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Retail Investor Study

Asset Management industry insights

Based on preliminary discussions and interviews with industry experts as well as a wide base of retail investors, four major themes were identified that capture current streams in the asset management industry:

  • Complex products
  • Product pushing
  • Trust-gap
  • Investor behavior

These identified topics build the foundation for the construction of an online survey which was conducted from October, 10th 2012 to October, 29th 2012. The survey included 390 respondents, being split into 38% female and 62% male participants. The average age was 35 years with nationalities split between 51% Swiss, 13% German, 8% British and 28% of other nationalities.

The survey was followed-up by in-depth interviews which covered approximately 10% of the sample. Follow-up interviews were picked by random sampling from the previous online survey participants and lasted roughly 45 minutes while following a semi-structured approach. It explored a general set of themes but allowed for the flexibility to raise new questions during the interview. The following paragraphs briefly cover the major findings for each topic.

Complex products

Surveyed investors show a clear preference for simple products and associate predominantly equities and bonds with simple characteristics. 79% of respondents expressed an inclination towards simple products, naming equities, fixed income and currency products as the top three simplest products. Funds in comparison are perceived as complex and are ill understood. But also ETFs, which gained considerable media attention, are poorly understood with below 10% of investors stating they have a good working knowledge of ETFs. Survey participants also seemed to lack a clear explanation to the added benefit of the perceived additional complexity. One interview participant stated that “it seems that [fund providers] added intentionally more complexity without benefit to keep the power tipped in their favor”.

The survey revealed that retail investors cluster around five main types which can be distinguished and have distinctive characteristics. There is a correlation between investor types and their appetite for what is perceived as complex products.

Product pushing

Whether an investor feels the necessity to contact an advisor depends on the quality of information, the confidence of the investor in the information and the investors’ ability to understand the information. However, over 90% of investors firmly believe that advisors are biased and pushing products and will avoid using investment advice from an advisor.

The recent press coverage on retrocessions has raised public awareness on financial flows in the industry. This sensitized investors on one hand to the costs of funds and advisory fees but also on the other hand leads them to question the general competence of their advisors, with below 10% of investors believing advisory fees are justified. With regard to fund TERs a fraction of survey participants understands the data fully; the portion that does understand the data considers TERs too high.

Trust-gap

Investors perceive a lack of competence in their advisors and hence would not pay money for their service. More than 25% of investors would likely go directly to the manufacturer in the case an advisory fee was charged. Over 70% of investors indicated a trust deficit with regard to advisors and a large majority believes that advisors are currently wrongly incentivized to give objective investment advice.

Investor behavior

On the basis of the above mentioned issues the investors react with several dysfunctional behaviors that harm them, but also impact the other market participants. They find themselves trapped between mistrust and lack of knowledge and suffer from the industries inability to communicate effectively. While a large majority agrees on the complexity of products and has difficulties using financial information or understanding the underlying mechanics of products, they rate themselves as very knowledgeable, displaying certain overconfidence in their ability to make investment decisions. This plays into the mistrust investors have for advisors and their perceived incompetency. Being used to receiving free advice when they need it, it is very unlikely that they would be willing to pay for the service based on their behavioral pattern.

Recommendations

The analysis of the online survey and in-depth interviews leads to a set of recommendations for asset managers to position themselves in the future. Having neglected retail investor needs for a prolonged period of time, products have been manufactured in isolation without an integrated process. To improve the current situation, asset managers need to tackle the issues in a holistic approach. The immediate situation needs a product recalibration, bringing the existing product portfolios back in line with investor needs and expectations. Second, to become fit for the future asset managers need to rethink their production development process.

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