According to the Office of National Statistics, around half the UK now conduct their banking affairs online. (1) In fact, you don’t even need a computer to do your banking – thanks to banking apps, it’s now possible to make payments and manage your account via your smart phone.
Investing online or via an app may seem, at first, to offer a lot of benefits. However, UK investment companies are reluctant to develop this technology – largely due to the risk of mis-selling products. The big question remains – is it ever a good idea to invest digitally, and what are the risks involved with doing so?
The Advantages of Digital Banking and Using Apps
Tech-savvy people would argue that investing online offers significant benefits. It’s a quicker process than traditional investment, which means either visiting the financial establishment in person or making a phone call. With just a few clicks of the mouse or smartphone screen, the investment is made, in a fraction of the time normally taken.
It’s also easier to access and manage investments – giving individuals more power over their money, and enabling them to monitor its progress. However, whilst this sounds appealing in theory, the reality of the situation may mean that it’s easier to mis-sell investment products – a potential scandal that most banks are desperate to avoid.
The Risks of Mis-selling Investment Products Online
Simplifying the process of buying investment products to the point where it can be done in a matter of minutes is not without its risks. This is especially the case with investments that involve considerable expenditure, or pension products. If loss of money invested causes significant impact on the individual, it seems inadvisable to make hasty investment decisions.
Sri Chandrasekharan, head of HSBC Global Asset Management, expresses concerns about digital investment, suggesting that it could result in more customers selecting unsuitable products.
“Increasing ease of consumption in investment funds… isn’t necessarily in everyone’s best interests,” he states. “Technology of this kind could compromise fiduciary safeguards if a client buys into a fund via a mobile phone app without a full understanding of the attendant risk-reward.”(2)
Impracticalities of Matching Product to Person Online
Without first meeting in person or talking on the phone, it becomes difficult for the adviser to match a suitable investment product to the individual’s specific needs.
The FCA currently requires all investment fund managers to gather a wide range of facts about their clients before recommending any specific products. Quite how this can be achieved online or via a smartphone app isn’t immediately obvious.
Most companies offering investment products are reluctant to put themselves at risk of being embroiled in another mis-selling scandal. However, some investment firms are taking a different approach. Instead, they’re offering an ‘execution-only service’, designed to appeal directly to customers who want to make online investments with little or no involvement with advisers. These firms make significantly less money on each investment, but won’t be held accountable for poor investment decisions.
Digital Investment – Failing the Client?
For seasoned investors who understand the process well, online investment is an appealing concept; enabling them to manage their investment portfolio quickly and easily. But not all financial experts agree with the technological developments.
David Norton, head of investments at AES International, a wealth adviser, concludes: “If a client shouldn’t be in a position to invest in a particular product, but is able to because of a new technology and loses money, then the system has failed structurally.”
In answer to comments like these, investment giants BlackRock are developing a new system called ‘robo-advice’ – designed to offer guidance using sophisticated algorithms. Despite the sophisticated technology, it is difficult to see how any form of automated service could gather the information required to make the right investment decision.
Should You Invest Online?
If you’re a seasoned investor, and you’re using money that you can afford to lose, then there’s no reason why you shouldn’t benefit from investing digitally. However, if your investment is important to your future welfare, it’s advisable to work with a real person when seeking advice. Otherwise, you run the risk of placing your money in an unsuitable product.
- 1) http://www.bbc.co.uk/consumer/25953741
- 2) http://uk.reuters.com/article/2015/10/19/us-britain-funds-fintech-idUKKCN0SD1YH20151019