Note: In this publication, we analyze strategic alternatives to what was stated in the opinion letter sent by Sebastián Rojas to the Diario Financiero on February 5th regarding the attempt by local investors to replicate what happened with GameStop. 

Robin Hood in the Wall Street Forest 

Robin Hood, or Robin of Locksley, is a fictional character who, along with his bow, challenged the Sheriff of Nottingham to steal money from the nobles, obtained through usurious rates, and return it to his people. 

A few weeks ago, a group of characters gathered on Reddit came together en masse to buy shares of several decaying companies and “bring down” large hedge funds that had “short” positions in companies like GameStop, with supposed million-dollar losses. The irony is that they used the Robinhood investment platform to execute their plan, an investment platform that apparently does not charge commissions for stock purchases, although it does earn from the spread when buying and selling at advantageous points for them. But beyond this almost anecdotal event, the existence of these platforms opens the world of investments to all people with something to invest. So, although Robinhood does not steal from the rich to give back to the people, it does enable more people to gain wealth in the investment market. 

Robinhood surpassed 13 million downloads on Google Play and the App Store since the GameStop rally began, opening the door to small investors, like the teenagers who participate in the Reddit forum, and the eyes of other massive investors who today pay high commissions to their investment instrument providers. 

In Chile, on the other hand, after the GameStop event, a smaller group organized through Twitter tried to replicate the experiment with Schwagger shares. Although this event had very limited results, it shows us that in our country there is interest in investing and, above all, there is still much room to grow in the segment of small investors, with platforms that simplify the process for those with limited knowledge of the financial market or who distrust it. 

The best example of this opportunity in the local industry today is the reach that applications like Fintual—a company that in 2018 started as an asset manager offering only 3 funds and $250,000 in managed assets, and now has more than 40,000 clients and $350 million in assets—are achieving. Its success is due not only to the technology that facilitates the investment process but also to how it simplifies the process for investors, from language and understanding to registration and the way investments are executed. 

Although this industry was born internationally in 2008 with applications like Wealthfront and later Betterment, in Chile, it is a recent phenomenon that is growing alongside about a dozen investment fund platforms (such as Focus and Fintual) and stock trading transactions (such as Racional or Capitaria). Foreign platforms also enable simple investment in assets today, such as eToro, which allows the automated management of portfolios from outstanding traders. 

With their respective differences, all these platforms have four elements in common: simplicity for registration and access to the platform (no requirements); simple and approachable language for their clients; competitive (and even superior) returns; and charging lower fees compared to traditional investment managers (which can ultimately be more expensive, as is the case with Robinhood). With these elements, platforms manage to lower the barriers to entry for small investors, adding elements that generate a greater sense of transparency. 

These applications do not compete in the institutional or high-net-worth markets; they usually operate in the mass market of small and medium-sized investors. In Chile, this market has a commission size from funds of around $350 million annually. These platforms not only have the potential to capture commissions in this market, but they also have the potential to grow it by incorporating people who do not invest today. 

Building these platforms involves significant technological development, which companies like Wealthfront took years to stabilize. It also involves high security requirements for integration with existing company systems. In this case, there are “white label” platforms—customizable for the brands that acquire them—that can accelerate development but only solve part of the complexity of building them. 

Although these platforms have not been free of controversy and even lawsuits, today small investors have realized that there are easy-to-access alternatives to invest their money. In a survey conducted in November 2020 by Montblanc Consulting among members of the millennial group, 5 out of 10 have 75% of their savings in these platforms, with the main reasons for choosing them being low fees, low entry requirements, and the perception of transparency. 

This phenomenon poses significant challenges to investment companies, stockbrokers, and fund managers in Chile, questioning the development strategy and sustainability of the investment management business, with trade-offs between investing or maintaining and the inherent risks of the various alternatives. Among the possible strategies to face these challenges are: 

1. Developing a platform to enter or serve the mass market as a defensive strategy to avoid losing clients. 
2. Developing a mass platform to enter the market and grow the pie, with the risk of cannibalizing current products and services. 
3. Not developing a mass platform and focusing on a market segment with the traditional model by improving the value proposition. 
4. Focusing on automating and being a “low-cost” provider. 
5. Or simply doing nothing, with the risk of losing future market shares but maintaining margins. 

These alternatives raise the question, how is my company preparing to face these new competitors and the arrival of this type of technology?