The End of the Traditional Middle Man

Note to Our Valued Readers:

The following blog post is the first in a series about what we consider to be a quiet revolution happening in the investment world. While stocks and bonds formed the bedrock of virtually every investment portfolio for the past 100 years. In the coming decades, many investors are seeking something different from what stocks and bonds have to offer. Many are seeking investments that:

·         Do not rise and fall dramatically from day to day or month to month;

·         Generate significant, predictable cash flow;

·     And, are free of manipulation by insiders, momentum investors and cynical fund managers whose every word is calculated to influence other investors or beat down stocks they have bet against.

At the same time, in the post-financial crisis era, banks are struggling to meet the real needs of their customers. Specifically, they move very slowly and generally only lend to people who already have so much cash that they don’t need a loan. They flock to work on the largest loans (preferably in the tens or hundreds of millions of dollars), but in the process they close the door to millions of very capable small business owners and real estate developers who create most of the jobs in our economy.

Fortunately, thousands of investors are discovering a way to bring capital to thousands of worthy borrowers—with the help of online marketplaces as well as offline private lenders. They are making enviable returns by financing small businesses and all kinds of real estate, stepping in where banks are unable to go. We have a name for this phenomenon -“Be the Bank.” We firmly believe that thousands of investors and borrowers will grow to millions in the coming decades, and we expect to play a meaningful role in this trend toward non-bank lending in the years to come.

Our first post in this series is below. Please feel free to contact us here if you want to learn more or if you have any questions or comments for our management.

The End of the Traditional Middle Man

A sea change is happening in the financial industry, and only the savviest investors are responding to it. That’s because it’s not immediately apparent to those focused exclusively on Wall Street. The trend is called disintermediation.  And it is changing investment as we know it.

What’s disintermediation? Think about the disappearing department stores, music stores, movie theaters, crafts stores, travel agencies, even car dealers: technology increasingly allows buyers and sellers to deal directly with each other. Disintermediation, in other words, means getting rid of the middle man. Or more specifically, the rise of new creative middle men and women at the expense of the incumbent middle men.

The investment industry is no exception—except for one thing. Investing lags behind the other sectors in disintermediation. It’s happening, but later. That’s why you haven’t seen much written about this—yet. As an early adopter, you get to be something of a pioneer. But investors are understandably cautious about trusting their money with unknown entities. You should be, too. Still, the change is inevitable, and the opportunity has arrived already. Today’s banking giants are not offering good options to businesses and individuals in need of financing. You can offer a better deal by becoming your own bank. It’s our job, as one of the early scouts in this just-settling territory, to show you the safest routes. 

In the months to come, I’ll show you how to make better returns on your capital by being the bank—with a better safety net than normal investing through stocks and bonds. Meanwhile, a great way to get a sense of disintermediation and its opportunities is to explore online lending marketplaces such as LendingClubProsper, and the real estate area, sites such as RealtyMogul or Patch of Land and PeerStreet.

These sites will help you get a sense of the types of borrowers who are not being served by today’s highly regulated banks. You will also see what kinds of returns are available on loans to these borrowers, and in the case of real estate private money loans, the kinds of projects they are pursuing. The time you spend researching online will inform your journey toward a more satisfying approach to investing, with more stable returns--if you do your homework.

In the posts to come, you’ll see how disintermediation can help you become even more of a bank, in ways that improve your own community.