ifie-ifie americas chapter webinar: sound practices...

IFIE-IFIE Americas Chapter Webinar: Sound Practices for

Investment Risk Education

Report Context

• C8 mandate: “Regulators should play anactive role in promoting the education ofinvestors and other market participants.”

• Reality: IOSCO members regularly see instances in which investors lose money they do not expect/can’t afford to lose. This is often based on a misalignment

between retail investors’ understanding of risk and the actual level of risk to whichthey may be exposed through aninvestment

Education can help

Copyright FINRA 2017 | 2

Report Context

• Report published September2015

• What we found: Important research Sound practices Challenges Examples that can be shared


Purpose & Scope of Report

To explore how securities regulators use investment riskeducation to address the misalignment between retail investors’understanding of risk and the actual level of risk to which theymay be exposed through an investment.

“Investment risk”: the risk that an investment will not deliver the expected yield and/or lose value.

What is “Investment Risk Education“ ?

Includes a range of education, information and communicationactivities, aimed at retail investors, which seek to:

• Promote awareness and understanding of key investmentconcepts;

• Influence investor attitudes and behaviours; and• Improve investors’ financial skills & competence.


Scope: Investment Risk

Risk is applied broadly in the report and can encompass numerous types of risks:

CapitalVolatility

Liquidity Inflation

Interest rateCredit


Potential Outcomes of Investment Risk Education

• Build greater awareness and understanding of key investment concepts

• Influence attitudes and behaviors of investors related to management of investment risk

• Improve investor’s financial skills and competence


Methodology

• Literature review

• Qualitative survey. C8 members provided information about: Investor education role Data collected and research

conducted Approaches and practices—

examples Completed by all 26 C8 members


Lit Review: Factors Influencing Attitudes Toward Risk

• Levels of financial literacy/knowledge: Willingness to take risk tends to go up with

knowledge Less knowledge also correlates with less

investing Experience: Investors don’t always

learn from past mistakes• Gender: Men take more risk—but may

experience greater losses (Boys Will Be Boys: Gender Overconfidence, Barber and Odean;The Canadian Money State of Mind Risk Survey – 2014, Weinstein)


Lit Review: Factors Influencing Attitudes Toward Risk

• Age: Older investors make more mistakes when choosing high-risk investments: e.g. overly optimistic predictions of risky stocks (Individual Differences in Financial Risk Taking, Stanford)

• Product Complexity: Studies tend to show investors don’t understand many broadly held investment products (e.g. US SEC study of investor understanding of target date funds – only 36% said TD funds do not provide guaranteed income in retirement)

• Regulatory protections for retail investors


Literature Review: Measures of Risk

Beta Alpha

Modern Portfolio Theory:

Sharp Ratio

Standard deviation

R-SquaredCredit


Literature Review: Risk Management

Diversify Stop-Loss (stocks)

Dollar-Cost Average Ladder (bonds)


Literature Review: Measures of RiskChallenges to normal risk-based investment behavior:• Many investors don’t apply or understand risk

analysis

• Hong Kong 2014 Survey: “One-third of investors expected to have over 20% annual investment returns and over half (53%) did not have a stop-loss strategy to limit potential investment losses.”

• Japan 2011Survey: 59% of respondents said they did not know the answer to “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”


Literature Review: Measures of RiskChallenges to normal risk-based investment behavior:

• Prospect Theory (Mitchell/Utkus): Emphasis on role of gains or losses, not wealth maximization. Prior losses make investors reluctant to incur

additional losses Gains are seen as cushion enabling assumption of risk

• Familiarity bias: tendency to invest in what is familiar

• Behavior finance suggests that aspirations more than risk-based analysis is at work in decision making. E.g. “I want to be rich.”


