Younger Investors are Taking on Big Financial Risks

The Financial Conduct Authority (FCA) has made tackling harm in the consumer investment market a priority.

With this in mind, BritainThinks has been commissioned. This is an insight and strategy consultancy that aims to complete in-depth research into the behaviours, attitudes, and financial resilience of self-directed investors.

Together with feedback from its Call for Input on the Consumer Investment market, this research will underpin the FCA's work in the consumer investment market. In particular, this research will help design a new campaign to address the harm that can be caused by consumers investing in high risk, high return, illiquid investments that may not be suitable for their needs.

The research has helped the FCA to gain a better understanding of investors who engage in high-risk investments, such as Cryptocurrencies and Foreign Exchange, and they have now published their findings.

They have found that there is a new, younger, and more diverse group of investors getting involved in higher risk investments. The belief is that has been prompted in part by the increase and accessibility of new investment apps.

There is evidence that these higher risk products may not always be suitable for the investor’s needs, and nearly two thirds of investors claim that if they suffered a significant investment loss it would have a fundamental impact on their current and possibly their future lifestyle.

The research states that the key reasons for the decision to put their money in such investments is the emotions and feelings the investments gave them, such as:

- Enjoying the thrill of investing

- Social factors like the status that comes from a sense of ownership in the companies they invest in

The research goes on to show that this is particularly true for those investing in high-risk products for whom the challenge, competition and novelty are more important than conventional, more functional reasons for investing such as wanting to make their money work harder or save for their retirement. In fact, 38% of those asked did not say a single functional reason for investing in their top 3 responses.

These investors often have high confidence and claimed knowledge. However, it also shows they also have a lack of awareness and/or belief in the risks of investing, with over 4 in 10 not viewing ‘losing some money’ as one of the risks of investing.

They also have a strong reliance on gut instinct and rules of thumb, with almost four in five agreeing “I trust my instincts to tell me when it’s time to buy and to sell” and the same number also agreeing “There are certain investment types, sectors or companies I consider a ‘safe bet’.

The findings indicated that this newer audience has a more diverse set of characteristics than traditional investors. They tend to skew more towards being female, under 40 and from a BAME background. These self-investors appear to rely on tips and news they have found on the various social media outlets and again this trend seems to have been driven by new investment apps.

At the same time these investors have the lowest levels of financial resilience making them more vulnerable to investment loss. The research shows that a significant loss could have a fundamental lifestyle impact on 59% of self-directed investors with less than 3 years' investment experience, who are more likely to own high risk investment products, this compares with 38% of investors with greater than 3 years’ investment experience.

Alongside this research, the FCA has also launched a 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 FCA advises consumers to consider five important questions before they invest:

1. Am I comfortable with the level of risk?

2. Do I fully understand the investment being offered to me?

3. Am I protected if things go wrong?

4. Are my investments regulated?

5. Should I get financial advice?

At Bluecoat Wealth Management, we offer a Second Opinion Service for clients’ friends and loved ones. It’s a chance for a 30-minute discussion following which we give an Executive Summary of the areas that they ought to consider in their financial planning. This might prove invaluable to young investors.

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