During the recent World Cup, I sat down to watch a few matches with my 10-year-old son, which also involved sitting through various gambling ads telling him what a cracking wheeze that was.
Once again, I was reminded of how easy it is for some to peddle financial rubbish, while investment firms need to plaster everything with that 4-letter word – “risk” – until potential customers feel like they’re about to abseil down a cliff. Blindfolded. On a piece of string.
During all our research, focus groups and interviews with consumers over the past three years, not once have I talked to anyone who was not aware that they could lose money on the stock market. We also know that for many, stock market risk only implies downside, gambling, loss and quite often, absolute loss.
Against this backdrop, no wonder 72 per cent of all Isa contributions go into Cash Isas making negative real returns. It’s safe to assume a decent chunk of these savings are long-term savings, which are not an active asset allocation decision but a passive decision driven by fear, lack of confidence, loss aversion and suspicion.
This 72 per cent figure is the biggest failure of our industry and a huge flashing red alert to the Treasury.
We need to make investing easier and explain it better.
Enter stage left the robo-advisers, the lovechild of regulation and technology. Robos were born post-RDR-type regulations, principally out of a need to service smaller accounts, busy investors and less-confident wannabe investors.
Although I see teething problems and a few rough edges, robo-advisers or, more broadly, digital investment managers, are a positive development to the retail investment landscape, offering diversification and ongoing portfolio management.
Any historical analysis of DIY investors will reveal an equity-heavy group, often with an acute home bias, lack of diversification and sometimes owning mostly shares in the company where they work. It’s not always pretty.
As for new potential clients, our recent analysis shows that non-investors think the FTSE 100 is a riskier investment than Amazon shares or other popular retail brands.
Diversification is neither understood nor easy to manage for the DIY investor and risk management is one of the most appealing things that robos bring to the retail table, evidencing lower maximum drawdowns than other popular DIY routes. This is positive, responsible investing.
Now let’s consider the suitability rules, as conceptualised pre-RDR and pre-fintech.
The requirements to check customers have knowledge and experience of investing are outdated. It is no different to asking people on NHS Direct if they are GPs or can evidence a working knowledge of medicine. Of course they can’t, which is why they are there in the first place.
As for capacity for loss, is it really necessary to check this for a new investor with £100? For someone setting up a monthly £25 direct debit? Of course we have a duty of care to vulnerable clients, but surely there is a materiality argument here. If we’re going to be consistent then let’s make everyone down the newsagents buying lottery tickets do the same thing.
The debate too often centres on whether new digital entrants should abide by the same rules as traditional advice businesses. This is a red herring. The real debate has to be what we do about anachronistic rules and why we make an investment portfolio harder to acquire than a trifecta at Ascot, a cryptowallet, a payday loan or a punt on Crowdcube.
As a nation we really need some radical thinking. Do we want to create an environment where people are perfectly wrong? Or approximately right? Right now, we are consigning too many people to the scrapheap of negative real returns with their long-term savings. Well done us.
Holly Mackay is founder and chief executive of Boring Money