Part Two: Moving onto the FCA, being burnt by the dot.com bubble, the possibility of a Fintech bubble, where the name eToro came from, virtual trading and some final thoughts.
We moved on to the FCA and some recent voiced concerns from the regulator over inexperienced people trading CFDs and getting into difficulties.
Assia sees the FCA’s worry as a good thing: “Generally what the FCA main guidance has always been and quite correct in that guidance, is that retail customers should always understand the risks of the products that they are using.
“I think generally we are seeing more informed people, so generation x and y are by definition sort of more informed, they want to be more involved in their decisions, and FCA wants to emphasize the fact that when people are taking risks they need to understand those risks. I can say that eToro is doing a lot of work to communicate those risks effectively. I think generally being involved in the markets requires people to understand risks and the ability to take that risk and assess it.”
You can see that Assia is not that sympathetic to people who don’t try to understand the risks and learn what they are doing. And to those that don’t want to be involved, he has some simple advice: “For people not willing to have that responsibility, then I would say of course, they can always work in the traditional world of say giving all of their hard earned money to someone else who they don’t know what he really does with their money.”
For Assia, people need to understand the problems of managing their money, even if they let someone else do it for them.
No matter how good the story, there are also the ‘buts’ and ‘what ifs’, so what does keep Assia, a self-confessed optimist, awake at night?
“When I’m looking at what’s going on recently in the markets, then I say my biggest concern is the markets turning red constantly, entering into a long bear market, leading to people being afraid of making their own decisions, that is something I generally think is the biggest risk of having responsibility, is entering a pure bearish market.”
Assia recounts his own experiences when he started trading actively for the first time. It was during the now infamous dot.com bubble. He made a lot of money as a young individual, but lost much of it following the fall. Over to Assia: “When the markets came crashing, in March 2000, I was actually just drafted to the army, I remember me with a pay phone talking to my broker over the phone, and that is an experience which sometimes sort of creates a burn.
“I remember that it was actually that that led me by the way to do a portfolio. So, as I’m the optimist, I went and studied portfolio management and financial advice after the market crashed, I said okay, obviously I don’t understand them enough, I lost most of the money I made in the markets, I need to learn more, what I think people should take from that and understand more about risk management, about the ability to short the markets when they are bearish, to diversify risk.”
As if to highlight that fear about bearish markets, Assia points to China: “If you think about the amazing growth in China, retail trading activity, about 90 million people in China opened a stock broker account over the last two years, it’s a mind blowing figure, but over the past six months, they went into a bearish market.”
What worries Assia most is not a bearish market itself, it is the wrong conclusion people take from that bearish market. It’s people thinking you can’t make decisions on your own, you can’t understand the market.
Having experienced a number of financial bubbles already, does Assia worry about a Fintech version?
“I’m optimistic, I’m an entrepreneur…” said Assia “…but, I think Fintech is probably the largest revolution seen on the internet since the internet.”
He said that there are currently around 117 trillion dollars of assets under management within the global financial system, but it’s managed by technology developed in the 1980s and 1990s. The entire industry is based on sort of ecosystems and paradigms which were correct 20 years, ten years ago. And things are going to change rapidly said Assia.
“Some of the existing banks are realizing that and are driving investment in the field, but if you think about 117 trillion dollars, I say 20 to 40% of that in the next five years are going to change the infrastructure that they are based on. They are going to sit on different technologies, so it makes sense to invest a lot in this industry that is completely going to change.”
As for specifics, Assia is excited about his own sector, social trading, but also crowdfunding and equity crowdfunding. He is especially keen on real estate crowdfunding which in his view will allow people to invest in markets which were simply not open for them historically.
For Assia, Fintech is a bright new world: “The block chain is a mind-blowing technology revolution, anything related to block chain and bitcoin, again I’m a computer scientist, so purely from the technology point of view, the changes which are going to be driven by that are going to change economies completely, they are going to change how Governments issue currency, change relationships between Government and banks, which will change relationships between people and banks, and obviously, payments global payments, and the fact that the world is becoming global and consumer focused, these are all trends which are inevitable and they are changing the largest industry in the world, the finance industry.”
Assia sees this financial empowerment as creating wealth for the next affluent generation, which in turn creates a cycle of money backing more start-ups, who then become affluent, and so it goes on. For Assia, a successful economy should be about fast access to money and fast access to opportunity.
He didn’t quite answer the original question about whether a Fintech bubble was forming, but as he is a serial optimist, I’ll forgive him for dodging that particular subject.
I had to ask the question, why did he call his operation eToro? The answer tells you a lot about the man behind the company: “eToro was the electronic bull, so I’m the optimist, I believe in the bull market, and it’s also an electronic trading and routing organisation, but that’s a much longer story.”
And a story I will ask him in the future.
As to how well the platform performs, I started a ‘virtual’ eToro account shortly after speaking to Assia. Rather kindly, they give you $100,000 to play with and happily, as I write this piece, my virtual account happily stands $112,098, which is a decent return. So when I have a spare $100,000 to play with (that day is some way off yet!), I will place it with eToro.
The other way to look at it of course, is that had I placed the more likely figure of $1000 with eToro, then I would be $120 up, which is less spectacular than 12 grand, but still a healthy rise. Now, which financial institution would give you that rate of return for a couple of weeks’ trading?
Mind you, let’s not forget the financial institution mantra that what goes up could come down. And my paper 11 grand profit might easily be a 11 grand loss. Had that been for real money, I guess that things can become rather painful, so it’s best to remember that this is serious stuff and you’d best be careful, no matter how good you think you are at trading.
So what of the future? eToro is definitely in the growth stage and it is likely that that will continue for some time. Assia points to a report from the World Economic Forum about the future of financial services and which highlights social trading as one of the key innovations which will define the future of investment management. Assia quotes from the report: “What they said is that the next generation of retail and social trading platforms offer effective means for individuals to share, or sell their investment expertise, directly competing with traditional investment managers.”
He continues with his own view: “So if you think about social trading, yes it is the future for people who want to trade directly by themselves, but it is also a potential future for the investment management industry, because looking at fund managers through the traditional ecosystem of mutual funds etc, suddenly you can find talented people from all around the world.”
I’ll leave you with that thought, that as we progress into the Fintech brave new world, social trading might be a source of growth for the traditional investment management industry, one which has had its own fair share of knocks and could possibly do with something to inspire its future.