Most potential investors don’t know how

(November 14, 2003) With equity markets on the upswing, advisors have surely noticed a return of fund manager roadshows. Soon RRSP advertising will blazon every newspaper and every television station. And much of it may well be wasted.

The problem — one many advisors understand — is that most potential investors are not the sophisticated do-it-yourselfers who figure in the discount brokerage ads. They pay attention to investment opportunities only sporadically, or only when they have to, after an inheritance or when they move to a new job.

Research commissioned by the Investor Education Fund demonstrates that only two in 10 investors are concerned about risk-adjusted returns — or even know what risk is. Most folks are at an even more basic stage: they don’t even know for sure if they want to invest, let alone where to invest. Much of the financial information available to consumers presumes a motivation to invest and an awareness of multiple investment choices.

“Focused on home and career, adults typically pay little attention to personal finance until they’re confronted with a decision,” said Terri Williams, president of the Investor Education Fund, at the annual dialogue with the Ontario Securities Commission (OSC) held in Toronto earlier this week. The Investor Education Fund was established in 2000 and funded by enforcement settlements collected by the OSC, now at $7 million. Since February, 2003 it has operated a Web site, investorEd.ca, marshalling education materials from the OSC and the Canadian Securities Administrators.

“Our vision is that investors will be equipped to make appropriate financial decisions, due to access to trusted, relevant and understandable information and educational resources,” Williams says. “Our mandate is to help people make effective use of the financial information out there as well as the services and advice the industry offers.”

But all the resources, and all the advice in the world won’t help investors if they balk at using them. The barriers are high. Few potential investors are motivated to learn on their own about investing, says Williams.

Financial literacy

Even if potential investors want information, when there has been a triggering event, such as a marriage, an inheritance or a child soon to go to university, many lack financial literacy, or even functional literacy.

“We need to use language that people are familiar with,” says Williams. “Investors don’t understand the language, but the more important finding that we realized is that they don’t understand more than just the language.” In the absence of financial literacy, investors may not have “a clear understanding of how the financial choices they make will affect the attainment of their goals.”

“The information we’re giving is not what they need,” says Williams. “They need answers to questions such as: where should I put my money while I decide what to do?… The early decision stages are often ignored by material provided to investors,” she explains. “The content that is provided to them often jumps right to product information.”

How consumers ask questions

A review of surveys conducted across many countries shows that “people would only pay attention to financial information when something was pushing on them, when there was some event in their life that made them have to know it,” says Ed Weinstein, president of the Brondesbury Group, who conducted the research for the Investor Education Fund.

“Really only two out of 10 people care most of the time, the rest do need it occasionally, in what are teachable moments” for advisors, Weinstein says. “The experts talk about rates of return, they organize the world in terms of products, they don’t organize in terms of questions that the average person has: where do I put my money; what’s the best investment. They ask quite simple questions that are much harder to answer.”

What’s more, most people “want to learn a little bit, just when they want to know it.” When they want to know it usually involves three classes of events: “those events that left you money, those events that left you needing money, and those events that left you saying I really don’t know where I am.” Planning for retirement is an example of the last event.

The Brondesbury Group conducted face-to-face interviews with 30 consumers, paying attention to how they framed financial questions and particularly the words they used. They often spoke on financial matters at a much simpler level then they would use for their own business. And some of the standard material in the financial services industry, such as the prospectus, is out of their league. Weinstein gives a real-life interchange.

“What was your problem? Did you get the information from your advisor?”

“My advisor gave me a prospectus to look at.”

“What did you want to know?”

“Well, I wanted to know what I would get from this fund.”

“Did you find the information in the prospectus?”

“No, it wasn’t in there.”

“Did you see anything in the prospectus about returns on investment?”

“Yes, but I didn’t know what that meant.”

Says Weinstein: “They don’t talk about risk levels, they don’t talk about returns, they ask questions like: how much will I get? They ask questions like is this safe? Is this a good investment.”

Unfulfilled desire for advice

Weinstein also found that “there was a lot of skepticism about the market and there was a lot of skepticism about the industry.” Still, “a large chunk felt they had a need for advice that wasn’t being met. In many cases they felt that they weren’t deserving of advice.” One respondent said, “I really don’t earn enough.” Yet, he was making $60,000 a year, and had come into a windfall of $75,000.

In asking people what they would do after a triggering event, Weinstein reports that only one-quarter of the consumers knew what to do. Most were grappling with early decision-stage questions: “Should we save the extra money or enjoy it now? Where should I put the money while I’m figuring out what to do with it? Who should I talk to?” He adds that one-third never figured out the answers to these basic questions, and so did nothing.

About half sought advice. Of those who did, 60% did invest some of their windfall, while one-third put money into a house and one-third spent it. Those who didn’t seek advice, Weinstein found, tended to be younger. Their main triggering event was moving to a job where they earned more money.

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Terri Williams will be speaking on this research at the Advisor Forum in Toronto, November 19.

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Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(11/14/03)