Strengthening retail investment and long-term savings in the EU

By Martin Parkes, Co-Head EU Policy, Government Affairs and Public Policy, BlackRock

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

European retail investors are increasingly drawn to innovative solutions harnessing digital technologies and communication tools, with better transparency, and easy to set up investment accounts. They are served by a diverse market of suppliers ranging from neo-brokers and neo-banks to traditional branch-based bank networks building out their digital offerings with new ways to meet the financial planning needs of European retail investors. The product tool kit in Europe is already very broad with traditional Undertakings for the Collective Investment in Transferable Securities (UCITS) and the fast-growing Exchange Traded Funds (ETF) sector giving access to publicly traded assets. This allows Europeans to achieve their investment goals by investing in successful global and European companies, innovative future champions, while reflecting their sustainability preferences such as transition investing. Retail investors have now a greater choice of tools to build diversified portfolios and manage risk. Most recently, the European Long-term Investment Fund (ELTIF) 2.0 opens the door to retail access to private assets – these include investment in infrastructure, innovative small and medium companies and private debt which are essential to the growth of the European economy. While an exciting development, we are still at the initial stages of ELTIF rollout with considerable focus needed on the education of both retail investors and their advisors.

Future policy action could draw on the success of national long-term savings products: France’s Plan d’Epargne Retraite (PER) uses easy to understand life-cycling strategies, and has seen the opening of over 10.4 million accounts.¹ Digital providers have witnessed similar success with ETF savings plans in continental Europe: these offer innovative and easy to use retail access to markets with around 7.6 million trades of €175 on average being executed on ETF savings plans every month.² At the European level, the pan-European Personal Pension Product (PEPP) has still to take off. A successful relaunch of the PEPP at scale should take on board the best user features of existing investment solutions. An essential factor in encouraging the take-up of long-term retirement saving strategies is the roll out of life-cycling strategies, as seen in the French PER or US target date funds. These have proved to be successful in reducing the complexity of making ongoing investment choices by institutionalising the suitability process within the ongoing product design. When paired with tax incentives and/or workplace auto-enrolment strategies these can be highly effective solutions for encouraging regular-term investment. Investing successfully for the long-term means allowing investors to invest across a wide range of assets – incentives to restrict diversification across asset classes, e.g. by favouring equities at the expense of broader exposure to fixed income and private assets or across geographies are likely to be counter-productive over time.

Despite many positive trends, too many European investors still consider that investment is too complicated or simply not for people like them. As an example, a recent OpinionWay survey for BlackRock showed that while 71% of the French population recognises the importance of savings to achieve financial security, 82% found investment products too complex.³ Future policy actions should tackle these behavioural and operational barriers to simplify the investor experience rather than increasing the number of product categories and labels. Likely success factors include simplicity of access by reducing the number of clicks needed to open basic investment accounts while also encouraging investors to invest regularly on a diversified basis with enhanced educational support. The roll-out of fractional share dealing has made it far easier for investors to set up monthly savings plans allowing them to allocate a fixed monthly amount to ETFs and shares regardless of the underlying nominal value. As the European Securities and Markets Authority (ESMA) focuses on best practices,we continue to see divergent positions at national level on the acceptability of fractional dealing – a common approach to this operational utility has yet to fully emerge.

European investors use a wide variety of sources for support before investing, ranging from finfluencers, family and friends, employers to regulated firms. In addition to financial literacy programmes, supportive policy actions may include regimes for financial health checks and for guided advice to bridge the gap between execution-only services and full portfolio advice. This goes further than proposals in the Retail Investment Strategy for simplified advice, with a regime allowing providers to roll out financial planning linked to a choice of investment goals at scale. Labels can help catalyse investor interest provided they do not become a source of complexity or reduce investor choice. With such a broad product choice available we need collectively to make it easier for European investors to choose an appropriate combination of products and reduce the administrative and operational complexity of investing.

Disclaimer

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of July 2024 and may change as subsequent conditions vary. There is no guarantee that any forecasts made will come to pass.