10/11/2015

There is one powerful, simple fact about the $140+ million wagered on this month’s Melbourne Cup that the investment industry can probably only dream of emulating. No matter how little – or how much – you decided to bet based on the horse/jockey/colour/lucky number, the one thing that was not in doubt was that you knew you risked losing the lot.

Indeed, the average punter on Australia’s most famous horse race probably expected to lose whatever bet they had placed. That is often seen as the price of being involved in a horse race that is a national – and increasingly international – celebration of the sport of kings.

A win, for most people, would make a good day better, while the loss would hopefully not be crippling.

Indeed the history-making win by Michelle Payne to become the first female jockey to ride the winner in a Melbourne Cup probably helped ease the short-term pain of those who had backed the short-priced favorites only to see them finish behind a local rank outsider.

Melbourne Cup punters understand that gambling is not investing.

However, at times investing can be akin to gambling, particularly if you do not understand the risks involved. The challenge for investors is that understanding the risks in a particular investment can be easier said than done.

This week, the chairman of ASIC, Greg Medcraft, spoke publicly about the challenges our securities regulator faces in ensuring that investors fully understand the risks they take when investing in complex and risky investment products.

Medcraft was speaking in the context of new powers that are proposed to be given to ASIC, following the recommendations by the Financial System Inquiry, which will allow the regulator to directly intervene where it sees products being mis-sold to investors.

The objective is to put more responsibility on product issuers for both the product’s design and how it is being sold. While the detail of those new powers is yet to be released the other side of the coin is communicating with investors in ways they can understand clearly what risk they are taking on.

Product disclosure statements take a lot longer to read and digest than the Melbourne Cup form guide. They are by their nature serious legal documents crafted carefully to ensure that product issuers are disclosing everything in accordance with the law. So it is hardly surprising they do not make for riveting bedtime reading. Nor is it surprising that many – if not most – investors simply do not read the PDS before investing.

Notwithstanding the new product intervention powers ASIC is expected to receive, Greg Medcraft has also challenged the industry to explore other ways to help investors improve their knowledge of the products they are considering investing in by using modern technology.

These days the rise of social media platforms like YouTube, Facebook, Twitter and LinkedIn has dramatically changed the way people not just access information but how they process and use it.

Vanguard participated in a pilot program in conjunction with ASIC to develop an electronic Key Facts Statement that potentially could replace a printed PDS.

It was developed for tablet application and incorporated video, audio and animated graphics. Also included was an investor self-assessment quiz to gauge different levels of understanding.
The goal was to understand if short-form disclosure could be engaging and effective. The results overall were positive with the clear message out of the consumer testing for the need to present information in the simplest format possible.

Information on costs and being able to access that information easily was of high importance to investors who took part in user testing. Content on risk and return also ranked highly on the importance scale but consumer understanding varied widely.

We’ve only just begun to explore how technology can help consumers understand the real costs and risks of investing, but it is clear that having simpler, more interactive and engaging product disclosure in place will help people avoid taking bets on their financial future.