Climbing the asymmetries of information in finance with the web? The time is now.
We all know it: internet is a powerful force in democratizing information, reducing the typical gap between the experts and the public. Information is the currency of the internet. The effects are amazing in many industries and sciences. The impact of this change is enormous, just think about the MOOCs: with a decent connection and a bit of drive, you can access online courses from the top universities in the world, for free.
The massive wave reducing the unbalanced distribution of information between buyers and sellers, typically called “information asymmetry”, seems to have affected all industries but one, finance.
When I decided to abandon my golden career in investment banking I was really fed up with finance and probably not greedy enough to resist longer in a job that was uninteresting to me. When my partners and co-founders of AdviseOnly, came to me with the idea of using the web to make the output of a financial technology of professional standing, easily accessible to the savers’ public through the web, I falled in love with the project. Using the web to foster financial knowledge and increase investors’ awareness, was giving a new sense of purpose to my background.
The idea behind AdviseOnly is quite simple. Investing is pretty much like cooking. You don’t need to know all the chemistry and physics behind cooking, to put together a decent meal. Metrics such as liquidity, risk, diversification can be easily explained to a child.
Everybody can understand the basics of finance and investing. It’s no rocket science, just the use of an overly technical language and too much jargon, often unnecessary, which makes people feel uncomfortable and not ask too many questions, particularly about fees.
The effect of the internet: reducing information imbalances and generating trust.
Internet has been quite efficient at reducing asymmetries of information by shifting information from the hand of those who have it into the hands of those who do not.
Today, in many industries, consumers have the same information that businesses have long had. This shift toward a more balanced distribution of information benefits consumers and quality businesses alike. Consumers have the power to direct their business towards the companies that offer the highest quality offerings for the best price.
By increasing transparency and trust between buyers and sellers through equal access to information, companies are helping to create more efficient markets.
The auto is one market in which companies have entered with the mission of informing and empowering consumers, others examples include firms producing sophisticated technological devices such as smartphones or computers.
Is it easier to choose a car or to make an investment?
Try a very simple social experiment. Just ask to some of your friends, possibly working in different sectors, if they can name 5 attributes that influences their decision about purchasing a car. Most of them will likely be able to answer and justify their choice. Then try the same thing by asking the if they can find 5 reasons that make them choose an investment. They will probably struggle to name 3. Shall we assume that a car is something easier to understand than an investment?
Finance is a strange industry, driven by the offer rather than the demand side.
The idea behind Adviseonly looked quite reasonable to me. Strange but true, finance seems to be the only industry that has resisted the impact of internet as the most powerful force to reduce asymmetric information. Financial literacy is quite low and the general level of understanding of financial products and their costs is quite depressing in western countries.
Why that? There are many reasons, some of which reside in the human psychology and are the field for research of behavioural finance. Surprisingly enough, emotions have a big influence in the way we handle our savings.
Most people are not able to take autonomous financial decisions, financial intermediaries are key in shaping the way we invest, pretty much anywhere.
It’s one thing to share a decision with someone who has the same level of information, it’s another if the level of information is unbalanced.
Banks are fostering information asymmetries
In order to accelerate change in investors’ culture in Italy, we have adjusted our strategy and decided to approach financial institutions to help them innovate their range of investment services by offering them our technology. Meeting after meeting I soon realized that the asymmetries of information between finance professionals and investors, no matter what level of education, are nothing but a strategic decision of most financial institutions.
Financial institutions have been complacent in maintaining their information advantage, which enabled them to hide high fees, and distribute ridiculously funky investment products. An overly technical language and hundreds of pages of prospectuses and termsheets that nobody understand and is willing to read, do the rest.
Banks in Italy continue to make high margins on households due to their informative advantage and to the fact that they present finance as the most unengaging topic in the world.
Regulators have a moral obligation to do better.
I might sound freak, but I believe that financial inclusion and consequently basic financial literacy should be just another civil right. That is what is happening already in many developing countries.
Our life is made of a series of financial decision and our wellbeing as individuals strongly depends on understanding financial basics, even if we find it boring. Having a basic understanding of how debt, interest, saving and investment work, is not only a moral obligation but a requirement for leaving a good life.
The unsustainability of public welfare schemes in western countries, should encourage governments to inform people about the importance of saving for retirement and to provide unbiased advice on transparent and cheap alternatives. That is basically what Obama did with the new rules on retirement-fund advice.
To effectively protect investors, regulators should make an effort to further promote transparency and a type of financial disclosure that can be really useful to people, written simply and clearly. Simple examples and an engaging format would be necessary.
Regulators are well aware of this and should make an effort to promote good financial education, possibly unbiased, provided by independent organizations and not by financial institutions.
Financial Innovation Now: when the going gets tough the tough get going.
A few days ago something major happened with the announcement of a new initiative called Financial Innovation Now. Financial Innovation Now is an alliance of technology leaders, including Amazon, Apple, Google, Intuit and PayPal, working together to modernize the way consumers and businesses manage money and conduct commerce. Just a few quotes from their website :
“We believe that technological transformation will make financial services more accessible, safe and affordable for everyone, and we promote policies that enable these innovations”
“We believe financial innovation will grow opportunities for all consumers to have safe and reliable financial tools and deepen financial literacy”
“We believe financial innovation will empower consumers to better manage their financial lives through convenience, ease of use and access to more options”
These guys are the masters of the universe of the web and have the power, money, creativity and user base to completely reshape the world of finance. Music for my ears.
“Vuolsi così colà dove si puote ciò che si vuole e più non dimandare..” Dante Alighieri — La divina Commedia (XIV Century)