Investor eductaion

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Investor eductaion

  1. 1. Rafael Febres-Cordero Regulation of financial education: solution or part of the problem? Madrid, 1 October 2007
  2. 2. Financial issues concern everybody “ Remember 32 years ago when I told you not to worry your pretty little head about money? Well, I take it back.”
  3. 3. Overview <ul><li>Consumer behaviour – why we need help </li></ul><ul><li>What sort of help do we need? </li></ul><ul><li>The role of industry </li></ul><ul><li>The role of the Regulator </li></ul><ul><li>Conclusions </li></ul>
  4. 4. Widespread financial education is more important than ever <ul><li>“Financial education is increasingly important, not just for investors. It is becoming essential for the average family trying to decide how to balance its budget, buy a home, fund the children’s education and ensure an income when the parents retire” </li></ul><ul><li>“Individuals are increasingly being asked to take sole responsibility – and assume the burden of risk – for complex savings tasks which were previously at least shared with governments and employers, such as investing for a pension or for higher education for their children” </li></ul><ul><li>(OECD, Policy Brief, July 2006) </li></ul>
  5. 5. <ul><li>1. Consumer Behaviour.. </li></ul><ul><li>Why we need help! </li></ul>
  6. 6. Time spent to buy a new car / motorbike Base: Whole sample Question: And when you need to buy a car or a motorbike or a scooter, all in all, how long does it usually take you to make your decision on which product you’re going to buy (totalising taking information, discussing with friends or family members, going to dealers, etc…)? On average… UK 21 days Germany 34 days Netherlands 33 days Spain 36 days Sweden 33 days Portugal 42 days France 31 days Italy 32 days Source : Pan European research on Retirement, Research conducted by TNS Sofres on behalf of Fidelity Investments amongst the General Public aged 18-60 years old in 8 European countries in October/November 2005
  7. 7. Time spent to buy a new financial product Base: Own at least one risk financial product Question: And when you decide to buy a new financial product such as stocks, bonds, mutual funds, life insurance, how long does it usually take you to make your choice? On average… UK 12 days Germany 21 days Netherlands 20 days Spain 10 days Sweden 10 days Portugal 9 days France 14 days Italy 14 days Source : Pan European research on Retirement, Research conducted by TNS Sofres on behalf of Fidelity Investments amongst the General Public aged 18-60 years old in 8 European countries in October/November 2005
  8. 8. Conclusions on time spent On average (in days) <ul><li>Audio-visual equipment </li></ul><ul><li>Car / motorbike </li></ul><ul><li>Savings account * </li></ul><ul><li>Risk financial product * </li></ul>UK Germany NL Sweden France Italy Spain Portugal * Base: owners <ul><li>Purchasing a car or motorbike takes the longest; usually about a month </li></ul><ul><li>Purchasing a financial product takes about 2 weeks (3 weeks in Germany and the NL), so less than buying a car, and even sometimes less than buying audio-visual equipment (Sweden, Portugal) </li></ul>Source : Pan European research on Retirement, Research conducted by TNS Sofres on behalf of Fidelity Investments amongst the General Public aged 18-60 years old in 8 European countries in October/November 2005
  9. 9. Source: Fidelity Investments analysis, 2004. Not intended to represent the experience of all plans. Age Percent Stock Allocation 90 20 30 40 50 60 70 80 Asset mix optimised for investor life stage Asset Allocation - What we should do 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0%
  10. 10. Source: Fidelity Investments analysis, 2004. Not intended to represent the experience of all plans . Age Percent Stock Allocation Asset mix optimised for investor life stage Asset Allocation - What we do instead 90 20 30 40 50 60 70 80 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0%
  11. 11. We fail to understand risk <ul><li>A Challenge </li></ul><ul><li>Offer people a bet with an equal, 50/50 chance of winning or losing $1,000 and most will decline </li></ul><ul><li>Keep the equal 50/50 odds, keep the down-side at $1,000 and you have to increase the potential win to $2,500 before most people will accept the bet * </li></ul><ul><li>We are not natural risk takers </li></ul><ul><li>But our failure to understand or assess risk leads us to take risks without realising we are doing it </li></ul>* Kahneman & Tversky, ‘Prospect Theory: An analysis of Decision Making Under Risk, 1979.
  12. 12. <ul><li>2. So we need advice </li></ul>
  13. 13. Three Levels of Learning <ul><li>We need to distinguish between…. </li></ul><ul><li>Financial capability education </li></ul><ul><ul><li>“This is what a pension is and what it’s for” </li></ul></ul><ul><li>Generic advice </li></ul><ul><ul><li>“It’s a good idea to think about a pension sooner rather than later. Check what your employer is providing and get proper advice if you think it’s not enough.” </li></ul></ul><ul><li>Personalised or product-specific advice </li></ul><ul><ul><li>“I have examined your personal circumstances in detail and I recommend this type of product from this provider and I recommend that you contribute $xx every month for the following reasons….” </li></ul></ul>
