There is a big difference between Anglo-Saxon and Continental markets. In the European Union (EU), only 17% of household assets are invested in financial instruments, compared to 43% in the United States. In order to increase this share, the European Commission has put forward a proposal for legal reform in the framework of the Retail Investment Strategy. After analysing the market situation, the European Commission concludes that there is a certain lack of protection for retail investors who do not always receive the best value for their money in the products and services purchased. This reform aims to improve transparency, regulate digital communications and develop product governance to make sure they act in accordance to client’s interest. The aim is to improve the way conflicts of interest are managed so they attract retail investors to the market. In the preparatory reports, there is a key element that stands out from the others. The recommendations of financial advisors are the main source retail investors in EU take in account when making a financial decision. It is blind trust: «People tend to follow the advice they receive even when the advice is bad,» according to the European Commission report by Kantar Public, in collaboration with Milieu and the Centre for European Public Studies. In fact, the percentage of investors who rely on advisors for their final decision-making comes up to 45%. This information is reflected in the «Flash Eurobarometer FL509: Retail Financial Services and Products, October 2022»:
We should congratulate financial advisors who have achieved this high degree of trust, because it is the outcome of an improved financial training and its resultant professionalisation. Among savers’ reasons for not participating in the financial market, only 12% attribute it to a lack of confidence in advisors, according to the same barometer:
In sum, lack of trust in advisors is not one of the main reasons for the low participation of savers in the financial market.
Taking these information into consideration, it is surprising that the European Commission, citing the «Eurobarometer survey monitoring the level of financial literacy» as the source data, considers lack of trust in financial advisors as the main reason for the low participation of savers in the financial market.
The Proposal for a Directive on the protection of retail investors in the Union of 24 May 2023 states:
At the same time, using the same source, the European Commission, in the document «Questions and answers on the Retail Investment Package», indicates that 45% of consumers consider that the advice they receive is not in their best interest, as reflected in this paragraph:
«The consumer markets scoreboard has generally ranked investment services among the services that consumers trust the least. Specifically on investment advice, according to a recent Eurobarometer survey [1], 45% of consumers are not confident that the advice they receive from financial intermediaries is primarily in their best interest.
[1] Eurobarometer survey monitoring the level of financial literacy in the EU, 2023. The relevant question is Q12: “How confident are you that investment advice you receive from your bank/insurer/financial advisor is primarily in your best interest?”.
An identical reasoning was used by Verena Ross, ESMA Chairwoman, to the European Parliament’s Committee on Economic and Monetary Affairs on 29 June 2023, as follows:
The above-mentioned «Eurobarometer survey monitoring the level of financial literacy», turns out to be the «Flash Eurobarometer 525, Monitoring the level of financial literacy in the EU», March-April 2023, published on 19 July 2023. Although this is a report on financial literacy it includes a final question along the following: «To what extent do you trust that the investment advice you receive from your bank/insurer/financial advisor is primarily in your interest», with these results:
This approach by the Commission, followed by ESMA, silences off the trust in advisors and highlights a contradictory piece of information, from a report dedicated to financial education.
It would be advisable to make a rectification and change the strategy followed. Trust in advisors is the main entry point for retail investors into the financial market. This trust should be seize in order to recognise and enhance their work. In a market with increasingly complex financial products, the work of the advisor, analysing risks and recommending the right products for the client’s needs and objectives, is essential and should be acknowtheledge and promoted.
Dr. Fernando Zunzunegui.
Materials:
– Flash Eurobarometer 509: Retail Financial Services and Products
– Questions and Answers on the Retail Investment Package
– Monitoring survey on the level of financial education in the UE
– Opening Statement of June 29, 2023, from the President of ESMA