Survey


Challenges1. Product complexity, e.g. US FINRA note the difficulties

associated with clear communication when investor risk profiles are very individualistic

2. Reaching investors at the right time, e.g. Germany BaFinhighlight that retail investors can only be reached on a voluntary basis

3. Taking account of investors’ behavioural biases

4. The role of advisors and other financial intermediaries - out of scope but insufficient questions and heavy reliance, e.g. Ontario Securities Commission research

5. Measuring & evaluating initiatives – a common issue


Sound Practices

Focus on influencing retail investor attitudes and behavior aswell as improving knowledge

• Resources mainly offered via digital means

• More than general information: targeted & tailored guidance

• Tools and resources that allow users to interact, test,learn and obtain information based on their personalcircumstances

• User testing is key during the development phase


Sound Practice 1

Case study – Ontario Securities Commission Risk Profile Quiz


Sound Practice 2Develop initiatives that take an evidence- based approach inresponse to the needs of retail investors

• Investment risk education activities should be evidence-based, taking into account insights from research(including behavioural economics) to better understand the decision-making behaviours of the target audience

• Applying behavioral insights help adapt to and/or take advantage of investors’ behavioural biases

• Some C8 members use behavioral finance principlesin the design and development of theirtools/resources


• US FINRA National Financial CapabilityStudy – 2009, 2012 & 2015


Example: Evidence-Based Research

Examples: Using Behavior Finance


Sound Practice 3

Test initiatives with the target audience

In order to maximise the likely effect of any investment risk education initiative, testing with the target audience is animportant step in the process. Testing can be conducted duringdevelopment and on an ongoing basis, allowing changes to be made in response to user needs which may change over time.

Example: FINRA Foundation’s Investor Protection Campaign tested “before and after” against a control group.


Sound Practice 4

Develop initiatives that reach peopleclose in time to the making ofinvestment decisions and that arepromoted in a variety of ways to expandreach and interaction.

Providing information, tools or resourcesat the right time is likely to be mosteffective – that is, at the point in timewhen it can positively influence aninvestor’s decision-making or promotesaction.


Case study – AMF France

• 2014 AMF France Forex Intermediary campaign• AMF France displayed false adverts, similar to the

real adverts by intermediaries

• Clicks on the “false adverts” took users to theAMF’s website to learn more about the products, using AMF educational tools

• 37,000 people clicked on the false adverts and were directed to educational material in 7 weeks


Sound Practice 5

Send clear messages that are adapted for different targetgroups (e.g. beginner and more savvy investors) and for the different ways people access information.

Case Study – “Cash@Campus” Program - Malaysia SC


Case study – FCA UK

• Consumer Spotlight examineshow people deal with money & financial services

• Divides the population into 10 segments based on financial needs & attitudes

• Focus is on capabilities & potential vulnerabilities of groups


Sound Practice 6Use engaging content and delivery styles

• Crisp website information: warnings, checklists, videos,glossaries

• Online tools, calculators, mobile apps

• Hard copy brochures & publications (older investors read!)

• Face-to-face: telephone hotlines/online seminars/webinars

• Mass media paid advertising/PR and media campaigns• Social media & search engine optimisation• Partners’ communication channels


Case study – ASIC Australia


Sound Practice 7Design activities that are current and up to date with emergingnew technologies and developments in financial markets

Case studies – OSC and AMF Quebec


Sound Practice 8Where relevant, develop investor education initiatives thatcomplement regulatory actions to enhance impact


Sound Practice 9

Develop evaluation frameworks and measures at the outsetand seek to evaluate outputs and outcomes

• Quantitative measures

• Qualitative measures• pre- and post- testing• user feedback• conversions• complaints data• randomised control trials

• Population-wide surveys

• Changes in attitudes and behaviours


Examples — Evaluation Measures


• All C8 members seek to measure investment risk activities quantitatively: web analysis, attendance numbers, materials provided

• Example: France Forex 37,000+ clicked on false adverts in 7

weeks 25% increase in AMF website traffic during

campaign Number of hotline callers doubled requesting

Forex info/assistance

Recap: Take Aways1. Focus on influencing retail investor attitudes and behaviour

as well as improving knowledge2. Develop initiatives that take an evidence-based approach in

response to the needs of retail investors

3. Test initiatives with the target audience4. Develop initiatives that reach people close in time to the

making of investment decisions and that are promoted in a variety of ways to expand reach and interaction


Recap: Take Aways5. Send clear messages that are adapted for different target

groups (e.g. beginner and more savvy investors) and for the different ways people access information

6. Use engaging content and delivery styles7. Design activities that are current and up to date with

emerging new technologies and developments in financial markets

8. Where relevant, develop investor education initiatives that complement regulatory actions to enhance impact

9. Develop evaluation frameworks and measures at the outset and seek to evaluate outputs and outcomes


Questions

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