• Dec. 8, 2016, 9:54 pm

Vest technology protects regular investors

One of the best aspects of financial technology is its ability to level the playing field by bringing advantages previously enjoyed by a select few to a wider audience.
Continued improvement in the technology, especially computational capability, is the catalyst, but it is not alone. Entrepreneurs with the motivation to reduce inequality employ that technology to make people’s lives better are another key piece of the equation.
Meet Karan Sood, the CEO of Vest, an asset management and technology company focused on providing wider access to innovative target outcome investing strategies. Using its proprietary technology, Vest brings institutional quality risk management solutions to regular investors.
Institutions and high net worth individuals have long had protections unavailable to the rest of us. For a premium, structured notes deliver guaranteed returns protecting investments from value drops.
 “We are building technology and investment products which allow investors to invest in the market with a degree of downside protection,” Mr. Sood said.
An example Vest's system. The size of all three sections, upside, protection and downside all adjust based on investor preference.

An example Vest’s system. The size of all three sections, upside, protection and downside all adjust based on investor preference.

Market participation is still the best wealth building strategy over time, Mr. Sood added. People are intimidated because of unfamiliarity process, data volume, volatility, and an industry focus on the short-term.
They’d feel better if they were protected.
“Take insurance, for example,” Mr. Sood said. “The chances of an unseen event there are substantially lower. We should have similar protections here.”
Without protections, people panic, like many did when liquidating their assets in 2008.
“That’s the worst time to do that,” Mr. Sood said. “We profess the right way is to get protection like you do with insurance. Get a contract that stipulates if the value goes down below a certain level it’s made up.
“We want to bring that to everybody so people get access to protected investments without specific knowledge.”
Think of this as the democratization of derivatives, a process that can be delivered in two ways, Mr. Sood said. The first is to manufacture and deliver popular products. The second is to use the latest in technology on the front end so consumers can understand investments while automated technology on the back end executes transactions.

The technology is perfect for brokerage firms who license the technology, giving their financial advisors a highly visual tool to develop structured investment portfolios. Begin by picking a stock, and the length of time you wish to own it. The program accesses that stock’s historical performance data.

Then things get interesting. Using sliders, the investor customizes the level of downside protection they wish to have. The more protection they want, the more of a premium they pay.

Take a stock currently trading at $191.30. The investor decides they want downside protection of the final share price plus $70, meaning if the stock trades anywhere between $121.30 and $191.30, the investor suffers no loss. Should the stock trade below $121.30, the investor only loses the amount between $121.30 and the final price.

Like any insurance, one has to pay a premium, in this case 8.94 percent, making the stock’s price $208.41. In exchange for that protection, the investor caps their upside.

“If the user wanted to to this themselves they’d need good knowledge,” Mr. Sood said. “We take care of this.”

There are two main challenges in bringing this solution to the masses, Mr. Sood said. The first is to make the process as simple as possible for novice investors. The second is infrastructure costs. Traditional infrastructure is expensive, so it is only feasible to employ it on a large scale and at large costs. That leaves few logical players.

“Technology can solve both of these problems,” Mr. Sood said. “Use the front end to make it simple and easy to understand, and automate the back end.”

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