Last week I read an article in Money Management magazine by Julia Faurschou on advising young people (Advising Young People, Making Financial Planning Cool, MM February 2015).
It’s certainly an interesting topic and one that needs to be addressed, now more than ever.
Let’s face it, financial services just aren’t cool. I’m not sure that it was ever cool to be financially prudent. I don’t see that changing any time soon. Although saving money for the future is clearly important, there are so many more interesting things that get in the way.
In January, I was thrilled to become a Dad for the first time. Now I am very much looking forward to taking my Daughter skiing or surfing, or even down to the Recreation Ground to watch Bath Rugby.
Am I looking forward to a chat about the merits of pension tax relief, the importance of life insurance, the flexibility of the new pension rules and a dividend tax credit? Not so much.
I’m certain my Daughter’s idea of what is cool will be very different to mine, but you get the point.
Young people have a widely held scepticism of the financial system. They see it as an industry built on self-interest and personal gain, rather than one of benefit to them. The financial crisis of 2008 intensified this perception.
It is vital that people understand the long-term benefits of investing. What is the point of investing money? It’s also important to promote concepts like the flexibility that savings can bring; helping people to achieve their desired lifestyle in the future. From experience, these ideas are more tangible and interesting to most people.
There is an increasing call for basic financial management to be taught in schools. This should extend into basic business education like setting up your own business, understanding cash flow and fundraising.
If investing is ever to be cool, it needs to be interesting, real and must capture people’s imagination. It needs to be cool to be involved in business as well as to invest in it.
But, are the financial products to interest younger people out there?
Words like entrepreneur, crowdfunding and start-up, is this the future? Interesting, definitely.
Is it more interesting to invest in smaller businesses? Businesses are run by people who are accessible and interested to meet investors, whose rewards are aligned to those of their investors, where individuals can even get involved where they have the relevant skill set. Perhaps that sounds more interesting?
The UK has world-leading tax breaks for investment into smaller companies.
Of course, careful consideration needs to be given to such investments, as they have their own specific features, which means they are not appropriate for everyone. For example, the illiquid nature of the investments would not be appropriate for those looking to save a deposit for their first home. That said, for those already on the property ladder, the nature of smaller company investment might work well for those who can afford to take a longer-term view. Warren Buffett is the living embodiment of the benefits of a long-term, buy-and-hold strategy.
Risk is also a key consideration. Investment in smaller companies is generally deemed to be a higher risk.
Could the government do more by introducing a further tax advantage for younger people investing in smaller companies, effectively underwriting some of the downside risks? The cost to the Treasury would be limited, but the change in attitude towards investment could be significant.
It’s something that should be explored. Younger investors investing more in small companies that need funding, in a risk managed way. Sounds promising.
Access to quality financial advice is also critical. The Retail Distribution Review (RDR) has created a significant advice gap, large numbers of people not seeking advice due to cost. The FCA needs to stop their unhelpful self-denial on this important topic and report on what is actually happening and what can be done about it.
The Government has announced the right to advice around the new pension flexibility for those approaching retirement.
Would it be wise to set up a new initiative, to help young people access quality financial advice? Perhaps government subsidised financial advice is the way forward? Helping to prevent the next financial crisis (caused by the huge and growing savings gap) before it happens.
Now that really would be cool.
The detail contained in the article is for information only and does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. First Wealth LLP is an appointed representative of Best Practice, which is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice.
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