The UK investment and financial advice sector is facing a problem.
Many sophisticated and institutional investors understand the concepts of daily trading and can take on a short-term investment approach. But retail investors, who are more likely to be less financially educated, are also looking short-term.
According to a recent survey by the Financial Conduct Authority (FCA), just 21% of those that invested in high-risk vehicles such as cryptocurrency and forex said they were considering holding their most recent investment for more than a year, and 8% for more than five years.
This is despite 60% saying that they prefer more long-term stable returns than investments that rise and fall dramatically.
So, why is there this discrepancy?
Andrew Hardy, director of investment management at Momentum Global Investment Management (MGIM), said: “The democratisation of finance has been increasing over the last year or two. Technology is a big part of it, it’s a lot easier these days than it previously was to invest.
“There are clearly a lot of big returns being made or talked about in crypto. You can understand how people quickly have headed in in that direction. This great democratisation has opened up investments to many more people.”
Education
Retail investors should be looking at goals-based investing, mostly aimed at retirement. But this sudden urge for short-term returns means there is a need for education.
Olivia Ellis, associate director at Mirabaud Wealth Management, said: “My view is that there should be financial education embedded into the national curriculum. It doesn’t matter if you’re from a wealthy background or not, generally, the education on finances whether that’s pensions or student loans is pretty much non-existent so that’s why there’s an absolute gaping hole.
“I think social media is a wonderful thing and it’s a great platform and marketing tool, but it’s becoming a powerful platform which is promoting all sorts of unrealistic financial advice. If it sounds too good to be true, then it probably is.
“I’ve seen a lot of nonsense on social media which is a problem and distracts younger people from focusing on traditional long-term investing. Most of the time social media promotes a short-term trading mentality as opposed to a long-term investing one. Younger people are more excited by cryptocurrencies as opposed to their pension investments and therefore it gets overlooked.
“There’s a massive problem which needs to be addressed, but it is tricky. I think overall, how do you tackle the social media problem? It’s unregulated. It’s very difficult.”
How to help new investors
Recently, the FCA launched an £11m ($15.2m, €13m) five-year campaign called InvestSmart to target investors who are possibly dipping their toe in the market for the first time and need help navigating their way through the sector.
The campaign aims to reach consumers through social media and online, where much of the hype around investments happens. The campaign asks investors to consider their appetite for risk and to ignore the trends, directing them instead to advice available on the FCA’s website.
MGIM’s Hardy added: “Understanding risk and return, it sounds so basic to us, but it’s so fundamental and easily underappreciated. Just one-in-five respondents considering holding their most recent investment for more than a year. I mean that’s incredible.
“Industry needs to highlight to people the expected range of returns, or the historical range of returns that have happened. What we try and educate our clients on is the importance of a long term investment horizon to increase your chances of ultimately meeting your goals and taking the right level of risk for what they are aiming to achieve.
“You need to ask investors – what is your objective? What are you trying to achieve? If individuals are going to take control of their investments, then they need to start thinking a little bit more about their goals.”
Regulatory involvement on high-risk products
The majority of retail investors with a short-term view are looking for returns from very risky products including crypto. But with a lack of investment knowledge, they shouldn’t be allowed to invest in assets like these.
Hardy said: “Most regulators are not approving crypto-type strategies and for good reason because it’s unproven.
“There’s a lot of risk within them, and by giving that stamp of approval, they’d be implicitly endorsing it to some extent, or some people will see it as that. They need to continue to be judicious in how they give out those regulatory approvals for different types of investments.
“But I think, at the same time, regulators need to be careful not to go too far. By making control over your own investment portfolio easier and more accessible for individuals, it is a big positive for the sector.
“It’s just a big change from where we’ve been over the course of previous decades. There’s going to be an uncomfortable period of change for the industry. We don’t want regulators to stop people from being able to manage their own finances.
“But regulators should be careful to make sure that platforms that investors access their investments through take appropriate steps to try and limit access to people who understand what they’re doing .”
