Rafael FebresCordero

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Rafael Febres-Cordero Regulation of financial
education solution or part of the problem?
Madrid, 1 October 2007
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Financial issues concern everybody
Remember 32 years ago when I told you not to
worry your pretty little head about money? Well,
I take it back.
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Overview

• Consumer behaviour why we need help
• What sort of help do we need?
• The role of industry
• The role of the Regulator
• Conclusions

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Widespread financial education is more important
than ever

• Financial education is increasingly important,
  not just for investors. It is becoming essential
  for the average family trying to decide how to
  balance its budget, buy a home, fund the
  childrens education and ensure an income when
  the parents retire
• Individuals are increasingly being asked to take
  sole responsibility and assume the burden of
  risk for complex savings tasks which were
  previously at least shared with governments and
  employers, such as investing for a pension or for
  higher education for their children
• (OECD, Policy Brief, July 2006)

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• 1. Consumer Behaviour..
• Why we need help!

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Time spent to buy a new car / motorbike
Question And when you need to buy a car or a
motorbike or a scooter, all in all, how long does
it usually take you to make your decision on
which product youre going to buy (totalising
taking information, discussing with friends or
family members, going to dealers, etc)?
On average
Sweden33 days
UK21 days
Netherlands33 days
France31 days
Germany34 days
Spain36 days
Italy32 days
Portugal42 days
Base Whole sample
Source Pan European research on Retirement,
Research conducted by TNS Sofres on behalf of
Fidelity Investments amongst the General Public
aged 18-60 years old in 8 European countries in
October/November 2005
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Time spent to buy a new financial product
Question And when you decide to buy a new
financial product such as stocks, bonds, mutual
funds, life insurance, how long does it usually
take you to make your choice?
On average
Sweden10 days
UK12 days
Netherlands20 days
France14 days
Germany21 days
Spain10 days
Italy14 days
Portugal9 days
Base Own at least one risk financial product
Source Pan European research on Retirement,
Research conducted by TNS Sofres on behalf of
Fidelity Investments amongst the General Public
aged 18-60 years old in 8 European countries in
October/November 2005
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Conclusions on time spent

• Purchasing a car or motorbike takes the longest
  usually about a month
• Purchasing a financial product takes about 2
  weeks (3 weeks in Germany and the NL), so less
  than buying a car, and even sometimes less than
  buying audio-visual equipment (Sweden, Portugal)

On average (in days)
Portugal
UK
Germany
NL
Sweden
France
Italy
Spain

• Audio-visual equipment
• Car / motorbike
• Savings account
• Risk financial product

Base owners
Source Pan European research on Retirement,
Research conducted by TNS Sofres on behalf of
Fidelity Investments amongst the General Public
aged 18-60 years old in 8 European countries in
October/November 2005
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Asset Allocation - What we should do
Asset mix optimised for investor life stage
Percent Stock Allocation
90
20
30
40
50
60
70
80
Age
Source Fidelity Investments analysis, 2004. Not
intended to represent the experience of all
plans.
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Asset Allocation - What we do instead
Asset mix optimised for investor life stage
Percent Stock Allocation
Age
Source Fidelity Investments analysis, 2004. Not
intended to represent the experience of all plans.
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We fail to understand risk

• A Challenge
• Offer people a bet with an equal, 50/50 chance of
  winning or losing 1,000 and most will decline
• Keep the equal 50/50 odds, keep the down-side at
  1,000 and you have to increase the potential win
  to 2,500 before most people will accept the bet
  
• We are not natural risk takers
• But our failure to understand or assess risk
  leads us to take risks without realising we are
  doing it

Kahneman Tversky, Prospect Theory An
analysis of Decision Making Under Risk, 1979.
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• 2. So we need advice

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Three Levels of Learning

• We need to distinguish between.
• Financial capability education
• This is what a pension is and what its for
• Generic advice
• Its a good idea to think about a pension sooner
  rather than later. Check what your employer is
  providing and get proper advice if you think its
  not enough.
• Personalised or product-specific advice
• I have examined your personal circumstances in
  detail and I recommend this type of product from
  this provider and I recommend that you contribute
  xx every month for the following reasons.

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Learning is most effective when personalised

• As we move from generic to more detailed advice
  it is easier to make it more personal
• But even at more generic levels it is possible to
  focus on issues where individual investors need
  to make their own decisions e.g.
• Bank accounts and basic budgeting for young
  adults leaving home for the first time
• Pensions and mortgages for people starting their
  first job

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• 3. What can industry do?

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Help investors to help themselves

• We need to recognise that too much information
  can cause overload. Industry can help with
• Planning Tools
• Target Funds
• Auto-Enrolment

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The impact of planning tools on consumer
motivation
IMPACT
CONSEQUENCE
ACTION STEP
Insert personal data
Changes problem from abstract to personal
Motivates interest and engagement
Creates a sense of hope
Makes a solution tangible
Project results
Adjust assumptions and inputs
Stimulates a sense of mastery
Illustrates options
Combination of hope and mastery creates optimism
and the desire to take action
Review final plan
Offers a way forward
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This is how we have done it at Fidelity.A
universal concept that is applied differently in
each country
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• 4. The Regulators role

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Regulation can help in the provision of
information as part of the solution by.

• making sure investors get the right information
  at the right time
• ensuring product information is consistent so
  that investors can compare products and make
  well-informed decisions
• ensuring advisers meet their responsibilities to
  investors and
• maintaining scope for innovation and creativity
  within the industry.

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Regulatory Tools Disclosure and advice in Europe
- theory

• Disclosure around product content
• Investors should be able to get the information
  they need
• Disclosure around adviser services
• Responsible distributors should be clear how they
  are with their customers about what they can
  offer
• Protection against unwanted information
• Investors should not receive unsolicited services
  with demands for payment
• Support for independent advice
• Investors should understand the value of advice

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Regulatory Tools - part of the problem?
Disclosure and advice in Europe reality and
unintended consequences

• Disclosure around product content
• Conflict between what regulators want and what
  investors wantHow many regulators have actually
  asked investors what they want?
• UCITS simplified prospectus legal document or
  marketing tool?
• Disclosure around adviser remuneration
• MIFID EU regulation of disclosure of adviser
  remuneration
• Only applies to investment firms not insurance
  companies hence could lead to lack of
  consistency and confusion from the investors
  viewpoint
• The impact of regulation on education
• Onerous regulation can discourage some from
  giving advice at all.
• We need a balance protect consumers but allow
  education to flourish

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• 5. Conclusions

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Conclusion 1. To work best investor education
should ..

• be seen as a life skill, developed over years
  rather than a one-off classroom session
• develop understanding of risk, the relationship
  between risk and reward and how to manage risk
• personalise information as much as possible,
  even at the generic levels
• create focus on issues where decisions are
  really needed, using lessons learned from
  behavioural finance about investor inertia to
  prevent overload
• equip people to seek further advice when needed

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Conclusion2. Regulation can play an important
role

• It should facilitate the disclosure of
  information to investors to enable them to
  compare products for themselves and to decide
  when to seek advice if they are unsure
• It needs to look out for unintended consequences
  of well-meant regulation and be prepared to adapt
  as necessary
• e.g. In the US the 2006 Pension Protection Act
  created safe harbors for employers to offer
  advice.

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Legal information

• Fidelity/Fidelity International means Fidelity
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  Fidelity organisation. Fidelity only offers
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  Investments International. CS1212