Trends in household wealth and saving
In the last years, household net wealth has kept rising in the Eurozone (+3.2% in 2015), while remaining substantially stable in Italy (approximately +0.4% in 2015), where the increase in financial assets (+5.2%) was offset by the reduction in real assets' value (-3%; Figure 1.1). In the euro area, the improvement in household economic conditions (on rising employment rate and disposable income) recorded since 2013 (Figure 1.2) has gone with a steady progress of economic sentiment and a reversal in the slump of the saving rate, now almost back to its pre-crisis level (13%). The Italian saving rate (about 10% at the end of last year) remains far below its historical level, and keeps marking a widening gap with the Eurozone average (Figure 1.3). As a legacy of the crisis, muted risk perception and low interest environment keep triggering households' preference towards liquid products (i.e. cash and deposits, steadily above their 2007 level), insurance products and pension funds, at the expense of direct holdings in shares and debt instruments. Similar trends are recorded in Italy, where mutual funds have experienced a marked recovery too (Figure 1.4). In terms of financial liabilities, in the Eurozone household position has remained robust, with the liability-to-asset ratio and the debt-to-GDP ratio slightly declining since 2011 and reaching, at the end of 2015, 32% and 61% respectively. In Italy, indebtedness ratios are stable and persistently below those in other euro area countries (23% and 43% respectively), although the gap has been narrowing in the last years (Figure 1.5). Bank loans to households, after the slump experienced in the aftermath of the financial crisis, are now witnessing a recovery supported by progress on both the supply side (Figure 1.6) and the demand side (Figure 1.7) and reinforced by the on-going decline in bank lending interest rates (Figure 1.8).
Financial knowledge and personal traits
The 2016 Survey confirms alarmingly low levels of financial knowledge among Italian households. Questions on basic notions sitting at the heart of financial choices, such as inflation and risk-return relationship, record slightly more than 40% of correct answers. As for advanced questions, addressing knowledge of the characteristics of the most common products, the percentage of correct responses ranges from 41% to 11%. ‘Don't know' answers prevail across almost all the items inspected, weighing from 34% of total responses as for the question on risk-return trade-off up to 66% as for risk ranking of deposits, stocks and stock funds (Figure 2.1). The proportion of correct and ‘don't know' answers are homogenous across genders (Figure 2.2).
Another dimension of literacy is captured by individuals' acquaintance with financial instruments: more than 20% of respondents are not familiar with any product (8% for the subsample of investors), while the remaining 80% report to know mainly government and bank bonds followed by listed stocks and stock funds (Figure 2.3). Low financial literacy severely affects the understanding of market trends and new phenomena, such as negative yield bonds. Indeed, the vast majority of the interviewees are either unable to give an opinion (40%) or judge these instruments too risky (38%). Only 23% of respondents show a correct understanding, by motivating their approach towards negative yield securities on the basis of their risk attitude (Figure 2.4).
Beyond low financial knowledge, investment choices may be hindered by individuals' self-assessment of their own financial capabilities and overconfidence. The 2016 Survey shows that Italian decision makers perceive their abilities in saving, monitoring household budget and avoiding useless expenses as at least on average in around 85% of the cases, while these proportions reach 69% and 61% of the cases when it comes, respectively, to understanding basic products and making good investment decisions (Figure 2.5). High self-assessment is significantly higher among investors than those who do not participate in financial markets and shows some degree of variation across tasks and socio-demographics segments (Figure 2.6 and Figure 2.7).
Poor outcomes of financial choices may result from under-diversification, which in turn may be driven by low knowledge as well as cognitive biases. Indeed, portfolio diversification is correctly understood only by 6% of respondents, while the remaining reveal either misunderstanding of risk/return relationship or attitudes potentially ascribable to a number of biases (Figure 2.8). In general, propensity towards under-diversification is more frequently detected among less educated and less wealthy individuals; also gender differences do sometimes play a role. Although misunderstandings of diversification are more frequently detected among low-literate respondents, financial knowledge is not always associated to the correct behaviour (Figure 2.9 e Figure 2.10). Financial decision making may also be driven by mental accounting: investment decisions, for instance, may mirror the separation between a safe investment portfolio and a speculative portfolio in order to protect safe investments from the potential negative returns of the speculative investments. People's tendency to split their money into separate accounts according to a number of subjective criteria (like the source of the money and the purpose of each account) is shown by 23% of the interviewees, while only 6% are inclined towards a portfolio management approach (Figure 2.11 and Figure 2.12).
Perception of financial risk may vary across individuals depending on the dimensions they consider more important. About half of the Italian financial decision makers (both investors and non-investors) identify risk with capital losses, followed by variability of returns (about 25%), lower than expected returns and exposure to market trends (both around 20%; Figure 2.13). Consideration of risk dimensions shows some degree of variation depending on financial education. Low-literate respondents exhibit a higher sensitivity to the risk of misunderstanding of financial information and insufficient legal protection, whilst high-literate individuals are most frequently concerned about market trends and liquidity risk (Figure 2.14).
