FCA report on younger investors and risk is ‘wasted opportunity’

The regulator and industry can do better than this, says interactive investor.

The Financial Conduct Authority (FCA) has today published a report exploring a worrying trend of younger investors taking big financial risks.

Key findings:

• New, younger, more diverse group of consumers getting involved in higher-risk investments, potentially prompted in part by the accessibility offered by new investment apps.
• There is evidence that these higher-risk products may not always be suitable for these consumers’ needs as nearly two-thirds (59%) claim that a significant investment loss would have a fundamental impact on their current or future lifestyle.
• Today’s warning from the FCA that young people are taking on big financial risks is important after a year in which more younger investors discovered investing.

There is absolutely no doubt that many have participated in some of the higher-risk trends – from crypto to the Reddit/GameStop saga.

Some of the research findings are extremely concerning. However, while it comes at an important juncture after a savings revolution, a sample size of little over 500, ‘skewed towards those investing in or considering investing in high-risk, high-return types of investments’ falls short of a wider, more nuanced picture.

Moira O’Neill, Head of Personal Finance, interactive investor, says: “20 years or so on from the bursting of the dotcom bubble, stock market opportunists have always been around – and too many speculative investors get their fingers burned time and again. The trouble is, if you talk to them alone, and fail to look at the bigger picture, you don’t learn very much. So, today’s FCA report feels almost like a wasted opportunity.

“It’s why we have been calling for more financial education in schools for years – it’s horrifying that some young investors are being steered by TikTok, not teachers or parents, on important issues that will affect their financial futures far more than which GCSE options they pick.

“The last year has seen a revolution in savings habits, although it is premature to draw any long-term trends, least of all draw sweeping conclusions about younger investors.

“Our younger investors have more investment trust exposure and less direct equity exposure than older generations. For every ‘GameStop’ in the top 10 most-bought funds over the last year, you’ll find several solid blue-chips running alongside it. There’s no question that many younger investors have participated in some risky investing behaviour over the last year, but it is not the whole story.

“As for the FCAs ‘five important questions’ investors should be asking themselves – point 3 – ‘am I protected if things go wrong’ needs a huge caveat. If self-directing investors make a poor investment decision, they will have to live with the consequences, whatever the protections. And financial advice is all well and good, but many people just can’t afford it.

“There is a danger here that investors end up retreating back into cash savings – something the regulator has previously warned about. We need to be having much more nuanced conversations about risk and reward. 

“For example, someone earning £20,000 and saving an extra £25 a month into their pension on top of the minimum automatic enrolment contributions, from the age of 23 to 68, could have an extra £28,000 in their pot at retirement assuming a 3% annual return. Increase your risk profile and seek out a 5% annual return, and they could have over £132,000 more in their pot at retirement. Playing around with risk, and how even small extra contributions, and a little more risk, can add up, can have a profound impact without taking on too much risk, is important. This needs to start at school.”

On investing around ‘gut instinct’

Becky O’Connor, Head of Pensions and Savings, interactive investor, says: “Depending on your gut feelings is a terrible strategy for investing if you actually want your money to grow meaningfully over the long term. The FCA research suggests that ‘FOMO’ (Fear of Missing Out) is driving younger investor behaviour – ‘PLU’ (People Like Us) pressure is creating a herd mentality, with people feeling like they need to invest in high-risk products, like crypto, because they see influencers that look and sound like them on social media platforms suggesting it.

“These are well-known marketing strategies, designed to appeal to our need for a sense of belonging. It’s worrying that instead of encouraging people to buy trainers or music, this style of marketing has been extended into high-risk investment products.

“As with most big life decisions, impulsive action driven by what others are doing is rarely a recipe for success. Investing is a long-term thing, not a get-rich-quick scheme.

“We want young people to invest – in their pensions and for their families’ futures. But we want them to think long and hard about it, do their research and take the time and effort to understand things like risk from different types of asset classes.

“Most young people don’t have money to burn – so potentially throwing it away on high-risk investments is a big waste when there are so many life challenges down the road for them that they might need that cash for.

“Developing self-awareness about your own individual risk tolerance and composure is also really important. Podcasts such as interactive investor’s new ‘Mind and Money’ series can help with this.”

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The coronavirus market downturn has spurred many young people to dip a toe into the world of investments for the first time - perhaps because they are at home more because of the government-enforced coronavirus restrictions and have more time to consider their finances and ways in which to make their money work harder for them in the low savings rates environment. Some 25% of new ii customers were under 35 in Q4 2020.

“The concern is that many of these young, novice investors will learn important investment lessons the hard way by losing money on a high-risk propositions. The GameStop saga is case in point. Fortunate investors could have experienced huge gains if they had sold at the right time, but many lost out once the bubble burst. This baptism of fire into the world investing could put the uninitiated off for life and scupper financial goals.

“But perhaps it is a bit of a stretch to draw hard and fast conclusions on young investors based on a sample size of 517 people ‘skewed towards people investing or considering high-risk, high-return investments.’

“Risk is an inherent part of investing, but some propositions amp up the stakes to levels akin to slot machines in Las Vegas. But taking too little risk (or no risk in the case of cash) can mean that you won’t achieve your goals, just as taking too much risk can be harmful to your long-term wealth. The right balance needs to be struck.

“The FCA has today launched its digital disruption campaign to prevent investment harm. The campaign uses online advertising to disrupt investors’ journeys and drive them to the high-return investments webpage – which covers key questions consumers should ask before investing.

“The City watchdog has reaffirmed (albeit indirectly) the negative influence of the internet in fuelling the problem. While there is useful material out there to help people on their investment journey, there is a lot to be cautious about.

“The FOMO culture that shrouds social platforms such as TikTok, Reddit and Instagram has become a breeding ground for the marketing of high-risk investments shunned by the mainstream investment industry – often for good reason. 

“While it is easy to get caught up in the hype around the latest high-risk ‘get rich quick’ investment, it is important to take a step back and remind yourself why you are investing in the first place. Investing is a one man/woman’s race. As such, your investment strategy should align with your attitude to risk and your investment time horizon.

“The key for investors of all ages is to ensure that your portfolio is well diversified across assets, sectors and regions so that you are not overexposed to risk in any one part of the market.

“A good and proven way of lowering your investment risk is by investing small amounts regularly. Most often, investors do this by drip-feeding investments monthly to help smooth out the inevitable bumps in the market. The advantage is that you also buy fewer shares when prices are high and more when prices are low – a process known as pound-cost averaging.”

Missing from the FCA's warning today that young people are taking on big financial risks, was any nuance around conventional investment platforms and those others which instead focus on CFDs and spread betting.

Richard Wilson, CEO, interactive investor, says: “In the digital world you can drag in 200,000 customers in a couple of months through clever UX on an app. And at the point of sale the customer sees “FCA Regulated” and thinks it must be OK. But do they know if they are in a bank, with an investment platform, or effectively in a casino? How companies describe themselves is not regulated. The FCA needs to make it clear if people are walking into a casino or a pension company.”