EU Investment firms still placing huge barriers to aspiring self-directed investors, study reveals

by 30 Apr, 2018

A study carried out by Deloitte Luxembourg on behalf of the European Commission has found that large numbers of retail investors across the 28 member states of the EU are being overcharged on entry fees for investment products like funds, while the quality of advice they receive from financial institutions is also not serving them optimally. The research also indicates there is a widespread problem with low financial literacy which is causing would-be investors to be put off before they even start investing.

The fresh findings are just one of many indications that people around the world are struggling with understanding the financial markets and how to start making their money work for them. As we will explain, this phenomenon is not unique to the EU alone.

The study found entry fees for buying an equity fund could cost retail investors up to 8% of their initial investment (in Germany for example), on top of annual ongoing charges by fund managers, with similarly stringent entry requirements across other EU nations. To make matters worse, there was often a corresponding lack of transparency in terms of the amount of fees these investors would be paying on an annual basis on top of the initial investment. In some cases, no fee data could be found on distributors’ websites.

The report explained that this lack of transparency “impedes (investors) ability to compare fees across different products and distributors. As a result, the retail invesor might simply refrain from investing at all, or simply choose among the products provided by the bank where they are already a client, thus preventing them from shopping around.”

Indeed, the findings showed that in most EU countries, investors generally seek advice from non-independent advisors like banks and insurers, who tend to propose between 2 and 3 in-house products, regardless of how unsuitable those might be for the investor.

Mick McAteer, head of the Financial Inclusion Centre, said the report raised “real concern about the shocking level of costs and lack of competition” in many EU countries. The high cost of fees is harming savers and damaging economic growth, as capital is being extracted before it ccan be invested. McAteer added: “The investment industry is grossly inefficient. It needs major surgery.”

Policymakers would prefer to see money being shifted out of savings accounts and into markets (in assets such as stocks) to help boost economic growth, but the study clearly indicates that confusion about everything from fee structures, to how one investment product compares to others, to whether investors can trust financial advisors is clearly putting people off investing and stymying this hope.

This goes some way to explaining why cryptocurrencies became such a popular asset class last year, with rank beginners who had never invested before in their lives joining the craze. The perception that they were easy to access and relatively cheap (as well as extremely lucrative) prompted a flood of investment into digital currencies. Meanwhile, equity markets still seemed to many like a mystery in comparison, on top of the fact that many brokers charge extortionate fees to access them through funds and other investment vehicles.

The executive summary points out: “The Consumer Markets Scoreboard which monitors how markets are functioning from the perspective of consumers clearly indicates that financial services are consistently ranked among the poorest performing service markets in Europe. Combined with a general low level of financial literacy, the average retail investors in Europe have little confidence in their own financial decision making as well as in financial institutions in general. Today, an average consumer is overwhelmed by the sheer complexity of, and uncertainty associated with investment products which is partly due to the generally low familiarity with basic financial concepts.”

These kinds of findings are not limited to the European Union alone. The study shared many similarities with a report from US bank Wells Fargo in 2017, which revealed widespread confusion amongst American millennials when it came to understanding basic financial concepts, which in turn was putting them off the idea of investing. Invstr carried out its own research in 2016 which revealed similar data, namely that financial literacy with regards to investing was weak amongst young people, and that not enough people in general were making adequate provisions for their futures financially.

Overall, the findings from both the Commission and Wells Fargo show that traditional investment experts like banks and brokers are often failing retail investors and taking advantage of their lack of knowledge. There was some positive insights among the gloomy findings however. The most interesting aspect of the Deloitte study from our perspective related to a growing trend of self-directed investment, particularly among young people.

The study reads: “Due to the technological and societal changes of the digital age, the share of self directed investors among the younger generation is increasing. Instead of consulting (independent or non-independent) financial advisors, they rather rely on their social networks (friends, family or social media) when faced with an investment decision.”

Self-directed investing is the activity of individual investors trading assets on their own behalf, unlike a robo-adviser for example, which picks assets (usually exchange traded funds) for an investor. Though these products have grown in popularity in the last few years, particularly across Europe, they still suffer from similar drawbacks to the more traditional forms of investing, namely that robo-advisor platforms often make it difficult for an investor to understand what assets are actually inside a portfolio, besides making it hard to assess how much they will be paying in fees.

Invstr is championing this fresh rise in self-directed investing as outlined in the Commission’s findings for 2 reasons. Firstly because we believe this is the best way to get a solid understanding of the financial markets, and secondly because we understand that many people are reluctant to trust investment firms, banks and brokers to invest their capital and give them advice. For this reason, our app includes easy-to-use compare and share charts, technical analysis, personalised news feeds, instrument ‘Glance Cards’ with easy-to-understand signals and health score, an Investment Game and other features help to provide investors with everything they need to become successful self-directed investors. Our platform is a one stop shop that gives an investor total control.

Indeed, though much work needs to be done to improve transparency and financial education, the way people relate to finance is changing for the better, and Invstr is a part of that change. As Invstr CEO Kerim Derhalli pointed out in this article, we are in the midst of a new investment era, and though retail investors make up a small share of the population (due mostly to the aforementioned issues concerning trust and financial literacy), we at Invstr think this share should be far higher.

The aforementioned studies reaffirm that new investors can often face large barriers to entry, which often comes on top of a limited understanding of how investing works, compounding their difficulties. Invstr is helping to solve this problem on 2 fronts, by providing a wealth of resources in-app which help people to learn about the markets, while also making it easy to open an Invstr Portfolio, which makes investing stress-free. Our platform is lowering the barriers to entry for new investors thanks to our partnerships with competitive brokers like DriveWealth in the US and SIC Stocks in India.

We are also in the process of establishing new partnerships across the globe which will allow Invstr users to trade an even broader range of stocks across other markets in both developed and emerging economies.

Through our low-cost Portfolio feature, investors can start trading their favourite stocks quickly and easily with minimal fuss, removing complications and helping to encourage beginners to get started.

Investing shouldn’t be laborious, long-winded and expensive. It should be fun, simple and fairly priced. That’s where we come in.

Related: Commodities become best performing asset class as crypto magic fades

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