Making Markets Mainstream

Finance according to robo-advisors

This presentation, given as part of the annual graduate student conference at Simon Fraser University’s School of Communication, explored how new investing platforms teach users about financial markets. Robo-advisors are semi-automated applications that let users invest in diversified portfolios relatively cheaply – think of Wealthsimple Invest or Wealthfront, for example. Adapted from my thesis work, in the presentation I talk about how the investment strategies that ground these tools are based on riding the breadth of the market – and what this means when it comes to ethics and our investments.

Today I’ll be focusing on one core aspect of the financial infrastructure that robo-advisors use: exchange-traded funds, or ETFs. As one Reddit user puts it, “these are basically the world in one ticker”. What do they mean by this?

Imagine you can take 5 dollars of spare change, throw it into an app, and own fractions of shares of hundreds of different companies ranging from pipelines to perfume. This is what an ETF lets you do: each ETF can hold hundreds or even thousands of individual stocks, which allows investors to diversify with incredible breadth. And it’s this level of diversification and the degree of removal that it offers from the market itself that I want to explore today.

This project involved conducting the walkthrough method on two Canadian robo-advisors over the course of 3 months – Wealthsimple Invest and CI Direct Investing, as well as a critical discourse analysis of Reddit discussions related to the apps.

Robo-advisors are semi-automated investing platforms designed for nonexperts. Users complete a questionnaire that generates a portfolio based on risk preference, financial understanding, and time horizon, and the robo-advisor then manages this portfolio automatically. Robo-advisors usually have lower account minimums and fees than traditional advisors since they onboard and interact with users digitally. Many scholars attribute the rise of robo-advisors to a lack of trust in financial services, especially among young people, and increased risk aversion after the 2008 financial crisis.

Robo-advisors use exchange-traded funds (ETFs) to make up the bulk of their portfolios. And which assets will be included in an ETF are determined by the stock index that a given ETF tracks – for example, the S&P 500. Overall, the philosophy is to ride the entire market rather than trying to invest in ‘winner’ companies. Robo-advisors are based on a passive investing approach where assets are held for a long period of time and short-term market changes are not considered.

My thesis builds on the literature exploring financialization, which refers to the increasing power of the financial industry and financial interests in general. More specifically, this research contributes to scholarship on the financialization of everyday life. Over the past several decades, the retreat of the welfare state has shifted financial risk from the public sector to individuals and households, and new financial products have proliferated in response. Scholars often invoke Michel Foucault’s concept of governmentality to describe how this change has also led to shifts in subjectivity: individuals govern themselves rather than power being imposed from above. The impacts of financialization on everyday life are profound: as Max Haiven argues, finance inflects cultural practices that would normally be considered outside the scope of financialization.

In the remainder of this presentation, I’ll explore the power that passive investing lends to stock indices, and finish by outlining the main recommendation I make in response to the political stakes of passive investing.

In mainstream economic thought, as Gills and Morgan put it “markets are basic to growth, growth means progress, progress means growth through markets” (Gills & Morgan, 2021, p. 1194). Robo-advisors promote mainstream assumptions about financial markets which serve as both standalone principles and support a more abstract conception of the market where stock indices inevitably rise over time. For example, robo-advisors use diversification and asset allocation to manage risk, spreading a portfolio between different geographic areas and investing in a broad range of assets, under the assumption that the market as a whole will always go up.

Because ETFs can include hundreds or even thousands of individual assets, they manifest the idea of riding aggregate growth. And according to robo-advisors, investing in the aggregate can be part of a liberating and democratic agenda where individuals can participate in—and profit from—broader stock market growth.

However, the rise of passive index investing in fact has concerning implications when it comes to ethical and environmental issues. Patrick Jahnke (2019a) describes index funds—including index-tracking mutual funds and ETFs—as ‘holders of last resort’ for fossil fuel divestment. Passive ETFs track stock indices, as mentioned earlier, and this means that passive investors effectively delegate decisions to the index providers who decide what companies are on an index and therefore, what companies passive investors will buy shares in (Petry et al., 2021, p. 153; Robertson, 2019). In riding the entire market, then, an individual’s portfolio almost definitely includes stocks from companies that contribute to social and environmental damage.

Thanks to the increasing popularity of passive investing, the most well-known index providers (MSCI, FTSE Russell, and S&P DJI) have become market movers. The inclusion or exclusion of a company on an index will direct flows of capital, and stock prices rise and fall accordingly (Authers, 2018; Robertson, 2019, p. 800). In this sense, Rauterberg and Verstein claim that “indices are the indispensable and invisible infrastructure of modern finance” (Rauterberg & Verstein, 2013, p. 5). Yet index providers have few constraints when it comes to the formative decisions they make. Methodologies are protected as trade secrets (Robertson, 2019, p. 806) and index providers can make discretionary decisions about inclusion (Petry et al., 2021, p. 156; Rauterberg & Verstein, 2013, p. 19).

