With fintech developments undergoing significant digital disruption, Stockpot, a recent entrant in the sector, has emerged as a platform that is dis-intermediating the trading process.
The firm was launched in April 2013, operating on the premise that the end consumer is faced with high transaction costs and information asymmetry in financial services sector. “The financial services sectors takes advantage of people outside the industry, overcharging them for advice, fund management, trade executions and other charges. It’s a big operation to bring costs down for the end consumer. The costs are so high that many people don’t invest,” says Christopher Brycki, founder and CEO of Stockspot, in an interview to DEALSTREETASIA.
Backed by Global Founders Capital, which is linked to company building firm Rocket Internet, and H2 Ventures, Stockspot is Australia’s first online and automated investment advisor. The firm was selected as one of the 50 Best Fintech Innovators globally by KPMG and named Asia’s most innovative new financial technology start-up of 2014.
Brycki, who possesses an extensive background in the financial markets, previously working as a portfolio manager at UBS, where he invested the banks’ capital, He says that it is his personal mission is to re-engage a generation of Australians who have been locked out of the market for financial advice and investments due to high fees and outdated technology.
What led you to launch StockSpot?
I used to be a fund manager and saw how the insides of fund management industry functioned. One major problem I perceived was the fees and the information asymmetry that exists. The financial services sectors takes advantage of people outside the industry, overcharging them for advice, fund management, trade executions and other charges.
It’s a big operation to bring costs down for the end consumer. The costs are so high that many people don’t invest. Some people try and manage their own investments, but that can be dangerous as they’re not cut out for it or are illiterate about finance and financial markets.
I saw that the industry was creating too many transaction costs, so I decided to go directly to the consumer and cut out the middlemen.
Where do you see yourself going with StockSpot – IPO or acquisitions?
I’m not thinking about an exit, as we’re still in an early stage, as there’s still lots I want to achieve. I am 10 steps from where I’d like to see investments go, as I want to see StockSpot change the industry and see alterations that will benefit the consumer. I understand the cost structure and value chain of the industry and want to take away what is unnecessary.
It’s not about adding more features but taking away unnecessary features that people pay too much for. I want customers to use something that provides the essential features.
Where do most of your customers come from?
All our customers are in Australia right now. From a regulatory perspective, we do have many Australians residing abroad investing at home, as well as local Australians. We do have a surprising number of expat customers. It is kind of justified as a lot of Australian expatriates are living in Malaysia or London with a pool of capital in a bank account and they want to invest it.
Ours is a digital product so they can easily do it and manage the funds. This is a digital acquisition route for acquiring customers that have a link to Australia. If we want to expand abroad, we need some sort of physical presence in the country and the portfolios we create need to cater to that specific jurisdiction and market.
We are looking at expansion not to the US or UK but elsewhere. This is due to saturation in the landscape there, with examples like Future Advisor in US and Nutmeg in UK. Hong Kong has a few players as well. We are looking at markets in Asia due to their proximity to Australia.
Who are your major backers in this enterprise?
There’s currently two venture capitalist (VC) funds backing us right now. They’re Global Founders Capital, the investment fund of Rocket Internet and H2 Ventures. A few early investors are high net worth individuals (HNIs) from financial services that liked our concept and understand the benefits of what we are doing.
Where do you see StockSpot going in the next few years?
The biggest pool of money available in Australia is retirement money, with A$2 trillion worth of retirement savings. Stockpot would like to get into that market segment. Otherwise, we will take our model to other countries, as there’s an existing customer base. We are also exploring other verticals like budgeting or insurance. But we want to get it right in Australia first.
What is your take on the stock market turmoil currently impacting Asia Pacific markets?
We have actually covered this on the Stockspot blog. When markets are turbulent like now, our business philosophy is that short-term movements are noise, especially when it comes to long-term investing.
Most of our investors are looking at a three-year horizon and there are problems that emerge when people manage their own money. I studied behavioural finance and there are a lot of damaging actions that people can take when they manage their own money.
We help to educate our customers in managing their money and make them situationally aware. Media is always hyping up the turmoil and making people do silly things, so as a trader you become desensitised to news.
Our model is slightly contrarian. For instance, when shares decrease, bonds go up. When markets fall, we help our investors transfer their capital to growth assets and sell down some of the shares, putting them into their bonds. We help rebalance and calibrate our investors portfolios. I am pretty cynical about listening to the news and only the big hedge funds really understand what is going on.
Digital currencies (e.g. Bitcoin) – what’s your take on the role they play in fintech?
I am interested in how verticals within the fin-tech space interact. Digital currencies will eventually fit into the realm of what we are doing, since we are looking at timing differences and transaction costs.
Right now, our customers are doing transactions from a bank account to their StockSpot account – which is a Macquarie bank account.
We white-label Macquarie Banks’s products. As a startup, trust is hard to earn, so first of all, you need to have partners that you can trust and are financially stable. To get a banking license is very difficult. And currently, with friction and transaction timing and costs, it can take up to three days. Very often, we get e-mails all the time from customers and we have to explain that it can take two days to shift cash to their account.
Shifting from your cash account to an ETF portfolio or stock portfolio comes with high transaction costs. Stockpot’s minimum investment threshold is A$2000, for instance.
Digital currencies like Bitcoin will help in reducing transaction costs dramatically. Cryptocurrencies can remove transaction costs between assets, because at the moment, to move money from one asset to another often involves a gateway. Bitcoin has the ability to remove this gateway and eliminate the cost, getting rid of that friction.
Once consumer understanding and awareness rises and Bitcoin or another digital currency becomes mainstream, then it wll reduce costs and transaction latency. Digital currencies can operate in many little niches that we are targeting. And we are trying to figure out which approach can help us become more mainstream.
What was the biggest challenge in transitioning from UBS to being a startup founder?
I just naturally love chaos. It’s often said that the most stressful job in the world is being an entrepreneur, while the second most is stockbroker and professional trader. In both professions, you often get problems thrust on you and have to make sense of them. In both occupations, you are a problem solver, whether its a hiring problem, or regulatory problem, as there’s so many problems everyday.
For me, the challenge that was easiest was making the decision to leave a comfortable job I loved, leaving a career to set up your own business. I was really passionate about this idea and I’d rather do it now and try it out, rather than not have tried it. It’s a lot harder to do risky entrepreneurial stuff as you grow older with more responsibilities.
It’s about helping consumers as there are so many challenges. The passion for your product and business makes other people as passionate about this. Another major challenge was recruiting people and persuading them to leave their jobs, alongside attracting talent and raising funds from investors.
What’s your take on crowdfunding?
It helps with capital formation, as typically companies that haven’t been able to get capital through other means can rely on this to gain growth capital, via people relying on retail investment. Crowd-funding has existed for a decent amount of time in Europe but there have not been many big exits in terms of firms that utilise equity crowdfunding.
Non-equity crowdfunding is a great way to support non-profit activities and art projects. But when it comes to equity crowdfunding, there’s a gap in know-your-client (KYC) processes and due diligence, meaning that there’s a lot of information asymmetry in that domain.
Australia has retirement funds worth $650 billion that is self-managed, out of $2 trillion currently available. But many managers aren’t sophisticated investors. Engaging in crowdfunding only to access a return is risky. And as a trader, I’d see crowdfunding as part of a portfolio of options, and an investment option that’s tagged with high uncertainty attached.