Investing with Dozens and ideas for the future

This is all very interesting, responses are much as I suspected. Difficult to win over seasoned investors in any situation. Is attracting new investors the better path?

The fee comparison above isn’t entirely fair - for non-black members, 0.5 is the maximum fee - because no fees on loss making days, right?

If I’ve understood correctly, can anyone (@robert might not be allowed due to rules about how rates are advertised) give an indication of the true rate they’ve experienced? I guess 0.25% (ie 50% of days end up, 50% end down?) is overly optimistic - I’m guessing things generally drop quicker than they come back up?

I’ve think you may have misunderstood the fee structure. You don’t get charged if your portfolio value is less than what you invested. So if you invested £1,000 you won’t get charged for days when portfolio value is less than £1,000. You will still get charged if portfolio value drops on a particular day (relative to previous day’s value) as long as the portfolio value remains above the value you invested (i.e. above £1,000 in this example).

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I have :frowning:

First, it’s a good idea to split this discussion to a dedicated thread. It might sound like I’m saying this in hindsight, but I was long expecting this to happen. :slightly_smiling_face:

Good to know. I think it’s essential to have an “expert mode” switch on the investment section if you really want to serve both new and experienced investors. Perhaps the expert mode will also switch between a handful of selected funds (what we have right now) and most funds available on the market (like a regular investment platform).

The risk assessment is an one-off process, I’m not too bothered by it. And, THB, a part (but not all questions) of it is actually a regulatory requirement, so you can’t really skip it. But I’m totally agree with you about the goal setter. Dozens, please allow us to turn it off.

BTW, since you mentioned the risk assessment, I remember the the income/net asset/etc. boxes all accept at most 5 figure numbers, so anyone has more than £100k income/net asset/etc. won’t be able to enter the real number, and is forced to enter something else instead. This needs to be addressed urgently, as those numbers are actually a part of FCA’s KYC requirement, which means those affected customers were forced to give false information to Dozens. This is a very serious issue. Once you fixed this issue, you will need to ask everyone to fill in that form again.

I have the same question. But honestly I don’t think a fund suggestions thread is the way to go. If you want to have experienced investors using Dozens invest, the fund universe shouldn’t be made selective. All funds do not violate certain criteria (e.g.: non-UK reporting fund, dirty class fund) should be made available.

Out of curiosity, may I ask why do you want a currency hedged equity fund? I’d totally understand your reason if you were asking for a currency hedged bond fund. But you are asking for an equity fund, and equity movements are a lot more volatile than major currency pair’s movements. What’s the point of avoiding the small currency risk but take on a big equity market risk? Or is it the other way around, that you are actively managing your portfolio and switching between the hedged and unhedged versions of the same fund to take advantage of predicted currency movements? If that’s the case, perhaps trade on margin or forex futures is a better way to do it, as you will be able to use a leverage to amplify your gains (and losses too).

Hmm, that perhaps is from a different view than @o99 . I want to hear your side of the story too. Would you mind explain to me why do you think a currency hedged world equity fund is the “most reliable” investment?

In fact, it’s a lot easier to attract the former than the later. The former already have the expertise, knows what they are looking for, and ready to switch if anything fits their need better and/or is cheaper than what they have at the moment. You would be surprised to find out how many people with a small pension pot switched to the Vanguard SIPP when it first became available. On the contrary, “new investors” (i.e. “soon to be investors”) don’t know what they are looking for, are confused by the choices of funds and platforms, mentally put an equal sign between investing and gambling, and between risk and losing money. It’s much harder to educate them, take the equal signs away from their minds, and encourage them to make their first step.

I wish, but that’s not true. @o99 has explained it how it works, and in reality (hopefully) your investments will grow over time, so depending on your choice of fund, only the first few days or months you may enjoy some nil-fee days, and after a while you will certainly be paying 0.50% per year until you sell the funds. Therefore, ignoring the first couple of months, it is a fair enough comparison.

The time horizon for when I want to access my ISA funds will probably be years rather than decades. Over this time period I’d prefer to avoid currency risk on the equity portion (not just the bond portion). Particularly due to potential for Brexit to drive movements in GBP.

For my SIPP (time horizon in decades) I’m not bothered by currency risk and am using 100% unhedged equity.

