The invisible hand Pfäffikon SZ, Switzerland – Adam Smith (1723 – 1790) was a Scottish moral philosopher and is widely known as the father of modern economics. He is also considered one of the founders of classical liberalism. He believes that the pursuit of one’s own individual interests would ultimately serve social interests. A free market is the most profitable for society as a whole. Smith called it ‘the invisible hand’ of the free market that creates harmony and balance. Banks are better off Banks today are financially better off than five years ago. Yet the banks and their bankers are still vilified, and that’s remarkable. In recent years there has been done a lot to make banks healthy again. Despite this process, we kindly ignore an investment in a bank. For example, you will not find us on the list of the by Gerrit Zalm so adored Initial Public Offering of ABN AMRO Bank. In addition, the competitive model of a bank in general is not functioning properly. I will come back to this point. A financial value that suits all our criteria is equivalent to finding a needle in a haystack. We have been able to locate only two of them worldwide, of which one is included in our Thirteen Diversified Fund. After all, in a diversified portfolio of only about thirteen stocks, exposure in a financial value is desired. More interesting is perhaps why the appearance of the banker is so degraded. Notable in this context is the suicide of bankers worldwide. The issues Boumeester and Schmittmann are no stand-alone. Meanwhile, we are working hard to build a better banking landscape through a European banking union. Yet there is still something wrong. Backing the wrong horse Maybe we are backing on the wrong horse by implementing a European banking union and the almost irrevocable Eurobonds. I am not a fan of Eurobonds. The incentive of the countries that have violated the Treaty of Maastricht repeatedly disappears when we are sweeping debt together. They get rid of their obligations too easily. Countries such as the Netherlands and Germany pay a very high price in order to keep their expenses adequately. It is the world upside down. This dissatisfaction can turn into a remarkable result in the European elections [this article was written in April 2014, before the European elections 22-25 May, ed.]. The last few years Banks have been trying to achieve a change in their cultural settings themselves. The goal is to gain confidence again from consumers and businesses. Banks are generally determined to give this shift in culture a big twist. In addition, governments pull the reins further by increased supervision and having implemented associated regulations. Moreover, capital requirements are also increased step by step and liquidity in the financial system is maintained – through all kinds of strange detours. Investors are guilty The swelling bureaucracy should be less in my opinion. I conclude dryly that all measures have still not succeeded in fixing the crumbling image of the banker. Of course, such a process takes time. Many of the implemented measures are too much. The unnecessary extra protection of the investor is a good example. Who wants to invest, should do his homework well and know why and where to invest in. Today, the investor easily assumes that the regulator (AFM respectively) automatically detects and eliminates all the bears on the road. When something goes wrong, the supervisor gets the blame. Nonsense, of course, nine times out of ten you are guilty by yourself and you are faced with your own investment decisions. The most important thing that has a negative impact till today is the wrong approach around the regulation of banks. In my opinion the regulation passed its goal. Banks should simply be part of the free market, where it is all about the customer and nothing else. In a competitive system it is in the first place not the culture or various government regulations, but to the customer who needs to get the full attention. More competition Competition ensures full responsibility of the own banking. Thus, the bank is forced to operate customizable, maintain sufficient capital and to create especially not peculiar side steps. The (capital) market thus forces Risk-based acting. When the bankers in question do not act this way, they will eventually go under. For me, they do not need to be saved. Letting the taxpayer pay for this kind of accounts, has been a bad plan. Obviously there is an important role for the government and the regulator. They need to supply a stable framework for the match and provide an objective arbitrator. Only when the competing mechanisms do not work, the government must intervene. For example, an increase in capital ratios is a good development and does not get a healthy competition in the way. Currently, however, everything seems reversed. The main focus is not the customer, but it is all about rules and regulators. Banks are under such heavy supervision that they can almost not make their own decisions. And the end is still far away. The government thinks that she is doing well, but is mistaken in the competitiveness of banks. At this time, competition can only do its job if the government is not intervening anymore. There is no market-based economy, which leads to all the consequences we have seen. Some people already say that there should not be a market-based economy in the banking sector. That is a prejudice. In the last century, several banks have done an excellent job for decades. Many had their own niche and expertise. It remains ironic that there is practically nothing left from the fabulous international branch of ABN AMRO for example. The roots have been in the deep history, hundred of years ago. But the excellent local banking system of the Rabobank was also unable to withstand the test of time. The recently notable developments will be tough for the Rabobank. Hank Paulson On July 10
