The advent of online investing and trading platforms has resulted in a reduced need for traditional financial intermediaries and advisors. This process of democratization of access to stock, currency, and commodity trade began in the ‘90’s, and has now become the norm.
It probably does not help that one advisor tells you one thing and another advisor tells you something different. It also does not help that so many of them, including the ones at Edward Jones, missed the dot come crash during the turn of the century and did not advise their clients to sell as Lucent and Cisco, for instance, came crashing down.
Online platforms challenge traditional financial intermediaries on fees and encourage the average person to invest directly without a financial advisor in the middle. Here are a few reasons for this changing trend.
- Diversified Investment Strategies at a Low Fee
Until now, most private banking groups only allowed access to their specialized financial products to the rich.
This has changed entirely with today’s online offerings that allow common individuals access to investment strategies that normally would have required a high net-worth bank balance (typically more than $5 million).
- Complex Algorithms Outperform the Human Brain
With a rise in computational ability of the machine systems and the introduction of artificial intelligence, powerful automated investment algorithms are now outperforming human investment managers in certain asset classes.
According to a leading news website, only 42% of large-cap core fund managers can outperform the S&P 500 net of fees. When you account for the fee financial advisors and other middlemen charge, clients would be better off if they invested directly in an index fund.
- Eliminate the Middleman
Years ago, one couldn’t make a trade without contacting a broker, but in the Internet era, it only takes a few clicks. The ease of accessibility makes online trading attractive to those who did not have the capability of working with a full-service broker in the past.
Online traders can execute transactions without a broker altogether. This doesn’t mean trading is done without a broker entirely, as brokerages are the ones who execute the trade when you click the mouse. However, online trading allows trade with practically no direct broker communication.
But you may not want to put your trust in online sites so much. For instance, Charles Schwab’s website back in 2008 (and why would anything change?) would make a company that is in the sewer look like a wise investment. These sites make money off of trading volume. They want to entice you to trade. So this is something to think about.
- Negligible Trading Costs
When a financial broker executes and maintains your portfolio regularly, it costs a decent amount of money whereas online trades don’t cost as much. Edward Jones used to charge $50 per trade back in 2007, for example. Many online trading sites allow you to execute trades for only a few dollars – but is that trade going to be a wise one?
As the number of online brokerages goes up, the prices of services will continue to decline. Many discount brokerages already offer trades for very low prices and some don’t even require a minimum account balance.
- Complete Investor Control
Financial investing and trading online is done entirely at the convenience of the investor. In conventional trading, an investor would operate with time and effort required to contact the broker. And if the broker is busy, they would take additional time to place the order.
Online investing and trading executes transactions in seconds. Investors are also able to review all types of trade and investment options available instead of depending on a broker to tell them the best place to park their cash.
- Monitor Your Investments in Real Time
Online brokerages employ advanced interfaces for customers to check their investment activity throughout the day. You can check it through a phone or a tablet and see any rise or decline in the prices in real time.
Brokerages offer complex tools for investors and traders at all levels, providing analytic platforms, research reports, and everyday financial news. This is reducing the need for expensive financial advisors.