A trend analysis : a study analysing retail investors’ perception on social investing as an alternative to traditional investment brokers

Abstract

The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. For the purpose of this study the principal-agent problem was broken down into four main challenges which are; transparency, trust, costs and performance whereby these factors will be addressed throughout this study. These challenges will contribute to the aim and objective of this study whereby retail investors are asked through a survey to address these challenges when going through the investment process with Traditional Investment Brokers and eToro’s CopyTrading platform. Retail investors’ responses will be thoroughly analyzed and compared to understand the relationship between the principal and agent and if there are any apparent issues between the two. The scope of this study is to test the hypothesis of the principal-agent problem being reduced by eToro’s CopyTrading platform. This in turn will ultimately identify if a trend is forming where retail investors are shifting away from Traditional Investment brokers and searching for alternative platforms such as eToro’s CopyTrading platform. The analyzed literature in this field shows that investment brokers and portfolio managers have different incentives then those of their principals which leads to the principal-agent problem developing. This in turn is reflected on the trust investors have towards their agents where from a research study conducted by (Edelman & CFA, 2013) Institute only 53% of investors trust investment manager firms to do what is right. This research study will contribute to the study on online communities and social trading platforms of research where it will try to identify if eToro’s CopyTrading feature can reduce the principal-agent problem.