Building Wealth for Everyone: How Banks Can Democratize Recurring, Low-Cost, Long-Term Investing

Active investing is challenging, often yielding less-than-desired results for the average investor. While professional investors with access to advanced tools, up-to-the-minute market information, and complex models might occasionally beat the market, for most of us, that’s a near-impossible feat. The efficiency of markets today means that any publicly available information is quickly priced in, leaving little room for non-professionals to gain an edge.

As a result, many experts now agree that the best strategy for non-professional investors is not to try to beat the market but to join it—in a low-cost, well-diversified, and passive way. This means moving away from active stock picking and market timing and instead adopting a buy-and-hold philosophy, primarily through recurring (at a fixed frequency) small investments in passive funds like ETFs that track broad, diversified indices.

Research consistently supports the superiority of passive investing for long-term wealth building. Nobel laureates and financial studies alike underline this:

• William F. Sharpe’s "The Arithmetic of Active Management" (1991): Sharpe demonstrates that after accounting for costs, the average active investor must underperform the average passive investor. The math is simple: higher fees and transaction costs erode returns, making active management less efficient.

• Eugene F. Fama’s "Active Management in Mostly Efficient Markets" (2007): Fama’s research shows that markets are generally efficient, meaning that stock prices already reflect all known information. This makes it extremely difficult for active managers to consistently outperform the market, reinforcing the case for passive investing.

• SPIVA Scorecard: The SPIVA Scorecard by S&P Dow Jones Indices reveals that over extended periods, most active funds underperform their benchmarks. For instance, over a 15-year period, more than 90% of U.S. large-cap, mid-cap, and small-cap managers failed to beat their benchmarks.

• Dalbar’s "The Behavior of Mutual Fund Investors" (2019): Dalbar’s research highlights that the average investor’s poor market-timing decisions result in significantly lower returns than the market indices. Over a 30-year period, the average equity fund investor earned just 5.04% annually compared to the S&P 500’s 10.0%.

The historical performance of the S&P 500 underscores the benefits of long-term investing. Over nearly a century, the S&P 500 has seen significant fluctuations, but when viewed over extended periods, the likelihood of negative returns diminishes dramatically. On a yearly basis, the S&P 500 had a negative result in 27% of the years, but looking at 3, 5, and 10-year periods, this number is reduced to 16%, 12%, and 6%, respectively. Investing regularly, regardless of market conditions — a technique known as euro/dollar-cost averaging — further smooths out the risks associated with market volatility.

Even the legendary Berkshire Hathaway fund, which significantly outperformed the S&P 500 over decades (from 1965, the S&P 500 delivered a compounded annual gain of 9.9%, while Berkshire stock delivered 19.8%), has seen its performance converge with the index in recent years. In the period from 2003 to 2022, the S&P 500 delivered a 9.80% compounded annual return while Berkshire came in slightly lower at 9.75%. This trend supports the idea that in today’s efficient market, even the best active managers may struggle to beat a simple, low-cost passive strategy over the long run.

While the theory of consistent, long-term investing in passive funds is compelling, it’s often out of reach for many retail investors. The reality is that most people face unpredictable expenses, periods of lower income, and other financial pressures that can disrupt their ability to invest consistently. This financial instability can undermine the effectiveness of a long-term investment strategy, particularly if investors are forced to sell assets prematurely or skip contributions.

Banks have a crucial role to play in addressing these challenges. At Capilever, we’ve long advocated for financial products that help customers maintain their investment strategies despite life’s uncertainties. One promising solution is to offer credit options—such as a modernized, accessible version of "Crédit Lombard"—which allow customers to borrow against their long-term ETF investments at low cost. By fully automating this process, banks could make it quick, flexible, and available to a broader customer base, enabling more people to invest consistently over time.

To truly empower customers, banks must also take responsibility for educating them about the benefits and costs of different investment strategies. Instead of pushing their own high-commission, actively managed funds, banks should provide transparent comparisons with passive alternatives. Currently, while regulations like MiFID2 in the EU require banks to assess whether an investment is appropriate (i.e. the customer has sufficient knowledge and experience) and suitable (i.e. in line with the customer’s risk appetite), there’s no mandate to ensure that the investment is cost-effective. Banks are required to provide a "Key Information Document" (KID) for every fund, offering an overview of the risk, costs, and investment strategy of the fund, but there is no obligation for banks to show multiple KIDs side by side (including those for passive funds) and explain why they propose a specific investment.

Providing customers with easy-to-use tools to compare different investment products (e.g., Capilever’s IRCT product) would be a significant step forward. It’s time for banks to be more customer-centric—not because regulations force them to, but because it’s the right thing to do.

While ideally, banks would take these steps independently, sometimes regulation is necessary to accelerate progress. Smart regulation can guide banks towards more consumer-friendly practices without stifling innovation or imposing undue administrative burdens. A balanced approach, where banks are incentivized to act in the best interest of their customers, is key to fostering a financial system that works for everyone.

By making long-term, consistent investing accessible to all, banks can help more people benefit from the growth of the global economy. This isn’t just about financial returns—it’s about reducing inequality and giving everyone a fair chance to build wealth. It’s time for banks to step up and make this vision a reality.

For more insights, visit my blog at https://bankloch.blogspot.com