Most people aren’t confident enough to put their money into anything that isn’t cash or a simple, usually low-risk fund. But saving for retirement today demands higher returns. So how do you get people comfortable with financial risk?
Alarmed by talk of the savings gap and the prospect of a retirement in penury, Joanna takes a look at one of the new breed of pension portals. They promise transparency and control – showing her the value of her pension fund in real time and giving her unlimited choice about how it’s invested.
But there’s a problem. Faced with more than 7,000 funds to choose from, she hits ‘analysis paralysis’. Even filtering her choices by top ratings leaves her bewildered.
Worse, when she clicks through to a fund’s report, she sees charts that not only suggest it marginally underperformed in an index she’s never heard of – it also has periods when it dropped in value by quite a margin. She doesn’t want to lose money.
Joanna doesn’t understand pound-cost averaging. She has no idea what return she’ll need for a decent retirement. A risk-weighted portfolio is a mystery to her and she can’t interpret fund performance.
In short, she needs financial 'help'.
“We can't underestimate the importance of the media here” argues Sridhar Chandrasekharan, Global CEO of HSBC Asset Management. “It plays a vital role in educating consumers and helping them understand the benefits of investing for the long term. It's tempting for investors to look at fashionable new products, but they may not perform and be right for them over the long term."
Behavioural economist Daniel Kahneman demonstrated “loss aversion” in 1990 - a person who forfeits £100 will lose more satisfaction than they gain from a £100 windfall. A deposit account, then, looks attractive: no losses, even if the gains are modest. But investing is a long-term game. Individual assets periodically rise and fall – but over the long term, these risks are compensated by higher overall gains.
Cash savings are ideal for short-term needs. As Caroline Rookes, CEO of Money Advice Service, pointed out at the KPMG Savings Debate, “…half the population don’t have enough put by to meet a surprise £300 bill.” But the low returns from easy-access savings accounts won’t cater for life needs such as a period of unemployment, let alone retirement. People who appreciate they need higher returns to meet even their most basic requirements are more likely to invest.
One of the big problems for Joanna is too much choice, not only of thousands of funds, but also of different ‘tax wrappers’ with varied fee structures, features and tax incentives. “Companies are starting to simplify investing,” says David Conway, who runs the customer experience practice at KPMG Nunwood. “Hargreaves Lansdown has just three options for long-term saving, for example.” Products and funds with simple features that meet obvious life objectives and clearly explain the risks and rewards make investing more tempting.
We need new regulations around the provision of information, guidance and advice - the ongoing Financial Advice Market Review is critical. MiFID II includes controls on advice, as well as product governance and asset safeguards. But its application will be counter-productive if the industry responds with more limited products.
Mass conversion from savers to investors demands a fresh product set. “There’s an interesting conversation to be had around what global asset managers can do for consumers, for example, using guarantees and products to replace annuities,” says Chandrasekharan. “The trend is for simpler products and lower fees – which might have unintended consequences but there are plenty of interesting new ideas coming through.”