Finance markets can prove extremely difficult to navigate but are made exponentially trickier by often-expensive and opaque financial advisers, who charge a premium for advice that may not prove fruitful anyway.
An interim federal government report into financial services confirmed advice is too expensive, with almost half of Aussies (42%) having never used a financial adviser.
“A generation of younger investors can no longer afford access to investment advice due to cost,” Stockspot's Chris Brycki said.
“The Murray report confirms that technology can reduce costs for consumers, decrease risk and improve the quality of and access to advice.”
The report found fees in Australia’s superannuation sector are among the highest in the OECD and there is “little evidence of strong fee-based competition in the superannuation sector”, resulting in only “modest” declines in fees over the past decade.
“Fees have consumed over a quarter of superannuation returns since 2004, despite scaleincreases,” Brycki said.
iTWire spoke to Stockspot's Chris Brycki at length to find out what his cloud-based startup, Stockspot, is doing to turn the tide back in favour of the consumer; giving reasonably priced financial advice, all online.
Are young people getting screwed over when it comes to financial advice?
The government report was looking at all areas of the financial system, but the advice side, and especially access to advice, was probably one of the areas they looked at in a lot of detail. With FOFA, which is the new financial advice laws, one of the biggest issues is conflicts of interest, that exist within the vertically integrated banks. And the result of this means people that don't have a lot of money to invest, or to give to a financial adviser to help them, usually end up paying a lot of hidden fees, because they can't afford an upfront fee of a few thousand dollars. What they end up doing is being charged fees on their superannuation, on their insurance, and on their investments. The fees are quite hidden and most people don't understand them.
The report basically looked at ways technology can help to open access to financial advice, and also financial products, especially for people that don't have a lot of money. Young guys like us. Some interesting stats came out of the report too, for example 20% of people received financial advice online, yet there are very few providers out there offering services, helping people manage their finances online. We're the first end-to-end online direct to consumer product out there. So there's a big unmet demand for it. The difficulty in it is actually getting set up, the regulation is still quite hard for small businesses. It's taken me a year to get to the point where I am now, where I can offer consumers a good online product.
That would put a lot of people off, right? If they knew it would take them a year to get things up and running.
Yeah, exactly. Well like any business, if you went and set up a store or something, once you have the rent and have your product you can start selling. But financial services, for good and bad reasons, it's very highly regulated and difficult to set up. Not many people would be silly enough like I was to quit my job and spend a year trying to set up a business. So yeah the government looked at ways it could open up the marketplace to more competition, and they talked about potential to improve efficiency and competition, through technology products. It's a theme we've looked at a lot, like they mentioned in the report cloud technologies for instance have the ability to enable companies to offer products direct to consumers without really clunky software. Which is what we're doing already; offering a complete product that is all sitting up in the cloud as opposed to making people own software. There's Xero in the accounting space, and they're doing something similar for accounting.
Would you describe yourself as the Xero for the stock market?
Yeah, we're the Xero for investing. Except with Xero the only difference is they're mainly going through advisors and accountants. So they don't go direct to consumer. Whereas we want to go direct to consumer, because unfortunately advisors add a lot of fees for consumers but in many cases don't add a lot of value. They charge a lot for their time, and they need to I guess because they can't speak to a thousand people in a day, but because you get to speak to someone you end up paying a lot of money. My view is that in a lot of other areas of our lives, like travel or shopping, people should have the option of buying at a lower cost and buying directly. There's always people that want to go to DJ's and have that whole store experience, and have someone help them, but there's also going to be people that want to do shopping online. And I think it'll be the same with financial products as well.
Do you provide advice too, or is it more for people that know what they want to invest in?
