How technology is changing the way consumers invest

The manner in which money is invested in both private and public markets is changing with the help of technology

In a recent post on the state of consumer fintech, I went over the main ways in which technology is changing the way consumers consume, invest and borrow, namely:

1. Increasing access to information thereby allowing users to make better decisions
2. Reducing friction in completing transactions or making inaccessible transactions possible(where friction can be time/effort)
3. Lowering the fees/improving returns on transactions

The state of consumer fintech

I’m now going to dig a little deeper into investing to show that because the manner in which consumers invest varies so much, there is no one-size-fits-all solution that works for everyone. Therefore, there are a number of products that cater to different customer needs, although the manner in which they help is still the one or more of three identified above.

But how do different consumers invest differently when it comes to investing?

One way to think about consumers is on a spectrum, where the consumers to the far left are the ones that know about the markets and want a lot of control over their investments (commonly known as “active” investors), while the ones on the far right want to invest their money in a way to get good returns given their risk profile, but don’t want to get into the nitty-gritty of it (the most “passive” investors).

I like to thing about it on a spectrum in terms of automation, where the far left is people that want little to no automation, whereas the far right represents those that want a lot of automation.

For the sake of simplicity, I’m going to divide up the consumers into three segments in terms of the level of “automation” they want to put into their investing: low, medium and high, but I think in actuality it’s more a spectrum than a division.

With that done, lets consider how technology is changing how each of these types of consumers invest, and lets do it for two kinds of markets: public and private.

Public Markets

This involves investing in stocks and bonds. A decade or so ago, this activity was performed in one of the following ways:

1. Do research by reading WSJ and other publications, look through S-1's, ask friends what they are doing and invest using e-trade or other brokers
2. Put their money into index funds/mutual funds
3. Hire a private wealth manager to manage their wealth (assuming they had enough wealth to hire one)

Lets see how each of these can either be replaced or augmented in better and/or cheaper ways, by examining the tools now available for the different customer segments.

Low automation/high effort

These are investors that want to do research themselves and decide what stocks to buy. The “active investors” if you will, who previously did research by reading the WSJ and other publications and examining S-1's, picked stocks to buy, and bought them using e-trade or other online brokers.

Technology is mainly helping them by (1) making it easier for them to do research including in ways that were not possible before and (2) making it cheaper to carry out trades.

Some of the products that help these kind of investors perform research:

1. Estimize which crowd sources estimates from hedge fund, brokerage and independent analysts
2. Stocktwits which is a social network for traders
3. ChartIQ which provides web and mobile tools for traders to perform technical analysis

Some of the products that helped investors carry out trades for cheaper or in a different manner include:

1. Robinhood which enables users to buy stocks without any fee.
2. Tradeking which is an online brokerage charging $4.95 per trade.
3. Quantopian which allows users to research and write their own algorithms which they can backtest and use to trade.

Medium automation/effort

These are investors who either know a bit about the markets and want to learn more but more or who want some control over where their money goes but don’t necessarily know all the details about stocks to be able to invest in them without some kind of help. They previously either bought an index fund or mainly bonds or bought a stock every now and then.

Products that cater to them tend to be those that teach them about markets, curate stock recommendations for them, or provide simple analyses for them so that they can make decisions.

Here are some tools for these kind of users:

1. Learnvest which teaches users about the markets and provides them with personalized financial planning
2. Motif which lets users invest in a basket of stocks based on a theme or trend
3. Cappio which provides reports and recommendations that anyone can understand
4. Openfolio which brings the sharing economy to personal investing, allowing users to see which stocks are popular in their network and benchmark themselves against their peers.
5. Fundseeder allows investors to discover trading talent whom they can invest money with.

High automation/low effort

These are users that might know very little or nothing about the market. They are the “passive investors” that don’t have time to pick stocks or even index funds or themes by themselves — all they want to do is to invest their money in a diversified portfolio in a manner that meets their long terms goals. Most people tend to fall in this category, so naturally there have been a lot of services that help these users invest. Previously, these people either bought index funds, didn't invest at all, or used private wealth managers.

