Next year Britain’s spell of ultra-low interest rates will probably come to an end. After six years of a Bank of England rate of 0.5 per cent, and miserable returns on savings, the world that private investors emerge into will look less welcoming than the one that existed pre-crisis. Interest rates may rise, but we will be far from the rates that most had come to regard as normal. In the meantime, trust in financial services has been damaged and the advent of separate charges for financial advice has led many to conclude that it is not worth the money.
The implications of this are hinted at in a piece of research into DIY investors commissioned by the Financial Conduct Authority entitled “The motivations, needs and drivers of non-advised investors”. The report identifies three groups of investors which it calls Confident Self-Starters, Eager Learners and Hesitant Hopefuls. Confident Self-Starters are experienced, often better-off and invest money they can afford to lose with a reasonable level of knowledge and skill (though they are prone to over-confidence). Eager Learners are younger, slightly less well-off and less experienced but are committed to the research and self-education that it takes to be a DIY investor. Many will go on to form the next generation of Confident Self-Starters.
It is the Hesitant Hopefuls that provide the most worrying element of the research. This group, the report says, has turned to DIY investing for two main reasons. First, they “would not be averse to using advice if they a) could avoid the fees, and b) were certain that the adviser was ‘doing the best by me’.” Would anyone turn down financial advice that was both high-quality and free? Second, “after five years of Bank of England base rate at 0.5 per cent, they feel driven to seek higher returns” and “importantly, consumers in this group are the most likely to feel ‘forced’ into investing as they would generally prefer the security of cash.” Perhaps worst of all, they “feel discouraged from doing any research because they feel the information is complex and overwhelming”.
These reluctant DIY investors are doing exactly what the macro-economic commentators tell us Quantitative Easing is supposed to make us do—they are being pushed reluctantly to make riskier investments in order to secure an acceptable return. The problem is that the financial collapse that made QE necessary has done nothing to increase people’s trust in financial services providers or to make their expectations any more realistic. They know they are out of their depth but won’t pay for professional advice.
This is worrying, but waiting to meet this growing band of reluctant DIY investors is a financial services industry that has seen a “marked increase in… firms offering customers the opportunity to purchase investments without advice”. The reason they’re keen on non-advised sales is easy to work out. Providing advice is expensive; many people don’t want to pay anyway; and the risk of any comeback from regulators is far lower if people are making decisions without taking formal investment advice, which is tightly regulated.
Instead, the name of the game for most firms is to offer much cheaper and more lightly-regulated “guidance” (which is what the Chancellor promised everyone who reaches retirement, alongside this year’s pension reforms) without tipping over into fully regulated “advice”. This is the line that the retail investment industry will dance around over the next few years. Looked at in that light, it’s not difficult to see the dangers of interest rates staying low for a long time to come. This will maintain the pressure on Hesitant Hopefuls to take more risk just as the industry is developing more effective ways to sidestep the risky business of advising them. Protecting these reluctant victims of QE is going to be one of the FCA’s biggest challenges.