EU consumers have access to an increasingly wide range of retail investment products. However, they often face significant challenges when it comes to collecting and comparing the information needed to make a good investment choice. These are some of the main findings of a recent study published by the European Commission. The study, which covered 15 Member States and was carried out by Deloitte Luxembourg, provides an independent overview of how well European retail investment markets work from the perspective of end-investors. Specifically, it sets out the difficulties that consumers in the EU face when trying to buy investment funds, life insurance or private pensions.

Importance of retail investment

Encouraging Europeans to save for the future – and making it possible for them to do so effectively – is a key policy objective in the EU's capital markets union. Today a large part of European savings are held in bank accounts with relatively short maturities. This can mean some savers are at a disadvantage, depending on their financial situation and risk profile. This is particularly an issue in the current context of low interest rates and demographic ageing. Furthermore, getting retail investors to invest in capital markets is critical for the long-term funding of the EU economy. But for this, retail investors need to feel confident that the investment products proposed in capital markets will yield a decent return.

Key findings of the study

Overall, the study identified considerable differences in how much, on average, it costs an investor when buying the same category of retail investment products across EU Member States. The study also contains wide-ranging observations and findings related to the way retail investment markets work. Specifically, it found that:

• An average retail investor seeking personal advice from banks or insurance companies would end up with fairly similar investment recommendations across Member States. He or she would generally be offered a limited number of options – usually in-house investment funds, followed by life insurance policies. By contrast, the situation in the UK and Netherlands differs significantly from other markets, probably due to the introduction of a ban on inducements. Inducements – for instance commissions, fees and any monetary or non-monetary benefits – can be paid by issuers to investment firms distributing securities to clients. But inducements can create the potential for conflicts of interest for investment firms, which can in turn have an impact on the advice given to investors. 
• Retail investors who decide to purchase an investment product on their own have access to a large and diverse number of products. However, they face huge challenges when it comes to collecting and comparing data. Information on nearly all products is available on distributers' websites in the different Member States, but the documentation provided is not always transparent. Also, the information is not at all standardized across countries.
• Investors buying a product on their own have access to a large variety of exchange traded fund (ETF) products to choose from. An ETF is an investment fund that invests in a basket of securities and commodities generally designed to track the performance of an underlying index. Because they mirror an index and consequently do not need to be actively managed, ETFs tend to have lower fees. A tech-savvy retail investor is able to easily access ETFs through online platforms at a low cost. By contrast, less financially sophisticated investors who rely on the advice of their bank will very rarely be advised to invest in ETFs.
• Though rapidly gaining in popularity among the younger generation, overall only a small number of retail investors are willing to pay for automated advice through robo-advice platforms. A major concern is that robo-advice relies on the self-assessment of the customer in terms of current financial situation, experience with investment products and risk appetite. So an investor's overconfidence or unreliable information could lead the robo-advisor to propose an unsuitable product. Robo-advisors usually focus on portfolios composed exclusively of ETFs due to the low associated costs.

Current EU legislation is already going some way to improving the situation. Specifically, MIFID II, PRIIPS and the Insurance Distribution Directive, which are being applied throughout the EU. Once these laws come into effect, they will have a significant impact on the transparency of costs and charges, which the study showed to be one of the main problem areas.

What next?

The study is an important step in a process of monitoring and evaluating how well capital markets are working for retail investors. The issue is being further discussed at a public hearing in Brussels at the end of June 2018. Also feeding into these ongoing discussions will be a report, expected towards the end of 2018, by the European supervisory authorities (ESAs) on the costs and performance of some investment products. And as part of the FinTech action plan, the Commission will examine the current landscape of technology-driven digital interfaces that help people find suitable and cost-effective retail investment products across the EU's capital markets.

Read more on the study and retail finance