Saving and investment decision making
Financial control, meant as the ability to track expenses and to save, is a prerequisite underpinning people's participation in financial markets. Moreover, the quality of investment decisions depends on the ability to go through all the building blocks of a conscious and informed choice before investing, i.e. to detail goals, holding period, expected return and risk capacity. Appendix to this Report investigates some aspects of individuals' handling of financial matters and investment decision making.
Investment choices and investment habits
In the aftermath of the sub-prime crisis, Italian household participation in financial markets decreased, proportionally more for women, middle-aged, residents in the South of Italy and middle-class wealth (Figure 3.1 and Figure 3.2). In recent years, however, it has recovered heading towards 50% of households at the end of 2015, almost back to its 2007 level (55%). While declining in Italian government bonds, investment funds and Italian listed stocks, household participation experienced a two percentage point increase for Italian bank bonds that, at the end of last year, are the product most frequently held by Italian investors. Over the same period, individual asset ownership rates have shown similar relevant changes. Reported data on financial wealth composition witness the increasing preference for liquid products, with the share of bank deposits and postal saving accounts rising from 38% in 2007 to 52% in 2015, at the expense of stocks, government bonds and bonds, recording the most significant contraction (respectively, -43%, -23% and -19%; Figure 3.3). As for the drivers of investment, the main triggers of financial markets participation are the availability of capital protected/minimum yield guaranteed products and trust in financial intermediaries. Non-investors report to have been inhibited mainly by lack of savings (60% of respondents), followed by the fear of potential capital losses (20%), concerns about negative market trends (15%) and lack of trust in financial intermediaries (more than 10%; Figure 3.4). As for investment habits, 24% of interviewees make decisions on their own, while the remaining are equally split among those either seeking for professional support (28%) or delegating to an expert (10%) and those relying on the so called informal advice, i.e. family and colleagues' recommendations (38%; Figure 3.5). Informal advice is more likely to be preferred by men, less educated, self-employed and wealthy individuals (Figure 3.6), while reliance on professional advice is more common among high-literate (Figure 3.7) and less overconfident investors (Figure 3.8). Relying on a professional expert (either an advisor or an asset manager) is negatively associated to overconfidence in private information and positively associated with the attitude towards a correct portfolio diversification (although a positive correlation is found also with respect to the so called erroneous diversification, i.e. the propensity to invest in many different assets characterised by a low level of risk; Figure 3.9). Mental accounting is a cognitive feature more frequently found among investors rather than non-investors, thus implicitly suggesting that the willingness to participate in financial markets may be also associated with individuals' attitude to separate money into different accounts, as the investing account, according to its destination (Figure 3.10). Finally, investment habits display some association with risk perception, i.e. risk dimensions which individuals are more concerned about: self-directed investors appear to be significantly affected by the fear of capital losses; professional advice users seem to be more attentive to liquidity risk and market trends; informal advice seekers are more sensitive to market trends (Figure 3.11).
The demand for financial advice
MiFID review (so called MiFID II) enhances investor protection and is expected to further enable investors to choose the preferred type of advice. However, the vast majority of Italian decision makers either do not know any of the investment services envisaged by the current legislation (almost 60%), or are not able to identify the services providing the highest degree of protection (more than 80% of non-investors and 50% of investors; Figure 4.1). Focusing on the use of advisory services only, at the end of 2015 approximately 80% of the households participating in financial markets report to avail themselves of financial advice. However, tailored-cut recommendations (MiFID advice) only account for 28% of investors, while the remaining 50% receive either passive or generic advice (i.e. respectively, advice services provided by professionals who did not contact their client in the last 12 months and recommendations that are not tailored on the customer; Figure 4.2). The main reasons preventing investors from seeking for advice are investing small amounts of money (34%), investing in simple products (28%) and lack of trust (22%). Trust in advisors would increase if they were perceived to help clients understand risks (around 35%) and monitor investments (about 35%); other relevant factors are independency and certified competencies (pointed by around 25% and 15% of individuals, respectively). Empathy with advisors, driven by gut feelings, is deemed significant by around 15% of the investors (and even more by non-investors, as 21% of them point to it), therefore signalling that the emotional side of trustworthiness is as important as certified competencies. Noticeable, 47% of non-investors are not able to identify any specific factor that could enhance their trust in advisors (Figure 4.3). When choosing the expert, the intermediary's suggestion weighs the most, followed by shopping around and relatives and friends' hints (Figure 4.4). Consistently with historical data, the vast majority of personal financial recommendations keep being provided at the initiative of investment firms (about 60% of the cases), being only 7% the investors receiving the advice upon their request; one third of the interviewees are not even able to indicate the subject prompting the proposal (Figure 4.5). MiFID and advanced advice (i.e. recommendations based on a wide range of products and subject to a periodic suitability assessment), are mostly used by highly educated, self-employed and wealthy individuals (Figure 4.6 and Figure 4.7), who are also more informed than other advisees and more prone to use different information channels (Figure 4.8). Higher holding of risky assets is a further distinctive feature differentiating MiFID-advised portfolios from passive or generic-advised portfolios (Figure 4.9).
