In our previous article, we explored how poor investment and savings behaviours could lead to higher vulnerability among Malaysian investors – leaving them at risk of suffering fraud, financial exploitation, or the effects of unsuitable investments. Nonetheless, we also highlighted that vulnerability is a multifaceted phenomenon with frequently overlapping and closely interconnected drivers.
Beyond financial behaviour and accessibility, the Institute for Capital Market Research Malaysia (ICMR) also identified situational and industry-related drivers of investor vulnerability. Based on findings from our nationwide survey, this article will delve deeper into both these categories to further understand how Malaysians experience vulnerability during their investment journeys.
Navigating Unexpected Life Changes
Situational drivers refer to experiences of specific life events or temporary difficulties such as bereavement, job loss, income shock, death within close relatives, or changes in expenses and savings behaviours. Understanding these drivers is especially significant considering how our lives have been impacted by greater uncertainty since the COVID-19 pandemic.
Throughout the pandemic, many Malaysians lost their jobs, income, or faced income cuts. The impact of this lasted even after lockdown measures were lifted and has been exacerbated by the rising cost of living. ICMR’s survey conducted in early 2022 found that 60% of Malaysians felt that their expenses had outpaced their monthly income in the last 12 months, hence affecting how they made ends meet.
Despite Malaysia’s economy opening up in the post-pandemic phase, many Malaysians are still struggling to sustain themselves financially. This was evident even before the real knock-on effects of inflation had been felt, which rose from 2.3% in January 2022 to 3.8% in December 2022 on the back of higher food and transportation prices.
To curb inflationary pressures, the Central Bank of Malaysia (BNM) increased the Overnight Policy Rate (OPR) by 100 basis points to 2.75% as of the end of 2022. Now, sandwiched between higher borrowing costs and higher inflation of food and oil prices, households will have even less discretionary income – which could increase their level of vulnerability.
It gets more concerning when the issues of expenses and inflation are coupled with complex life events, which appears to be the case for 61% of respondents to ICMR’s survey. Within this group, most respondents experienced ‘death of close relatives’ or ‘changes in employment and financial status’, potentially most of these losses being due to COVID-19.
Despite the widespread belief that vulnerable individuals comprise the older generation, our study emphasises that notwithstanding age, changing life situations caused by the pandemic or changes in employment can cause individuals to feel more financially vulnerable. This, coupled with the current state of the economy, further contributes to poor financial decision-making.
Challenges Dealing With Financial Service Providers
The final category of vulnerability driver we identified is ‘industry-related drivers’. The variables measured in this category include experiences surrounding the actions of market or individual financial providers; firms that do not act with appropriate levels of care; products that are inappropriate for a particular client; and inadequate/complex or misleading documentation/information.
ICMR found that 47% of surveyed respondents rely on financial consultants, agents, or brokers as sources of financial information. However, we also found that investors only referred to financial consultants who happened to be their friend or who were introduced by their family or friends. This correlates with our findings of 44% preferring to listen to friends and family for financial information.
Moreover, 83% of those who do seek professional financial advice claim to experience some difficulties, especially due to insufficient information or knowledge. At the same time, 70% of those who engaged with financial service providers faced some misconduct, including unsuitable prices or terms, being pressured into making an investment, high fees, technical issues, and language barriers.
This was further confirmed in our qualitative interviews, where interviewees felt that all the documents and information given were too complicated and difficult to understand. Elderly folk and youths were among the most affected. This, coupled with low financial knowledge, will make understanding important disclosure documents even more difficult for these groups.
Many investors feel that financial services and products have been streamlined and designed based on the idea of a perfectly rational investor. Because of that, financial consultants and agents struggle to meet the needs of investors who do not fit into the idea of a perfectly rational investor, which has the potential to lead to negative experiences and consumer detriment.
“The documents and disclosure are too complex and hard to understand. Only those with financial background could understand. I feel that the sales agent does not know the details of the product so the agent will just work to promote”
– Emma, 34, real estate consultant
Vulnerable Investors More Susceptible To Financial Scams
Although not all vulnerable individuals face the same challenges, most tend to feel overwhelmed and unable to cope during certain vulnerable moments. When faced with these feelings, individuals find it difficult to prioritise, which leads to sub-optimal decision-making. This results in them making decisions that further worsens their situations, particularly when dealing with financial services firms.
Findings from the three vulnerability drivers we’ve explored highlight that individuals may experience overlapping vulnerable characteristics, leaving more investors susceptible to the allure of making fast money. Stay tuned for our next article, as we will look closely at the factors that cause investors to fall prey to investment or financial scams.
This article is part of a content series by the Institute for Capital Market Research (ICMR). Follow ICMR’s Facebook page to stay updated on behavioural tips and insights for better investing habits. To learn more about ICMR’s research on new age vulnerabilities, visit www.icmr.my or download the full report.
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