Hargreaves Lansdown hopes to democratise financial advice with its new Savings and Resilience barometer, explains Senior Analyst Nathan Long.
The six-monthly barometer launched in January, making this the second edition, and is designed to be a pulse check of resilience in the country.
The idea, explains Nathan, was to create content from the firm’s in-house expertise within its advice division. Nathan highlights the advice gap: there is only so much that can be said to a client without it being classified as regulated financial advice. Regulated financial advice is expensive and primarily a preserve of the relatively wealthy.
“We wanted to try and democratise some of this knowledge that an advisor would pass on to a client,” Nathan says.
Constructed in partnership with Oxford Economics, the barometer is built around five “pillars” of resilience: controlling debt, protecting your family, saving for a rainy day, saving for later life and investing to make more out of your money.
Nathan says that there is plenty of research on the individual pillars but there was no overarching piece of research that combined these into one holistic view, taking into account the inherent trade-offs between these different financial goals. So what is the barometer saying about the nation?
“Broadly what we are seeing is that in lockdown, across the board there was an improvement in financial resilience. A lot of this came from people not being able to spend.”
One indicator used is whether somebody has enough cash savings for three months of essentials, which saw a big increase in numbers. Net financial assets increased, with people able to invest more.
The barometer found, however, that wealthier households have had a disproportionate increase in financial resilience due to more of their spending being discretionary.
Particularly in poorer households, these gains in financial resilience are now being swallowed up by the cost of living crisis. Many now facing the choice of cutting costs, eating into cash savings or taking on more debt. In the pensions space, people’s savings are now falling behind what they are going to need.
“You’re seeing multiple areas where this cost of living crisis is biting,” Nathan explains. “This has wiped out gains during lockdown, but it’s incredibly poorly distributed. While you’ve got a fall across all income deciles, lower income households are suffering the most from that.”
Investor pathways – and how behaviour is changing
Outside of the barometer, Hargreaves Lansdown has observed a change in behaviour amongst its own customers, as a firm which had been on the receiving end of the investment boom since the pandemic hit.
As this boom came through, the firm was careful not to chase the people who were short-term investors, Nathan explains. While as the market leader the firm had plenty of brand new investors signing up, it stuck to its messaging that investing is a long-term endeavour.
There are signs that Hargreaves Lansdown’s approach has achieved some success in moving some of these investors who had originally signed up for a single stock towards more diversified investing, in the form of a fund. For example, investors who might have bought a single share purchase were targeted with messaging around how diversification could build greater resilience.
Nathan notes that there is a complexity challenge in convincing people to invest in funds rather than single shares.
“There’s a FOMO (fear of missing out) effect,” he says, on why investing in a single share might be appealing to first time investors. “It’s quite easy to understand what a share is; people fundamentally understand the process of buying a share.”
With funds, on the other hand, firms need to explain multiple ideas such as diversification and risk.
Nathan believes that the industry, as well as regulators, could improve on this process of capturing so-called “unsophisticated” investors.
“The industry needs to be more relaxed about the starting point somebody takes [in investing]. It’s more important where they end up.”
Nathan says more needs to be done to “capture that interest and help them become an investor rather than saying it must be via this route”.
Regulation weighs down on messaging
Nathan also believes regulation can weigh down on how firms talk to clients. For example, in its eagerness to adhere to regulation the industry can end up primarily talking about negatives.
“[Investors are] constantly being reminded of the risk and how much how badly things can go.”
“We’re not very good at framing the likelihood of you being better off after five years, after ten years, after 15 years. I think broadly the industry doesn’t do that trade off of risk versus return very well in terms of its disclosure.”
One area where Hargreaves Lansdown in particular is engaging with regulators is in improving the information flow to investors, whether this is platforms or the investment firms themselves.
“One of the problems is that as soon as you start to personalise that information, to try and have a bigger impact and resonate and help people understand and connect with it more, you very quickly risk that becoming regulated finance advice.”
By using personalisation, however, he believes ultimately the customer journey can be improved. In particular, he is interested in how using certain information about a client can help with removing irrelevant information and ultimately reducing the cognitive load required.
Despite having some successes, it is “quite hard with how the legislation is currently.”
Image credit: LordHenriVoton