The problem is it can reduce choice of funds available and locks you in to that reduced choice for 12 months. This is undoubtedly done with novice investors in mind, but for those already comfortable with making their own choices it’s off-putting.

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But if you understand about investment risk, then you can just answer with a high risk appetite and have all options unlocked. Not sure how the selection process is introduced but if it was started as selecting the highest risk level you might be prepared to consider rather than just for this specific investment that might work? I certainly appreciate not having to repeat the process each time as with some others.

Yes, but you would need to understand the impact of the risk assessment prior to doing it, and you may need to answer dishonestly. If you don’t know about the connection between the risk assessment and fund availability in advance you may end up being locked out of some options for 12 months.

I have a relatively low risk appetite for my ISA but that doesn’t mean I don’t want to see all the investment options available to me and make choices myself. To see all options I need to say in risk assessment I have a high risk appetite.

Much better I would suggest would be to allow users to opt out of the risk assessment and allow self certification as a sophisticated investor to turn on an access all areas mode. Perhaps require passing of a short test to ensure understanding of investing.

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Probably didn’t articulate myself effectively but what I am thinking is that the questions should be geared to an individuals understanding of risk / implications so someone with a good understanding will then have access to the full portfolio and can select the investments appropriately. This would not lead to ‘gaming’ the system or dishonesty, in your example you would demonstrate a good understanding of investment risk and then be able to select an appropriate investment strategy. Clearly your option is also valid but might prove more problematic to implement and lead to greater complexity. I think we are broadly agreeing though.

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Yes, I think so. We’re both saying investor understanding should somehow be taken into account. At the moment it’s not. At the moment what funds you see is entirely based on Dozen’s judgement of your risk appetite and perhaps time horizon (I can’t remember the exact questions).

If you’re expecting to only hold your investments for a few years (less than 5), is investing really the right choice? If you are investing for longer than 5 years, dose the exchange rate change really matter?

I don’t agree with you on this. Brexit is a past event, and the price is already included in the exchange rate today. What drives currency movements is the event yet to happen. When a future event happens, the exchange rate could either go up or down, depending on the nature of the event and the market sentiment. We don’t have a crystal ball, and can’t predict that with any degree of accuracy.

If you agree that you can’t predict the future exchange rate movement direction, then you are paying a cost for currency hedging and not expecting anything in return. It isn’t very rational, is it?

But if you can predict the future exchange rate movement direction with a meaningful degree of accuracy, you should trade forex directly. The use of leverage will produce a much bigger gain (and loss) than hedging currency in an equity fund. However, I doubt anyone can, otherwise we should’ve seen the next Buffett in the forex market on the news by now.

I’d argue that the result of risk assessment should constrain the portfolio risk, not individual fund risk. Because a very risky equity fund could be a building block for a very conservative portfolio. For an example, I think that we all agree that Vanguard LifeStrategy 20 is a fairly low risk fund, and we also all agree that an emerging market equity fund is very high risk, but the VLS20 fund actually has 1.66% of its money invested in the Vanguard Emerging Markets Stock Index Fund (as on 31 March 2020). Does this make VLS20 a high risk fund? Of course not. But is an EM equity fund suitable for an investor who has a low risk appetite? It depends.

First, I’m fairly confidence that you are not a sophisticated investor. Why? Because the word “sophisticated investor” has very specific meanings, it’s not just any experienced investor. The COBS 4.12.8 R reads:

A self-certified sophisticated investor is an individual who has signed … a statement in the following terms:

“SELF-CERTIFIED SOPHISTICATED INVESTOR STATEMENT

I declare that I am a self-certified sophisticated investor for the purposes of the restriction on promotion of non-mainstream pooled investments. …

The highlight from the above statement is “non-mainstream pooled investments”. All of the ETFs and OEICs available in Dozens invest are mainstream. So this doesn’t apply.

Second, self certification is a slippery slope, it will soon lead to misselling complains from investors who has lost their money.

I wouldn’t be surprised by the number of people who would mindlessly search the answers on the Internet, without realizing that they are exposing themselves to the risks they don’t understand.

