One of the most exciting developments in UK financial services in recent years has been the growth of online solutions for retail investors. There’s now a range of direct-to-consumer offerings available from the likes of Vanguard, Fidelity, Moneyfarm and InvestEngine. As well as being relatively cheap, they are generally easy to use, and an excellent way for people to save for retirement or to supplement their workplace pension.
Why, then, is it still a relatively small percentage of the population that uses these solutions when, according to recent research by BlackRock, 74% of working adults in Britain feel they are not on track to achieve a reasonable standard of living in retirement? (1)
There are probably many reasons, not least our susceptibility to temporal discounting, or the way we prioritise short-term spending over long-term financial security. But there is, for me, another factor at play, and that’s the dizzying array of choices that people who visit these sites are presented with. AJ Bell, for instance, offers DIY investors access to more than 20,000 investment options. Interactive Investor has more than 40,000 choices available, including more than 3,000 funds and 1,000 ETFs.
The Paradox of Choice
This is a classic example of what behavioural economists call the paradox of choice. In other words, although having more options might seem beneficial for consumers, too many choices can lead to anxiety, decision paralysis and dissatisfaction. In investing, the number of options can be so overwhelming that people struggle to make a decision. In some cases it leads to sub-optimal choices, and in others to not doing anything at all.
Social influencer Sahil Bloom elaborates on this point in his new book, The 5 Types of Wealth. (2) Today’s investing industry, he writes, “looks more like an amusement park with an almost unlimited variety of rides. It is, he says, “a creation of the human imagination, designed to draw you in.”
For Bloom, the trend towards ever greater choice has accelerated with the rise of the internet and, particularly, social media. Stock and crypto trading apps, he says, “spend millions to make their products addictive. A desire for novelty, dopamine and entertainment is their profit opportunity.” And yet, he warns, “many of the fancy investments and financial instruments (they offer) are singing a siren song and luring you into danger.”
But the product proliferation we are currently seeing extends far beyond high-risk financial instruments like leveraged ETFs, binary options and contracts for difference. The whole asset management industry is busy churning out new products to tempt investors with. The growing number of active ETFs is an obvious example.
The Starbucks Effect
Phillip Coggan addressed this issue in a recent article in the FT. (3) The problem with recent product innovations, he says, is that, in most cases, they don’t represent any improvement on what was already available.
For example, active ETFs are cheaper than active mutual funds, but they’re still three or four times more expensive than passive ETFs and no more likely to beat the market net of costs. And option-based ETFs provide higher income in the short term, but investors can already achieve the same thing, and at lower cost, by simply pairing a passive equity ETF with a passive bond ETF or cash account.
Coggan likens these new choices to the recent explosion of options for coffee drinkers known as the Starbucks effect. “Starbucks,” he says,” makes a virtue of its ability to offer a wide range of caffeinated beverages. Consumers can order a Java chocolate chip frappuccino with whipped cream if they wish. Whether that is the best value, or indeed healthiest, option is another matter.”
What’s the Answer?
Clearly, it’s in the interests of product manufacturers to keep rolling out new innovations. For active managers, the existential threat posed by the growth of index funds has made it a commercial imperative. The boom in active ETFs in particular looks certain to continue for a while.
But is it really necessary for investment platforms to offer so much choice? At the very least, they need to do more to help consumers narrow their options down.
In the meantime, here lies a real opportunity, in my view, for financial advisers. What clients and prospects really want is clarity on what they should be doing. And what they need, as Sahil Bloom writes, “in a financial universe that tempts our imagination, (is to) focus on the simple boring basics.”
Of course, every client’s circumstances, requirements and capacity for risk are different, but the basic building blocks of a successful investment strategy are the same for everyone. By presenting clients with all-in-one, evidence-based solutions like Timeline’s classic or tracker portfolios, and helping them stick with it, advisers can replace the burden of endless decisions with the clarity clients need. That really is worth having.
This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products.
Robin Powell is a freelance journalist and the Editor of The Evidence-Based Investor.
References:
