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Magazine Issues » November 2018

ASSOCIATION COLUMN: Sold, not bought

Arnaud_HoudmontThe average individual investor is overwhelmed by the sheer complexity of, and uncertainty associated with, the investment products available. Earlier this year, the European Commission released the findings of a study it commissioned on the European market for retail investment products.

This should be seen in light of the continued work towards a Capital Markets Union (CMU) and the statement put out last year by the European Commission, emphasising that “retail investor engagement is a critical challenge for the development of a stronger capital market in the EU. This requires greater confidence among retail investors, and transparency to help investors to make the right investment decisions”.

The study draws a grim picture detailing the obstacles retail investors face when seeking financial advice or wanting to buy an investment product. Despite the fact that this study is limited in its findings by the very restricted availability and comparability of costs and charges of retail investment products, it confirms what Better Finance has been stressing for years:

The average individual investor is overwhelmed by the sheer complexity of, and uncertainty associated with, the products available. Information on distributors’ websites is not sufficiently transparent and not at all standardised across products and countries. As far as costs and charges are concerned, many either don’t display this information or present it only partially.

It is difficult for individuals who are not financially savvy to find, understand and compare this information to choose a suitable product. This confirms the urgent need for independent and cross-border comparison websites that support retail investors.

As it stands, investment products are not bought, but sold. Individual investors and savers have been crowded out of equity markets and pushed into fee-laden and frequently under-performing “packaged” investment products. In fact, the average retail investor seeking personal advice tends to turn to non-independent advisers via their banks or insurers in the belief that it’s “free” advice, completely unaware of the underlying incentive schemes and potential conflicts of interests.

Not surprisingly, the situation is different in the UK and the Netherlands, where inducements have been banned. In these member states, individual investors are systematically redirected by banks and insurers to independent financial advisers and, as a result, distributors present the lowest ongoing charges of all types of funds. Consequently, local investors have become more cost-sensitive and better informed about investment products.

The Commission’s study also confirms that in general, low-cost ETFs are rarely proposed by “human” advisers but are predominant among robo-advisers, something Better Finance highlighted in three consecutive editions of its research into robo-advice. Better Finance believes robo-advice platforms could lead to significant benefits for EU citizens as savers and individual investors in need of a more direct and stronger link between savings and the real assets they are invested in.

Already the emerging sector is charging significantly lower and more transparent fees with few or no commission from providers. That being said, these platforms still deal with products and services that require clients to be relatively financially literate to really understand the value of their offers.

Arnaud Houdmont, chief communications officer at Better Finance

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