However, I’m not saying this isn’t a valid solution, it’s just the questions in the test need to be carefully worded to minimize the results come from Google searches. To further prevent the user searches something more general, like “Dozens invest test answers”, and find all the questions and answers, the questions will need to vary between different accounts, and new questions will need to be added regularly and overly exposed old questions need to be removed. Some mathematics questions may also help, as the numbers in the question may be generated randomly, and the description can be very short and make it hard to search on the Internet. For example:

You bought £1,000 worth of this fund at the beginning of 2017, what’s the value at the end of 2019?

Fund Performance

Year 2016 2017 2018 2019 2020
Change % +10% +4% -9% +5% +2%

A. £1,050.00
B. £1,041.04
C. £1,000.00
D. £993.72
E. £974.61
F. None of the above
G. I don’t know

I totally agree with you. It’s important to measure both the understanding of risk and willingness to take risk. The former should limit what funds are available to the investor, and the latter makes sure the riskier funds carry a warning label.

Also, I’d also like to point out that the total amount of risk an investor is comfortable to take is often not the same as the investor is willing to take on a specific part of their portfolio. For example, for someone who is very adventures, they may invest most of their money in 100% stock, but if they need a certain amount in 10 years to pay off their interest-only mortgage, they may choose to invest this part of their money in a lower risk portfolio instead.

Unsurprisingly, the opposite is also true. For example, for someone who’s in early 20s and is very risk-averse, they may invest mostly in a 20% equity fund in their S&S ISA, but they would not invest in the same way in their DC pension pot, because they know that the pension pot has a very long time horizon, and invest so conservatively will significantly reduce their retirement income.

No, time horizon is not asked. They asked about your income and net worth (part of KYC), and how many years of experience do you have.

Time horizon only appears in the goal setter, but it’s very irresponsible at the moment. They are telling their users that they can invest £10,000 in the emerging market for 1 year to reach £10,670. However, the reality is, a British investor invest £10,000 in the emerging market for 1 year will only have less than 45% chance to reach £10,670, worse chance than tossing a coin. They would have better chance to achieve that if they took £670 from the £10,000 to the casino and bet it all on the black in one roulette game - about 48% chance. (Please don’t do this, it’s a terrible way to potentially gain £670)

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Yes, I suppose its the wrong term. I have been asked to self declare as a sophisticated investor on other platforms (and met the criteria), but yes they weren’t mainstream products. My point however is simply that I think there should be a mechanism whereby we can opt out of hand holding and restrictions on choice.

I don’t think this is the right thread thread for discussing investment strategy as it will get in the way of discussion of the app/platform. It’s partly why I suggested earlier it might be a good idea for a dedicated thread on fund ideas. But to comment briefly - some of the 5 year periods your your graph have 40-50% swings in GBP/USD. I would say this is quite significant, even if generally dwarfed by equity movements. I’m prepared to lock in ~ 2% cost across 5 years (annual premium of ~ 0.35%) to guard against possibility of 40-50% negative impact due to currency movements. I wouldn’t do it across decades as your graph shows currency movements cancel out over decades.

I really hope it wasn’t the London Capital and Finance mini-bonds. :wink:

Yes, this part I totally agree.

TBH, I don’t think this is entirely off topic. Because the answer to my question actually shows investors have different believes and needs, and if Dozens want to attract experienced investors, this is actually pretty relevant.

As you’ve pointed out, some investors like you are willing to pay the small cost of currency hedging to avoid the possibility of 50% exchange rate down swing over 5 years (arguably, the equity return were much more than that, and the overall returns were positive), or catch a rare 40% exchange rate up swing, while others like me aren’t. It’s because we have somewhat different believes, strategies, or goals, and the time horizon also plays an important role. To cater for both types of investors, Dozens will need to have a hedged and an unhedged version of the same fund at the same time.

BTW, I’ve actually posted in another thread a few weeks ago, asking why do we not have an unhedged S&P 500 fund.

Off-topic, I don’t use any currency hedged fund in my portfolios, but I do manage the currency risk via other “cheaper” methods, such as exposure to FTSE 100 and gold, both produce returns while also have the tendency to move in the opposite direction of the GBP/USD exchange rate. To me, it’s better to manage the currency risk for free (or better, get paid to do it), than paying a cost to mitigate it.

I understand all the points above about perceived ‘babying’, but I think the hassle of a few extra clicks for a user needs to be weighed against the risk of the hassle / massive expense of even spurious claims/complaints of mis-selling.

