It is inevitable that holding a cash investment will reduce real value.
To encourage good outcomes, a disclosure should be provided for cash products that explains this specific risk to the consumer. This will allow them to make informed decisions and choose the right products that match their objectives in both the short and long term.
Risk must be contextualised
When it comes to explaining investment risk to retail clients, the wealth industry commonly uses similar wording across the board.
There will be variations in the wording, but it will almost always contain the following three points:
- The value of your investment can go down as well as up.
- You may get back less than you originally invested.
- Past performance is not indicative of future results.
This wording can be off-putting, but adding context to these risks can help consumers make informed decisions.
- The value of your investments can go down as well as up, but diversifying your portfolio can help protect against inflation as well as other risks.
- You may get back less than you originally invested – investment products should be viewed as a long-term investment. By holding investments for five to 10 years can help protect you against this risk.
- Past performance is not indicative of future results, although historically, diversified portfolios will see greater returns than cash Isas and savings accounts.
Furthermore, providing graphs to illustrate the performance of cash vs investments can provide the context needed to support consumers in making informed decisions.
Firms should also differentiate the risk involved between investment products sold by providers – for example, a product that only allows an individual to buy less volatile assets such as index trackers and managed funds compared with a product that allows investors to purchase assets across the whole of market, that is, directly investing in equities and more risky investments. The latter is more volatile and carries more risk.
This distinction has already been made for investments deemed as very high risk, so why not for asset classes that are historically lower risk.
Contextualising the risk involved for products where risk varies would help consumers choose the right options for their level of risk tolerance.
Barriers for entry
Another issue that needs to be addressed to support investing is eradicating the perception of an investor as a London-based white male in a blue suit.
Gender, demographics and background all contribute to imposter syndrome, which impacts investing.
Investing is not for everyone, but it should not be impacted by these factors.
In research carried out by The Investing and Saving Alliance and the University of Nottingham, the language used for investment products can negatively impact investors, and by contextualising risk warnings it saw a 14 per cent increase in cash invested in stocks and shares.
It was also noted that the improvement seen in women investing was even greater.
The study said that the current wording indicates “gambling”, for which women on average are more risk adverse to, and therefore are less likely to invest when they feel their investment outcomes are more dictated by chance.
Expanding outcome testing
Outcome testing forms a key part of the requirements to successfully implement consumer duty.
The expectation is that firms continually assess their products against the four outcomes and ensure they are delivering good outcomes for consumers.
Where poor outcomes are present for the whole customer base or even a subset of consumers, outcome testing should identify causality that firms can utilise to improve their processes, operational practices or company culture.
