REPORT 2015

Trends in household wealth and saving
After the slowdown due to the financial crisis, household net wealth in the Eurozone has been experiencing a slight increase with an average growth of approximately 3% over the past two years (+3.4% in Italy; Figure 1.1). The relative weight of real and financial assets is now gradually retracing back to its early 2000's level, after the widening gap also driven by the rise in house prices.
The growth marked by household wealth in the Euro area is mainly due to a valuation effect, with the average saving rate steadily around its pre-crisis level (Figure 1.2). In Italy, in spite of a reversal of the falling trend due to the economic downturn at the beginning of 2013, the household saving rate remains far below its pre-crisis levels.
Mirroring market trends, over the past two years the ratio of financial assets to disposable income has shown an upward trend both in the Eurozone and in Italy (Figure 1.3). In the same period, the ratio of financial liabilities to disposable income remained stable, after the soaring trend recorded over the last decade, with the Italian figure persistently below the Euro area average.
Following the financial crisis, household holdings of currency and deposits as well as of insurance policies and pension funds rose both in Italy and across the Eurozone, mainly at the expense of mutual funds shares, non-equity securities and listed shares (Figure 1.4). At the end of 2014, the proportion of financial assets held in mutual funds shares was back to its 2007 level, whilst holdings of listed stocks remained lower, also reflecting the negative performance experienced by stock markets over recent years.
Since 2008 mortgage loans and consumer credit have recorded declining and, in some cases, negative growth rates both in Italy and the Euro area, driven by the weakened activity in the property market and the subdued domestic demand (Figure 1.5).

Financial resilience and saving behaviour
In order to gain insights on Italian households' saving behavior, evidence was collected on their perceived financial capability, financial resilience as well as ability to save. Perceived financial capability was investigated by ascertaining to what extent respondents felt to be better than average in monitoring budget, saving and investing. More than 80% of interviewees think themselves as above average at avoiding useless expenses, budget monitoring and saving (Figure 2.1), whilst the proportion of ‘self-confident' subjects decreases to 70% with respect to the understanding of basic financial products and to 65% and 63% when considering saving for retirement and investment decisions, respectively. Financial capabilities are rated similarly across genders, although women are more likely than men to regard themselves as being worse than average at making investment decisions (47% and 34%, respectively; Figure 2.2). Moreover, the proportion of individuals rating their financial capabilities as better than average seems to be positively correlated with financial wealth (with the exception of the wealthiest households; Figure 2.3). Resilience was defined with respect to respondents' appraisal about income changes over the last 12 months, their ability to cope with a major loss of income and their outstanding debt. At the end of 2014, 47% of respondents report a deterioration in his/her income, either temporary (15%) or permanent (32%); 39% feel that their income remained stable, while 10% register an increase (Figure 2.4). The perception of a drop in income is more widespread among women, self-employed and residents in central and southern regions (Figure 2.5). As for financial resilience, half of the interviewees declare to be not ‘robust' to a one-third drop in their disposable income; this concerns more women, low-educated people, residents in the South of Italy, employees and retired (Figure 2.6). Almost 41% of respondents carry debt, either mortgages (25%) and/or consumer credit for durable goods' purchase (21%; Figure 2.7). As for saving behaviour, only 30% of the people are able to ‘save something' or ‘sufficiently', whilst 45% declare that their income just balance their expenses, 15% are using their savings and 11% are falling into debt. As expected, the proportion of people unable to save is higher among low-educated respondents, residents in the Centre and the South of Italy as well as self-employed, housewives, students and unemployed (Figure 2.8).

