Digital workaround culture epitomizes this millennial age. Disruptive technologies — once feared by consumers — are now harnessed by some to circumvent established commercial rules, sales channels and costs.
At the forefront of this change are techno-savvy young adults largely shut out of the conventional economy. Lacking much disposable income and frustrated by barriers to entry, they’ve learned how to get what they need and what they want through highly adaptive online sharing mechanisms.
Should the investment industry be concerned about this? Many within the industry would probably say no – why worry about a group’s inclination to dodge fees if that group isn’t your target market?
But this sidestepping isn’t always confined to the millennial cohort. Ever since Napster, we’ve seen it go mainstream again and again in a variety of consumer sectors — sparking wholesale disregard of copyright laws, exclusivity agreements, blackout restrictions, municipal regulations and other “gatekeeping” measures that once worked well as devices for controlling (and extracting revenue from) access to goods and services.
We’ve also seen that when those gates get bypassed and free riders flood through, the torrent quickly overwhelms commercial law. In fact, the law becomes quite useless. Mass enforcement against dispersed violators is effectively impossible; and in this kind of chaotic environment, once established business models are seen as irrelevant and impotent, they simply crumble.
Viewed from that perspective, digital workaround culture is a very real threat not only to the investment industry’s conventions, but also to the prosaic ways of securities regulators. For example, regulators can insist all they like that trading must be conducted on recognized exchanges by duly registered dealers, but if millions of buyers and sellers choose instead to find each other online and consummate trades among themselves using direct payment apps, there’s really nothing that regulators can do to stop it.
Likewise, regulation can’t keep people from “sharing” model portfolio suggestions and paying for the arrangement, if they’d rather do that than hire a licensed investment firm to advise them on their asset allocations.
The real question, therefore, is not how to shut down improvised stock exchanges that spring up on peer-to-peer networks, or how to prevent stealth advising from taking place on some Uber-inspired platform. The real question is: What will make investors prefer to choose a regulated platform instead of those alternatives?
We know the answer won’t be that the regulated option is more affordable, simpler or easier to access. It definitely isn’t. But regulation does retain one ace up its sleeve — it can offer consumers a significant measure of protection they won’t find in the Internet’s libertarian play space. This is the potential difference maker that might keep consumers from gravitating toward digital workarounds. However, it can make that difference only if the protection is real and truly effective and thus valuable enough to keep consumers choosing the regulated option.
Making investor protection real means making it work in the real world, where most investors don’t read disclosure documents and couldn’t understand them even if they tried. Real investor protection means safeguarding investors not only from dishonest advisors, but also from the effects of advisor compensation programs that breed conflicts of interest. And it means taking action to stop complex, high-risk, high-fee products from being sold to unsophisticated investors, no matter how wealthy they may be and no matter how nice it is in theory for them to have more investment choices.
Making investor protection real and effective also means putting that protection in place now, not years from now. The industry must stop dragging its feet on investor protection initiatives, and securities regulators can’t keep studying those initiatives endlessly They have to make sound decisions about them in a much more timely fashion, and then regulators must see to it that their approved policies are implemented quickly.
Anything less risks setting in motion broad experimentation with the sort of technologies that fuel workaround culture — and those technologies really can be incredibly disruptive. Other industries have learned this the hard way. They’ve been diminished and utterly transformed, or, in some cases, they’ve been rendered unnecessary and irrelevant, and that’s pretty much destroyed them.
Therefore, strange as it may seem to some people, the investment industry needs to become a strong advocate for real and effective investor protection. Doing so is in the industry’s self-interest. But, more than that, it also may prove to be the industry’s only means of self-preservation.