Interview Gijs Nagel
Can you tell us something about yourself, your study and how you started with DEGIRO? My internship for the HEAO education ‘Management Economics and Law’ took place at AOT, a market maker company in Amsterdam, now known as BinckBank. Within this company I came in contact with trading on the stock market. I do not know if you remember that people traded formerly on the stock market through open outcry. People were shouting the price they wanted to buy and sell at the exchange. I started at a time when this ceased to exist, and all the trading continued on screens. After my graduation I stayed with AOT and I have been trained there. This training was entirely focused on trading, especially on valuation of options and everything that has to deal with these options. Initially, it was my intention to continue studying. However, it suited me so well that I continued to work. Within BinckBank I worked with a team. This team and I started in 2007 for ourselves. DEGIRO was a result of this team. How did DEGIRO started? Where is the foundation? This team consisted of five men who started a company that issues and manages mutual funds. However, beforehand, we needed a solid infrastructure that we would be able to act on all stock exchanges worldwide. We built this infrastructure all by ourselves. Everything that was for sale was very expensive and inadequate functioning. Especially with software it is nice if you have it under control. It makes you flexible and less dependent on others. In 2008, this infrastructure was placed into a separate company, which is now called DEGIRO. We soon faced a lot of demand from other fund managers for our infrastructure. Especially professionals, who trade on stock exchanges around the world, were interested. By means of DEGIRO they were able to act at much lower rates than they were used to. This caused a rapid growth in the business segment. There is now for about ten billion transactions running on our infrastructure. This is for our company a small margin, but due to the high volume sufficient to keep the business running. Every transaction we do extra for our customers immediately yields a positive contribution to the profitability of DEGIRO. Therefore we will now approach also the private market DEGIRO. We are placing the private market together with the business market. They both get the same low rates. Why are you placing yourself so far below the average market price and not something more moderate? A private investor nowadays makes almost full use of the Internet. When a customer places his order online with us, there is no difference between these private customers and professional customers. We use for our retail customers therefore the rate of the professional market. These are about 80% lower than the prices private investors regularly pay. In our opinion, the companies did not pass through the advantages they received in the past years to their customers. So we are not really cheap but others are in our opinion quite expensive. In recent years there have been a lot of changes mainly on the cost side of brokers. Infrastructure costs, such as fiberglass and renting space in data centres have become a lot cheaper. Our competitors insufficiently passed on these benefits to the customers. We saw this as an opportunity to also give the private customers these low prices, which actually should already exist. With this step, private investors have now got everything they need; a quick access to markets worldwide and professional fees. Nice detail is that the news today goes quickly to private investors through the Internet. News via Twitter is, for example, often faster than conventional news services such as Bloomberg or Reuters. Many people together are better than just one journalist. How did you come up with the name ‘DEGIRO’? A transfer system is a software system that keeps track of what exactly is from whom. In DEGIRO money is coming in from customers who then start investing with it. We will keep track of what is traded, by whom and who owns what. So that will be done by our giro system (transfer system). We thought: “Lets use the foundation of what we do as our name.” Initially, the name was not as important as we only focused on professional customers. Meanwhile, we also serve many individuals and increasingly more people are asking where the name comes from. This does not really matters for business customers. Can you tell us more about your business model and how it works? Our costs are related to the staff, we mainly employ programmers expanding and improving our infrastructure. There are also costs for data centres and lines to Hong Kong, Frankfurt, London and the USA. We are also busy