The concept of democracy extends beyond politics—it is reshaping financial services too. Investment platforms should be at the forefront of this shift, broadening access and levelling the playing field, says Linda Johnstone (pictured), Novia Global’s Head of Investment Proposition. But just as not all political democracies are equal, some platforms are more “democratic” than others. So, in this her latest blog for IFA Magazine, Linda asks how do you separate the Norways from the North Koreas of the investment world?
As a politics graduate who hails from the Isle of Man, home of the world’s oldest continuous parliament, I have a keen interest in democracy. Unfortunately, it seems fashionable in political circles to suggest this is a system of government that is under attack.
Google “threats to democracy” and you will find the term applied to various individuals, parties, movements, policies, laws, ideas and so on. Worse still, all the doom and gloom may well be justified, with the Economist Intelligence Unit’s annual
Democracy Index regularly charting democracy’s decline in recent years.
Last year’s report acknowledged only 24 “full democracies”. These were led by Norway, which achieved an index score of 9.81. At the other end of the scale were the likes of North Korea, Myanmar and Afghanistan, with scores of 1.08, 0.85 and 0.26 respectively .
Thankfully, although the bigger picture may be depressing, there are still some arenas in which democracy is clearly flourishing. One of them is the financial services industry, whose ongoing process of “democratisation” is benefiting an ever-wider range of investors.
Platforms ought to be central to this transition. Ideally, they should encapsulate the fundamental notion of levelling the playing field – that is, giving as many people as possible access to the same opportunities.
It is right to concede, though, that some platforms are more “democratic” than others. So what separates the Norways from the North Koreas in this increasingly competitive marketplace?
Democratisation through innovation
It is helpful to first briefly reflect on what the democratisation of financial services entails. This also provides useful background for the emergence and rise of platforms.
In this context, in essence, democratisation can be thought of as the broadening of access to products and services whose availability was once strictly limited. We can illustrate the concept in action by winding back a century or so and considering the launch of the original open-end mutual fund.
By pooling resources to buy a diversified portfolio of securities, this breakthrough immediately and dramatically widened access to financial markets. For the first time, individual investors could buy and sell shares at their net asset value at the end of each trading day.
A comparable revolution took place towards the end of the 20th century. Amid mounting interest in the then-novel notion of passive investing, exchange-traded funds (ETFs) began to gain mainstream attention.
The advent of ETFs allowed investors to track a market index instead of relying on a fund manager to actively manage holdings. Fast-forward to the present day and we find that, as with open-end mutual funds, there are now thousands of such vehicles invested in trillions of pounds’ worth of assets.
Platforms are very much in the tradition of these mould-shattering innovations. They open up the investment universe, they bring institutional buying power, and they are becoming both more numerous and more popular. Yet here, as in the sociopolitical realm, it would be wrong to assume all democracies are alike.
When democratisation is not all it seems
It might be argued that true democratisation in this sphere lies in the number of opportunities to which access is granted. Take Novia Global’s platform, which is designed for international advisers and clients.
Our investment universe consists of more than 7,000 funds from over 300 fund managers. The array of options includes UCITS funds, ETFs, SICAVs and bonds.
We believe such a level of choice is key to delivering the diversification necessary in today’s challenging environment. Crucially, it is also entirely in keeping with what advisers and clients want and expect. In our opinion, that is what democracy in financial services is all about.
It is also important to take account of what we might think of as the underlying mechanics of democratisation. For instance, how solid are the workings and structures that underpin a platform?
A platform could be regarded as less than a “full democracy” – to use the Economist Intelligence Unit’s terminology – if it is hard to use or if its technology is unreliable. Similarly, it might be difficult to have faith in an offering that does not have a suitably qualified team of experienced experts at its heart.
And what about the law of the land? Just as a trustworthy legal system is vital to a nation’s claims to democracy, continued alignment with regulatory requirements is essential to a platform’s ability to keep serving its stakeholders to best effect.
Platforms and the ballot box
At the core of every democracy, of course, is the right to vote. Platforms undoubtedly tick the box in this respect, because they are competing for the votes of advisers and clients.
The fight for business is now much fiercer than previously. Remember that 40% of advisers interviewed for a survey published late last year described the market in the UK as “oversupplied” .
There are obviously many positives that might be derived from this kind of organic growth. For example, competition could help lower costs, drive further innovation and raise overall standards.
Yet there is also a Darwinian aspect to what is happening. Almost half of the advisers who took part in the aforementioned survey agreed a platform could fail financially within the next three years .
This is why it pays to choose carefully. It is why, as in the wacky world of politics, there is significant merit in distinguishing what is merely said from what is actually done. Rhetoric does not always match reality.
The democratisation of financial services may have come a long way, but the truth is that it is still far from complete – even in the platform space. Recognise as much – and do not waste your vote.
