“Democratizing finance” sounds unquestionably positive.
Lower fees. Easier access. Fractional shares. More people participating in capital markets.
Those are genuine improvements.
But in a recent Globe and Mail column, I looked at research suggesting that making investing easier and more engaging does not necessarily mean investors end up better off.
One study examined 142 gamification updates introduced by 17 U.S. brokerages between 2018 and 2021.
The results were striking.
Brokerages benefited from higher trading volumes. Market makers benefited from trading patterns that became easier to manage and profit from.
Retail investors, however, were consistently worse off. They earned lower returns while experiencing greater volatility.
Other research suggests that platform design can influence more than trading frequency. Motivational prompts modelled on social-media investing posts made participants more willing to hold riskier assets for longer.
None of this means financial innovation is bad.
Digital platforms have dramatically lowered investing costs and expanded access to markets. Fractional shares, for example, allow investors with relatively little money to build diversified portfolios that would once have been difficult to construct.
The problem comes when platforms are designed primarily to maximize engagement.
Investing is one of the unusual activities where doing more is not necessarily better. Checking your portfolio more often, trading more frequently and having access to markets around the clock can create more opportunities to make mistakes.
That creates an important distinction.
Democratizing access to investing is good.
Democratizing speculation is something else entirely.
The next generation of investment platforms should not compete only on price, convenience or how addictive their interfaces can become.
A better measure of innovation would be whether the people using those platforms actually make better financial decisions over time.
Preet Banerjee
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