Clients' willingness to pay a fixed cost for professional help is key to the development of advice services, especially of those delivered on an independent basis. However, only around 25% of respondents or less are willing to bear a cost, with the exception of MiFID advice users (50%; Figure 4.10 and Figure 4.11). The preferred charge by investors reporting some interest in independent advice would be proportional to portfolio returns (Figure 4.12). Among respondents identifying valuable features in professional experts (40% of the sample), the most frequently reported are consideration of client's needs and goals, use of plain language and support in preventing poor choices followed by empathetic attitudes (i.e. attention paid to the client and availability) and the absence of conflicts of interests (Figure 4.13). As for the implementation of the recommendations received, 65% report to follow the advice, while about one third either ignore or only occasionally follow it. The reasons for not heeding the professional are mainly linked to lack of trust (Figure 4.14 and Figure 4.15). The majority of the investors do not have a clear understanding of the extent to which the quality of financial recommendations also depends on the information delivered to their advisors, being inclined to provide only partial information, whilst 16% of respondents are not willing to give any detail about their own needs and characteristics to the intermediary (Figure 4.16). This evidence mirrors the difficulties individuals experience in going through a correct investment decision making process, encompassing all the steps needed for aware choices (Figure 4.17).
Focus: robo-advice and crowdfunding
Digitalisation is expected to quickly change the provision of financial services. Disruptive innovations are already reshaping the way products and services are designed, distributed and consumed. Automation in financial advice (so called robo-advice) and capital raising through crowdfunding platforms are of particular interest for their prospective impact on retail investors. Along with potential risks, which are increasingly investigated by domestic and international regulators, these phenomena might deliver a number of benefits. Automated financial advice is forecast to improve availability of wealth management services for a growing range of consumers. Equity crowdfunding is anticipated to broaden the opportunities for businesses to access funding options other than the traditional bank lending, which following the changed economic environment has been experiencing a progressive contraction. The Italian legislator has found such opportunities especially suitable to the so-called innovative start-ups (i.e. hi-tech companies), which pursuant to the Legislative Decree 18 October 2012, no. 179, converted into Law 17 December 2012, no. 221, and in compliance with ad hoc Consob Regulation can solicit the wide public's savings by means of the Internet. The Legislative Decree 24 January 2015, no. 3, converted into Law 24 March 2015, no. 33, has recently extended this opportunity also to innovative small and medium-sized enterprises and to UCITs investing mainly in these companies.
The development of robo-advice and crowdfunding postulates that consumers have appropriate digital skills, are aware of the new options available (and the corresponding risks) and are willing to engage with them. As for digital skills (defined over five areas including information, communication, content-creation, safety, problem-solving), at the end of 2015, Internet users (accounting for about 65% of the population) can be classified as high-digital-literate only in 30% of the cases; not surprisingly, skills decline with age (Figure 5.1). Individuals' attitude to rely on the web as a financial information channel, proxying the use of the Internet when making investment choices, is not widespread yet: although increasing in recent years, it involves slightly more than 12% of the investors surveyed in 2016 (Figure 5.2).
Robo-advice is neither known nor attractive to the vast majority of the interviewees, whose lack of interest in the service is mainly due to concerns about online financial frauds (66% of the sample; Figure 5.3).
Crowdfunding is still largely unknown too, given that 74% of the respondents never heard about it. Again predominantly because of the worry of scams, online investing via a crowdfunding platform is attractive to only 19% of interviewees, willing to invest less than 1,000 euros in 50% of the cases and up to 5,000 euros or more in 34% and 16% of the cases, respectively (Figure 5.5 and Figure 5.6). Individuals interested in either robo-advice or crowdfunding share some characteristics, being mainly highly-educated and financially literate (Figure 5.4 and Figure 5.6).
At the end of 2015 equity crowdfunding platforms authorised by Consob were 19, but only 9 of them were active. At mid-June 2016, 19 out of 48 campaigns launched on these platforms were successfully closed, while 12 are still ongoing (Figure 5.7). Participants in crowdfunding campaigns are mainly men, investors aged between 36 and 49 years and residents in the northern regions of Italy; around 40% of them live in the same geographical area of the issuer (Figure 5.8 and Figure 5.9).
The Report was prepared by:
Nadia Linciano (coordinator) - CONSOB, Head of the Economic Studies, Research Department (email@example.com)
Monica Gentile - CONSOB, Economic Studies, Research Department (firstname.lastname@example.org)
Paola Soccorso - CONSOB, Economic Studies, Research Department (email@example.com)
The opinions expressed in the Report are the authors' personal views and are in no way binding on Consob.
ISSN 2465-1974 [online]