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The Emergence Of The Informed Investor

By: Mary De Paoli

Our industry has worked hard over the past 15 years to help Capital Accumulation Plan members become more informed investors. Today, thereʼs good evidence that, for a host of reasons, investment knowledge and competence are increasing for the average Canadian.

This evidence shows that plan members are increasingly more involved and have become better informed investors. Granted, while thereʼs no industry-specific research to confirm this experience, the October 2006 Canadian Securities Administrators Investor Index concluded that:

This may be short of our ideal, but it does signal a firm step in the right direction. While I wish our industry could take the lionʼs share of credit for these developments – and that education was the driving force – there were some other very powerful forces at work.

Dot-com Bubble

The dot-com bubble burst. Companies such as Enron came – and then went. The headlines generated by events such as this raised awareness in Canadians of the potential gains, and losses, of the investment markets.

The Internet expanded and took up residence in more than 82 per cent of Canadian homes. With this, more than 62 per cent of us decided to conduct banking transactions online, making Canadians more comfortable about using the Internet to manage their financial affairs.

When we look at the Internet in the context of CAP membership, the impact has been even more significant. The combination of Internet and Intranet technologies has given plan sponsors a whole new toolbox for communicating with, and providing education to, plan members. Convenience, accessibility, and currency – coupled with the mediumʼs ability to enable self-paced learning – have been well deployed by many plan sponsors.

It stands to reason that our combined efforts to educate the more than three million Canadians served by our industry cannot have fallen on fallow ground. As suggested by the June 2005 national symposium on financial capability, the impact of these efforts has been “…programs, information, and advice that improve financial understanding … increase aptitude and confidence and, therefore, improve the financial decisions and behaviours of individuals.”

Profound Impact

Thereʼs still a long way to go to bring plan membersʼ investment knowledge and competence to the level we want. But the improvements to date have – and will continue to have – a profound impact on what we do.

The effects are already being felt in investment program design – both in terms of the type and number of products offered. However, the emerging insights of behavioural economics need to be incorporated into the design of investment products to accommodate the changing risk profiles and knowledge levels of plan members. At the same time, sponsors must continue to assess the optimum number of investment products needed to serve their plan members.

As education – and experience – work to impact behaviour, the more important it becomes to refine ongoing communications. Plan members need more personalized communications that reflect their life stage and investment style. Learning must be layered to accommodate diverse attitudinal characteristics and knowledge levels. And language needs to be attuned to engage an increasingly diverse audience.

The irony of increased investor sophistication may well be increased pressure on plan sponsors to offer advice. As plan members become more knowledgeable and competent, it seems likely that more of them will want – and demand – the benefit of professional investment advice.

That being said, the most significant impact of the emergence of the informed investor will be the long-term health of our industry. The more we do to improve the investment knowledge and competency of plan members, the healthier we all will be.

Mary De PaoliMary De Paoli is vice-president, group retirement services, at Sun Life Financial.

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