The desire to de-risk our lives

The most obvious manifestation of ‘de-risking’ since the pandemic began has been the phenomenal adoption of food delivery services, as customers move to shop from the safety of their home. Originally, the benefits of delivery were marketed around saving customers time and offering flexibility. We’re now seeing the unintended value of online shopping in helping to reduce perceived risk. But, how is this desire to de-risk our lives affecting the financial services sector and what opportunities will arise from these shifts in behaviour?

This week we’ll be looking at the effect on saving and investment behaviours.

The Coronavirus has put pressure on global markets across the world: the FTSE 100 has fallen by almost a fifth since the start of the year. Travel giants EasyJet and Carnival Cruises have exited the index after collapses in their share prices, and we have now seen the 18th Property Fund suspension. All within the context of short-term volatility put down to the potential of a second wave of infections, and the tentative reopening of the economy. It goes without saying it’s a difficult time for investors.

On 11th March the Bank of England cut interest rates to 0.25 %, only to hold an emergency meeting the following week and cut this back further to a new record 0.1%. As a result, 62 (or just over one in ten) one, two, three, and five-year fixed-rate bonds disappeared since the beginning of March and 200 High Street banks are now offering rates of just 0.01%.

Meanwhile, Marcus (Goldman Sachs) will temporarily close applications for its 1.05% Easy Access Online Savings Account from today (Wednesday 10th June) due to a huge surge in savings deposits during the coronavirus lockdown taking them near to regulatory limits. The account had been widely referenced by Martin Lewis as savers desperately sought advice on where to put their money. Yet despite plummeting interest rates, more and more people are switching investments to cash.

Remarkably though, this picture looks altogether different when we observe perceptions of investors who have received financial advice. Schroders May 2020 survey of the UK Independent Financial Adviser community found that capital loss is the major concern for clients (91%), followed by impact on retirement (85%) and investment income loss (64%). 100% of their clients were broadly ‘understanding’ in relation to the impact of the coronavirus on their portfolio. And the impact on investors’ attitudes has been surprisingly mild with ‘slightly bearish’ attitudes increasing by only 3% on 2019 (41% up from 38%).

Advisers have been speaking directly with clients more than usual (up to 73% from 36% on an average month) with ‘reassurance’, ‘encouraging clients to sit tight’ and ‘helping them make sense of the future’ the primary reasons for communication. With nearly 50% approaching retirement delaying this decision, it shows the demand for ongoing investor education within the context of the market. This sheds further light on Aegon’s 2019 findings that under half of advisers’ clients (47%) have an understanding of risk and reward before it is explained to them, and (related to this low level of understanding) half of advisers find additional education impacts their clients’ risk appetites.

It brings into question the transactional nature, especially in D2C robo-platforms, of investment propositions that do little to provide ongoing education on the value of investing, and over the long term, in helping people achieve their lifestyle goals. The investor experience has been left in the hands of the stock market as the ‘service’ element of investing seems to have all but been ignored, or at worse seen as the responsibility of an intermediary.

If investor communications instead focused on tapping into the psychology and behavioural neuroscience behind perceptions of risk and reward, we’d likely see that not only would customer satisfaction remain stable, but there may also be decreased sensitivity to perceived risks (Aegon found 32% of advisers’ clients became less cautious after initial engagements).

To refer back to supermarkets: those who came out on top pivoted their strategy to provide services that supported ongoing engagement, despite changing behaviours. It seems we could learn a lot from this in financial services.