The Armchair Investor

Are they aware of the P2P risks?

Following an on-going debate concerning peer-to-peer lending, as to whether everyday investors are being made aware of the risks involved, Medianett has questioned key players in the market, along with other alternative finance professionals on their view of the new generation investor.

The ‘Armchair Investor’ can be explained as an inexperienced investor who has stumbled across the peer-to-peer market and utilises it as a vehicle to obtain better returns than those provided by their savings with high street banks.

While conducting a rough market analysis many P2P lenders stated to the Medianett that their typical investor is 50+, male and has a knowledge or experience of investing. However, there has been a slight change to the demographic, as more women and younger investors are being included in the trend.

With the general public becoming more trusting of the P2P market, some have questioned whether the layman investors are in real danger of losing their savings?

“The downside to not being an ‘experienced’ investor is that there are inevitably huge risks to the investor,” commented Ashley Ilsen of Regentsmead, adding: “I think the scale of the risk needs to be illustrated so that Joe Bloggs knows that if he wants a better rate of return on his savings there is naturally a price to pay for this.”

Speaking as part of the younger demographic, Ashley argued that it’s important to bear in mind that since 2008, all this section of the population has known is a rate of return on savings that is below inflation and, if inflation picks up, it could mean that having your funds sitting in an account results in the true value of your money being lost.

“Perhaps younger investors, to an extent, feel ‘forced’ to look for other, riskier investment opportunities, and the downside of this is that people will lose money from not fully understanding the risk incurred,” he concluded.

An anonymous comment stated that investors are being seduced by the promise of higher returns for what sounds like no risk, adding that “low interest rates are forcing savers cash to look for higher returns”.

On the other hand, Matthew Arena of Brilliant Group believes that inexperienced investors are capable of deciding for themselves, stating: “Anybody investing in anything without taking advice is effectively self-certifying their level of understanding. Many are capable, many are not, but as long as we are not talking about vulnerable groups the choice should be left to the individual.”

In Matthew’s experience, he believes the younger generation places less value on investment advice, by using the internet to undertake their own research to become more aware of the product. “It probably says more about how the word is spreading about P2P investments and the differential in the attitude to risk than anything else,” he added.

Jackie Ferguson of London Bridge Plc believes it would be helpful to have some investment experience in order to understand the pro and cons, however, she added:  “…the P2P platforms offer potential investors the ability to gain entrance into the investment arena with a small investment so provided you as the new investor have done your homework, then I believe it is an excellent way of gaining investment experience without risking too much.”

“Speaking to young people, I believe they like the idea because the potential interest is more than they can earn in a bank; they can actually see a project and see their investment make a difference , as well as being able to experience this without risking too  great a sum.”  

Aldwyn Boscawen of P2P lending platform, Wellesley & Co, explained that while investment experience may help customers to understand the risks, it is important to realise that p2p risks vary from more commonplace investments.

He believes that the younger demographic is a positive change: “…the more people that are aware of the industry and feel that it is a viable investment, the better,” he said, adding “While we have not seen this specifically on our platform, we feel this is due to the passive nature of our investment and that the active loan marketplace model suits younger investors who look for higher returns, rather than greater security.”

Nick Moules of RebuildingSociety feels that it is not essential to have previous investment experience to venture into P2P lending. “What is essential is that investors consider the risks and manage their investments accordingly. New investors should consider spreading their investment across over several businesses. Not only does this work to overcome issues of risk, but allows them to hold a diverse portfolio,” he added.

“Investing in P2P lending is not just for experienced investors.  It is however important that those people approaching it for the first time understand how it works, appreciate the risks and how to minimise them and optimise their returns,” said Caroline Munro of FundingKnight.

While Caroline thinks that P2P lending is designed for investors of all ages, she also believes that it is for investments and not savings: “Where funds are needed for a ‘rainy day’, where any degree of risk is unacceptable, where immediate access is a must, then the bank or building society continues to be the best place.”

“No matter how carefully any platform attempts to screen borrowers, some loans will fail”.