The EU’s renewed push to achieve a Savings and Investments Union (SIU) is one of those policy ideas that appears irresistible. Trillions of euro sit idly in bank deposits earning very modest returns, while businesses across Europe struggle to access growth capital, holding back the economy. If even a fraction of that money could be channelled into investment products, the benefits could be substantial.
For Ireland, with an estimated €170bn in deposits and a significant funds and asset management sector, the opportunity is a particularly obvious win-win for everyone.
The financial services industry has embraced the SIU initiative enthusiastically, which is hardly surprising. More money flowing into funds, pensions and investment products would create opportunities for managers, advisers and financial institutions.
Why are so many people still reluctant to invest at all?
Before anyone celebrates the prospect of unlocking Europe’s savings, they should confront a more difficult question: why are so many people still reluctant to invest at all?
The obstacles
For years, consumers have been told that investing is the sensible long-term choice. They have heard the arguments about inflation eroding the value of cash, about the power of compounding interest and about the importance of building wealth for retirement.
There are plenty of firms offering products that allow you to invest in all kinds of assets, whether its shares, index funds, exchange-traded funds, property and even more exotic options. And still, the majority of us seem content to let our money sit in current accounts earning nothing.
Many struggle to understand basic investment concepts
Three factors appear to be at play. The first is education. Financial literacy remains weak across Europe, and Ireland is even further behind. Many struggle to understand basic investment concepts, let alone navigate the jargon, fees and increasingly complex options available to them when it comes to investing.
How do you learn about any of this? You might be lucky enough to come from a wealthy background where interaction with financial advisers is the norm. That’s not the reality for most. We need to teach financial literacy from an early age and demystify it so that people feel comfortable asking for advice.
Long memories
The second challenge, I believe, is fear. We need to acknowledge that even as we approach 20 years after the financial crisis, memories linger. Consumers watched banks collapse, economies unravel and ordinary households bear the consequences. Scandals involving misselling and poor advice sent out a message that the financial services industry prioritised its own interests ahead of those of customers.
Too much investment literature remains impenetrable
The third factor is that a generation of younger people can only dream of having extra income to invest. Gen Z may have better education attainment and, in many cases, highly paid jobs, but they have also faced economic pressures that previous generations did not: of slower career progression, higher rents and the struggle to save for ever more expensive homes.
That suggests the financial sector’s biggest challenge may not be solely designing a product for a mass audience.
Start educating early
Financial education must also begin earlier. Most people leave school with little understanding of savings, investing, pensions or returns. By adulthood, many have already developed financial habits that are difficult to change. The industry could start by simplifying communication. Too much investment literature remains impenetrable. Important information is buried beneath technical language and regulatory disclosures that are probably doing more harm than good.
They also need the confidence that they are receiving advice they can trust. They need confidence that fees are transparent and fair, and that the risks and rewards are being explained honestly rather than selectively. Most importantly, they need confidence that financial institutions are acting as partners rather than sales organisations.
Europe’s savers hold the key
Products need to be flexible, too. Is a one-size-fits all account suitable? Maybe if you’re at the age where preservation of capital is the goal. Perhaps for a younger generation just starting, any savings that offer a return is the aim. Maybe there are those who have a higher risk appetite, but are put off by firms looking to generate fees by preserving access for the ultra-wealthy and institutional investors.
The SIU has the potential to reshape the financial landscape. It is a huge opportunity for funds and the investment sector, especially in Ireland.
The industry likes to talk about unlocking these savings. The reality is that Europe’s savers hold the key. Until they are convinced that investing is straightforward, transparent and in their interests, the money will stay exactly where it is.