We do both. People can already directly invest, you can just set up an eTrade or a CommSec account, but people that do that, well first of all people are scared to do that. A lot of people that aren't actually in finance don't understand what they're doing, but also people that do that, even if they think they know what they're doing, they often don't. Or most people don't, and they end up not doing the right thing, having too much risk in their portfolio, then doing the wrong thing when markets fall and getting scared. So we wanted to provide advice as well, because we help people find the right mix of investments to match their risk profile, and how long they want to invest for. And then they need money, and it's quite a complicated process in the background. Even though it looks quite simple for consumers, there's a lot of work in the background to actually match people up with the right product. And that's what we do, we match them up with what's the right investment mix for them.
Usually if you were going to go and do that, you could do that and see an advisor, but they usually say the minimum fee is two thousand dollars, or five thousand dollars. It's just too much money for a lot of young people.
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Can you talk me through the process, do you meet in person, or is it an online chat that goes on? And how much does it typically cost?
It's completely online, so you go through a questionnaire, and it's ten questions about what's your attitude towards risk, what's your timeframe, when you need cash, whether that's next year or in two years' time for example. That's important information. And then based on all your answers we create a mix of low-fee index funds, so these are funds that are listed on the stock market and charge low fees, but most advisors don't recommend them, because they don't get kickbacks. They're like the 'home brand' funds, where they're the same product but just a much lower fee. So we find the right mix of them, and by mix I mean instead of just owning Australian shares, like most people would if they went and set up a CommSec account, we give people global shares as well, emerging market shares, bonds, and metals as well. And then based on your answers to the questions we work out the right percentage of your money to put in each of those baskets, and then we manage that investment process and read the answers of people, and we do all the tax reporting as well for you. So at the end of the financial year there's no work for you to do. You can just basically plug straight into Xero if you use it, or print off a statement. So yeah, the whole process is online, mainly just through the website and occasionally some emails to let you know what's going on.
The minimum investment is two grand, so anyone can really get started, and if you invest two grand, the fees for a year is about a hundred and fifty bucks. And that's a lot lower than if you went through an adviser, especially if you're getting started.
So do you pitch it mainly as a way for people to get started with the stock market, or is it really for anyone?
It's both. What we're seeing is a lot of people signing up that are just young people that might have two thousand dollars or somewhere between two and 20 thousand dollars and they want to get started in investing, and make sure they're investing in the right things. A lot of those sort of people, who are just getting started and saving up for a house or want to get a better interest rate that they're getting with the bank, and also people that manage their own super. Self managed super's a really big area of superannuation, it's like $530 billion, of people that manage their own, and a lot of those people start to do it themselves and then realise it's actually a lot harder than they thought. And so they want a bit of assistance in setting it up and getting the right mix of investments. So typically those people, the average self managed super fund in Australia is about $500,000. So they're a lot bigger clients. So we're seeing a mix of those bigger clients that are managing their own super and also just young people that are just getting started.
What's your background Chris, what job did you quit to be able to do this?
Since I was a kid I've always loved trading and investing, I worked during uni at a hedge fund, trading stocks. And then went to UBS, which is a big Swiss bank. Basically where you invest the bank's money. So I was a portfolio manager for the bank, for five years. And then I spent a little bit more time at a hedge fund investing for them, before I left to start this last April. So almost a year and a half ago. I was young and wanted to have a go at starting a good business, as opposed to working for the big banks.
Have you got a team going?
At the moment it's myself, and a developer, who I went to school and uni with. So we're really good mates. And a whole bunch of advisers we've got now, we've got an ASX-listed company invested in us, that happened a few months ago, and from there we have a few advisers that help us on strategy and that sort of thing.
Are you seeking more investment? Where's that at?
Not at the moment. We have enough at the moment. At the moment we're focussing on improving and iterating the product and making sure customers are happy, and making sure we have a perfect product before we go to the next step and start marketing it. We're not going out and marketing too hard yet.
Finally, what do people need to look out for when they're investing?
Often people's biggest downfall is making the wrong decision when things get tough. The markets always go up and down. Behavioural finance is a whole area in itself, just understanding people's emotions when they invest. If you go and do it yourself, like I found when I was a kid, you go through a wide range of emotions and they can be pretty tough to deal with.
For more on Stockspot head over to its website.