09
Oct
2024
A photograph of John Allan

Educating and Empowering Investors More Important Than Ever Amidst Accelerating Transformation

The Investment Association (IA) is a member of the International Organization of Securities Commissions (IOSCO)’s Affiliate Members Committee. Each year IOSCO holds a World Investor Week to raise awareness about the importance of investor education and protection and highlight the various initiatives of securities regulators in these two critical areas. The themes this year are Technology and Digital Finance, Crypto Assets, and Sustainable Finance.

To mark World Investor Week, John Allan, Head of Innovation and Operations at the Investment Association, explores the key issues and opportunities impacting the modern investor and the importance of ensuring that the best interests of investors remain at the heart of a fast-changing landscape.

Unprecedented technological advance is changing both what we can invest in and how we invest. For some – especially younger investors – the entire experience is already different to anything that previous generations have known, with digital wallets and cryptocurrency that trades 24/7 being used alongside the traditional mutual fund or its more modern equivalent, the Exchange Traded Fund (ETF).

But as we move into the Web 3.0 age, mutual funds may be about to undergo their own revolution. Distributed Ledger Technology (DLT) can now provide a hyper-efficient, secure infrastructure, potentially taking us closer to a very different world in which greater personalisation and the transformative power of AI will change the nature of the fund completely.

The IA has called this new world Investment Fund 3.0 (IF3.0). Depending on where we go from here, the investor experience in IF3.0 may change dramatically, requiring us to focus closely on both on the opportunities ahead and the risks, ensuring the best interests of the investor remain firmly in centre focus.

Investment Fund 3.0 – modernising collective investing

So what makes IF3.0 so different? It is characterised first and foremost by the modernisation of the infrastructure underpinning the collective investing experience. Where we currently have multiple agents along the value chain running record-keeping systems and processes to keep track of the fund’s operations, there will be a single digital record on a shared blockchain.

But this is really only the beginning of the journey. Blockchain offers the possibility to bring access to both new and existing assets classes that have been difficult to trade in conventional fund structures or which could be traded more efficiently. There are examples ranging from private markets to money market funds.

Crucially, greater computing power and AI also provides the opportunity for investors to better tailor their investing experience to their needs, long-term goals and preferences. Instead of thousands of people investing in the same fund, with the same portfolio, investors may have access to a much more personalised portfolio, tailored directly to their preferences.

The extent to which the funds market can adapt in such a way to provide these benefits depends on a wide range of factors and the exact path is not yet clear. But in doing so, collaboration across firms, regulators and most importantly, with the end investors, is crucial. Dramatic change is not always a smooth journey. To ensure that all types of investors are served in the best possible way, we must make sure to listen to investors and put those needs at the heart of the transformation.

A new range of risks to address

IF3.0 will sit within a wider world of digital finance in which new or modernised platforms offer unprecedented direct access to financial markets, enabling individual investors to engage in trading and investment activities with ease and efficiency.

Issues such as cybersecurity, data privacy, and the need for robust regulatory frameworks must be addressed. Direct investors must be equipped with the knowledge to navigate these digital platforms safely. Understanding the risks associated with online trading, the nuances of automated investment services, and the implications of algorithm-driven financial decisions are crucial.

At the same time, the volatility and regulatory uncertainty relating to the burgeoning crypto market can pose risks. Investor protection, in the context of crypto assets, involves an understanding of the underlying technology, the ability to discern legitimate projects from scams, and awareness of the regulatory protections that apply – or don’t.

We must work to foster a well-informed investor community that can engage with this asset class with the necessary confidence and caution. These investors continue to seek the safety net that regulated routes can provide, and we advocate for the same regulatory principles and requirements to apply to the crypto asset class as applies to mainstream asset classes, in addition to greater global consistency on regulation, aligned with IOSCO’s recommendations.

Artificial Intelligence

As recent developments and our work with member firms have shown, AI is having, and will continue to have, a significant role in the evolution of asset management products and services. It will power the modern investment fund by accessing almost any data point needed, at speed, and provide market insights for portfolio managers to assess and act upon.

From another angle, its adoption more broadly will also have a major impact on the companies and sectors that we, as global investors, invest in – with some sectors playing a smaller role in major economies in future, and others greatly enhanced.

As this seismic shift becomes clearer in the coming years, it is important that companies engage carefully with their shareholders in order to adapt to the changing environment, support their employees and adopt AI in responsible and ethical ways.

Building Investor Knowledge and Confidence

As access routes to investment change, and the ability to personalise investments increases, a solid foundation in the basics of investing will be crucial for all investors, regardless of experience level and how they may choose to access investment opportunities. This can both enable people to benefit from the long-term financial resilience that investing can deliver while empowering more people to spot scams and fraud.

Our hope is that, just as the traditional mutual fund and ETFs provide investors with the reassurance that their assets are managed by regulated professional entities, so too will IF3.0. So those who are less experienced can rely on an industry that has been managing money successfully for more than a century, but which will now be doing it with a higher degree of sophistication than ever before.

As technology evolves at an accelerating pace, bad actors can also capitalise on these developments, increasing the risk of fraud and scams. For example, AI-powered voice impersonation programmes and real-time video deep fakes of trusted friends, family or colleagues can persuade people to part with their money fraudulently. Awareness and education play a crucial role and the Financial Conduct Authority’s (FCA) ScamSmart campaign, a programme that the IA fully supports, is designed to help consumers avoid investment and pensions scams. The IA also works extensively with members, the FCA, law enforcement agencies and government to clamp down on scams.

Investors need to obtain clear and easily understood information about what they are investing in and have access to advice and guidance when it is needed. Information should balance both opportunity and risk to ensure that individuals aren’t inappropriately deterred from investing when it is in their interest to do so, but they can also understand what they are investing in. Investment must become more inclusive and bridge the gap between precautionary cash savings and long-term investment – and this can only happen through education.

Conclusion

As the financial landscape transforms at an unprecedented pace, new and exciting developments for product and services are becoming available to investors. Through collaborative efforts, listening to their needs and a commitment to empowering and educating investors, we can ensure that investors are well-prepared to navigate this dynamic environment. IOSCO's World Investor Week serves as an important platform to address key themes and to foster a resilient, informed, and empowered investor community.

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