Financial knowledge and personal traits
Financial knowledge and numeracy are key to effective money management and, in particular, saving and investing. A set of basic concepts underpins financial decision-making, including inflation, portfolio diversification and risk-return trade-off, while the calculation of simple interest and expected pay-off for an investment gauges numeracy. The ascertainment of these concepts in our sample returns poor understanding levels. Almost half of respondents are not able to describe inflation, whilst 55% and 57% incorrectly define risk diversification and risk-return relationship, respectively (Figure 3.1). As for numeracy, about 72% of the subjects are not able to compare investment options across expected returns, while roughly 67% show insufficient understanding of simple interest rates. Basic financial knowledge seems to be higher on average among men, residents in the North of Italy and positively correlated with high levels of schooling. In details, the breakdown of respondents' performance (as measured by the number of items defined correctly) by some socio demographic characteristics shows that the proportion of ‘top literate individuals' (i.e. those answering at least four questions rightly) is far higher among men than women (24% and 11%, respectively) and among highly-educated than low-educated respondents (36% and 18%, respectively); moreover, North scores better than the South (24% and 16%, respectively; Figure 3.2). Gender differences in financial knowledge are also confirmed by an item-by-item comparison: in particular, the percentage of men answering the five financial basics' questions correctly is on average higher than that of women by 8 percentage points (Figure 3.3). As for the level of schooling, the gap across the proportions of financially informed interviewees across levels of education is on average 16 points (Figure 3.4), whilst the percentage of residents in the southern and insular regions failing the answers to the financial literacy questions is on average 11 points higher than among residents in the North of Italy (Figure 3.5). Financial knowledge was also related to self-assessed financial capabilities, with specific reference to the understanding of basic financial products and the ability of making good investment decisions. Among the respondents reporting an understanding of basic financial products equal or higher than the average person, 30% is not able to correctly define inflation and 44% cannot solve a simple-interest problem (Figure 3.6), whereas the mismatch between respondents' self-assessment on investment capabilities and their actual understanding of portfolio diversification and risk-return relationship involves 32% of the subjects. Turning to knowledge of specific investment options, 18% of the sample is not familiar with any instruments, 67% know Italian government bonds, while a share of individuals ranging from 48% to 40% mentions bank bonds, listed stocks, deposits and mutual funds (Figure 3.7). When coming to risk ranking, listed Italian stocks are rated as the riskiest instrument by 19% of respondents, followed by stock funds (11%). Derivatives products are known by the lowest percentage of interviewees (11%), and only 5% regard them as risky instruments.
Alongside with financial knowledge, personal traits and risk preferences may heavily impact on the way people make their financial decisions. Behavioral economics sheds light on a series of common patterns of behaviour marking a deviation from the rationality hypothesis and showing that consumers may not be able to make good financial choices even when they have access to information and/or are financially educated. In our sample, behavioral traits were explored with respect to risk perception, optimism (i.e. the tendency to ‘believe about the future') and some attitudes susceptible to influence risk judgment across contexts and domains. As for feeling about financial risk, at the end of 2014, 51% of subjects regard it as an uncertain event to be avoided rather than an opportunity (41% at the end of 2013; Figure 3.8). When detailing risk dimensions, half of the respondents mention the possibility of capital losses, while concerns about exposure to market trends, lower than expected returns or return volatility are pointed out by a proportion ranging from 25% to 29%. The perception of risk dimensions, however, varies with financial education. ‘High knowledge individuals' (i.e. those answering five out five financial literacy questions rightly) are more uneasy about the cost of compensation schemes, difficulties in monitoring investments and capital losses; ‘low knowledge individuals' (i.e. those failing answers to all questions) are more concerned about getting returns lower than expected, capital losses and variability of returns (Figure 3.9).
Optimism is captured with respect to the expectations of a positive/negative return delivered by a hypothetical one-year investment in the Ftse Mib stocks and is not predominant: indeed at the end of 2014, 65% of respondents anticipated a loss (69% at the end of the previous year; Figure 3.10). Also the elicitation of economic satisfaction returns a high percentage of individuals with a negative attitude (70% in 2014 versus 66% at the end of 2013). To ascertain context-specificity of risk preferences, interviewees were asked to state their attitudes towards, respectively, alternative remuneration arrangements (job context) and alternative risk-return profiles of a financial investment (financial context; Figure 3.11). Inconsistencies between stated risk attitudes across the two contexts (i.e. people preferring only or mainly fixed remuneration but choosing a high risky investment and vice versa) involve a percentage of respondents ranging from 15% to 19% (Figure 3.12). Risk preferences may also change across domains, i.e. a risk-seeking attitude in the loss domain may turn into risk-aversion in the gain domain (so called certainty effect): this inclination is indeed exhibited by 31% of interviewees (Figure 3.13). The tendency to sell too quickly financial assets that have gained value (winners) and hold too long financial assets that have lost value (losers; so called disposition effect) is observed among 37% of respondents (Figure 3.14). Attitude towards biases (as measured by the exposure to the ‘inconsistencies' such as preference instability across contexts, certainty effect and disposition effect), is likewise relevant across genders (about 70% of either men and women exhibit at least one bias), whilst it is lower among people with poorer financial knowledge (34% of them do not show any bias) than high-literate individuals (17%; Figure 3.15). Exposure to biases might also be correlated with sensitivity towards some risk dimensions, such as capital losses and market trends (Figure 3.16).

