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Smarter investing

By now, the Sandler review team at the Treasury will be sifting through the many responses they will have rec-eived to the consultation document sent out in July.

This is a major and wide-ranging review and, as a result, several of the responses are very weighty.

Here, I want to concentrate on just a single issue but one which should be central to the review – how do you raise the level of understanding inves-tors have of the factors which will affect the outcome of their investment?

In the consultation document, the scope of the review is described as covering “whether the UK market as currently structured, with its products and Government and regulatory infrastructure, leads to efficient investment decision-making and to optimal outcomes for consumer interests more broadly”.

In the questions raised in the review, there are many about investment strategies of providers and the extent to which they are recognised by intermediaries. There are also references to consumer influence (which is assumed to be weak) and the extent to which greater consumer education could improve that influence.

It is really this last point that I want to concentrate on. Specifically, to what extent does the investment-related information we currently give consumers (especially at the point of sale) help them make informed investment decisions which will feed through to their ability to influence the behaviour of intermediaries and providers?

An investor considering starting a savings product will be given a lot of information about how the charges under the plan will affect the outcome of the investment.

Specifically, they will be told that the charges will have the effect of reducing the investment performance over the term of the investment by so many percentage points – the reduction in yield.

Curiously, they are not given any equivalent indication on how the investment choice under the plan could affect the outcome of their investment.

I am not talking here about the provider they choose and the potential for that provider to outperform other providers. That is an important decision but before you get on the ladder of consumer understanding and influence, you need to start on a lower rung – the one that addresses the point that some forms of investment are likely to perform less well than other forms and that the choice made could well affect the outcome of the investment to a greater degree than the effect of charges.

The ABI, in its response to Sandler, rightly makes the point that for retirement savings there is currently a savings gap which it estimates to be £27bn a year and growing.

Only by closing this gap can savers expect to have a reasonable income in retirement. The gap could be closed by increasing the amount of savings (and this is the single most important component) but it could also be partly closed by saving “smarter”, in particular, by investing in ways which can be expected to produce a better long-term return.

At the start of the sale, making the point about investing smarter can be difficult under the current regime. It is almost as if the concern the regulators have over what you can and cannot say about comparative performance between provid-ers stifles any meaningful commentary about comparative performance in any context.

If you wanted to educate the consumer and assist them with their investment decision, would it not be helpful to show that, if they were to invest their contributions in equity-based funds, they might base their projected outcome on a certain rate of investment growth but, if they were to choose something closer to deposit-based funds, they should exp-ect a lower rate of investment growth?

Exploration of the reasons for this would lead to a discussion between the adviser and the customer about guarantees and volatility and, possibly, other investment options. It would be done in the context of the investment which the customer was considering making – a much more direct way of getting the message over than the untargeted generic statements which are all the customer is likely to get at present.

Although current rules req-uire projections at different rates of return, they are not related to investment choice in any way. They do no more than make the point that the outcome might vary – basic-ally, a fact of life of any investment and one which could be made just as easily (and perhaps more clearly) in words without the numbers.

We could put multiple projections to better use if we used them to help the investor und-erstand the point about investing smarter.

The good news is that a change of attitude may be on the way here although at the moment only in a limited part of the investment market. In the recent announcements on statutory illustrations for money-purchase pension benefits, there is a proposal that, where the investment is in assets – where it is reasonable to expect long-term returns lower than on equity-type inv-estments – the provider should base the illustration on an accumulation rate lower than the 7 per cent a year proposed more generally.

This is in the context of annual benefit statements for these pension benefits but it begs the question of what to show at point of sale.

Also, if the principle of differential investment outcome is accepted for pension plans, why not for other forms of investment?

The Americans are said to have a more informed and educated view of investments. If you want to see how one US company deals with the question of investment differential for 401(k) investors, follow Jake&#39s online tour at as he helps you decide between bumpy and smooth rides, depending on your asset mix and their consequences for your retirement fund.

Sandler was interested in the lessons we can learn from retail savings markets in other countries.

I suggest he looks at this website and considers whether changes to our current regulatory structure for projections might not help him achieve his goals.


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