AF Advisors: Be aware - Not Investing Comes with Risks!
This column was originally written in Dutch. This is an English translation.
By Teun van Kampen, Consultant, Legal & Regulatory Solutions at AF Advisors
Perhaps this common-sense wisdom applies to a large share of Dutch households that do not invest. In fact, a significant number of them may be exposing themselves to risk precisely by not investing. This presents a major opportunity for the sector—provided it can effectively meet the needs of this target group.
This spring, the Dutch Authority for the Financial Markets (AFM) stated that many households are missing out on potential investment returns. Around one-third of Dutch households (approximately 2.6 million) do not invest, despite holding more liquid assets than the financial buffer recommended by the National Institute for Family Finance Information (Nibud). Within this group, one segment stands out in particular: 800,000 households have sufficient assets to invest but are simultaneously accruing insufficient pension benefits through the first and second pension pillars to maintain their standard of living in retirement.
Among households that do not invest despite having sufficient assets, a total of €50 billion is held above the financial buffer recommended by Nibud. Much of this capital currently sits in savings accounts, steadily losing purchasing power due to inflation. This represents both a financial risk for these households and a missed opportunity for the wider economy.
This raises an important question: how can this target group be reached? Against that backdrop, it is noteworthy that the AFM announced in May that it will further explore under what conditions automatic portfolio rebalancing and automatic risk reduction could be incorporated into execution-only investment services.
With lifecycle investing, the investment risk profile is gradually reduced as the investment horizon—particularly the retirement date—approaches. For the approximately 800,000 households at risk of a pension shortfall, this type of product could help bridge the gap. It combines the low entry threshold and relatively low costs of execution-only investing with the level of support and simplicity this target group requires.
The AFM's 2016 Guidance on Qualitative Innovation in Financial Services primarily highlighted the limitations in this area. The fact that the regulator is now explicitly discussing the possibilities for lifecycle investing and automatic risk reduction within execution-only services suggests a more positive approach. Moreover, the AFM is explicitly taking the broader European regulatory landscape into account. Clarification that aligns with European developments could create greater scope for these solutions within the Dutch market.
At first glance, however, expanding the scope of execution-only services creates a degree of tension. The guiding principle behind innovation in investment products is that it must serve the interests of the potential client. Investor protection must therefore remain paramount. The fact that many people do not invest may indicate limited investment experience, suggesting that investment advice could actually be appropriate.
Research from the AFM's Consumer Monitor shows that many Dutch consumers feel they lack sufficient knowledge to invest. They also perceive investing as risky and often have little interest in it. In addition, a large group believes they do not have enough money to get started. Notably, 9% say they would like to invest but simply do not know where to begin.
If this also applies to the households that currently do not invest and therefore face the risk of a pension shortfall, there is a strong case for developing and making suitable investment products easier to access. Lifecycle investing and automatic risk reduction are more than just product features—they can be viewed as built-in behavioural and risk-management mechanisms. If the possibilities within execution-only services are expanded, improvements in investor protection may actually come from integrating these lifecycle features and automatic risk reduction into investment products.
This creates a win-win-win situation. Households with sufficient assets that are currently at risk of a pension shortfall would gain access to simple and suitable investment solutions. At the same time, billions of euros in idle savings could be put to more productive use. The financial sector would also benefit, as these 800,000 households represent a substantial source of potential new assets under management.
Some room for innovation already exists. The AFM has indicated that it intends to provide clarification within the existing regulatory framework, implying that the current rules already offer opportunities. Those opportunities, however, remain underutilised. The question is: who will seize them?
