Last week saw the latest release of ISA stats from HMRC. These figures come out every 6 months or so, and against a backdrop of the household savings ratio being at a generational low they don’t make pleasant reading for anyone involved in the investment industry. Over the last year, £120 billion was put in cash ISAs, compared to £43 billion into stocks and shares ISAs. The number of subscriptions was down, the total amount subscribed was down, and cash still rules. Ouch.
Already we’ve seen the usual provider hand wringing, bemoaning how people are choosing to save into cash rather than investing in (their) stocks & shares ISAs. More often than not these messages are clearly self-serving, but they do have a point. People are not saving enough, and a good proportion of those who are could be doing more with their money. The reality is that if you are involved in the investment industry, whatever you are doing to try to convince people to invest isn’t working. Stop. There needs to be a different approach.
For things to change, the industry needs to (collaborate and) listen to what these ISA stats are really saying, and then attempt to communicate to customers in a different way. Loss aversion is an increasing problem. The fear of loss is outweighing the positive of potential gains, even in an environment where a loss in real terms is a certainty by saving into cash. The FCA’s own consumer research is showing that people tend to focus on the here and now, and are using less structured and more personal decision making. Providers need to recognise this and start to build solutions that offer a more gentle step between cash and the scary world of investing. Crucially, providers need to explain risk to customers in a way that resonates, not alienates, and the regulator needs to help make this happen.
A quick glance at some of the emerging online propositions, most of whom will have gone through the FCA’s Fintech programme in some shape or form reveals an almost uniform approach to suitability and risk assessment. Almost every proposition I’ve seen, ranging from the smallest start-up to high street banks have a linear process whereby you are recommended to hold 3 months’ salary in cash “for emergencies” and then are taken through a risk questionnaire. Most explain risk in terms of volatility, however very few actually quantify the potential for loss. You are left to decide what being “balanced” actually means, and whether this is how you want to invest your hard earned. No wonder people stick with the comfort blanket of cash.
If people are going to be encouraged away from cash these systems need to evolve. For most investors risk is not about volatility, it’s much more personal. The risk of saving/investing inappropriately, the cost of delay, not actually doing anything can in some cases cause more damage to the end outcome than whether you are a risk level 4 or 5, yet I’m still to see anyone explain this to an investor in a way that allows them to make an informed decision as to the risk/return trade-offs they are willing and able to make. There are some bright spots of innovation, for example the Moneybox investing app that rounds up your spending to the nearest £ and then allows you to invest the proceeds, or Get Chip which automatically saves for you, and I wonder if this is where the answer lies. More personal, more accessible, easy to use to the point of being automatic. Getting people to save and invest intelligently, or at least with some sort of discipline, and removing the need to think about it too much. Maybe this is where providers should focus their efforts, developing new innovative solutions, instead of the old tried and tested methods, which based on current evidence seems to be failing all concerned.