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Just the ticket

Darwin&#39s theory that living things must adapt to survive has never been more pertinent to our industry. Product providers, consumers and the advice process need to evolve.

Dramatic stockmarket falls over the last three years have caused palpitations in generally cautious investors. Nerves have been further frayed by all the bad news that has come out of the financial services sector and the war in Iraq.

At unpredictable times like these, investors become more cautious, opting for the “cash under the mattress” approach rather than risk hard-earned money on products that cannot guarantee a certain level of return or even the security of the original investment.

It also puts the spotlight on people&#39s concept of risk. It is one thing to say you are not averse to risk when markets are booming but quite another when your assets get drawn into spiralling markets.

A bear market forces everyone to realise that markets can go down as well as up and the harsh reality of risk hits home.

As an adviser, it is crucial not only to communicate the risks of investment products to customers but also to ensure they fully understand their own needs and attitudes to risk.

Consumers have more access to information than ever before but this does not mean they are able to pinpoint what is the most suitable investment portfolio for themselves.

It is no understatement to say that advice is the cornerstone of the industry. With a myriad of products on the market, it can be a daunting process to decide where to invest. Advisers shoulder a great responsibility to know their customer and thoroughly test their attitudes before recommending a suitable product.

When clients are unhappy with their investment choices, it is often due to a breakdown in communications. They do not necessarily fully appreciate the relationship between risk and reward or their own attitude to risk. As a result, their expectations of performance, particularly in the short term, may well be unrealistic.

This pattern was reinforced by Zurich-commissioned research into customer attitudes to risk undertaken by the Henley Centre. The message that came out loud and clear was that people need to consider their own attitudes to risk carefully when making investment decisions and that, to do this properly, they need information. A second finding was that we are getting more cautious about our investment decisions.

Further research for Zurich by Mori Financial Services confirms that investors are in an increasingly cautious mood. Asked whether they would swap FA Cup Final tickets for tickets to the Worthington Cup and the chance to win World Cup Final tickets, 48 per cent stuck with their FA Cup tickets. When it came to money, a wary 61 per cent were not prepared to risk losing £200 of a £1,000 investment for the chance to gain £2,000.

The message is that providers need to adjust to changing customer needs in these more cautious times. As an industry, we need to provide customers with the products they want and we need to be giving quality advice to ensure they are the right products.

It is encouraging that companies are recognising this and we are beginning to see a new generation of products that offer transparency, protection and security from volatile markets.

As a result of the Henley Centre research, Zurich has redesigned its investment proposition, transforming customer needs into tangible products alongside a refined advice process.

Just as the industry needs to react to these changing circumstances, so does the consumer. Great efforts are being made by a range of bodies and organisations to instill an understanding of financial services from a young age. These include the personal finance education group under the new chairmanship of Ron Sandler.

The ABI&#39s Raising Standards scheme is also working hard to provide consumers with clarity of information and processes.

Individuals need to take advantage of these developments – it is a two-way process that works on the basis of a partnership approach. A financially astute, well guided investor who understands their attitudes towards risk and reward is the ultimate aim.

Confidence needs to be restored and trust regained in the financial services markets. Cautious investors need encouragement to dip a toe back in the water.

Advisers are crucial. Greater education and information are important but that is not the same as recognising your risk threshold and understanding the context of the investment decisions that are needed – that is where advisers step in.


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