  14. 14. Learning is most effective when personalised <ul><li>As we move from generic to more detailed advice it is easier to make it more personal </li></ul><ul><li>But even at more generic levels it is possible to focus on issues where individual investors need to make their own decisions e.g. </li></ul><ul><ul><li>Bank accounts and basic budgeting for young adults leaving home for the first time </li></ul></ul><ul><ul><li>Pensions and mortgages for people starting their first job </li></ul></ul>
  15. 15. <ul><li>3. What can industry do? </li></ul>
  16. 16. Help investors to help themselves <ul><li>We need to recognise that too much information can cause overload. Industry can help with </li></ul><ul><ul><li>Planning Tools </li></ul></ul><ul><ul><li>Target Funds </li></ul></ul><ul><ul><li>Auto-Enrolment </li></ul></ul>
  17. 17. The impact of planning tools on consumer motivation IMPACT CONSEQUENCE ACTION STEP Review final plan Adjust assumptions and inputs Project results Insert personal data Combination of hope and mastery creates optimism and the desire to take action Offers a way forward Stimulates a sense of mastery Illustrates options Creates a sense of hope Makes a solution tangible Motivates interest and engagement Changes problem from abstract to personal
  18. 18. This is how we have done it at Fidelity. A universal concept that is applied differently in each country
  19. 19. <ul><li>4. The Regulator’s role </li></ul>
  20. 20. Regulation can help in the provision of information as part of the solution by…. <ul><li>…making sure investors get the right information at the right time; </li></ul><ul><li>…ensuring product information is consistent so that investors can compare products and make well-informed decisions; </li></ul><ul><li>…ensuring advisers meet their responsibilities to investors; and </li></ul><ul><li>…maintaining scope for innovation and creativity within the industry. </li></ul>
  21. 21. Regulatory Tools Disclosure and advice in Europe - theory <ul><li>Disclosure around product content </li></ul><ul><ul><li>Investors should be able to get the information they need </li></ul></ul><ul><li>Disclosure around adviser services </li></ul><ul><ul><li>Responsible distributors should be clear how they are with their customers about what they can offer </li></ul></ul><ul><li>Protection against unwanted information </li></ul><ul><ul><li>Investors should not receive unsolicited services with demands for payment </li></ul></ul><ul><li>Support for independent advice </li></ul><ul><ul><li>Investors should understand the value of advice </li></ul></ul>
  22. 22. Regulatory Tools - part of the problem? Disclosure and advice in Europe – reality and unintended consequences <ul><li>Disclosure around product content </li></ul><ul><ul><li>Conflict between what regulators want and what investors want How many regulators have actually asked investors what they want? </li></ul></ul><ul><ul><ul><li>UCITS simplified prospectus – legal document or marketing tool? </li></ul></ul></ul><ul><li>Disclosure around adviser remuneration </li></ul><ul><ul><li>MIFID – EU regulation of disclosure of adviser remuneration </li></ul></ul><ul><ul><ul><li>Only applies to investment firms not insurance companies hence could lead to lack of consistency and confusion from the investor’s viewpoint </li></ul></ul></ul><ul><li>The impact of regulation on education </li></ul><ul><ul><li>Onerous regulation can discourage some from giving advice at all. </li></ul></ul><ul><ul><li>We need a balance: protect consumers but allow education to flourish </li></ul></ul>
  23. 23. <ul><li>5. Conclusions </li></ul>
  24. 24. Conclusion 1. To work best investor education should ….. <ul><li>…be seen as a ‘life skill’, developed over years rather than a one-off classroom session </li></ul><ul><li>…develop understanding of risk, the relationship between risk and reward and how to manage risk </li></ul><ul><li>…personalise information as much as possible, even at the generic levels </li></ul><ul><li>…create focus on issues where decisions are really needed, using lessons learned from behavioural finance about investor inertia to prevent overload </li></ul><ul><li>…equip people to seek further advice when needed </li></ul>
  25. 25. Conclusion 2. Regulation can play an important role <ul><li>It should facilitate the disclosure of information to investors to enable them to compare products for themselves and to decide when to seek advice if they are unsure </li></ul><ul><li>It needs to look out for unintended consequences of well-meant regulation and be prepared to adapt as necessary </li></ul><ul><ul><li>e.g. In the US the 2006 Pension Protection Act created ‘safe harbors’ for employers to offer advice. </li></ul></ul>
  26. 26. Legal information <ul><li>Fidelity/Fidelity International means Fidelity International Limited (FIL), established in Bermuda, and its subsidiary companies. Unless otherwise stated, all views are those of the Fidelity organisation. Fidelity only offers information on its own products and services and does not provide investment advice based on individual circumstances. Fidelity , Fidelity International and Pyramid Logo are trademarks of Fidelity International Limited. Issue by Fidelity Investments International. CS1212 </li></ul>

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