I’m sure a lot of discussions were had / advice was taken on ensuring Dozens have sufficient record that customers understand the risks they are taking.

I’m sure nobody here would do it, but you can see the risks of spurious or just plain malicious claims? Blame the people who came up with PPI :slight_smile:

Personally, I think you should have to upload a video of yourself, each time you invest, clearly stating ‘Hello, me from the future. You risked losing this money and now it’s gone. There’s nothing you can do, just deal with it. If this video is being played to a judge/jury I direct you not to rule in my favour. I hereby plead guilty to any and all counter-claims made against me by Dozens / Project Imagine - throw the book at me’.

Maybe I’ve swung too far the other way? :slight_smile:

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Hi @dan_g,

The reality is, there’s dozens (no pun intended) of platforms out there, and you rarely see any platform “babying” their customers. They all got away with it by telling their customers: “Please remember that the value of an investment and the income from it can go down as well as up and you may get back less than you invested”. Perhaps equally important, they also make it clear that they do not provide advise.

Imagine how day traders will react to that. Although admittedly Dozens misses lots of features for day traders. Real-time charts, limit order, etc., just to name a few.

Yes, way too far. :wink:

I had hoped the sarcasm would become apparent at some point in there… My point was that there is a balance for Dozens, and they’ve stayed on the safer side.

No day trader would consider Dozens for that purpose, and I don’t think it is the market Dozens want (yet?). Anyone who thought they could use it that way would be clearly demonstrating they were not a ‘sophisticated’ investor :).

Its “Spender to saver to investor”, not (day) trader. If you take someone on a journey from managing day-to-day spending and no savings to building an emergency fund to risking some of your capital on the stock market all in the same app, then extra warnings are entirely appropriate.

I’m sure you’ve seen a correlation between strength of warnings an intended audience of platforms? Of course HL and co have less-stark warnings - because you only need to self-certify once as ‘willing to take risk’ and everything you do on their platform is investment, and a customer is firmly in that world with its associated risks every time they log in. That’s very different from 1 app to pay your rent, build an emergency fund and try out investing.

I agree that easing these warnings off with some sort of expert investor mode might be a nice-to-have, but I think there are other much more important/exciting/interesting things that could be done. In the mean time, a few extra warnings to see off bogus mis-selling complaints seems the right balance to me.

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That’s a part of the big picture I’m trying to understand. What is Dozens’s target market?

I’m fully aware that at the moment it’s focused on the spender-saver-investor, but what’s the mid to long-term plan? Do they want to target at experienced investors, or a step further, day-traders? It’s worth pointing out that the spender-saver-investors will gradually become more experienced, but unlikely to turn themselves into day-traders.

For those soon-to-be novice investors, I’d argue that there may be enough warnings on the app, but the recommendations/guidelines given to them are way too misleading, and may have dire consequences. See my comments on the irresponsible goal setter above.

Ideas to fix and improve the goal setter:

  1. Ask the user when do they need the money, instead of calculating it based on the risk level the user choose. If they need the money in 5 years or less, recommend them to use cash savings products instead.
  2. Ask the users whether they have expensive (as defined by APR) debts, and make it clear that this doesn’t include the student loan.
  3. Check (and ask if they don’t have enough on Dozens, because they might have it elsewhere) the user have enough emergency funds.
  4. Change the predicted annual return to a more conservative and realistic number. More on this points below.
  5. If the investment fall short of the expected return, what can the user do in order to meet their goal? (e.g.: delay the purchase, draw savings from elsewhere, or purchase something less ideal but cheaper instead, depending on what the goal is)
  6. Have some pre-build portfolios for each risk group. As a starting point, those multi-asset funds (perhaps the world equity fund too) can form a portfolio on their own. I’d argue that most if not all other funds are not suitable to be hold alone.

