[The Wrap] Is a big problem hatching?
One of those Christmas feel good emails landed in my inbox the other day which got me thinking.
Friday, December 31st 2021, 2:14PM 
5 Comments
It was a rather well done infographic from online share trading platforms Hatch which boosts about its numbers for 2021. And it is probably entitled to.
If Hatch was a managed fund, other than a KiwiSaver Scheme, it probably had some of the strongest inflows in the market.
That raises the question are these platforms a threat or opportunity for financial advisers?
First to the numbers.
Hatch, which was set up by KiwiWealth, and recently sold to FNZ, says in 2021 its members, so-called Hatchlings, invested more than $1.1 billion with the platform - that's about $150,000 an hour.
It says deposits into the platform totalled $569.7 million (or about $1,189 a minute), and this was double last year’s total.
Some of the other highlights are a little perturbing such as this one: "620 investors joined the ‘Six Figure Club’. At one point during the year, they each made unrealised gains of $100,000 - or almost twice the average Kiwi salary."
There is no doubt these platforms are successful, but are they a threat or opportunity for financial advisers? The simple answer is who knows. Maybe Hatchlings are just learning the basics of investing and will realise they need some professional advice.
Or maybe will get into trouble at some stage, and need advice.
Or, the worst case scenario, is we have 1987 all over again. Thousands of investors lose heaps of money and are turned off shares for decades. The fallout from 1987 is really only just, finally vanishing (probably due to age).
I know the regulators are concerned about these platforms. While they are great for getting people to save, they are largely unregulated. There are plenty of stories around on the internet how people invest in whims, tweets, Reddit posts and other things.
No doubt pieces like the Herald's Top Broker Picks for 2022 will be enough for people to buy Scott Technology or Trade Window - largely unheard of and unresearched companies.
It really does seem that regulation is miles behind what is happening in the market. Other participants including financial advisers and managed investment schemes are tightly regulated, then there is billions of dollars flowing to these platforms.
When the market turns, as it inevitably will, it is going to be interesting times. Will that be 2022?
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Comments from our readers
Dollars to donuts, many Hatchlings will not be aware of the income tax provisions re trading.
First up, there is absolutely no obligation on a platform to point out these types of risks - e.g. the risk that suddenly these investors get copped by the IRD and made to pay tax on capital gains. This is completely at odds with how the regulations work within the industry, where the focus is on making sure that risks are clearly explained.
The platforms that are collecting transaction costs are incentivised to encourage people to trade.
The IRD is trying to streamline their systems so that they get less people having to file tax returns. In fact, anyone with more than roughly $10,000 in direct global shares should be filing an IR3 - which given there are hundreds of thousands of people on these platforms, there should be a huge surge up in the number of returns that get filed (assuming people comply with their tax obligations).
Also, the numbers here are completely at odds (in my mind) with the FMA survey results. The. FMA's survey appeared to show that there was a relatively low level of trading going on, but here we have numbers saying that there were inflows of $569 million, yet $1.1 billion of investments made. To me this sounds like a lot of trading activity.
Sharesies revenue numbers also appear to show that they have had high levels of transactions.
My pick is that the IRD does nothing though.
This despite most investors being non-advised, direct, and/or determined to go there.
After too many people borrowing too much(?) we got new regulations.
This despite very low defaults, and many clients being helped/managed out of difficulty by advisers, clients going direct to bank and/or determined to borrow.
Hath et al caters to those who want to go direct, DIY, and a determined to go there.
I'm fairly sure that when the hatchlings' feathers get ruffled, and they all end up taking a birdbath, we will of course end up with some new extra regulatory requirements, documentation, procedures and responsibilities.
That's how all this works eh?
Nevertheless, when markets correct (and they do/will), it is often the Managers with products available on direct-to-consumer-platforms who end up dealing with investors, and protecting their brand and reputation.
Is it a systemic problem that warrants the attention of Regulators - probably not. Although Managers should prepare themselves for the inevitable requests and concerns that will come their way from direct investors.
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Is that cheap or dear?