do embrace private funds over time, but only as long as there is someone there to guide them. Let’s champion advice in all its forms and support the premise that we don’t know everything – but there is someone out there who can help.