Risk and the UK saver: recklessly conservative or shrewdly cautious?

Transcription

1 True Potential Centre for the Public Understanding of Finance (PUFin) Annual Conference Risk and the UK saver: recklessly conservative or shrewdly cautious? Wednesday 19 November 2014

2 Welcome to the True Potential PUFin Annual Conference A pioneering Centre of Excellence for research in the development of personal financial capabilities, generously supported by True Potential LLP Sue Lewis Chair of the Financial Services Consumer Panel

3 Towards a common understanding of risk fresh thinking, new agendas Professor Sharon Collard Chair of PUFin The Open University Business School Professor of Personal Finance Capability

4 What s the research about? 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 Attitude to Risk Questionnaires reflect people s own understanding of risk? 3. Is there scope to improve Attitude to Risk Questionnaires 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?

5 What did we do? Qualitative research: in-depth understanding Consumer organisations, regulator, financial advice industry Consumers who had bought or considered buying an investment

6 Risks related to saving and investing: what do consumers understand?

7 Uncertainty: the more profound unknowabilities of life and history (Lanchester, 2010) What do people understand generally about the risks of saving and investing? How do people think about attitude to risk?

8 General Understanding General population Investments can go up and down Respondents who had considered/bought an investment Investments can go up and down Capital is at risk Impact of inflation on saving What else should people know but don t? Basic concepts Impact of charges What s a good return? What might the investment journey look like?

9 Attitude to Risk Willingness to take risk Sense of how much risk they are willing to take Used as benchmark Risk capacity Can I afford to invest money now? Are the building blocks in place? Mindful of capacity for loss but qualitatively rather than quantitatively Risk need Making money work for me Objectives shaped the risk they took Experience and expertise Peer influences Denationalisation, demutualisation Share clubs Running your own/family business

10 What kind of investor are you? Delegator Affirmation seeker DIY

11 Do Attitude to Risk Questionnaires reflect people s understanding of risk?

12 Advice process: advisers and clients discuss general risks of investing Attitude to Risk Questionnaires: quantify what may only be a sense or feeling Typically only offered as part of a regulated advice process

13 I m willing to take substantial investment risk to earn substantial returns. Suppose one year ago you invested 100K in a portfolio. Today you ve checked its value and find it is now worth 87K. How would you feel? Investments can go up or down in value and experts often say you should be prepared to weather a downturn. By how much could the total value of all your investments go down before you would begin to feel uncomfortable?

14 Views about Attitude to Risk Questionnaires Mixed views: useful but limitations At best: Enabling, part of educative process, compliance audit trail At worst: Tick-box exercise, output is the answer, little or no discussion For our consumer respondents : confirmed or clarified their sense or feeling

15 Attitude to Risk Questionnaires: Room for improvement?

16 Consumer-centric and user-friendly Ensure everyone understands the words and the meaning of the questions in the same way More effective use of text, visuals, graphics One size doesn t fit all Tailor to life-stage, investment goals? Capacity for loss

17 A new tool for consumers?

18 The Fundamentals What sort of Investor am I? What Risk am I prepared to take with my money?

19 What has the research told us? 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 Attitude to Risk Questionnaires reflect people s own understanding of risk? 3. Is there scope to improve Attitude to Risk Questionnaires 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?

20 @OUBSchool

21 The real consumer perspective on risk Alex Chesterfield Head of Behavioural Insights Which?

22 Real Consumers and risk Alex Chesterfield, Which?

23 Overview 1. The current status quo and three key issues 2. Why people don t like risk (in a pensions context) 3. Would guarantees impact perceptions & behaviour? 4. Conclusions (questions)

24 Current status quo: fragile financial resilience The UK is emerging from recession and a prolonged squeeze on incomes and spending However, many UK consumers financial resilience remains fragile And the situation is not improving as consumers are not putting more money aside UK households saved 7.3% of their disposable income in 2012, but by the first quarter of 2014 this had dropped to 4.9%

25 How and why are people saving? Consumers save for a range of short, medium and long-term goals There are three underlying reasons for saving: The future or the unknown i.e. for retirement income or saving for a rainy day Saving to spend - essentially short-term goals like holidays, car, maintenance Growing money In terms of how people save, cash is king

26 So, 3 key issues 1. Not enough people are saving 2. People are not saving enough 3. People (potentially) not saving as well as they could

