Investor s Dialogue How to make an illiterate Investor literate or learning the skilful way to handle your financials

Transcription

1 Investor s Dialogue How to make an illiterate Investor literate or learning the skilful way to handle your financials Background Material for International Conference "Improving Financial Literacy" hosted by the Russian G8 Presidency in Cooperation with the OECD Session 6: Best practices and next steps to improve financial literacy Moscow, November 29-30, 2006 Dr. Doris Schönemann / Beatrice Zwicky

2 Investor's Dialogue and Zurich University of Applied Sciences Winterthur Investor's Dialogue GmbH Joint Venture in Research and Education Research work carried out in June 2006 Questionnaire completed by 360 persons Questions asked regarding the following topics Questions defining the Finance Personality of private clients "Geldpersönlichkeit" Test of knowledge on financial topics and self-assessment Statistical questions Results Knowledge is poor, even with simple topics Own knowledge is overestimated, "overconfidence"

3 Investor's Dialogue and Zurich University of Applied Sciences Winterthur Investor's Dialogue GmbH Costs and Risks are perceived incorrectly Which of the following assets is the most secure? Which of the following assets yielded the highest returns? Equity 4 % 81 % Banking account 63 % 6 % Real estate 50 % 44 % Bonds 42 % 9 % Don t know 6 % 8 %

4 Investor's Dialogue and Zurich University of Applied Sciences Winterthur Investor's Dialogue GmbH Concept of Risk and Return not grasped correctly Which of the following products contains the highest risk? Highest cost of canceling contract within the first three years? Equity 63 % 6 % Banking Account 0.3 % 1 % Options 50 % 3 % Funds 14 % 11 % Mortgages 2 % 34 % Real Estate 3 % 11 % Credit 37 % 20 % Life Insurance 2 % 41 % Bonds 6 % 7 % Installments 14 % 9 % Structured Products 13 % 4 % Pension products (3a) 1 % 20 % Don t know 6 % 25 %

5 Investor's Dialogue and Zurich University of Applied Sciences Winterthur Investor's Dialogue GmbH Even seemingly simple Questions cannot be answered Why is it more reasonable for a person earning an average salary to invest into funds than invest into equity and bonds directly? Dividends and interest on direct investments are taxed at a higher rate The investment into funds is cheaper than the investment into equity and bonds The invested money can be diversified more broadly 50 % Funds shield against high losses 28 % Don t know 19 % 1 % 2 %

6 Investor's Dialogue and Zurich University of Applied Sciences Winterthur Investor's Dialogue GmbH Discrepancy between Self-Assessment and Knowledge shows "Overconfidence" Self-Assessment Index Knowledge Index

7 Investor s Dialogue 12 Years of Experience in guiding Private Clients to Financial Literacy 1. Many investors are bored by financial topics or cannot find access to topics 2. Some overestimate there knowledge, some don t think themselves to be fit for the theory Our Method to cope with this set of problems: Start with the Finance Personality Making finance interesting from a personal point of view Establishing a common basis for dialogue

8 Content of the Basic Seminar for Private Clients in Financial Literacy Excerpt of the Program 1. Get to know the strength and the weaknesses of your Financial Personality Helps the participant to judge his / her way of handling money. 2. Don t live without financial Goals Show the participant the relevance of budgets and long term planning of financial matters, matching wants and needs. 3. Don t disregard basic rules of the financial market Introduce the concept of risk and return, which many people do not understand. Helps understand why diversification is important and why one should stick to a personal investment strategy (risk profile).

9 Content of the Basic Seminar for Private Clients in Financial Literacy Excerpt of the Program 4. Essentials of Basic Know-how Investment instruments: from account to options. Financial key indicators and important financial expressions. Reading an account / deposit statement. What can you expect from your bank? 5. How to discuss with your bank Pricing How to set up your accounts to best serve your needs. Discussion with your banker, which products to chose.

10 Common Basis for Dialog Finance Personality of Private Client By a simple set of questions, phrased in non-financial language, we gain the interest of the private client. The private client additionally gets insights about: his / her financial potential his / her behavior regarding decision making his / her communication style his / her investment behavior (horizon / risk) Once personal interest is established, the learning process gets a good start and ongoing commitment.

11 The RFP Finance Personality The finance personality is defined by 4 factors. Financial Potential 1 Minimal 2 Limited 3 Average 4 Above average 5 Maximal Each of the factors has 5 dimensions. Decision Behavior 1 Controlling 2 Involved 3 Goal oriented 4 Insecure 5 Disoriented RFP Finance Personality Investment Behavior 1 Maximising Income 2 Spending oriented 3 Neutral 4 Savings oriented 5 Maximizing Wealth Behavior in Dialog 1 Simple 2 Emotional 3 Colloquial 4 Bussinesslike 5 Reserved

12 Financial Potential Human Capital Wealth Potential Social Network Income

13 Investment Behavior Living-today Oriented towards today Spending Living-tomorrow Oriented towards the Future Saving

14 Decision Behavior Control Personal Behavior Goal Experience and Knowledge Insecurity

15 Dialog Behavior Emotional Personal Pattern of Dialogue Professional Pattern of Dialogue Rational

16 Factors How to implement? Financial Potential Investment Behavior Decision Behavior Dialogue Behavior Set goal to mach potential Adapt financial plan to fit to Finance Personality Chose financial products to fit the way decisions are taken Use personal communication style

17 Results The participants of our training feel more at ease with their financial situation Many of them start to reorganize their financial situation once they have learned some basics and how to cope with banks A smaller percentage start a financial planning followed by the seminar Some participants change to delegating more of their financial decisions to specialists, but consciously controlling them A small percentage start trading actively after visiting the seminar

18 Set-up of Seminar 20 participants - Private Clients 2 sessions - each 4 hours, 2 weeks apart Lecture and group workshop Documentation including Finance Personality Test

19 Next Projects Investor's Dialogue GmbH Joint Venture with Zurich University of Applied Sciences Winterthur Lessons for employees Lecture in Behavioral Finance and Financial Literacy Teaching teachers (of public schools for training of children) Deep analysis of topics within Financial Literacy, especially related to lifecycle problems