Disintermediation

Disintermediation is the financial equivalent of “cutting out the middleman.” It describes the process where savers and investors bypass traditional 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 move away from traditional intermediaries isn't just a fad; it's driven by powerful incentives and enabled by modern technology.

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.

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 ETFs for very low commissions, sometimes even for free.
• 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 is reshaping entire industries, from how we save and borrow to how we invest for retirement.

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 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.

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: 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.