Let’s discuss the expected annual return. My best guess is, right now it’s using the annual return (CAGR) over a long period of time. This might be okay if your are investing for 30 years or longer, but we rarely do. For a shorter time horizon, it is a fairly misleading number. Invest for one year in the highest risk group, the reality will fall short of it more than half of the time. I.e. the user will have less than 50% chance to reach their goal. Even hold the EM fund for 5 years, there’s still 35% chance to loss money. The chance does improve if the user chooses a lower risk fund, but that’s not the whole story either. It becomes virtually impossible to reach their goal if the user chooses the lowest risk fund - short duration gilts. (this is exactly the reason why I said those funds are not suitable to be hold alone)

So, what number should you use in the app? I personally would recommend use the 85th percentile annualized real return (CAGR) over rolling N-years periods from a few decades worth of data, where N is the number years the user intended to stay invested or 10, whichever is smaller. For the examples in the post below, I use individual fund for the sake of simplicity. But the returns should be measured on portfolio, not individual funds. And the portfolio needs annual rebalancing.

For example, invest 10 years in the emerging market equity fund, the recommended method estimated annual real return is about -2.3% (using last 50 years historical data, before fund & platform costs and tracking error). That’s not a typo, it is negative. Because if you invest in EM equity alone for 10 years, there’s a non-negligible chance (more than 15%) that you will end up losing more than 20% (equivalent to 2.3% per year compound) of the initially invested money.

Note: if insufficient data is available (e.g.: the robotic fund, which tracks the STOXX Global Automation & Robotics Index, and historical data is only available since 20 June 2011), this becomes very tricky, and I don’t really have any good recommendation at the moment. Monte Carlo simulations may help, but I don’t like it because it’s hard to take the order of events into consideration without creating any bias. Anyone who can think of something that may work, please feel free to write down your ideas.

I’m gonna explain the methodology a bit.

Why percentile? CAGR is good for measuring past performances, but it’s biased toward to the extreme but rare values, so it’s not a good measurement for managing expectations. If a fund reliably returns 1% annually but had an one-off event doubled it’s value in one of the year over the last 50 years, it will have an average return of 2.39%. But can you expect that you will get a 2.39% annual return by investing in it for the next 10 years? I highly doubt about it. Anyone reasonable would expect a 1% annual return. A quantile number solves this problem nicely. You will get exactly 1% annual return for this fund, whichever percentile number you choose, except the 1st and 2nd percentiles.

Why 85th percentile? It result in 15%, or about 1 in 6.67 chance to fall short of the expected return. This is a small enough probability and should work for most people. You could pick 80th (20%, one-fifth chance) or 90th (10%, one-tens chance) if you like, but I wouldn’t go further than those two numbers. Go below 90th will include way too much noise and make the expected return unrealistically low. Go above 80th will introduce significantly higher chance to fall short of the expectation of the investors. You may also add an additional “average luck” scenario, which would use the median (50th percentile) number, this should give the user a good sense of what to expect from an average market condition. But if you do provide it, please be responsible and warn the user that they will only have about 50% chance to achieve this number.

Why annualized real return? Annualized percentage rate makes it easier to compare different products. You’d expect a bank to advertise a 2% AER 5 years fixed interest savings account, not 10.4% 5 years fixed interest savings account for the same reason.

Why annualized real return? For those who aren’t familiar with the terms, real return means inflation-adjusted return. The opposite is nominal return, which is not adjusted for inflation. The reason to use real return is because investment often involves a fairly long time horizon, and inflation cannot be ignored. Invest £100,000 at 8% can make you a millionaire in 30 years, how exciting? But by that time £1,000,000 would only worth a bit over £414,000 in today’s money if the inflation was 3%, not so exciting any more, right? If someone is saving for an university fund for their new-born baby, they will almost certainly use the cost of university in today’s money as their goal, unless they are financially well-educated, but then they should be able to read and understand the small prints on the app, and pick the correct numbers to use anyway.

Why over rolling N-years periods? For high volatility investments, such as EM equity, annual return over the entire time period (8.3% in the last 50 years) isn’t very representative and will give you a false sense of high return and low risk. The discrete returns is even worse - too many extreme values. You need one representative number that doesn’t over or under-estimate the returns, and doesn’t create a false sense of security, that’s why I recommend the percentile return over rolling N-years periods. When the N is close to the user’s time horizon (but capped at certain level, to avoid being too optimistic), this will give a realistic range of returns the user can expect, and probabilities to achieve the returns.

Why measure the portfolio, not individual funds? When you save £10,000 in a 5 years fixed rate cash savings account, do you care if the bank split the money into 5 different pots, some gains money and some losses money? No you don’t. You only care that you will get your £10,000 plus interest back at the end of the 5 years. The same applies to investments. You invest £10,000 in 5 funds for 10 years, the only thing really matters is what you get back in total at the end of the 10 years, not how these 5 funds individually performed.

