Is ‘reckless conservatism’ jeopardising long-term personal finance goals?

A new Green Paper, released today by The Open University Business School’s True Potential Centre for the Public Understanding of Finance (PUFin), proposes that a UK consumer reluctance to take investment risk may actually be jeopardising our longer-term financial goals, whether its stepping on to the property ladder, or providing an income at retirement.

Consumer research consistently shows that the UK consumer is generally risk averse when it comes to saving and investing money. Less discussed, however, is an increasing amount of evidence that suggests the average person has a limited grasp of the financial risks actually involved in saving and investing, from interest rates and the impact of inflation on day-to-day savings, to the liquidity risks involved in investing in property. This lack of understanding, alongside the mechanisms currently used by financial advisers to assess an individual’s risk profile, could be fuelling ‘reckless conservatism’.

At a time when self-service saving and investing is gaining ground, and consumers have more freedom and choice than ever before, the Green Paper, entitled ‘Towards a Common Understanding of Risk’, proposes new research that will explore both consumers’ understanding of risk, and the industry’s approach to risk assessment.

Sharon Collard, Professor of Personal Finance Capability at The Open University Business School and Chair of the PUFin research centre said:

“With our ever-changing economic situation, there will always be room for improvement when it comes to the UK consumer’s understanding of their own personal finances and the ins and outs of savings and investments. However, we at PUFin believe there is a very immediate need for fresh thinking about how to encourage the average person to consider the financial risks they face and to use this knowledge when making financial decisions. Our upcoming research is designed to tackle this subject and our findings will aim to take this fresh thinking in to policy and practice.”

Alongside issues and concerns about the way risk is understood, measured, communicated and acted upon today, the Green Paper sets out a clear research agenda, which will focus on four specific questions:

1. What do UK consumers understand by the term ‘risk’ in relation to saving and investing and what informs this understanding?

2. To what extent do existing risk profile tools reflect people’s own understanding of risk?

3. Is there scope to improve risk profiling to provide a better indicator of people’s attitude to risk?

4. Is it possible to develop a tool that consumers could use themselves, and what would this look like?

The research will be based upon in-depth interviews with policymakers, consumer organisations and the general public and will take place in Autumn 2014.

The launch of the Green Paper took place at Westminster on the evening of Tuesday 9th September, in a ‘Managing My Money’ PUFin event, hosted by Paul Blomfield MP. To download a full copy of the Green Paper ‘Towards a Common Understanding of Risk’, please visit the PUFin website.

David Harrison, Managing Partner at True Potential LLP, said:

“How consumers understand, interpret and act upon risks when making financial decisions is an incredibly important part of the risk assessment process that firms like ours go through everyday. As the industry continues to adapt and change, this timely research will serve both the financial services industry and consumers well, ensuring individuals are able to make the best possible financial choices for their future.”

The Green Paper follows the PUFin launch of the free ‘Managing My Money’ consumer personal finance course in May this year. The course was developed for those with an interest in developing their personal financial capability, but who do not have previous experience studying the subject. Following the overwhelming success of the initial course, it will be made available through The Open University’s free education platform, OpenLearn, in October 2014.

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