Retail Investment Strategy: A modern distribution framework needs behavioral economics insights

The EU Retail Investment Strategy aims to encourage citizens to invest more of their savings in capital markets in order to close the retirement savings gap and finance the transition of the economy. To find solutions to encourage retail investment, the insurance industry plays a key role: "We are counting on the industry to support ambitious changes to improve the framework for retail investors and thus help increase participation in the capital market," says Alexandra Jour-Schröder, Deputy Director General at the EU Commission.  

This can only succeed if consumers understand the opportunities of capital markets and are encouraged to utilise them. At the GDV event "Retail Investment Strategy: Time to change to a behavioral economics perspective?", policy makers, supervisors, academics and representatives of the insurance industry discussed how behavioral economics insights can best be incorporated into the EU’s Retail Investment Strategy.  

Practical experience and observation of consumer behaviour is key 

While panellists had a variety of views on the controversial issues of inducements and value for money, they all agreed that taking into account actual consumer behaviour is key. In this context, panellists identified a lack of financial literacy and information overload as two key stumbling blocks in the financial services customer journey. OECD studies show that retail investors often lack knowledge of pension products. The long-term benefits of capital market investments in particular are massively underestimated. "Knowledge about the compound interest effect is very low," said Chiara Monticone, Senior Policy Analyst at the OECD.  .  

Studies confirm that a lot investment behavior is driven by informal information 

Monticone further explained that potential retail investors are increasingly relying on recommendations from their personal environment when making investment decisions. An important step towards more involvement in the capital market is curiosity. Levers must be set in motion to encourage people to take more initiative and acquire financial knowledge. 

Studies by the European Insurance and Occupational Pensions Authority (EIOPA) also confirm the reluctance of European consumers to entrust their savings to capital markets. The supply of information and misconception on the products on offer are part of the problem. Clear and relevant information is needed to enable investment decisions. Marco Traversa, Team Leader Conduct Oversight at EIOPA, emphasized that simple digital access and comprehensible presentation, for example through layering, are essential in order to make financial information accessible to a broad mass of people. People should be introduced to the necessary knowledge during "teachable moments". However, he also made clear that it is important that these moments don’t turn into marketing exercises. 

Important role of financial advice 

Ralf Berndt, member of the board of Stuttgarter Lebensversicherung, points out that potential investors are generally cautious and not rational, and often lack confidence in returns. "Unfortunately we cannot expect retail investors in the EU to be very proactive on their own initiative. Experience shows that people want support and need help with financial decisions, which is why easy access to financial advice is essential.” said Berndt. The solution to these challenges also lies in the hands of political decision-makers, who are called upon to modernize and streamline the provisions for disclosure, emphasizes Berndt.  

Trilogue negotiations not expected until after the European elections 

The vote on the European Parliament's negotiating position on the Retail Investment Strategy in the Committee on Economic and Monetary Affairs is scheduled for March 20. The Belgian Council Presidency is also aiming to achieve a so-called "general approach" in the Council before the end of its term. However, it is unlikely that there will be enough time for trilogue negotiations before the European elections.