The advantage of this method for measuring long-term returns are:

  • Being a percentile number, it’s less affected by very rare and extreme events. These events will have bigger impact on the CAGR over the entire period.
  • It still takes considerations of the very rare and extreme events, and both the frequency of them and the movement ranges matter too.
  • It takes consideration of the sequence of events, which is something often missing from Monte Carlo simulations based on standard derivation and average returns. E.g.: the market tends to bounce back up after a crash, but it’s not guaranteed (see Japan).
  • It also takes other indirect and often delayed factors into consideration, such as currency movements caused by the not always timely fiscal and monetary policies responding to the market movements, and the effect of the eventual unwinding of the stimulus.

Honestly, the expected returns with probabilities will benefit experienced investors too, and help everyone makes informed choice about the risk they take and the returns they can expect. For an example, even you are a very adventurous and risk-seeking person, if you can achieve your long-term financial goal with 99% chance by investing in a lower risk portfolio, why would you choose to invest in a higher risk portfolio and gives you only 80% chance to meet your goal?

Plus, I haven’t seen any platform offering this kind of tools. You will have a selling point if you made this.

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I’ve said enough about attracting experienced investors. I think I need to talk about another idea to attract the soon-to-be novice investors.

When the user had enough money in the “Grow” section, allow the user to switch to a virtual parallel world, so they can virtually invest their money without taking any real world risk (or gain :wink:). Ideally restrict this to predefined portfolios, so the user can’t mess it up themselves and end up never wanting to touch the “Invest” section again.

I haven’t found a good way to manage the synchronization between the virtual parallel world and the real world when the user makes deposits or withdraws in the “Grow” section. A few ideas and the problems they face:

  1. Retrospectively ask the user what would they have done when they visit the virtual world the next time. The disadvantage is the news about the stock market may create unconscious bias in the user behaviour, and affect the outcome. The user may also disbelieve the outcome, because they were asked to go back in time and make decisions about the “future”.
  2. Automatically buy and sell investments in the virtual world to meet the demand. This is what open-ended investment fund managers are doing. Depending on the amount of money invested and the frequency/value of deposits & withdraws, it may either positively or negatively affect the investment performance. The real disadvantage is this may irresponsibly encourage the user to think of investments as an easy-access savings account.
  3. Keep a cash reserve based on how the user has been using Grow, and invest the rest. This is closer to real world scenario than the two other options above. But, obviously depending on the user behaviour, it may keep a huge cash reserve and create a big drag on the performance, and automatic buy and sell investments is still required to meet demands when the cash reserve is not enough.

Discussions and suggestions are welcome.

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There’s too much for me to reply to here without further input from my colleagues and maybe some organisation of my own thoughts … but this is very exciting to read.

I just wanted to address one particular question which has come up a couple of times in order to keep the conversation on track.

The answer is categorically not Day Traders!

Our goal is to create Financial Wellness for a much wider group of people that have not had access to financial services that are often limited to those with much greater assets - which means you need money to make money and feel secure.

Dozens aims to innovate in the financial services we offer to a new audience, but also those who appreciate what we stand for and are trying to achieve (by, for example, creating a brand driven not by increasing credit but helping customers build their assets for the long term).

So, we will definitely want to make sure we do not exclude customers with existing investments and experience, but we are mainly focused on those who are only getting started.

We are not interested in entering a market to help customers take further risks with their money through buying individual shares, carry out ‘day trading’ or other such trading (as opposed to investing). The fact is that too many UK customers are already too used to conflating ‘investing’ with ‘trading’ and so are not looking after their own future interests.

We are still a small and young business. There are lots of plans we would love to bring to market, but not everything can be done at our scale, and without securing adequate funding. That is what we are working on while we also build the technical infrastructure, and yet we’ve achieved a lot in a short time - if nothing else to have a community like this, with participants like you having useful conversations.

This thread is incredibly useful to see what it is that interests and motivates our customers, so we really appreciate it and can assure you we will be reading it with great interest. I will also try to arrange the recording (or even live) conversation with our CEO @AC soon - so we can maybe go over these ideas and give you feedback from the very top. Keep an eye on the #askAC plans for this.

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