Neighborly recently participated in a discussion with Colin MacNaught, the architect of MassDirect Notes, a program providing investors with direct access to new-issue general obligation bonds in Massachusetts, and Tim Schaefer, Deputy Treasurer of Public Finance for the State of California. Hosted by the California Debt Investment Advisory Commission, we discussed the future of public finance and increased transparency and liquidity in this marketplace.
Neighborly is a financial technology startup based in San Francisco modernizing the municipal finance market and bringing it into the digital realm for a new era of investors. We are working on increasing direct access for retail investors and providing meaningful, understandable data transparency for all stakeholders in this marketplace, including municipal finance professionals. We are taking a two hundred year-old, billion dollar per day market for financing public projects and bringing it to a new generation of people interested in making a direct impact in the places where they live, work and play.
Remember the age of bonds as a community investment and job creator? That was then.
Today, we have a market largely fragmented from the investment opportunity and the direct community benefit.
But post-Boomers and post-GenX, we have a new generation impacted by technology and information who view and experience the world much differently. This new generation born in the early 1980s and dubbed the Millennials (likely not by a Millennial) have been described as “bike-riding, organic-produce-seeking, social-media-petition-signers.” They have been the sole subjects of studies from Goldman Sachs to the White House. They are known to express concerns about their carbon footprint, firearm sales, tobacco-related health and safety issues, and other social values with their investment dollars. By 2038, Millennials, based on their size, age and investment power, will become “the most important financial generation in America”.
The traditional public finance industry will have to adapt to meet their needs. Here’s why.
Tax-Advantaged Investing Needs
Contrary to popular media, this generation does not live in their parents’ basement. A report from the Shullman Research Center, which tracks wealth trends, found that Millennials already comprise 23 percent of today’s U.S. millionaires. There are now about 5 million Millennial millionaires. That’s half as many as the boomers and 1 million more than the older and more established Gen-Xers. They believe in meritocracy and have a desire for faster, tangible impact.
This generation is inheriting the most of any other generation – $30 trillion – so in addition to looking at what impact their investments can have, they are also looking at wealth management and preservation strategies.
These Consumers Live Online
This first generation of “digital natives” are completely at ease with technology.
They trust technology to meet their consumer needs over traditional methods. As one public finance banker who has been in the industry over 30 years noted: they don’t want to use the phone to transact business, how am I going to reach them?
In Algorithms We Trust
For them, democracy equals access, not just to the ballot box, but to data that informs their decision-making. In many instances, they look at quantitative data over qualitative relationships. They are demanding increased transparency in their government as expressed through open data initiatives and Code for America fellowships. They seek to build trust in government through openness and collaboration: “build with, not for.”
Social Impact Matters
Consider these statistics: 49% of millionaire Millennials consider social responsibility as an investment selection factor compared to 34% of Boomers and 27% of seniors.
So regenerative finance, one in where you see your dollars recycled and multiplied within a community to further one’s social responsibility carries greater weight over extractive finance, one in which profits are taken out of a community.
With 1 in 3 living to the age of 100, Millennials have a big advantage in wealth accumulation: Time. Their future and savings horizon is a lot longer than previous generations, which means they could also be looking for relatively safe, long-term investment opportunities. As “buy and hold” investors, this strategy may take on a protracted meaning.
Bringing Bond Investing into the Digital Realm
Most of us know that municipal bonds lend themselves to a relatively safe investment opportunity, which has a direct impact in our community. However, the way the new era of public finance operates from a technological and social values perspective does not align with the way the byzantine municipal market works today. Today, with the myriad of online investment possibilities, it is still difficult to buy a municipal bond directly through the Internet without friction. Why are we still using the outmoded phone or worse, paper forms?!
Today, for a majority of investors, if you want to invest in a school district and buy a municipal bond directly, you need to call your broker and set up a time-consuming account and/or buy a bond that has likely switched hands a few times before it gets into your portfolio.
By providing this new era of investors with direct access through our brokerage, we are lowering costs for investors and issuers while increasing transparency and accountability in the marketplace.
We view the regulatory regime as a great opportunity to meaningfully engage our users. We see rules, such as “investor suitability” or “best execution,” as a way to protect investors while allowing for open data, pricing and information transparency.
We aren’t talking about crowdfunding. We are talking about meaningful and accessible investments in one’s community that make a difference in the lives of hundreds to millions of people. That’s community finance. That’s impact investing.