HOW ARE UK CONSUMER ATTITUDES TO RISK AND SAVINGS EVOLVING? Emma Napier Head of Distribution True Potential Investments

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1 HOW ARE UK CONSUMER ATTITUDES TO RISK AND SAVINGS EVOLVING? Emma Napier Head of Distribution True Potential Investments

2 THE UK IS FACING A PROBLEM Far too few people are saving anywhere near enough to enable them to live comfortably in retirement. We call this shortfall the Savings Gap and our mission is to close it.

3 We believe radical ideas and innovative solutions are needed in three areas: Agility, knowledge and technology.

4 OUR TACKLING THE SAVINGS GAP CAMPAIGN AIMS TO: Raise awareness of the problem with UK consumers. Lobby Westminster for reform in the sector. Improve public knowledge and attitudes to saving. Get people saving more to live comfortably in retirement.

5 TO DATE, WE HAVE: Launched the True Potential Centre for the Public Understanding of Finance, as part of a five-year, 1.4 million partnership with the Open University Business School. Released two free personal finance courses to the public a third to launch in Spring Over 65,000 people have already registered and/or completed course. Surveyed the savings habits of over 12,000 Britons.

6 OUR LATEST FINDINGS:

7 OUR LATEST FINDINGS:

8 OUR LATEST FINDINGS:

9 OUR LATEST FINDINGS:

10 OUR LATEST FINDINGS:

11 OUR LATEST FINDINGS:

12 OUR LATEST FINDINGS:

13 CHALLENGING CURRENT THINKING Research from the True Potential Centre for the Public Understanding of Finance

14 EXPERT WORKSHOP Three groups of people in September and October 2014: 1. Stakeholders, including representatives from consumer organisations and the financial services regulator. 2. The financial advice industry, including national and local advice providers, and risk-profiling experts. 3. Consumers who had bought or considered buying an investment, divided between those who had considered or bought an investment through a financial adviser and those who had not consulted a financial adviser.

15 FOUR QUESTIONS 1. What do people understand by the term risk in relation to saving and investing, and what informs this understanding? 2. To what extent do existing risk profile tools reflect people s own understanding of risk? 3. Is there scope to improve risk profiling to provide a better indicator of people s attitude to risk? 4. Is it possible to develop a tool that consumers could use themselves? What would this look like?

16 SIX PILLARS OF WISDOM The research suggested six Pillars of Wisdom that investors need: 1 Investments fluctuate and they may not get back the amount they invest. 2 Inflation can reduce the real value of money saved in cash. 3 What outcome are they looking for and over what time horizon? 4 The impact of charges on investment returns. 5 The rate of return in relation to inflation, how investments are taxed and the rate of income tax they pay. 6 What might their investment journey look like over the next three to five years and over the time until they reach their goal?

17 WHAT DO INVESTORS UNDERSTAND? Generally understood Less well understood Investments go up and down and you may not get back the amount of money you invested at the start. Inflation can reduce the real value of money saved in a savings account. What outcome are you looking for, and what time horizon are you thinking about? Have you considered the impact of charges and your likely returns? Have you considered the rate of return in relation to inflation, how the investment returns are taxed, and the rate of income tax you pay? This is what your investment journey might look like over the next three to five years, and over time until you reach your desired outcome. UNDERSTAND ASK VISUALISE

18 TWO COMPONENTS The research also highlighted that people s understanding of risk in relation to investing comprises two quite different components: How they understand the investment environment How they think about attitude to risk

19 INDUSTRY AND STAKEHOLDER OPINIONS The public doesn t understand the importance of inflation. It s important for savers to understand the outcome they want. Consumers should know what a good return looks like. Consumers must understand the impact of charges: The person selling you the fund should be able to say to you, right this fund is actually, of its type, very expensive. There s another one here that is very similar and it s much cheaper, they should be able to guide you like that and that never happens. So that s a discussion that consumers should definitely have.

20 FINANCIAL ADVISERS CONCERNS Consumers lack knowledge of fundamental financial concepts such as: Inflation Tax Probabilities How financial markets work How these concepts relate to an individual s own investments

21 ATTITUDE TO RISK QUESTIONNAIRES Attitude to Risk questionnaires aim to capture a client s: 1 Willingness to take risk. 2 Need for risk, which is the need to take risk to achieve their goals. 3 Capacity for risk, which is someone s financial ability to take risk. 4 Experience and expertise when it comes to financial matters.

22 ATTITUDE TO RISK QUESTIONNAIRES: CLIENT VIEWS 1. Willingness to take risk Consumers generally had a good sense of the risk they were prepared to take with their money, using terms like middle of the road, cautious and risky. A client s life stage was a key influencer on their willingness to take risk. A client's past investment experience also shaped their willingness to take risk

23 ATTITUDE TO RISK QUESTIONNAIRES: CLIENT VIEWS 2. Need for risk Making money work was a strong motivation to take some risk, rather than save in cash. Some consumers decided to buy higher-risk investments in order to maximise their returns or because they had a specific purpose in mind. The purpose of the investment also constrained risk, for example those investing for the benefit of their children, even when investing longterm. Consumers were more likely to appreciate the need for risk where they had made an active choice to invest.

24 ATTITUDE TO RISK QUESTIONNAIRES: CLIENT VIEWS 3. Capacity for risk Research identified three common dimensions to a consumer s ability to take financial risk: 1. Whether they feel they can afford to invest money from their current income; 2. Whether they have the financial building blocks in place to be able to afford to take some risk with the money they have; and 3. Their capacity for loss in an objective sense pounds and pence and how that could materially affect their standard of living, not simply how they feel about it.

25 ATTITUDE TO RISK QUESTIONNAIRES: INDUSTRY AND STAKEHOLDER VIEWS At best, Attitude to Risk questionnaires are seen as: An enabling device A tool to help clients consider their own risk profile in a structured and consistent way Educational, especially for novice investors A way for financial advisers to create an audit trail At worst, they are seen as: A tick-box exercise, offering no material benefit to the client or financial adviser

26 HOW EMOTIONS AFFECT PERCEPTION OF RISK True Potential PUFin s Professor Mark Fenton-O Creevy Professional traders and private investors are often driven off-course by intense emotions: They take risks to win back losses They feel lonely, with nobody to turn to Consumers perceptions can also be changed by: Major life changes such as having a family, the death of a spouse, divorce and re-partnering

27 MANAGING EMOTIONS The investment journey is often bumpy, but research suggests some simple strategies to help people manage their emotions: Write goals down Have a plan in place for different eventualities Turn to a source of emotional support

28 RESEARCH IN ACTION Based on the research findings, the Centre will look to provide inputs to help create: A toolkit for the ordinary/new investor A questionnaire/tool to capture attitude to risk designed for the ordinary/new investor The questionnaire must: Take account of individual circumstances and objectives Help people think about the different dimensions of risk capacity Be consumer-centric and user-friendly

29 OTHER WAYS TRUE POTENTIAL IS HELPING TO CLOSE THE SAVINGS GAP: Using technology to deliver client-centric advice. Keeping clients focused on their goals. Empowering clients to become more engaged with their finances. Offering clients the ability to track performance 24/7. Helping turn spenders into savers with innovative technology such as impulsesave - allowing people to invest at the touch of a button. Reminding clients that they do not need the help of a financial adviser all of the time, but they can benefit from having one.

30 Want more information? For additional details on our Tackling the Savings Gap campaign, the True Potential Centre for the Public Understanding of Finance or to read our latest White Paper, visit

31 THANK YOU