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The Financial Revolution Has Begun: 5 Bold Predictions for the Next Decade
Posted in Market Commentary on 2015-01-07

Cars and Tesla. Taxis and Uber. Shopping and Amazon. Networking and Facebook. Finance and...?

The past decade has seen a major upheaval of industry after industry. The internet and technology have completely re-shaped the way we relate to the world and the possibilities for our future. Yet, the best known financial upheaval of the past 10 years was when the banking system nearly destroyed our economy in 2008, only to be saved by the government and then to continue on its merry way.

In the next 10 years, the financial industry will experience a revolution.

The early signs are everywhere. It's been a bit slower than other industries, due to its huge footprint, the large incentives for current financiers to avoid change, and heavy regulations. But little cracks are showing.

Mint has changed the paradigm for saving and budgeting. Lending Club has crowdsourced small personal loans. Bitcoin has changed the definition of currency. These innovations, though, have all been largely on the fringe. You still save at your big bank, deal with your same 401k, and invest at the same brokerage.

Get ready for a bigger shift, and soon. Good news: it will all get much, much better.

Here's 5 bold predictions for how the industry will look in 2025.

1) Self-directed brokerages will become a relic, and automated investment management will rise.

In 1999, you paid $40 to make a trade, over the phone, to some guy who called you all the time to tell you about the next hot stock. It was a 'big deal' when you could trade over the Internet for $10 instead.

Today, almost the entire trading ecosystem is automated. Technology has made it nearly costless to execute trades, whether you are trading one share or ten thousand. Institutions pay a few cents, or less, for every transaction. Meanwhile, E-Trade, Schwab, Fidelity, and the rest still charge ~$7 or more.

It is only a matter of time before some smart engineers crack this problem at scale, and level the playing field. You can see this beginning to happen. Robinhood is trying to offer zero commission trades, and major players like Interactive Brokers already charge only $1.

Low commissions will be a race to the bottom, and soon become a commodity. New players will win customers by offering smarter, easier ways to invest instead. Gone will be the days when you had to navigate thousands of ETFs and mutual funds, hire a separate tax advisor, and worry about how to protect your portfolio from the next stock crash. Online advisors, like Hedgewise and Wealthfront, will become the new normal, offering fully automated investment management for less than your commissions in 1999.

2) Mortgages will become crowdsourced.

Lending Club already figured it out for loans up to $35,000. Why shouldn't mortgages go next? Imagine a world where you could give 100 qualified applicants $1,000 each towards their dream home, and make 6% interest with limited downside. They have not been able to get a loan through the big banks even though a tech-savvy intermediary has run their profile through advanced analytics and determined they are 99% likely to repay. When defaults happen, the same intermediary has a system that expedites and automates the foreclosure process, without you having to lift a finger.

There will be less banking inefficiency, less systematic risk, and another reasonable outlet for investors to diversify their portfolios.

3) The current 401k plan model will become obsolete.

I recently advised a friend on a new 401k plan from ADP. I was shocked to find that they had over 100 investment options, and not a single one had a fee under 0.80%. Not even the mutual fund that just benchmarked the S&P 500! You can get the same investment using ETFs at a fee of 0.07%.

Over 30 years, that extra fee would cost you around $200,000 on a $100,000 initial investment.

401k plan administrators are dominated by relics of old regulations, when mutual funds were still allowed to charge 10 different kinds of fees. The same regulations that were meant to help you invest your retirement money are now protecting absurd mutual fund charges in a broken system.

It's a simple problem, and it will be solved, soon. 401k plans will become automated, transparent, and standardized, with access to low-cost ETFs regardless of your employer.

4) Hedge funds will get open sourced (and hopefully, many will disappear).

Hedge funds have managed to continue to charge 20% of profits and 2% management fees for the past 30 years, while contributing net zero to society by definition. Because hedge funds are only in the business of making bets, someone always loses money whenever they make money. It's a zero sum game, except for the 22% of profits they skim off the top, which actually makes it a -22% game for the rest of us.

Interestingly, speaking as someone with experience in the hedge fund world, much of what they do is build algorithms and use technology to solve market inefficiencies. They spend lots and lots of money keeping their work secret, because it would be really easy just to replicate that same technology, which would continue to work just fine.

What if these walls got broken down, and financial technology got open-sourced just like the rest of the coding world? What if high-frequency trading were public knowledge, and everyone knew how to best keep trading costs down? What if these ideas just became coding libraries, open to all and continuously improved by financial engineers around the world? It could be the same as the move from Oracle and IBM to PHP and Python. It would make the investing world better off instead of a select few billionaires.

Hedge funds are a remnant of the closed, secretive companies of the past, desperately holding onto their intellectual property instead of embracing the new age of community and openness. It can't last forever.

5) At least one major new bank will become prominent, founded on technology and transparency.

This already happened a little bit with Simple, who cut out annoying fees, provided a good customer experience, and got a huge amount of momentum with that alone. But, they aren't major, and most people still haven't heard about them.

There's going to be a new bank that decides to do good, basic things for the world and becomes a household name.

They will pay people a real interest rate on their checking account, instead of 0.0002%. They will use technology to automate their systems so they can give people loans at reasonable rates with less paperwork, instead of forcing them to go to a place like Lending Club. They will eliminate the random assortment of client fees because they can make plenty of money in other ways just because they don't have some 60 year old legacy system and 10,000 employees using it.

It will force the other big banks to take notice, and it will be a breath of fresh air.

Those are my five bold predictions for 2025, and personally I can't wait for the new age to arrive. I'm tired of rich bankers and hedge fund managers who are holding the world back. It's time for finance to do some good in the world.

Disclosure

This information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Hedgewise makes no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use. Hedgewise may recommend some of the investments mentioned in this article for use in its clients' portfolios. Past performance is no indicator or guarantee of future results. Investing involves risk, including the risk of loss. All performance data shown prior to the inception of each Hedgewise framework (Risk Parity in October 2014, Momentum in November 2016) is based on a hypothetical model and there is no guarantee that such performance could have been achieved in a live portfolio, which would have been affected by material factors including market liquidity, bid-ask spreads, intraday price fluctuations, instrument availability, and interest rates. Model performance data is based on publicly available index or asset price information and all dividend or coupon payments are included and assumed to be reinvested monthly. Hedgewise products have substantially different levels of volatility and exposure to separate risk factors, such as commodity prices and the use of leverage via derivatives, compared to traditional benchmarks like the S&P 500. Any comparisons to benchmarks are provided as a generic baseline for a long-term investment portfolio and do not suggest that Hedgewise products will exhibit similar characteristics. When live client data is shown, it includes all fees, commissions, and other expenses incurred during management. Only performance figures from the earliest live client accounts available or from a composite average of all client accounts are used. Other accounts managed by Hedgewise will have performed slightly differently than the numbers shown for a variety of reasons, though all accounts are managed according to the same underlying strategy model. Hedgewise relies on sophisticated algorithms which present technological risk, including data availability, system uptime and speed, coding errors, and reliance on third party vendors.

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