Will the Leeds Reforms create a UK investment culture?
- The Leeds Reforms are a welcome attempt to tackle low rates of investment in the UK
- However, government return projections look optimistic
- Perhaps advisers should have a greater role in the process, rather than banks or insurers
The Chancellor’s Leeds Reforms have much to recommend them: too much of the UK’s wealth is squirrelled away in unproductive assets such as cash or property. Part of the brilliance of Silicon Valley is that great ideas can get funding. In the UK, even established businesses can struggle to raise capital. Risk aversion is holding the economy back.
Equally, the deterrents to investment are significant. Risk warnings around stock market investment are now out of all proportion to the actual risks involved. Experienced investors know enough to ignore them, while the less experienced are terrified into inaction. In reality, it should be straightforward to pick an appropriate fund on an investment platform, stick it in a stocks and shares ISA and keep contributing each month – yet only around 16% of people do it.
So any attempt to change this state of affairs is welcome. However, it needs to be executed carefully. That’s why this line on the Government website was worrying: “More than 29 million adults across the UK have cash sitting in a low-interest rate account offering around 1% - while the average return for stocks and shares over the last 10 years is around 9%. If those savers invested £2000 today, they could have £12,000 in 20 years’ time.
“This compares to £2,700 if they held this money in a cash account offering 1.5% at the current interest rate, making them over £9,000 better off.”
That sounds pretty seductive. But every investment professional knows that it doesn’t quite work like that. The Government cannot afford to go from one extreme to another. At the moment the FCA insists on catastrophic risk warnings to accompany the merest suggestion that stock markets might go up. However, to go from that to a message akin to “pile into equities, you’re going to win big” is not the right strategy.
What do investors need? They need good messages around regular saving, managing volatility, and looking long-term. These messages might have been a whole lot more helpful to them than those pedalled by the FCA in recent years. Oddly enough, they are the exact message that advisers give out day after day and evidence suggests it works pretty well to keep people invested.
That’s why the government’s choice to hand the banks, insurers and fund managers the task of targeted support seems bizarre. Surely, it might be better to bring in advisers, who give these messages every day? They know all about keeping people invested through thick and thin.
