Simplifying Investment Choice

Posted: 20 Nov 2014

See all articles by Henry Cobbe

Henry Cobbe

Elston Consulting Ltd.

Shweta Agarwal

Elston Consulting Ltd.

Date Written: November 1, 2014

Abstract

For a vast majority of investors today, the abundance of investment offerings, whether shares, bonds, investment funds or investment trusts is overwhelming. Many investors who want or need to manage their investments lack the confidence or financial capability to create and maintain an investment portfolio that is fit for purpose. Following Retail Distribution Review (RDR), an ‘advice gap’ has been created; a disconnect exists between regulatory guidance on the boundaries of retail investment advice, and intermediary firms willingness to roll out simplified advice or non-advised guidance models. As a result, participation in long-term non-cash savings plans, such as stocks and shares NISAs and SIPPs, is low and the risk of future financial unhappiness for many individuals is real. While automatic enrolment is addressing this inertia from a workplace pensions perspective, this white paper discusses how investment propositions can be tailored to known behavioural patterns to simplify savings decisions and deliver better savings outcomes.

Conventional wisdom has been to attempt to educate investors about investment science; to increase choice on the number and type of investment funds available; to offer portfolio construction tools matched to a risk profiling tool that may help with an initial investment decision; to offer more, and more frequent information about a portfolio; and to encourage savers to review their portfolios frequently. We argue that these approaches are inherently flawed, which is why, despite best intentions, take-up rates of non-cash savings products remains low for most savers.

Our proposed approach is to modify the nature and presentation of investment product offerings so that they mesh naturally with investors’ intent and capabilities for making investment decisions, while correcting common behavioural mistakes they make along the investment journey. Making the process of choosing from an overwhelming array of investment products easy and intuitive offers the promise of nudging consumers away from deferring or mismanaging investment decisions that eventually hurt their aspiration to lead a better quality life.

Keywords: Behavioural finance, portfolio choice, investment decisions, government policy and regulation

JEL Classification: D03, G11, G18

Suggested Citation

Cobbe, Henry and Agarwal, Shweta, Simplifying Investment Choice (November 1, 2014). Available at SSRN: https://ssrn.com/abstract=2527623

Henry Cobbe (Contact Author)

Elston Consulting Ltd. ( email )

20-22 BEDFORD ROW
LONDON, WC1R 4JS
United Kingdom
+442070428044 (Phone)

HOME PAGE: http://www.elstonconsulting.co.uk

Shweta Agarwal

Elston Consulting Ltd. ( email )

20-22 Bedford Row
London, WC1R 4JS
United Kingdom
+442070428044 (Phone)

HOME PAGE: http://www.elstonconsulting.co.uk

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
341
PlumX Metrics