Financial Literacy: Unlocking the Power of Long-Term Investing

Financial literacy empowers retail investors to make better long-term investment decisions with their assets. Broadridge strongly supports efforts by regulators and the investment industry to increase financial literacy in Europe, a goal that will be key to funding secure retirements for individuals and fuelling growth in the European economy.

European countries face a significant pension shortfall, and additional funding will be required to finance the retirements of a rapidly aging population. One of the biggest potential sources of that funding is household assets. Across Europe, households hold roughly 14 trillion euros in savings, but most of these savings are sitting in low-interest bank deposit accounts. With interest rates on deposit accounts running lower than inflation rates, the purchasing power of these savings has been eroding, rather than growing over time—presenting a serious problem for Europe.

Meanwhile, the European economy needs capital to fuel growth. The trillions of euros sitting in household savings accounts could serve as the long-term investment capital needed to unlock higher levels of growth in both individual national economies and across Europe.

Policymakers and regulators for the European Union and national governments have identified a central reason European households keep assets in savings accounts rather than putting them to work in long-term investments: a shortage of financial literacy.

Financial literacy empowers retail investors to make better long-term investment decisions with their assets. Broadridge strongly supports efforts by regulators and the investment industry to increase financial literacy in Europe, a goal that will be key to funding secure retirements for individuals and fuelling growth in the European economy.

European countries face a significant pension shortfall, and additional funding will be required to finance the retirements of a rapidly aging population. One of the biggest potential sources of that funding is household assets. Across Europe, households hold roughly 14 trillion euros in savings, but most of these savings are sitting in low-interest bank deposit accounts. With interest rates on deposit accounts running lower than inflation rates, the purchasing power of these savings has been eroding, rather than growing over time—presenting a serious problem for Europe.

Meanwhile, the European economy needs capital to fuel growth. The trillions of euros sitting in household savings accounts could serve as the long-term investment capital needed to unlock higher levels of growth in both individual national economies and across Europe.

Policymakers and regulators for the European Union and national governments have identified a central reason European households keep assets in savings accounts rather than putting them to work in long-term investments: a shortage of financial literacy.

Europe’s Financial Literacy Gap

By nearly every possible measure, financial literacy is lagging among Europeans. The 2023 edition of the E.U.’s Eurobarometer Survey showed that only 18% of E.U. citizens are highly financially literate. (Financial literacy scores were higher in some countries, including Sweden and the Netherlands, which have more developed investment cultures.)

One key component of financial literacy is a heightened understanding about the role of risk, a trait that seems to be in short supply in European households. Many European consumers seem to believe that keeping assets in deposit accounts is a risk-free strategy and that they incur risk only when they invest their assets. Households and investors with relatively high levels of financial literacy understand that there is risk in every financial decision.

If your goal is to fund your retirement, keeping your assets in a low-interest savings account and allowing value to erode with inflation is a guaranteed loss-making strategy. Meanwhile, accepting some degree of risk from long-term investments can provide access to higher returns that can help assets grow over time through compounding.

Regulators and the investment industry have recognized the problem and are joining forces to promote financial literacy. There is ample evidence in support of this approach. Studies have demonstrated the direct link between higher levels of financial literacy and retirement preparedness.

Rare Alignment Between Industry and Regulators

Although building a stronger retail investment culture in Europe sounds like a daunting challenge, I am confident we can achieve it. There are few issues on which industry and regulators are so closely aligned. Both sides understand that there is no trade-off between empowering Europe’s retail investors to take informed and educated risks and maintaining strong investor protections.

Not only is there no pushback from industry on financial literacy initiatives, asset managers and fund distributors see building a retail investment culture as so important to their growth prospects that they are more than willing to fund these programs themselves. That funding will be critical, as will a continuation of the close cooperation we are now seeing between government and industry.

Research can play an important role in advancing financial literacy in Europe. The European Commission’s Financial Literacy Strategy reinforces this priority by identifying “funding for financial literacy initiatives, including for research” as a core strategic action.

My firm is heeding this call by offering a new European Financial Literacy and Retail Empowerment Research Grant to support an independent academic research project on financial literacy.

There is no time to waste: European households need funding for their retirements, and Europe’s economy needs long-term investment capital to keep it globally competitive. There are trillions of euros in savings accounts just waiting to be put to work, if we can give individuals the knowledge and trust they need to invest.