Cloud opens up democratisation of retail investor services
Cloud services are opening up possibilities for the retail investor to create individual customised funds in a way that was previously the preserve of the super-wealthy. Coupled with UK regulation such as the Retail Distribution Review, the effect has been to make new business models possible, according to Michael Newell, chief executive at InvestYourWay.
“Nobody is really talking about how the cloud is fundamental to what they do, but it is,” said Newell. “Where previously it might have taken days or even weeks to get the information to set up a fund, and to change your portfolio and positions completely, and to activate your account, it now takes just a few seconds thanks to Amazon Cloud.”
Newell previously worked at BATS, where he was involved alongside Mark Hemsley in setting up the exchange’s ETF services. For some time, he had been increasingly aware of the kind of services that high net worth investors were getting and began to form an idea that someone could bring that to the common retail investor. The idea was to create a system where each individual person has their own fund. However, Newell soon realised that to make that possible, it would be necessary to service customers investing smaller amounts at significantly lower cost – something that had never really been viable up to that point.
“You’d never get that kind of individual attention unless you were high net worth,” he said. “If you’ve only got £2,000 to invest, it’s not going to be worth a fund manager spending the time with you and charging just a few pounds for their time, which is what they’d need to do to make it viable. It just didn’t work.”
Cloud services changed both the economics of the situation and the practicality of his original idea. Newell found that by obtaining computing power as a service, calculations that would have taken 48 hours on a laptop could now be completed in 30 seconds. A manual Google search process carried out by an individual to work out how best to invest might take days at the least, or more realistically weeks and even months – but on InvestYourWay, it can be done in seconds because the process is automated.
Part of the impetus for the new business was also provided by regulatory change, which began to make it easier to compete in the UK with the established fund managers. Specifically, the Retail Distribution Review which came into effect in January 2013 had the effect of forcing fund managers to unbundle their services, providing transparency into previously opaque business charges. Customers could now see exactly what they were being charged for, and that has had the effect of forcing down prices and changing consumer behaviour.
“It’s amazing that it took so long to bring that to the retail investor,” said Newell. “If you think about it, all of this has been happening in the capital markets for years. The focus on greater transparency and unbundling. The clarity on costs and fees.”
However, the idea still needed visibility and a user-base. This was provided when the platform agreed a deal with broker IG, under which InvestYourWay became a service available as an option on the drop-down menu for IG customers. The platform launched in October 2014, offering investment based on indexes rather than single stocks. This was done in part to keep costs down, and partly for ideological reasons. Newell explains that alternative instruments such as ETFs are popular, but would have involved gradually increasing slippage over time due to the costs of middle men. Focusing on indexes removes that problem.
The platform also claims to be the first to offer non-leveraged contract for difference trading. While around 40% of trading in London is estimated to be accounted for by CFDs, normally these are leveraged such that an investor who puts in £1,000 stands to gain £10,000 (but may also lose on the same scale). But IYW’s contracts are not leveraged.
The interface of the platform has quite a bit in common with the latest personal financial management interfaces. The first page consists of a time slider, a risk slider, and the amount the user wants to invest, as well as preferred geographical focus – Europe, America or Asia. After that, users get a pie chart breaking down how the service has allocated their investment based on the sliders. For example, into categories such as North American fintech startups, Asian banks, European corporates, etc. Users also get bar charts showing the historical performance of the fund they are designing, as they go along. They can also see an Amazon-style recommendation suggesting “People who invested in X, also bought Y…”
After that, the user is presented with optional add-ons such as investment in gold, banks, metals, pharmaceuticals, and other areas that may be of special interest. Hovering the mouse over one of these options allows the user to see what percentage of other funds have used that add-on. Choosing one of the add-ons recalibrates the fund that the user is creating to match, for example adding a bit more Switzerland if the user selected banks.
In a demonstration seen by Banking Technology, it was possible to adjust a fund by getting out of Europe and moving the user’s investment to Asia in a few clicks. According to Newell, it would take weeks to do that the traditional way. The process might involve moving money from one fund manager to another or starting an entirely new fund. It was also possible to see how much the cost of that move was – in a demonstration seen by Banking Technology, on a £10,000 investment the cost was £13. Prices are matched to the most recent available end of day data.