It is widely acknowledged that financial education is an important factor in life, helping us plan for the things that matter: buying a house, having children, getting married and of course retirement.
There was once a day when friendly people would come into your workplace, sit down with you and explain the importance of savings and asset allocations and how we should consider risk in our general portfolio of investments based on our profile.
From my own experience, I was surprised that in my first job - on a graduate income - someone was willing to talk to me about saving when I barely had any money to support myself. Nevertheless, it helped me understand that stopping work is something I will want to do one day and that I needed to be aware of what a pension is.
Well before RDR (Retail Distribution Review) this type of support was more readily available in the workplace for nearly everyone, as it was financially viable to deliver based on the amount of money being paid by pension provider commissions for the services advisers offered to their members.
This structure is no longer in place, and people, or their employers will have to pay for this fundamental life advice or by some luck have a 6-figure sum to invest with an adviser to warrant it being profitable for the adviser to deliver.
Consensus is that we don’t want to pay for financial advice when we don’t perceive ourselves to be in a position to save. At this point, many of us do not recognise the importance of saving or indeed where and how to save our money.
So instead, we may turn to information available to us online or from our friends and family. But is this a good thing?
In early January I listened to a talk on cryptocurrency in a popular co-working building in London. I am not by any means against cryptocurrency as a product or even as something to speculate on, should you be able to afford to.
At this talk there were some guest speakers, one of whom was a crypto entrepreneur and delivered a very engaging talk to one of the largest audiences I have ever seen at events such as these, with at least 500 people.
The talk was engaging, which is not surprising given the press coverage over the recent months. Human nature is to want more; these 20 somethings have missed the London housing bubble and are still recovering from an economic downturn, it is easy to understand why they would see investing in cryptocurrencies as short cut to getting on the housing ladder!
The issue I felt was in the messages being conveyed in the talk. The entrepreneur’s interest was clearly in driving the price up of his crypto holding, and in so doing being able to compare investing in cryptocurrencies to holding money in a bank. The arguments against holding money in the bank is that you are in negative equity once you’ve factored in the level of interest you receive on your money verses the cost of inflation. A very valid point, however he missed one key factor in his rationale, the risk the investor is taking and their propensity to lose money in the short term, holding money in a bank account is far less risky than speculating on cryptocurrencies.
As there is a lot of volatility in Bitcoin, I should mention also that the price at this point was roughly $15,000. The price today has been below $10,000. 30.01.18 – And any of these impressionable potential investors who were seduced by his presentation may well have invested off the back of this engaging presentation would be looking at a reasonable loss.
Shortly after, the entrepreneur went on to talk about pensions, highlighting that a pension fund of £1million pounds, the now lifetime allowance, will pay out somewhere between £40,000 - £45,000 per annum gross at retirement. This entrepreneur consequently concluded that a pension is a bad investment option compared to what you could have achieved in crypto if you had invested a year ago.
Investing in cryptocurrencies may turn out to be a lucrative investment, however at the time of writing this article, there are little fundamentals to currently validate this and I’m sure any financial adviser would rate these investments as an extremely high-risk option, of which only a small proportion of your overall assets should be allocated to.
So, what’s the issue with the audience members deciding that crypto investment is a good thing for them? If they invest a small amount of money that they can afford to lose then why not, it could help pay for a holiday if it goes well. But if they decide to take the information they were given literally, and subsequently do not increase their pension contributions or even opt out of a workplace pension scheme so that they have more cash to invest on the back of this crypto entrepreneur’s opinions, what are the consequences?
If it doesn’t work out as they had hoped, then they are potentially set back several years from achieving their retirement goals or even worse if they have shorter term savings objectives such as buying that first house or paying off a loan they need to focus on.
But how can this audience know any better if they have limited information in terms of investment advice and financial education, it is unlikely their start up employer is providing workplace financial advice or even a more cost-effective form of digital advice to guide people through the investment world.
Outside of the workplace, there does certainly seem to be more information made available on investing in cryptocurrencies than the merits of increasing pension contributions by a small % to help achieve your retirement goals, let alone how diversification of an investment portfolio can help optimise the level of return you could reasonably expect to get in exchange for the risk you take.
My first thoughts are that people who promote investing in cryptocurrencies should be regulated so that the information provided must be clear, fair and not misleading. We have recently seen this with CFD (Contracts For Difference) products, which are similarly leveraged.
Second, we must appreciate that there really is a large and ever-growing advice gap that needs to be addressed. As employers and industry professionals ourselves, should offer a trusted platform to deliver education on how to manage finances as well as provide appropriately regulated and unbiased solutions to employees to help them plan for and achieve the things in life that are important to them.
Advances in technology permit us to address the financial advice gap with more affordable and easily accessible solutions in the workplace. We shouldn’t tell people where to invest their money, but we can at least provide sound and valuable educational information so that those who are entering their careers can make informed decisions for the future.
At Smarterly we are dedicated to keeping things simple – we empower employees with simple information and tools to help them choose investments sensibly.