Prospective investors are put off by “intimidating” investment risk warnings, new research from Vanguard suggests.
According to the asset manager, making risk warnings clearer and less intimidating could have a tangible effect on improving investment participation.
Liz Waldron, head of product and client experience at Vanguard Europe, said: “Well-intentioned, traditional warnings often have the opposite of their intended effect. Rather than protecting consumers, they frequently trigger anxiety, confusion and disengagement, particularly among newer or more hesitant investors.
“Focusing on just the risk rather than the reward of investing often adds to existing fears and causes people to not invest.”
Waldron said the firm’s findings show that risk disclosures do not need to be stark or intimidating to meet regulatory expectations and clearer, more informative messages help investors better understand the risks and rewards involved.
To understand the impact, Vanguard assessed two risk warnings; the current statutory disclosure and a revised ‘investor friendly’ version.
Among those surveyed, the reframed risk warning – with clearer, warmer and more informative language – resulted in 61% reporting feeling more confidence to invest. It marks a 25% improvement on the existing statutory disclosure.
It also resulted in a 23% reduction in people dropping out during the process of opening an ISA.
Additionally, Vanguard’s research suggested short, digestible ‘educational interventions’ during the process of investing can be particularly impactful in improving investors’ confidence and understanding.
As an example, Vanguard said highly visual interventions were shown to help investors understand unfamiliar concepts such as inflation and the difference between savings and investing.
The research concluded that changes to current risk warnings combined with improvements in financial literacy are crucial to reducing anxiety among new investors. This in turn has the potential to boost investment participation, leading to better long-term financial outcomes and helping people meet their goals sooner.
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