Investment industry joins the direct fray

23 July 2013 | Investments | General | Jonathan Faurie

There is no doubt that technology is beginning to play a more prominent role in the way that society is run and governed. Almost every aspect of our lives is run by technology and the amount of people who are connected to the internet today is significant

Those who are connected will use Google every day. Current statistics show that every day, Google answers more than one billion questions from people around the globe in 181 countries and 146 languages. While the majority of the requests relate to everyday queries, reports show that there is a growing trend to use Google as a way of getting the investment advice that one would receive from a professional financial advisor.

DIY searches

“In the relatively short space of its existence, Google has become an inextricable part of our lives and often serves as the primary means by which we access information,” says Marcus Rautenbach, Head of Investment Consulting at Simeka Consultants & Actuaries.

In April 2013, Scientific Reports carried an article that shows how Google can be used to beat the market. The premise of the article, by Tobias Preis, Helen Susannah Moat and H. Eugene Stanley, is that the information publically available in Google Trends reveals a great deal about investor behaviour.

Investment insight

The authors propose that human interaction with the internet could perhaps provide fresh insights in the behaviour of investors during periods of significant market movements.

“It has been previously established that data from Google Trends is linked to economic variables such as motor vehicle sales, unemployment, travel destinations and even consumer confidence,” says Rautenbach. The authors now suggest that Google query volumes for search terms related to finance are used as early warning signs of market moves and that it could even be used as a predictive mechanism.

“Gathering information is at the core of investment decisions. Monitoring information-gathering trends provides astute observers with insight into investor behaviour and investment decisions that are likely to follow,” he adds.

Effective returns

Between August 2004 and April 2011, the period covered by the research, the generic search term ‘debt’ produced the most significant results.

“Supposing a holding period of one week for a notional long/short investment in the Dow Jones Industrial Average and without factoring in trading costs, the Google Trends ‘debt’ strategy produced a cumulative return of 326% as opposed to a buy-and-hold strategy that produced a cumulative 16%,” explains Rautenbach. “More to the point, a long only Google strategy produced a cumulative return of 128% over the period.”

Effects on the industry

While the short term and medical sectors have an established direct aspect, there has been a mixed reaction to the effects that going direct will have on the investment sector.

Lance Solms, Director at Itransact, says that the public is definitely using the internet but the effect on the industry is negligible.

“The public is looking for investment advice at a lower cost and the internet is the perfect medium for this. This is particularly evident with a younger group of investors who feel that there is no need for advisors. This is being driven by the fact that these people are young, unmarried and have no significant commitments,” says Solms.

While this suggests that there will be an adverse effect on advisers, Solms says that there will be no adverse effects on the adviser market as the public tends to turn to them when it comes times to take out life insurance and funeral policies.

“The traditional view of advisors looking after fathers and their sons has been changed slightly in the sense that advisers now tend to look after fathers and fathers as there is a gap while the younger generation turn towards direct investing,” says Solms.

Editor’s Thoughts:
It seems as the benefits of going direct may be encouraged by industry participants. Solms points out that because of the internet, the public is able to make an informed decision and we are seeing smarter industry investments. It is also beneficial to advisers when there is an educated and informed discussion when it comes to investing. Do you agree with these sentiments? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.

Comments

Added by Cuban, 23 Jul 2013

The internet surely informs but it does not provide experience. Once a person looses money dealing directly, they quickly run to advisors to help them. BUT still find it hard to pay fees for this advice. So the challenge remains to educate the client, whether young or old, to stick to their financial plan and to understand that they are paying the fees to the advisor to help (friendly enforcing) them to stay on the planned route for the best future outcome!
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Added by Marisa, 23 Jul 2013

Going direct will cost clients more in the long term. Firstly, the lack of knowledge is a huge disadvantage and most clients, in my opinion, will look at historical data and assume that is what they can get in terms of returns. If as financial advisors, we are reprimanded for using “tick box compliance”. How will a DYI risk profile be any better? Secondly, the commission earned is exactly that – it is earned! Client’s pay for our expertise. As a CFP® Professional, I invest a lot of time and money in my education and attending industry events to ensure that I’m up to date and able to provide my clients good advice. The commission is negotiated and the client is aware of every cent I earn. Going direct might reduce commission, but advertising will not be free and that bill will be footed by the client. I have seen several policies of the direct life assurers promising lower premiums by cutting out the intermediary and therefore claiming being more cost effective to the benefit of the client. How is a direct insurer’s accidental death at 4x more than the rate of normal death cover (with full commission at an intermediated insurer) better for the client? With risk business, assuming the client’s health is reasonable, there could still be room rectify a DYI mistake with proper financial planning and more careful consideration in terms of product placement. How will you rectify a DYI investment blunder? The younger generation needs to realise there is no “replay” button.
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Added by Peter, 23 Jul 2013

The premise made here is that the internet provides an enormous amount of information that can be to great benefit to, in this case, a young potential investor. The information is there, no doubt, but one must be able to use it correctly. Information without understanding is not only useless but dangerous. On the internet there is information on how to do a caesarean section and remove an inflamed appendix (with video step by step instructions). There is information on how to replace a clutch on a car, how to re-sole shoes, how to re-do your roof and how to enter a defence in a criminal court case. I could go on for ever on what you can find on the internet. Does the information on the internet compel you to do those things? Or do you let the Obstetrician (professional expert) do the caesarean and deliver your baby? The view that the young are carefree and can make use of the internet to invest as they do not need advice is a statement made without thought given to it. When one is young one needs the advice even more. Being young one needs a guiding hand to make sure that one sticks to the right type of investment and creates wealth. Young people are more influenced by the media and bravado (invincibility). Trying to “time “ the market and constantly trying to outdo the peers. The information is out there but they will need experience and expertise. This will help to avoid impulse “buying” into flavour of the month “investments” and establish a pattern of investment discipline. It is quite amazing that there is a constant attack on fees and the proposal that lower fees are the antidote for a lack of savings in South Africa. In my opinion the lack of savings is due to the expectations created and the absolute need to keep up with the “Joneses”. The instant generation has pushed the instant gratification syndrome to the maximum and by proposing that one should do investments (and financial planning) by clicking a few tick-boxes on a web site is downright dangerous if not irresponsible. Though this will give the individual “investing” an amount of instant gratification and feeling of being liberated, it will come back to haunt him. The problem is that if time is wasted it can never be caught up with. As stated above, there is no "re-play" button. The idea is to have a plan throughout life and to make sure one has enough to retire comfortably. If it was easy, everyone would be wealthy. It takes expertise and discipline, not the internet and a few clicks of the mouse. Rather tell the young people out there to find a qualified and dedicated Financial Planner. Partner up with him or her and work together on a plan. Take his or her advice and guidance, not blindly, and build your financial future. This is where the internet can come in useful. Find out and learn more on what your Financial Advisor tells you. Be educated but financial and investment planning is not a DIY project. Why are we teaching the young people that it is OK to pay a fee to an attorney or doctor? It is also OK to pay commission to the car salesman and the guy who sells us the new pool or new kitchen, but is not OK to pay a fee or commission to the guy that does something that is so much more important in your life than buying a new car or renovating the kitchen? The guy who helps you make provision when you are ill, when you cannot work, when your family’s income is taken away by death, when your kids university fees need to be paid, and when it is time to retire. Something that will have far greater consequences if done incorrectly than buying a car or fixing the kitchen. Remember, a qualified financial planner has studied for a minimum of 5 years. This is the same amount as your doctor
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Investment industry joins the direct fray

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