developing tools for investors who want to create a lot of diversification within their portfolio. With these tools you can soon be in hundreds of equities all over the world with only a small amount of money. We make this happen by letting people invest in fractions of shares. We are going to promote these tools too. What developments do you see in the broker market and what would you like to see? We think that three players will remain in Europe. It will be them who are now already handling the cost structure that is the standard over ten years. These parties attract investors to themselves. We are also planning an expansion of our services throughout Europe. We are now ready to operate in 27 countries. The market will therefore be changing a lot from small local players to some big players. The first steps can already be seen. We want DEGIRO to play a major role in this part. This consolidation is already much more advanced in the United States. This is mainly due to the fact that players reach economies of scale in an earlier state; it is one country with one market. Our
Message From Abroad
When asking someone what they think of the college life in the USA common thoughts are beer-pong, red cups, sororities and fraternities, and huge college dormitories. However, there is a completely different side to it that only a select few get to experience and not many outsiders know of: college sports. Everybody knows that the sports-culture in the United States is like no other. Having finished high school in the USA, it was time to decide whether or not to stay or to return back to The Netherlands and attend the university there. I played field hockey and wanted to continue playing at a high competitive level during my studies, and so my decision was easily made: stay in the United States and play hockey. Because attending college is very expensive, and a lot of people can’t afford it, many parents push their children to play sports and if they excel they can be one of the circa 25,000 students and receive a scholarship of up to around $50,000 per year to play sports for their respected university. This is one of the big reasons the sports-culture there is so dominant and very competitive. Knowing my parents were planning to leave after my first year, the only way I could stay was if I received a full scholarship, meaning all expenses covered. The recruiting process for this is something most Dutch people are unfamiliar with, as was my family. So it started. In my fifth year of high school I visited many universities, all showing interest in wanting me to play for their team. As a 16 year-old one can imagine a completely new world opening up. Many weekends were spent on the road figuring out what would be the best fit, not only for hockey, but also academically. I visited Duke University and fell in love. The next step towards attending college was complete, now all I had to do was pass my exams and graduate! Being a student-athlete is an experience of a lifetime. Instead of coming to school with everyone else at the end of August, we started practicing three weeks earlier in preparation for the upcoming season. This was great as a freshmen (first year students), being able to adapt and get comfortable with the university. You also got a chance to meet the other fall sports’ new athletes, as they were there all of August, too. When in season, which for hockey was every fall semester, you spend more time on the practice field than at home. We practiced every day and on Thursday we would leave to wherever we played that weekend, often moving practice to avoid traffic or catch a flight. Games were on Friday and Sunday, which was when you would return home. This meant missing two days of classes, but also times where for three weeks straight you were only home Monday, Tuesday, and Wednesday. We visited many great cities like Boston, New York, and Philadelphia and always stayed in the nicest hotels. It was anything but the typical college-student’s life. However, classes still went on and it was your own responsibility to stay on task. This often meant studying on bus or plane rides and a never-ending cycle of playing catch-up. All in all, it asked a lot of time management and energy, but I wouldn’t have changed it for the world. Work hard, play hard. This is something every student-athlete is aware of. Since you are all in the same boat and lead similar lives the different athletic teams often tend to be close. The 400 athletes at my school was a tight-knit group and when not “in season” you could always find us attending the same events and parties. It is comparable to the study- and student organizations we have in The Netherlands but then less formal. We also all lived together. Freshmen lived in dormitories with the other freshmen athletes, and upperclassmen lived in houses off-campus. My house had six field hockey players, and five houses down there was another “hockey house” with four other teammates. The same was for the other teams, and we all lived close by. For example, in my street there was at least one hockey, soccer, lacrosse, golf, and swimming house. It was a great four years of my life, and an experience no one can ever take away from me. It shaped me not only as a player, but as a person as well. It wasn’t easy, but very well worth it.