Perhaps that sober piece of wisdom applies to a large proportion of Dutch households that do not invest. In fact, a significant share is exposed to risk precisely because they do not invest. This presents major opportunities for the sector, provided it can serve this target group appropriately.
Earlier this year, the Dutch Authority for the Financial Markets (AFM) reported that many households are missing out on investment returns. Around one-third of Dutch households (approximately 2.6 million) do not invest, despite holding more liquid assets than the financial buffer recommended by the National Institute for Family Finance Information (Nibud). Within this group, one segment stands out in particular: approximately 800,000 households have sufficient assets to invest, yet are simultaneously building up insufficient pension wealth through the first and second pension pillars to maintain their standard of living after retirement. For households that do not invest despite having sufficient assets, this amounts to approximately €50 billion above the financial buffer recommended by Nibud. Most of this capital currently remains in savings accounts, gradually losing purchasing power due to inflation. This represents both a risk for these households and a missed opportunity for the broader economy.
This raises an important question: how can this target group be reached? In this context, it is noteworthy that the AFM announced in May that it will further examine under which conditions automatic rebalancing and automatic risk reduction could be permitted within execution-only investment services.
With life-cycle investing, the investment risk profile is automatically reduced as the investment horizon shortens, particularly as retirement approaches. For the approximately 800,000 households heading towards a pension shortfall, this type of product could help bridge that gap. It combines the low entry barriers and relatively low costs of execution-only investing with the level of support this group appears to need.
The AFM’s 2016 Guideline on Qualitative Innovation in Financial Services mainly highlighted the limitations in this area. The fact that the AFM is now explicitly discussing the possibilities for life-cycle investing and automatic risk reduction within execution-only services suggests a more constructive approach. Moreover, the AFM explicitly considers the broader European landscape. Clarification that aligns with European developments could create additional room within the Dutch regulatory framework.
At first glance, expanding the scope of execution-only services may appear to create a tension. After all, the central principle behind innovation in investment products is that it should always serve the interests of the potential client. Investor protection must therefore remain paramount. A target group that does not invest may also indicate limited investment experience, suggesting that investment advice could be more appropriate.
The Dutch Consumer Monitor shows that many people believe they lack sufficient knowledge to start investing. They also perceive investing as risky and often have little interest in it. In addition, many assume they simply do not have enough money to begin. Remarkably, 9% indicate that they do want to invest but do not know where to start.
If this also applies to the group that currently does not invest and is therefore at risk of a pension shortfall, it strengthens the case for developing and making suitable investment products more accessible. Life-cycle investing and automatic risk reduction are more than product features; they can be regarded as built-in behavioural and risk management mechanisms. If the possibilities within execution-only services are expanded, improvements in investor protection could actually result from these integrated life-cycle and risk reduction mechanisms.
This creates benefits on three fronts. Households currently facing the risk of an inadequate pension, while having investable assets available, gain access to suitable products that better meet their needs. At the same time, billions of euros in savings could be put to more productive use. The investment industry could also benefit, as these 800,000 households represent a substantial source of potential new assets under management.
Some room for innovation already exists. The AFM intends to provide clarification within the current regulatory framework, implying that the existing rules already offer opportunities. At present, however, this room remains underutilised. The question is who will seize this opportunity.
