The death of the middleman could restore trust in the financial industry

New ways of investing are cutting out the middleman. That's great news, says Merryn Somerset Webb. It should make things cheaper, and help restore trust in the financial industry.

Will we ever trust the financial industry? The obvious answer is that we will not. How can we, when the first thought of every financier looking to create a new product is about how he can muddy the waters so we won't notice how much we are being ripped off?

But I think we might have reached our trust trough. It's all about the end of the middleman.

For years now there have been too many layers between the end investor and the actual investment. Clients have gone to IFAs who have contracted out their investments to wealth managers. Those wealth managers in turn contracted out to various fund managers to create the actual portfolios. There will also often be a platform of some kind sitting between the wealth manager and the actual funds.

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That means that the direct manager of the investment will often have no understanding or empathy with the end client (I heard a man boasting on the train a few weeks ago that he had "never face-to-faced' with an end user" I bet he was a fund manager). It also means that most investors don't know much about the guy actually pressing the buy' button.

Look at it like that, add in all the disasters of the last few decades, and it is all too easy to see how the trust between us and them is gone.

The good news: that's changing fast. The middlemen are disappearing.

We often champion Terry Smith in the magazine for the simple reason that we like his investing style (although we wish he would charge less). But one of the reasons he has been so successful I think is because he appeals to people to invest directly via his website (no platforms or IFAs involved) and he explains exactly what he will do with their money when he gets it. There is a direct trust-creating relationship there.

Something similar is true of the major platforms. Take Hargreaves Lansdown. Yes, it is middle-manning between you and your fund (and yes I wish they would charge less, too!) but it's just one layer, and it is a layer you can have a direct relationship with.

Then there is the rise and rise of P2P lending something which appeals to people for the simple reason that they feel they are cutting out the middle man of the traditional banks.

Gillian Tett picked this idea up in the FT a few weeks ago. Baby boomers have always accepted help when it comes to their finances, she says: "they typically use financial advisers and invest in traditional assets such as the equity markets". Not so the millennials.

The young with cash to invest "do not like relying" on middle men. They don't use financial advisers. They "invest directly themselves" and they "like to have control". That means that they buy fewer traditional and many more alternative investment classes. They like private equity, hedge funds, direct equity investments and peer to peer lending sites. They also see their investment decisions as a "way to express their social political or environmental values."

The result is "redefinition of finance" and a rush from the industry to create more alternative products to fill the market gap.

Gillian isn't the only person featured in the FT in the last few weeks to have picked up this trend. In the weekend paper, Tom Braithewaite interviewed ex Citibank boss Vikram Pandit. He now feels "more at home"outside the old banking system than within it. That might be partly a function of being sacked by the old banking system, of course, but he still makes some good points.

"If you look at banks 100 years ago," he says, they were a vast part of the financial market. Today they are a very small part. We're in the early innings of watching the financial system develop."

Pandit is investing in that new system. His recent investments include Orchard, a P2P lending site; Common Bond, a student lending site; and Fundbox, a factoring business (that lends money to small companies with their invoices used as collateral).

"Technologically savvy financial startups can squeeze the banks and bring down financial costs," Pandit tells Braithewaite. And the key way to do this is by removing the "frictions" of the middle man.

So there you have it. The financial sector is losing its middlemen (P2P lending is close to hitting the £1bn a year mark). The result should (fingers crossed) mean that making your money work for you is cheaper. But with a bit of luck and good behaviour, it should also help with the process of rebuilding trust between investors and the financial services industry.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.