The internet has radically changed the way private investors manage their money. With new technology, they can now pick and manage their own investments using online “investment platforms”, also known as fund supermarkets.
In the past, many people would have gone to financial advisers to do this. But changes in the industry, not least intervention by the regulators and pricing pressures, mean many advisers will service only clients who have enough money to make it worthwhile.
Although there are platforms that will manage investments, there are many that enable investors to do it themselves.
The prospect of millions of amateur investors handling their own investments raises enormous issues, not least of which is whether they really understand the risks involved.
It was with this in mind that one of the online investment platforms, rplan.co.uk, commissioned me to undertake one of the most comprehensive mystery shopping exercises ever carried out into platforms that are “execution-only”, whereby the investors make all their own decisions about investment.
I estimate there are roughly 3.66 million investors in the UK who construct their own portfolios using platforms (analysis of Platforum data, 2016). This is either
because they like to do so, or they have no choice because of the lack of advisers willing to service their small investments.
There were several surprises in lifting the bonnet on these “direct to consumer” investment platforms.
But one of the most striking – and concerning – was that only ten of the 19 platforms I assessed offered tools by which investors could match funds to their appetite for risk, or risk profile.
One of the primary roles that any professional adviser usually undertakes for clients is to assess their attitude to risk and recommend investments to match it.
There are several ways to measure this but one scale that is becoming increasingly relevant is the Synthetic Risk and Reward Indicator (SRRI), which was introduced by the Committee of European Securities Regulators (CESR). Its aim was to provide investors with a method of assessing a fund’s risk. It rates investment funds on a scale of one to seven, with seven as the highest risk.
So how do UK investors rate their own risk appetites? To find this out, rplan.co.uk commissioned a survey of UK adults. In total, 1,058 UK adults were interviewed by Consumer Intelligence on 29 February and 1 March.
The survey revealed a strong aversion to risk: only 4 per cent rated their appetite as being six or seven. The vast majority described themselves as four (medium-risk) or lower.
However, further analysis by rplan.co.uk shows there is a major mismatch between UK investors’ appetite for risk and how those investors actually invest: 70 per cent of the investments they have made through Isas have top risk ratings of five to seven – even though only 9 per cent of UK adults rate their appetites for risk as being this high.
While UK adults on average rate their appetite for risk as 2.56 out of seven on average, the risk rating of the nation’s overall Isa portfolio is nearly twice as high as that – at 4.82.
Clearly some people invest more than others and they may have bigger appetites for risk. But the sheer weight of money in higher-risk investments points to investors having little or no understanding of the risks they are taking. And the growing use of online platforms that lack sufficient risk controls can only make the situation worse.
It is especially vital that people who are new to making their own investment decisions – especially with so many financial advisers pulling out of the market – should be able to filter their search for investment funds by their risk tolerance or attitude to risk and to monitor their portfolio to ensure it remains within the risk parameters they select.
Nick Curry, director at rplan.co.uk, said: “The absence of risk analysis tools from so many online platforms is quite surprising.
“It is a fundamental part of the investment process and technically it is a straightforward tool to implement.
“Platforms should be giving their clients straightforward explanations of how to assess their own desired risk levels and clear guidance on how to match their investments to that. At rplan.co.uk we regard that as one of the primary services we give to our users.”
Although five of the nine platforms in my survey that had no risk filtering tools did offer “model” portfolios, these used their own (rather than industry-accepted) interpretations of risk, and four platforms did not even have these.
There is quite a wide variation in the terms used to describe the risk levels in model portfolios – I came across terms such as “cautious”, “positive”, “adventurous”, “aggressive growth”, “growth”, “defensive”, “conservative”, “moderate”,
This is unfortunate and misleading. Surely a universal set of risk categories used across the industry would be the ideal to aim for?
Many investors in the UK are potentially investing their money without understanding the level of risk posed to their investments.
Most providers do not display the risk ratings when people are buying funds, and even when they are, ratings and other information can be hard to find.
All fund providers should be displaying the risk levels of their funds clearly, both before and after investing.
So what should investors look out for if they are handling their own investments online?
My research highlighted a wide variation in pricing, breadth of offering and service levels that exists across the main investment platforms.
This means investors must take a good look at several online platforms before committing.
Price is often a primary consideration for investors, who should be aware that platforms usually target those with certain amounts of money to invest, and price accordingly.
This leads to wide variations in cost even for the same size portfolio. Research I conducted last year, for example, showed that the annual cost of a £30,000 portfolio varied by as much as three times between the cheapest and most expensive.
The personal finance pages of the nationals sometimes run table comparisons of charges for different-size portfolios and these are a good starting point.
But going for the cheapest platform for a particular portfolio size is not always the right strategy. Investors should look for overall value, and a key part of that is the range and quality of the investment tools provided.
As a checklist, investors should ask whether a platform:
Helps them to assess their
Labels clearly the overall costs and the risk levels of funds.
Provides the tools to search funds and construct portfolios according to a desired risk level.
The ability for customers to set alerts based on performance and risk, as well as just price movements, in order to help investors keep tabs on their investment holdings, would also be of great benefit. Unfortunately, it is another area where the platform sector has much room for improvement.
Investing in funds, particularly for first-time or inexperienced investors, can be daunting, with thousands of products to choose from, particularly from websites so cluttered, that it can make the journey confusing and frustrating.
The real danger is that less experienced investors may select their investments based on previous returns or performance, oblivious to the financial risk such a strategy may entail.
But if investors persevere they can register and purchase the funds they desire with whichever self-service platform they choose, although some will take far longer than others.
Some of the providers I looked at contained extensive levels of fund information, reporting capabilities and tools.
These were suited to experienced investors, but they would prove less straightforward for a novice investor to navigate when looking to build a portfolio based on their requirements.