Finance Shouldn’t Think Small

Let’s adopt a straightforward view of a hypothetical business. This business has two types of units: those that make what the business sells and those that enable those units.

This is simple at first. At a bubblegum company, you can usually figure out who is involved in making the bubble gum and who is focused on taking care of other problems so that the company can make bubble gum.

The vice president of new flavors? Definitely on the “making things” side. The CFO? Almost always on the “other stuff” side.

It turns out that what’s true for the individual or the unit is true for the industry. The products and services that the financial industry provides are usually not ends in themselves. They are built to fulfill goals that others — organizations and individuals — have.

So Finance Is for Facilitation

This should be obvious. When investment advisers construct a portfolio for an individual, they are taking a pool of assets and arranging it so that it can facilitate the client’s livelihood. Investment bankers restructuring a company are doing the same thing: they are intervening to facilitate a future.

In a lot of thinking along these lines, this is the part where the author tells you it’s all about the client.

Reactions to that tend to fall into one of two camps. You either nod self-assuredly and congratulate yourself for being one of the good ones who already knew what was important. Or you close the browser tab with an eye roll and remark on how people who talk about this sort of thing are always full of lofty rhetoric but offer little in the way of tangible suggestions.

So I’m not going to tell you anything I already warned you to look out for. Instead, how about I suggest a few areas where there is a real need for attention, where the tools of finance can have a positive and transformative impact? Places where, as far as I can tell, there is a chorus standing on top of the industry and screaming:

Financial Innovation Welcome!

Let me lay out the areas that, according to consensus, appear ripe for disruption. These are the places where the horses are already well out of the gate, and which you may have already heard about on the nightly news. They are:

• Disintermediating banking. There is the payment side (with bitcoin and various apps) as well as the lending side, where peer-to-peer lending appears to promise a credit market free of middlemen. My colleague Ron Rimkus, CFA, has written a lot about the bitcoin side of this equation, and it’s probably wise to stay in touch with trends in this space. Especially if you own shares in banks that make money by charging fees to lend money and transfer it, it will pay to be aware of potential existential threats in this area.
• Replacing your financial adviser. You haven’t had to pay for financial advice for quite a few years, and I’m on the record saying that free financial advice will eventually be as common as free checking.
• Making better investment decisions. I use Sentieo and Quandl (as well as a Bloomberg) to simplify my research process, and with services like these, it’s getting easier and easier for someone with questions to find the answers they need to make better decisions. Even the Twitter feeds I follow have become a powerful tool to learn more faster and improve my decision-making.

There are definitely more things to be done. There are almost certainly new businesses that can be built in areas that I haven’t mentioned but are still part of the traditional finance “stack”: insurance, maturity transformation, and capital raising, to name a few.

That doesn’t mean the industry should think small.

There is a refrain in public opinion that calls for something I will dub “little finance.” This is finance without innovation. Finance as a utility. I want to focus on areas that aren’t traditionally considered “financial” but could eventually be, in the hopes that it will encourage our readers to think a bit bigger.

So, fully recognizing that our role as middlemen is and always will be to facilitate transactions on behalf of someone else who is acting with a clear end in mind, we need to be asking ourselves a simple question:

What New Thing Can We Facilitate?

There’s no excellent reason that insights and practices from the investment profession can’t be applied in new ways, and I think that there’s a lot to be gained from doing that. It might sound weird to think about the way investors approach the world as a technology that can be applied to other fields. It might even look funny to try, but anyone who’s ever used chopsticks to eat Cheetos knows that those risky ideas sometimes pay off. Here are three places where I think there might be room for something remarkable.

• Improving charitable donations. There’s a decent amount of evidence that charitable capital is allocated suboptimally. If you don’t believe me, spend five minutes with Eric Friedman’s excellent Reinventing Philanthropy and then come back here and comment. There must be a way to turn a simple truth — most people don’t think carefully about their charitable donations — into a product that people can really use.
• Bring power tools to budgeting. As a straightforward example, most consumer-facing financial software like Mint and Level Money (which I use and love despite its shortcomings) allow an individual to create a version of a balance sheet and a cash flow statement. But they’re missing something: income statements! These are invaluable in the analysis of companies, but consumers don’t have access to them in evaluating their spending.
• Recontextualize the world. There’s a lot of evidence that people have a hard time budgeting. Just one in three Americans do it, and I’d bet that far fewer of those stick to their budgets. Part of that is likely because money is an arbitrary unit of account. What if we started building products that made people’s financial transactions look more like the way they see the world? Hipsters could spend 400 lattes on rent instead of $1600 dollars, or maybe even 60 hours of work. If people can begin sensing money more intuitively, a lot of good things might happen.

This all comes with a substantive caveat. It’s all my opinion. What do you think? Let me know in the comments below.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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