27 Why don t people like risk? Going to focus on pensions as: 1. The most widely held investment product 2. The importance of pensions in the context of the wider savings gap 3. They provide a good illustration of why consumers do not like products that involve risk More broadly, people are generally negatively predisposed to pensions they are risky in two ways The need to take investment risk The association with scandals, such as Maxwell and Equitable Life

28 The dynamics of risk for the real consumer It s random and chaotic No capital protection Not perceived as safe or secure It isn t appropriate for the purpose Value goes down as well as up Synonymous with corrupt financial sector

29 So how likely are consumers to lose their money? Establishing the likelihood requires complex modelling work and depends on the investment approach of individual schemes But likelihood of getting back less than was put in is considered to be tail risk. The chance of losing everything is even more unlikely

30 Why the gap between perception and reality? Is it a collective failure in understanding about probabilities or something else? To some extent Research all point to a lack of consumer understanding about risk and outcomes But there are other factors that could supersede any gains in comprehension The availability bias When faced with possibilities, people will judge how likely each is by their ability to recall something similar So recent financial crisis has made the possibility of losing appear more likely Suggests even if people were able to understand tail risk, they may not take an economically rational view

31 What will I get in the end? The need for certainty Because there is no definitive answer to how much will I get at the end, perception that the product has failed to deliver Fundamental predisposition to be uncomfortable with uncertainty the certainty bias Unsurprisingly, consumers often request for guarantees - essentially a desire for protection

32 And how might guarantees impact behaviour? Would people contribute more? Self-reported research suggests consumers would contribute more if there was a guarantee Also evidence from abroad shows strong link between size of state underpin and savers willingness to take risk But good reasons for believing consumers generally unlikely to (choose) to increase their contributions voluntarily

33 Conclusions (questions) Back to the first challenges: 1. Not enough people are saving 2. People are not saving enough 3. People (potentially) not saving as well as they could So. 1. Should we look for / encourage products that are designed around the consumer? 2. Or continue with the existing product set, using existing/new mechanisms to increase coverage / adequacy? 3. Or something else all together? 4. And what about the wider issues beyond risk?

34 Lions and Lion Shaped Bushes in Financial Markets Professor Mark Fenton-O Creevy Professor of Organisational Psychology and Associate Dean (International Strategy) The Open University Business School

35 Western Coral Snake (plastic)

36 Trader Trader Manager

37 Emotion-regulation (Low performers) I m bit of a cold fish; I don t think emotions greatly affect my decision making. If you are making money, you are achieving your objective. [But later] When you lose money, it can be horrendous, violent mood swings. You don t know what to do when you lose money Managers on the desk are an added pressure, and my colleagues, so this emotion can encourage you to make decisions more quickly. It is important to have a recovery period from losses to be more emotionally stable before you go back in [to trading]. I think there is, [a strong emotional element to trading] I think that anyone who s doing it properly and has got their head screwed on is doing everything they can consciously to overrule that, and if I feel that I m trading emotionally I will walk off the desk, have a glass of water, walk up and down the street and then come back and make decisions when I m hopefully not emotional.

38 Emotional self-regulation (High performers) Emotion and rationality are not at opposite ends, they co-exist the entire time. You buy in at 50, they go to 48, you refuse to believe it. Your rational side says you ve got it wrong. Your emotional side says the market is wrong so you buy some more. They go to 46; you re really pissed off now, you re not going to sell them, you re not going to take this. They go to 42 your rational side kicks in and says I got this wrong and I am out and it doesn t necessarily - I am not suggesting it happens in that sequence every time but the two always co-exist. The two always co-exist. Big losses and big gains can swap around fairly quickly and once you understand that then you stop concentrating on the loss and you start concentrating more on how to make money back. One big trade is not going to make anyone and one big loss doesn t destroy you.

39 Discipline It's the ability to perform an idea of a specific situation and make a decision on the information you have but also to have the discipline to say an hour later I'm completely wrong. Let's get out of that trade One word...my biggest word would be discipline, and the second word would be honesty with yourself, because very often...if you keep yourself honest, in what ever way you do it, everybody has their own little ways. If you keep yourself honest...i have always worked on the basis that you don't have to be the smartest person in the world if you're honest. You only have to right, maybe 60/70% of the time and you can still make an awful lot of money. Whereas you could be very very smart, you could have a 90% success rate but if you're not honest [with yourself], the 10% will kill you, and make it a real problem.

