Quilter: It’s time to shake up risk warnings

Risk-warning disclosures on investment products are essential.

But the standard warnings — that investments ‘can go down as well as up’ and that investors ‘may not get back as much as they put in’ — are becoming outdated.

This chimes with the sentiment expressed by the chancellor in her November Mansion House speech, where she emphasised the need for the UK to regulate not just for risk but also for growth.

We recently asked a customer panel what they thought of the current risk warnings. Two in five (40%) said reading a risk warning had previously deterred them from investing. This is significant, considering these individuals, as advised clients, are generally more open to investing.

Although such warnings are intended to caution against high-risk investments, they can present a barrier for those looking to get into investing for the first time or those with a lower risk appetite. In short, they are a blunt instrument.

Investors should be armed with enough information to help them make a fully formed decision

To mitigate this, a more modern approach could be beneficial.

When we tested a more informative investment risk warning (below), which detailed both the risks and opportunities, 34% said they would be more likely to invest.

“Important information: Investments are intended for longer-term (five years or more) savings to help ensure any market volatility can be ridden out. Though investment involves an element of risk and the value may go down as well as up, in the longer term, investing could provide higher returns than holding your money in cash.”

Less black and white

Naturally, this type of disclosure may not work for every product and it must remain clear to investors that there is always risk involved when investing.

However, investors should be armed with enough information to help them make a fully formed decision rather than be spooked by the black-and-white risk warnings placed on products today.

Ultimately, risk disclosures are one part of a larger issue

Not only does the approach to risk warnings on investment products require modernisation, but the lack of risk warnings on cash-savings products also presents a problem.

Cash is often viewed as a safe haven but, as has been shown in recent years, inflation can significantly erode its value in real terms. Despite this, many people still hold excessive amounts of cash instead of choosing to invest.

We asked our panel if the following risk warning on cash savings would make them think twice, or be dissuaded altogether, when topping up their cash holdings. One quarter said it would.

“Important information: Past interest rates and inflation are not a guide to future levels and may not be maintained or repeated. Holding too much money in cash involves risk. The real-terms value of your cash holdings may go down as well as up, and your savings may not maintain the same level of purchasing power as you originally held.”

Having a solid understanding of where your money is held, and why, is important at all stages of life, but particularly so for younger people who are new to investing and could benefit by investing for the long term.

Schroders’ Lifetime Savings Initiative report found that only 46% of 16- to 18-year-olds understood the impact of inflation on their savings. As these people enter the world of savings and investments, it is vital they are better informed about the pros and cons.

The industry, along with the government and regulators, must work together to better understand the behaviour of savers

Introducing risk warnings on cash products and making investment risk warnings more informative could help shift behaviour and encourage more people to invest.

Reassessing how investment products are presented to consumers is another vital step if we are to make investing more commonplace in the UK, as the government intends. By updating the use of risk warnings, we could help people reconsider how to make the most of their money over the long term.

Small changes to make investment products easier to understand could also encourage more people to invest. For example, rebranding the current stocks-and-shares Isa to an investment Isa, as suggested by the Investment Association, may be more attractive for people who regard ‘stocks and shares’ as risky but ‘investment’ as long term and positive.

Many people still hold excessive amounts of cash instead of choosing to invest

Ultimately, risk disclosures are one part of a larger issue.

The industry, along with the government and regulators, must work together to better understand the behaviour of savers.

This will improve the levels of support given to consumers when they make financial decisions, thereby helping to close the advice gap.

Jenny Davidson is commercial proposition director at Quilter

This article featured in the December 2024/January 2025 edition of Money Marketing. 

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