Described as “voting with your money instead of with a bit of paper and pen”, is democratic finance just a bit of marketing gumpf, or a real concept with the power to change the way we think about our money and boost ethical investment?
As a nation, we love a debate. But if there’s one thing we agree about, it is that democracy is an incontrovertibly good thing, even if it doesn’t always produce the outcome we personally want. As a method to reach a conclusion that ends an argument, you can’t really beat it.
This blog was originally posted on Trillion Fund
If democracy fixed politics, could it also fix finance?
Recent developments suggest we may be on the verge of finding out.
The last few years have seen the rise of crowdfunding – the mechanism that raises money for specific projects or businesses through a large number of people putting in relatively small amounts. Kickstarter and Seedrs are two well know examples of crowdfunding platforms. Crowdfunding has been described as the essence of “democratic finance”.
According to Bruce Davis of Abundance Generation (Trillion Fund is an appointed representative for Abundance NRG Ltd, which is authorised and regulated by the FCA) it “connects the money of the many with the assets we need to build a society fit for the 21st century”. It gives people control over what their money is invested in. It is voting with your money, instead of a bit of paper and a pen.
But is this just marketing gumph, or is it a real concept with the power to change the way we think about our money and shape how our financial choices and institutions evolve in the future?
Let’s look at some key principles of democracy, and how they might apply to a couple of the more common things we do with our money.
Democratic finance check list:
Is my pension democratic?
It’s true that work pensions schemes are very much open access, with 27 million Britons already covered, and new ‘automatic enrolment’ rules designed to increase this number. However in other ways they struggle to meet democratic criteria.
Most of us exercise no control over where our pension savings are being invested. The majority of work schemes are ‘default’ schemes that invest across a wide range of assets and locations, often by tracking the composition of markets like the FTSE-100. This means that a good deal of your savings may be supporting investments with which you might not agree.
Where you do have an initial choice – for example by directing your savings into funds which avoid ‘sin stocks’ – things are only marginally better.
Stocks and Shares Independent Savings Accounts (ISAs) certainly come in many shapes and sizes, as a brief glance at sites like moneysupermarket.com shows. There is a great choice between different products, from FTSE trackers to ethical investment funds.
However as with other kinds of stocks and shares investments that are made through managed funds, transparency can be less than ideal. In addition, mechanisms which might otherwise promote ongoing participation, such as voting in AGMs, are usually exercised by the fund managers on behalf of fund investors rather than investors themselves.
Fund managers are like the elected leaders of your investments, if you like, so be sure you really want to elect them before you do.
‘Self-select’ ISA’s – where you directly chose each individual share or bond to be placed within the ISA wrapper – clearly offer more control and are arguable more democratic. However with these come a big personal responsibility for the quality of investments made, and a potentially greater risk of poor returns or lost capital.
Crowdfunding as more democratic finance in action
Crowdfunding is defined in part by the degree of direct control you have over your money. You believe in more lending for the nation’s budding entrepreneurs? Then you could lend through Seedrs. You want to see less fossil fuel pollution and help address climate change? Then you could look at an Abundance debenture for a renewable energy project developed in partnership with a local community. It’s important to note however that such investments are not risk free. For example debentures are long-term investments, returns are variable, and you may not get back all of your initial capital.
Crowdfunded investments are typically more transparent and open as that is partly the point of them. And crowdfunded investments – because they are open, tend to also be more socially responsible. After all, when we are more connected to our money it makes sense we will want to use it in ways that reflect our values.
It is this combination of democratic attributes that explains the rise in popularity of crowdfunding over the last few years. The industry is now valued at $2.8bn globally.
Yet despite the appeal of this idea, nothing is a panacea and there are still questions surrounding crowdfunding, such as:
- Does the new wave of ‘democratic’ financial products represent responsible personal investments with returns appropriate to the risk involved? Some may be relatively low risk with competitive returns, but others, such as start-up equity stakes, are inherently more uncertain but might come with the prospect of higher returns.
- How many people are financially literate enough to take more direct control over their money in a responsible way?
- Finally, can the emergence of mechanisms such as crowdfunding and peer-to-peer lending be a catalyst for the increased democratisation of the more common places we put our money such as pension schemes and ISAs?
The answers to such questions could affect whether democratic finance can continue to move from the margins to the mainstream.
You can follow Sam on Twitter; @Sam_Friggens