======Disintermediation======
Disintermediation is the financial equivalent of "cutting out the middleman." It describes the process where savers and investors bypass traditional [[financial intermediary|financial intermediaries]], like banks or brokers, to interact directly with the financial system. Instead of putting your money in a low-interest savings account, where the bank then lends it out for a profit, disintermediation allows you to lend your money or invest it directly. You might buy [[bonds]] straight from a government or corporation, or purchase [[stocks]] in a company without the guidance of a full-service stockbroker. This trend has been supercharged by the internet and the rise of [[FinTech]], which provides the tools for individuals to access [[capital markets]] with unprecedented ease. At its heart, disintermediation is about shifting power from institutions to individuals, giving investors more control over their own money.
===== The Why and How of Disintermediation =====
The move away from traditional intermediaries isn't just a fad; it's driven by powerful incentives and enabled by modern technology.
==== Why Bother Cutting Out the Middleman? ====
The primary motivation behind disintermediation can be summed up in two words: **cost and control**. Financial intermediaries provide a service, but they don't work for free. They charge fees, commissions, and earn a "spread" between what they pay for money (e.g., interest on savings) and what they earn on it (e.g., interest on loans). By cutting them out, you can potentially:
  * **Earn Higher Returns:** If a [[government bond]] pays 4% interest, you get all 4%. If you leave your money in a bank account earning 1%, the bank may be the one buying that bond and pocketing the 3% difference.
  * **Pay Lower Fees:** Investing through a direct [[online brokerage]] platform is often far cheaper than using a traditional financial advisor who charges a percentage of your assets every year.
  * **Gain More Control:** You decide exactly where your money goes, aligning your investments directly with your goals and risk tolerance.
==== The Rise of the DIY Investor ====
Technology is the great enabler of disintermediation. Before the internet, buying individual stocks or bonds was a cumbersome process reserved for the wealthy or the very determined. Today, a wave of innovation has democratized access to financial markets. Key players in this new landscape include:
  * **Online Brokerages:** Platforms that allow you to buy and sell [[securities]] like stocks and [[Exchange-Traded Fund (ETF)|ETFs]] for very low commissions, sometimes even for free.
  * **[[Robo-advisor|Robo-advisors]]:** Automated, algorithm-driven services that build and manage an investment portfolio for you at a fraction of the cost of a human advisor.
  * **[[Crowdfunding]] and [[Peer-to-Peer (P2P) Lending]]:** Websites that allow you to invest directly in startups or lend money directly to other individuals or small businesses, completely bypassing the banking system.
===== Disintermediation in Action =====
Disintermediation is reshaping entire industries, from how we save and borrow to how we invest for retirement.
==== Classic Example: Banking and Lending ====
//The Old Way:// You deposit savings in a bank. The bank pools your money with others' and lends it to businesses and homebuyers. You earn a modest interest rate. The bank handles the risk and paperwork, but also keeps the lion's share of the profit.
//The New Way:// You want a better return. You use your online brokerage account to buy newly issued [[corporate bonds]] directly from a well-known company. Alternatively, you might use a [[peer-to-peer (P2P) lending]] platform to lend money to a small business owner, earning a much higher interest rate than the bank offered. You've just disintermediated the bank.
==== The Shake-up in Asset Management ====
//The Old Way:// A financial advisor recommends an actively managed [[mutual fund]]. The fund manager charges a high fee (e.g., 1-2% annually) to pick stocks for you. The advisor might also take a commission for selling it to you.
//The New Way:// You read about the power of low-cost investing. You go to a low-cost brokerage and invest directly in a broad-market [[index fund]] or ETF that tracks the S&P 500. Your annual fee is minuscule (e.g., 0.03%). By choosing a passive fund over an expensive, actively managed one, you have disintermediated the high-cost fund manager and the salesperson. This is a classic move for a follower of [[value investing]].
===== A Value Investor's Perspective =====
For the value investor, disintermediation is a double-edged sword. It offers incredible opportunities to boost long-term returns but also comes with significant responsibilities.
==== The Good, The Bad, and The Risky ====
  * **The Good: Cost Control.** This is the biggest win. As the legendary investor [[Warren Buffett]] has repeatedly warned, high costs are a "parasitic" drag on performance. Disintermediation allows you to minimize fees, ensuring more of your money stays invested and compounds for you. Over an investing lifetime, this can make a difference of hundreds of thousands of dollars.
  * **The Bad: Your Own Due Diligence.** When you cut out the expert intermediary, //you// become the expert. You are now responsible for the research and [[due diligence]]. Buying a bond directly means you must assess the company's creditworthiness. Investing without an advisor means you must build and manage your own portfolio. This requires time, education, and emotional discipline.
  * **The Risky: Behavioral Pitfalls and Scams.** A good advisor does more than pick investments; they act as a behavioral coach, stopping you from panic-selling in a crash or chasing a hot stock at its peak. Without this buffer, DIY investors are more susceptible to making emotional mistakes. Furthermore, newer, less-regulated platforms can sometimes be fertile ground for scams, making thorough research more critical than ever.