The products that serve these customers completely manage their money at a reasonable rate, and tend to be called “robo-advisors”. These products are competing for money with private wealth managers, and their advantages include being cheaper, transparent and efficient.

Some of these products include:

1. Wealthfront which is an automated investing service that charges 0.25% in fees above $10k in assets managed.
2. Personal Capital which is an automated investing service that charges between 0.5% to 1% in fees.
3. Betterment which is an automated investing service that charges between 0.15%-0.35% in management fees
4. Nutmeg which is an automated investing service in Europe which charges between 0.3 and 1% in management fees.
5. Acorns which automatically invests spare change from everyday products into a diversified portfolio

Private Markets

This refers to investing in private markets, which has seen a big increase in interest and activity from consumers with Title II of the JOBS act which enabled equity crowdfunding being a primary reason.

We’ll be using the same customer segmentation as mentioned earlier, to look at how products help consumers invest in the private markets.

Low automation/high effort

These are investors that want to do their own research and decide which companies to invest in. The products that help them come in two forms: (1) those that help them with their research (2) those that make it easier for them to transact.

Some of the products that help these kind of investors are:

1. Datafox which helps users understand and predict trends in the private tech sector and offers a personal plan for individuals
2. Mattermark which helps users quantify performance and growth of private companies and offers a pro plan at $400/month which might appeal to some consumers, though is more targeted towards enterprises
3. Angellist which helps potential investors discover start ups looking for funding
4. Equityzen which allows investors to buy shares in private companies
5. Equidate which gives investors access to shares of private companies
6. Crowdfunder which is an equity crowdfunding platform

Medium automation/effort

These are investors that want to invest in private markets but don’t want to select the investments all by themselves. Technology has helped by allowing them to back people who can invest for them or curate companies in which they can invest (i.e., curated equity crowdfunding platforms).

Products that help these kind of consumers are:

1. Seedinvest which is an equity crowdfunding platform which helps potential investors find vetted start ups to invest in
2. Funders Club which is an online marketplace that allows accredited investors to invest in pre-screened, private companies
3. Microventures which is a an equity crowdfunding platform allowing investors to invest in rigorously screened and vetted startups
4. Angellist Syndicates which allows backers to access and invest in deals led by a syndicate they back, which depending on how you look at it could fall under medium or high automation

High automation/low effort

These are the investors that want to invest in the private markets but don’t want to handle the act of investing, leaving that to an angel or VC firm. Automated investing hasn't affected this segment as much as say the same segment in the public markets, because I think that most accredited investors use a wealth manager if they want to automate this or need an “in” at a VC firm to give them their money directly, or they want to have more of a say and so this segment is relatively small when it comes to private market investing. However, some products have emerged that cater to this segment.

A product that could help these kind of investors is:

1. Funders Club Partnerships which allows users to invest in startup funds managed by VCs/angels

Closing Thoughts

Technology is changing how consumers invest, both in public and private markets. It is helping all kind of customers, from the research-intensive investors that do it for a living, to the consumers that want an automated solution. And it is doing so in the three ways I mentioned:

1. Increasing access to information thereby allowing users to make better investing decisions by effective use of crowdsourcing and social networks (Estimize, Openfolio, StockTwits) and through AI and data analysis and visualization (Datafox, ChartIQ)
2. Reducing friction in investing or making inaccessible investments possible through curation (Motif, SeedInvest) and marketplaces (AngelList, Crowdfunder, Funders Club)
3. Lowering the fees/improving returns on investment through the use of AI and data (Wealthfront, Betterment, Nutmeg, Robinhood)

Another thing worth noting is how some companies such as AngelList and Funders Club are offering multiple products that target different customer segments, and also trying to become full-stack in terms of allowing for both research and investment through the platform.

Thanks for reading! Feel free to share this post and leave a note if I've missed a product you think should be in here, but please note I've tried to use examples to be illustrative more than exhaustive and have focused on startups rather than big companies that have been around for a while.

I’m tanayj on twitter if you want to discuss further!

A huge thanks to Zal Bilimoria, Niv Dror, Hart Lambur, Ned Renzi, and Matt Wong for reading drafts of this piece.