Once a year, UK investors receive a statement on the performance of their investments and pensions – but the information provided is often shamefully baffling and incomprehensible.
The IFoA Customer Journey Working Party has spent four years investigating how we might better communicate to customers the investment risks and performance of their funds.
What might customers receive at the point of sale? If they are lucky and typically advised, they get a Financial Conduct Authority (FCA) Key Features Illustration. These were introduced in December 1994 and are basically unchanged since, despite all the subsequent computing power and improvements in stochastic modelling. The deterministic projections shown give no indication of the likelihood of outcomes and are not meaningful to a customer’s goals.
In 2018, the Packaged Retail Investment and Insurance-Based Products (PRIIPs) European legislation introduced the Key Information Document (KID), aiming to gradually standardise disclosure across products and funds throughout Europe. This followed thorough research on what information a customer would want in order to feel more engaged and understand the risks. The core KID is more visually engaging, with three pages of standard format questions and answers. Its aim is to facilitate comparisons between products and funds.
We commissioned YouGov to carry out a survey using the PRIIPs KID documents for two different funds, to see if customers could understand the key investment risks. We also tested customer understanding of risk using various versions of our working party’s simpler disclosure, designed in line with the FCA Smarter Consumer Communication guidelines, with more minimal commentary. Our alternative disclosure was designed to clearly and concisely answer four key customer questions:
- What is the range of likely outcomes and downsides when investing?
- How volatile is the investment journey? (See Figure 1).
- How much can be lost when investing?
- Can money be accessed easily?
We split customers between experienced, passive, future and reluctant investors. We were particularly interested in the future and reluctant investors who may not have access to, or be able to afford, financial advice, or who may be unaware of how their workplace pension is invested or their levels of risk.
YouGov asked six key ‘exam’ questions to each of the 2,021 customers in the survey:
- Which fund is more likely to provide a higher chance of large profits or losses?
- Which fund will provide you with a lower return on average?
- Which fund has greatest potential loss if invested in for 12 months?
- Which fund has greatest potential loss if invested in for three years?
- Which fund is more likely to see variability in its returns?
- Which fund gives quicker access to your investment if you wanted to close it immediately?
Here are the YouGov results of six key statements or hypotheses we asked them to test:
Test 1: Experienced self-investors would have no trouble understanding risk with current KID documents
This test was passed, with 79% of questions answered correctly by experienced investors. They would be the least responsive to our alternative new disclosure.
Test 2: KID documents will not be so effective overall at communicating key information
This was proven correct: 53% of reluctant investor respondents answered “don’t know”. Maybe they are too nervous to discuss investing, but they evidently feel confused and unconfident.
Test 3: Less experienced investors need simpler documents that are more engaging
This test was proven: 66% of respondents preferred our simpler disclosure and thought it more visually engaging and appealing.
Test 4: Existing KID documents do not clearly highlight the risks
This test was proven: only 13% of those surveyed got all the exam questions right, with the less experienced receiving the lowest scores. Only one in four experienced investors got all questions correct and, concerningly, only one in 10 reluctant investors proved they understood all the risks involved.
Test 5: Documents that are simple and easier to access will improve understanding and decision-making
This test was surprisingly not proven. The scores did not improve with the new disclosure – looking at simple infographics and comparing funds alone was not enough.
We designed, redesigned and retested different disclosure styles and had the same results. A more immersive video or interactive approach would appear to be required alongside the disclosure.
However, our performance graphics (Figure 2) proved very popular, showing the total invested against the total fund value over time, as well as other comparisons of the actual returns made against inflation, the stock market, and savings rates. Most customers just do not receive enough information during their investment term other than account value and holdings.
Test 6: Customers do not currently understand the different types of risk on their investment products
This was strongly proven: YouGov found that half of those surveyed could not distinguish the risks and returns involved in investing. Whereas 75% of experienced and engaged investors could answer the exam questions correctly, this decreased to only 40% of reluctant investors, who make up two-thirds of the total population.
Customers do not understand the disclosure available on its own; they need something more compelling and involving.
Our call to action is for regulators, providers and all stakeholders in financial services to evolve communication using digital technology, through a variety of preferred customer mediums.
Our aim must be to focus on public comprehension and education, tailoring the needs of different customer types and segments via the way that they wish to communicate.
Gary Smith is head of product management at Old Mutual Wealth and Chair of the IFoA Customer Journey Working Party