How to build a stronger investor culture across Europe

As I handed over my passport to the immigration officer, I explained that I was arriving in the US for a mutual funds conference.  To my surprise, he said: “Right now I am invested in actively managed funds, but am thinking of switching to passive – what do you think?”.

It seems unthinkable that something similar would happen in Europe, where we have both an aversion to talking about money and a general unease with investing in equities. There is hope that this culture may begin to change. Indeed, one of the objectives handed to the High Level Forum, set up to advise the European Commission on Capital Markets Union (CMU) in the EU, was to propose ways of encouraging EU citizens to move money sitting in bank accounts into capital market investment.

Up until now, the EU institutions’ mission to boost, broaden and deepen European capital markets has largely been centred on capital raising and market infrastructure, so this focus on where that capital is coming from is very welcome. It is one of the reasons why I was delighted to be asked to join the Forum. I felt able to bring some of my experience of these things in the UK, both from an industry perspective and a regulatory one, from when I worked on the Retail Distribution Review at what was then the Financial Services Authority.

My colleague, Anastasia Petraki, has written a report on the reasons why a culture of investing remains elusive in Europe, what we consider we have to do to change this and how this fits with the High Level Forum recommendations.


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How to build a stronger investor culture across Europe – by Anastasia Petraki, Head of Policy Research


The reluctance of Europeans to invest in capital markets has been put down to several factors: their risk aversion, lack of familiarity, lack of trust and confidence, and limited financial literacy. These are all connected and mutually reinforcing. Some of these issues have been addressed by the traditional regulatory approach of focusing on information provided to investors, including on issues such as costs and performance, management of conflicts of interest, and more recently product governance requirements – all in the cause of greater investor protection.

All these are very important, but not sufficient to encourage people to start saving and investing. Much as regulation is needed in order to establish a solid framework which protects individuals once they decide to invest, we need to consider what comes before that decision.

Most people don’t wake up in the morning and think “I need to buy an investment fund today”. Deciding to invest is very different from something you need to do regularly, like buying car insurance. People don’t think about investment products; they seek solutions to their real life problems. They need to be encouraged to think about how they are going to achieve their aspirations. Creating a culture of investing is about ensuring people engage, and are supported and encouraged to so. It is about them seeing investment in the context of their overall financial position.

Although this will depend on people’s circumstances, including wealth and age, broadly we all have the following financial needs:

  • Paying off debts;
  • Accumulating and maintaining “rainy day” cash which may need to be accessed at short notice;
  • Having protection, through insurance cover, for belongings, illness or death, for example;
  • Ensuring income in retirement, probably through a combination of state provision, workplace provision and private provision.
  • Accumulating “discretionary savings”, which are not cash but rather more long-term and do not necessarily need to be accessed at short notice.

This is, of course, a rather simplified version and the distinctions are not always clear-cut. A longer term investment might be seen as part of a retirement plan, but in appropriate circumstances could equally be available for other purposes. The depth of social services provision by the state will play an important role as well.

But the point is, encouraging people to invest is not just about throwing products and information in the form of documents or comparison tables, at them. It is about supporting and encouraging them and responding to their wants and needs. It is about helping them to develop a proper financial plan.

To make investment part of that plan, it first needs to be established that the person has enough disposable income, which is not going to be needed in the short term. Then, they need to be helped to understand the “risk of not taking risk”. That is, the benefits of riding out short-term volatility (which should only matter if you need your money in the short term) in exchange for greater longer term returns.

Even when investment is part of the financial plan, it does not mean we are at the stage of talking about a particular “product”. The next decision is around where the money is to be invested, or the asset allocation. A global portfolio perhaps? Or one with a focus on producing income? What about environmental, social and governance aspects? The answer may be a single product or it could be a range of funds or direct investments.

It is only at this point where the actual products are selected among a range of similar alternatives, where price, risk, and return characteristics become relevant and where regulated disclosure plays a role.

So, what is needed to move from a situation where people don’t think about any of this or are afraid to discuss finance, to one where individuals are empowered to consider these issues and feel confident about talking to professional advisers about them?

Behavioural economics has taught us that if we want people to do something, we have to make it easy. At the same time, we need to recognise that people’s long term financial needs and the decisions they have to make can be inherently quite complex – so they need encouragement, help and support.

The starting point needs to be that the industry, whether advisers or product providers, speaks to them in a language that they can understand and want to engage with – and the regulations need to allow us to do that.

We need to develop much greater financial literacy – and get people to talk about money. This is not just about financial education in schools, although that is vital, but it is about catching people at stages in their lives when they are receptive. One of the most successful financial literacy campaigns I heard about involved offering materials for midwives to give to expectant mothers – when financial security is an important preoccupation.

Given its importance, we need to ensure that the support, advice and financial planning is reliable, trustworthy and of high quality. We need advisers and planners who demonstrate their professional skills and competence, including by meeting minimum qualification requirements.

There are those who also argue that quality of advice across the EU would be improved by following the UK and the Netherlands in banning the payment of commission, or inducements, by investment product manufacturers to advisers and distributors. They need, however, to consider very carefully the potential unintended consequences. Critics often cite the advice gap which has developed in the UK, but we also need to bear in mind that structures elsewhere in Europe, where individuals typically go to their bank for most of their financial needs and are frequently offered in-house products, are very different from those of the UK. This is too important to be “experimenting on a live patient”.

A good financial plan needs to start with a full view of the individual’s financial position – their savings, their borrowings, their existing commitments. Collecting it can be a very labour intensive job – going through filing cabinets, or contacting many financial services providers. We should be able to take lessons from open banking, to move to more open finance, to enable people to give permission for information about their financial situation from different sources to be drawn together in one place.

We in the asset management industry also need to communicate better with investors. Policymakers tend to talk about “transparency” and “disclosure”, which suggests a mindset of looking at things from the industry’s perspective. We need to start talking about how we offer information that individuals want and need (including about charges and performance) in a format they want to engage with. This may be on paper, but will increasingly be through the use of technology – which can also potentially make it much more interesting, and perhaps even fun!

There is no silver bullet which will make people start saving and investing, but it is great that the High Level Forum report doesn’t just cover technical issues such as securitisation or withholding tax (important though those are) but seeks to bring real people into the thinking.

It may be a long time before European immigration officers start talking about asset allocation, but this is a start.

I hope the one who spoke to me went and talked to his financial adviser!