30th August 2021
Compared to other nations, investment platforms in Ireland are in their infancy. Some say that we are such a small country that we’ll never have access to all the options, it’s just not worth the platform’s time coming here to compete for our assets. However, the fact that investment platforms which are regulated in another country can operate in Ireland under ‘passporting’ regimes, has resulted in there being at least some options. This week I will share a short piece which I hope to give you some insights on:
I was asked recently the following question by a listener of the podcast:
Recently speaking to a colleague about investing (not in pension products) we both agreed that we are not comfortable with online brokers and tend towards the bricks and mortar ‘expensive options’ as a safe haven (Irish Life, Zurich, New Ireland…etc). This is probably due to age and a certain amount of ‘conditioning’ over the last 30+ years by the same companies. Taking DeGiro as an example, could you comment on why an investor would not see all of their money disappear for any reason other than market volatility or poor investments decisions.-Anon
The questioner’s honestly was refreshing. Many of us have thought the same, and we may have proceeded to invest with some of the lesser-known platforms, or decided it wasn’t worth the risk we perceived it to be (more on that in a few moments!).
I won’t try influence your own thoughts about the new breed of online investment platforms in Ireland but I’ve reviewed Degiro’s regulatory notes and ‘investor service information’ (link here), given that was the platform mentioned. Having read that, here are a couple of key aspects that may be worth considering or clarifying before you jump in significantly:
Its a little opaque once it gets past the SPVs.
That is not to say that there is anything systemically worrying about using an online platform such as Degiro, Plus500 & eToro etc. I’ve looked into quite a few of the online investment platforms in Ireland with the same sort of lens, protection of client assets. They are all typically members of the Investor Compensation Fund, so worst case scenario in event of a bankruptcy, you should be entitled to get back at least €20k usually (depending on where the firm is head-quartered and authorised).
So, are these investment platforms in Ireland safe? Well, to a degree they are. Nothing is ever totally safe (that doesn’t exist), even cash in bank or gold in a vault, something can always potentially go wrong – the bank could fail or the vault could be robbed!
I’ve written about it quite a few times but to reiterate, we use an investment platform for client investments and pensions. The platform we use differs to the new breed of online platforms, and I believe offers greater protection for clients for the following reasons:
Of course, you get what you pay for! Using a route that offers this level of over-sight and protection is going to cost more than using a route which doesn’t! Many of us may be happy to pay say 0.2% or 0.3% per year for the benefit of having the above level of protection, as opposed to not paying 0.2% or 0.3% and NOT having that level of protection and assurance. It boils down to cost/benefit equation really. The route we use ensures that we pay a fair price for the service. There are other options such as Davy and others where we would get the same service and protections but we’d pay a far higher price! No thanks.
The questioner above mentions that they see their options being either the online platforms, or the well known big insurers in Ireland. Many are not aware that if you invest with an insurance company, which do not operate to MIFID II standards, your invested money or pension are actually owned by the insurance company – so your money sits on the Balance Sheet of the insurer. It is only when you draw it out of there that it can again become yours again! So some go as far as to say that if a large insurer in Ireland were to go bankrupt, your money could potentially be at risk. This is not a risk with the route we apply to client’s (and my own!) assets.
If you were walking down the road in your local town and were invited to take part in totally legitimate and free game, were you could win a car, would you do it? All you had to do was throw a tennis ball across a small room of 10 feet, and into a bucket – if the ball goes into the bucket, you are given a brand new VW Golf, or cash equivalent of €30k from the organisers. You have three throws, if any of the three go into the bucket, you get the car/cash. Would you do it? I would! There is nothing to lose, right. We win or we walk away with what we started with. About 90% of us would have a go I reckon.
Lets make it a bit more challenging so; in this scenario, all you had to do was throw a tennis ball across a small room of 10 feet, and into a bucket – if the ball goes into the bucket, you are given a brand new VW Golf, or cash equivalent of €30k from the organisers. You have three throws, if any of the three go into the bucket, you get the car/cash. However, if none of the three balls go into the bucket you have to transfer €5k from your bank account to the organisers. Would you do it?? I’m gonna guess that instead of 90% of us trying it, you might see only 5% of people doing it. The risk of losing €5k frightens us more than the chance of winning a shiny new car or €30k excites us!
It’s just like choosing investment platforms in Ireland! Many will, rightly or wrongly, see an investment in a lesser-known online investment platform as one which also brings a higher risk of total capital loss. Those that see it as such will most likely invest with the ‘tried and tested’ insurance companies.
“losses loom larger than gains”Kahneman & Tversky, 1979
Kahneman & Tversky wrote about Loss Aversion, and were the first to bring this significant aspect of behavioural finance to the masses through their book; Thinking, Fast & Slow. If you think about it, to have survived on this planet and prospered for as long as we have, being averse to loss was a very important trait! If it weren’t for it we’d have all been eaten by lions and other carnivores before we got to conquer (and some say pillage) the earth!
Our questioner displays a very healthy and standard Loss Aversion. In choosing investments platforms in Ireland, loss aversion is a prudent lens to have. If you perceive a certain investment route posses a significant risk to losing all your capital (aside from the volatility of the underlying assets they choose), then you would quite justifiably avoid that route. Provided the perception was based on reality and fact then it would certainly be the right thing to do.
Loss Aversion comes into play in far more than just choosing investment platforms in Ireland. It impacts everything we do; the products we buy, the partner we have or seek to have, the job we have, the friends we keep, our income draw-down approach to our ARF (Blog 117), how we drive a car, and basically how we live our lives! We will think about Loss Aversion differently in different circumstances and in the financial arena, with different pots of money we might have.
One of the biggest penny-drops that I believe investors ever have is when they learn to determine the difference between volatility and capital loss. Most investors are invested in moderately volatile investment products in Ireland, the very ones offered by the insurance companies. While better than sitting in a deposit account, many of these will prove less than optimal for the investors. And the investors can’t be blamed for that. They invest in this way because they are told it is the right thing to do, and because of the dreaded ‘Attitude to Investment’ survey which spits out a rating and away you into that product! The investor’s Loss Aversion antennae are on high alert when they are picking their investment and so they chose a route led by what they think is an aversion to loss, but what is in fact an aversion to volatility!
Only when we learn that real loss (of purchasing power) comes about due to high fees and lower than optimal volatility, can we willingly and happily invest prudently for our futures. Only then can we see that the cost of achieving the returns we want is in fact having to endure inevitable periods of temporary decline, as opposed to unnecessarily exposing ourselves to total capital loss.
If you seek a source of trusted, truly independent expertise on your investments, pensions & financial life, we can help.