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42 Camntech Actiwave

43 Key conclusions from research Emotions are an important part of decision making for finance professionals and investors Effective emotion regulation matters Effective emotion regulation suppressing or avoiding emotions Traders learn effective emotion regulation strategies across the course of a career and this can be improved and supported

44 Recent study of 600 private investors Same problems as the traders but more so Often driven off course by intense emotions Taking risks to win back losses Lonely and nobody to turn to I thought getting emotional about this was my dirty little secret

45 Dalbar study 20 years of data on investor behaviour in 401k plans shows investor returns to consistently underperform the assets they invest in. This gap represents an average annualized lost return of around 4%. It is largely due to investors mistiming the market, buying following price rises and selling following price falls

46 What works for traders? Writing things down Written record of trading strategy acts as a commitment mechanism Never change strategy without writing down reasons for changing strategy and critiquing them Emotional support

47 The importance of documented strategies Self control is like a muscle it gets fatigued - that is why diets don t work Set clear documented strategies and document any reasons for deviating from them in advance Support with if- then intentions

48 Round up Q&A session

49 Coffee break

50 Investors fund choices what do they tell us? Victoria Nye Director, Education and Training Investment Management Association

51 Recklessly conservative or shrewdly cautious? - the Investment management sector perspective A Tale of Two Cities? Advised: more affluent, experienced investors, pension Non-advised: beginning to invest, smaller sums, auto-enrolled The key players: Investment management firms, advisers, platforms, supermarkets Trustees, information providers, media, savers and investors!

52 Funds and UK stock market growth ( )

53 Robust demand for funds since the credit crisis Net retail sales ( ) Net deposits vs. net retail sales of UK authorised funds ( ) Source: IMA, ONS

54 Balancing the rough with the smooth?

55 Changes in investor preferences Net retail sales by investment objective ( ) Income Source: IMA, Morningstar

56 Income and capital returns on equity funds

57 Changes in investor preferences Net retail sales by investment objective ( ) Outcome and Mixed assets Source: IMA, Morningstar

58 Outcome and asset allocation funds managing risk Net retail sales into asset allocation funds ( ) Source: IMA, Morningstar

59 What should I invest in? Performance of Global Equities vs Mixed Assets (September 2014) IMA Sector 1 Year Cumulative return % 5 Year Cumulative return % 10 Year Cumulative return % 10 Year Volatility Global Equity Mixed Investment 40-85% Shares Mixed Investment 0-35% Shares Source: Morningstar, September 2014, Volatility shown is the annualised standard deviation of monthly returns (primary share class)

60 Managing risk as you get older - lifestyling 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% R+5 R+10 Years to Retirement Domestic Equities International Equities Gilts Corporate Bonds Cash

61 Our aim is to be in tune with our customers As investors, we are cautious, but we know we need to save Ongoing professional advice and information will help us decide Key messages: inflation reduces the value of savings starting early and saving regularly makes a difference to long term outcomes income is part of the reward diversification reduces risk Its easy to find out what happens to our money & how it is managed.. using products and services which balance risk and reward to enable us to meet our likely living costs as we grow older

62 The investment management sector perspective Sources: IMA Annual Survey Asset management in the UK, 2013/2014 IMA members product information and sales data and Morningstar performance data NEST: Improving consumer confidence in saving for retirement, 2014 CASS /Pensions Institute: How do savers think about and respond to risk, 2014 Investing in funds IMA website for new and existing investors

63 Key savings and risk challenges facing consumers and government Peter Smith Head of Distribution Engagement TISA leading on Savings & Investment

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65 @uktisa Click here to access The Savings & Investments Policy Project Dakota House 25 Falcon Court Preston Farm Business Park STOCKTON-ON-TEES TS18 3TX

66 Risk and the UK saver: The regulator perspective Rory Percival Technical Specialist Financial Conduct Authority

67 Panel discussion Martin Upton Director of PUFin (Chair) Alex Chesterfield Which? Victoria Nye Investment Management Association Rory Percival Financial Conduct Authority Peter Smith TISA leading on Savings & Investment

68 Closing Remarks Sue Lewis Chair of the Financial Services Consumer Panel

69 Thank you for attending Please stay with us for drinks and canapés in the restaurant Keep in touch with PUFin

70 The True Potential Centre for the Public Understanding of Finance is generously supported by True Potential LLP Click here for more information