Despite the importance of stock indices, robo-advisors obscure the role that they play in users’ investments. In the app, particular aspects of investing like timelines, risk levels, and depositing more funds are the focus. There is no attention given to individual assets or the indices that determine them. Ultimately, robo-advisors allow individuals to invest in aggregate growth without considering the real implications of their portfolios.

But investments are fundamentally political, especially in the context of climate change and other pressing social problems. Popularizing and regulating ESG investing – where environmental, social, and governance factors are considered when building a portfolio – could help to bring out this political dimension. Some robo-advisors already offer such portfolios: CI Direct Investing has ‘Impact Portfolios’ while Wealthsimple Invest offers a Socially Responsible Investing option. As well, there is already a demonstrated interest in taking ethical factors into consideration when allocating funds, as recent campaigns for fossil fuel divestment – including at this institution – have demonstrated (see, for example Choi & Hsu, 2022; DeRochie & Taylor, 2021; Moreno, 2022). Large institutional investments such as pension funds and educational endowments can be leaders in popularizing ESG investing. 

Currently, ESG investing is problematic because of a lack of classificatory regulation. Although socially responsible forms of investing have become more widespread since their genesis as a protest tactic in the 1960s, what counts as an ESG fund is highly contested (Nath, 2021). While agencies exist that seek to classify and rate ESG funds, their results often differ because of divergent and opaque proprietary methodologies (Conway, 2019). Very recently, guidance has been released in Canada that aims to set standards for how such funds are advertised and outlines the types of disclosures they must make to investors (Bijoux & Jongeward, 2022). This is a promising development but should be followed with more legal requirements.

Robo-advisors themselves could play a role in popularizing ESG investment. For example, robo-advisors could subsidize management fees on ESG portfolios, perhaps by raising fees on traditional portfolios. Or they could set their default portfolios to be ESG-compliant. They could also put ethical tensions on display for users which may motivate a shift towards ESG investments.

If applied on the level of stock indices, ESG investing could lead to more structural transformations. Jahnke (2019a) argues that funds could lobby index providers to remove undesirable firms from their indices altogether. Alternatively, new indices could be created and adopted on a wider scale, which would threaten the oligopoly that mainstream indices currently hold. Considering that indices serve as the infrastructure behind passive—and much active—investing, it is essential to configure these for ESG investing to move from a consumer-side intervention to one that has the power to disrupt and recalibrate markets on a fundamental level.

In terms of public dialogue, popularizing ESG investing could normalize discussions about ethics and personal investing, potentially generating fractures in the conception of the market as an all-powerful entity (MacKenzie, 2009) and creating room for broader debates about stock markets and financial infrastructure. In this sense, conversations about ESG investing would manifest Marieke de Goede’s (2005) approach to politicization where accepted truths are made debateable.

As more and more people turn to passive investing because of its affordability and convenience, it’s essential to think about and take action on the broader implications of personal investing with ETFs, where individual companies are basically irrelevant, and the focus is on aggregate market movements. As I’ve explored here, this presents the risk of tying our personal financial wellbeing to industries that are harmful. While ESG investing is of course not the only way to approach the implications of widespread passive investing, it presents one initiative that I believe could be relatively effective in stimulating dialogue about the role of markets in everyday life, and could simultaneously be politically and economically feasible.

Direct Citations

Gills, Barry, and Jamie Morgan. “Teaching Climate Complacency: Mainstream Economics Textbooks and the Need for Transformation in Economics Education.” Globalizations 18, no. 7 (October 3, 2021): 1189–1205. https://doi.org/10.1080/14747731.2020.1808413.

Jahnke, Patrick. “Ownership Concentration and Institutional Investors’ Governance through Voice and Exit.” Business and Politics 21, no. 3 (September 2019): 327–50. https://doi.org/10.1017/bap.2019.2.

Rauterberg, Gabriel, and Andrew Verstein. “Index Theory: The Law, Promise and Failure of Financial Indices.” Yale Journal on Regulation 30, no. 1 (2013): 1–62.

Jahnke, Patrick. “Holders of Last Resort: The Role of Index Funds and Index Providers in Divestment and Climate Change.” SSRN Electronic Journal, 2019. https://doi.org/10.2139/ssrn.3314906.

Goede, Marieke de. Virtue, Fortune and Faith: A Genealogy of Finance. Borderlines 24. Minneapolis, Minn: University of Minnesota Press, 2005.