Investment choices and investment habits
The proportion of Italian households participating in financial markets reached 48% at the end of 2014, seven percentage points higher than the previous year (Figure 4.1). Despite this increase, the figure remains still lower than its 2007 level, when it equalled 55%. As for portfolio composition, apart from bank deposits and postal saving accounts weighing by 48%, the highest share of household financial wealth is ascribable to asset management products, almost back to their pre-crisis level (around 16%; Figure 4.2). Corporate bonds and government bonds account both for about 14% (slightly below its 2007 level the former, basically stable the latter), while the quota of shares is equal to 5%, half of its pre-crisis level. The breakdown of financial market participation by some socio-demographic characteristics shows that investment in risky assets is more frequent among wealthier families, living in northern Italy (Figure 4.3). Participation is also higher when the head of the household is male, middle-aged, highly-educated and self-employed. Willingness to invest is prompted by trust in financial institutions and advisors (56% of respondents), availability of capital protected and/or minimum yield guaranteed products (52%), investment costs (41%) and financial markets trends (24%; Figure 4.4). The concern about capital protection and minimum yield guarantees is driven by the respondents' strong loss aversion: 55% of them are not willing to take financial risk implying a chance of loss and 17% would disinvest even after a very little loss. This evidence confirms a well-documented behavioral attitude, which may cause investors to miss out on opportunities and take emotional actions – such as liquidating their assets – possibly inconsistent with their long-term investment goals. The main drivers of financial investments exhibit a certain variation across some socio-demographic characteristics. In more details, trust in financial intermediaries is more frequently mentioned by high wealth families, financial decision makers living in the Centre of Italy and retired (Figure 4.5), whilst the availability of capital protected and/or minimum yield guaranteed products seems to be slightly less relevant among residents in the Centre of Italy and retired (Figure 4.6). Attention to investment costs is more pronounced among less wealthy households and residents in northern regions (Figure 4.7), while market trends are more important to men, highly-educated interviewees and wealthier respondents (Figure 4.8). Consistently with the evidence on loss aversion, capital protection is also very relevant to the choice among different investment options, alongside with holding period and diversification needs (mentioned as key features by 15% of the subsample of investors; Figure 4.9). Investment costs and the opinion of an expert follow (14% and 12% of investors, respectively), whilst liquidity, credit and market risks are deemed important to a much lower extent (by 10%, 6% and 5% of investors, respectively). Only 8% pay attention to the investment goal. As for investment habits, approximately 44% of respondents make a decision after consulting relatives or friends, about 22% follow a financial expert (either by seeking her advice before investing or by delegating her), whilst 15% make decisions on their own (Figure 4.10). The expert is regarded as the main source of financial information by 50% of investors, whereas more than 20% do not seek information. Investors relying on an expert are especially women, middle-aged individuals, highly-educated subjects, self-employed and wealthier households (Figure 4.11). Respondents showing a good level of financial knowledge are more frequent among those making decisions on their own, while the proportion of financially educated interviewees is higher among those relying on a financial expert with respect to those seeking advice from relatives and friends (Figure 4.12). The majority of investors seeking financial advice under-estimate their knowledge of basic financial concepts more frequently than individuals making financial decisions on their own (who tend to correctly assess their ability and knowledge; Figure 4.13). Investors exposed to at least one behavioural bias are more frequent among those making decision on their own, while the proportion of loss-averse is higher among those seeking advice from their relatives and friends (Figure 4.14).

The demand for MiFID financial advice
At the end of 2014, the percentage of Italian families receiving tailored recommendations (so called MiFID advice) remains below 10%, although recording a slight increase on a yearly basis (Figure 5.1). Households using financial advice at the intermediaries' initiative are preponderant (more than 50%), whereas those prompting an investment proposal are negligible. The proportion of households unable to identify the terms by which they receive advice remains significant (around 30%), although shrinking with respect to previous years. The proportion of Italian households receiving MiFID advice is positively correlated with the education level of the decision maker (18% when he/she holds at least a bachelor degree versus 8% otherwise) and financial wealth (4% among low wealth households and almost 60% among the wealthiest; Figure 5.2). Retail investors relying on MiFID advice hold better diversified portfolios than other households (74% of them own at least a risky asset among stocks, bonds, asset management versus a proportion ranging from 7% to 53% among the other households). Willingness to pay for financial advice is very low across all investors, concerning only 27% among those receiving MiFID advice and 15% among those receiving either generic or passive advice (Figure 5.3). Satisfaction among advice users is overall low: only 20% among those receiving MiFID advice declare to be very satisfied. The opinion on the service received is mainly driven by the advisor's paying attention to the client (48% and 34% among MiFID advice users and other users, respectively; Figure 5.4). Help in avoiding wrong choices and absence of conflict of interests follow (19% and 20% among MiFID advised investors and 12% and 14% among the others). Investors' awareness of the importance of providing the intermediary with the information necessary for the suitability assessment of the recommended products seems to be low. About 14% of respondents declared that they do not feel bound to give the advisor any information about their situation, whilst the percentage of individuals acknowledging the importance of the informational flow on the items also suggested by the MiFID rules (basically knowledge and experience, financial situation, investment objectives etc.) ranges from 8% to 30% depending on the item (Figure 5.5). The advisor, however, is regarded as the predominant information channel to be used before investing for respondents receiving tailored financial recommendations, whilst almost 50% of the interviewees passively advised either do not look for information or rely on family and friends. The proportion of respondents using internet as an information channel is negligible among all investors.

The Report was prepared by:
Nadia Linciano (coordinator) - CONSOB, Head of the Economic Studies, Research Department (n.linciano@consob.it)
Monica Gentile - CONSOB, Economic Studies, Research Department (m.gentile@consob.it)
Paola Soccorso - CONSOB, Economic Studies, Research Department (p.soccorso@consob.it)

The opinions expressed in the Report are the authors' personal views and are in no way binding on Consob.

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