Limits to financial services

Financial service choice is limited for many

The choices available in saving, investing and spending differs widely according to a number of factors such as age, location, and income. However, the most important factor is already existing wealth (net worth). People with the lowest net wealth tend to have the fewest options and hold cash. If they are able to accumulate more wealth, they tend to allocate more towards a primary residence, vehicles, cash savings, retirement savings, and life insurance. Those in the higher income brackets tend to have more diverse portfolios and invest a significant amount of their wealth in business interests.

This becomes a self-reinforcing cycle. The more wealth one has, generally the more choice and options one has with saving, investing and spending. This means that there is the potential to withstand greater risk of loss in seeking higher returns. The issue is that not everyone has access to investment, saving and spending options to store and preserve their wealth. Choice is limited for many people. The financial services industry doesn’t always provide products and services that are understandable, easy to use, efficient, and widely accessible to all. There are many reasons for this limited choice, and the consequences of this lack of choice put hurdles in front of people that can be difficult to overcome.

Investing options are limited

Investing opens up the chance to make returns, thereby growing wealth. Riskier investments may have a better upside but this comes with a greater probability of loss. Those with more wealth can generally afford to pay for advice and wealth management services to navigate this terrain, which often includes access to certain investments. Certain investments require investors have a minimum net worth. These additional requirements are in place for good reason – they are meant to attract investors that are more sophisticated, understand the risk, and can afford the potential loss. One of the consequences though is that those below this wealth threshold simply cannot access these investment options.

Finally, those with a lower net worth may not be able to afford any losses. Moreover, knowing how to hedge an investment to mitigate downside potential is an important part of investing and portfolio management. This is not knowledge that all persons possess or have access to.

Savings and other options are limited

Saving is meant to preserve and potentially grow wealth over time. Part of this is preserving purchasing power from inflation, which has been elevated over recent years in many countries. One way investors can seek to protect their purchasing power and hedge against inflation is by holding precious metals, like gold, and currencies, which can require access to savings and other options beyond the country where they reside. These options aren’t available to everyone, and those with lowest net worth may have fewer options for access, potentially leading to higher costs if they can access them.

For instance, investing in gold can have unique challenges, such as requiring a safe place to store the precious metal. Foreign currencies also have obstacles. Excessive fees make exchanging money into or out of foreign currencies or even holding foreign currencies unaffordable for many. Cross border remittance can be expensive, with fees ranging from 3-10% depending on the service provider.

Payment options are limited

Most people pay for goods and services using their national currency (so-called ‘fiat currency’). However, not all currencies have the same purchasing power and this purchasing power can vary significantly over time. It used to be that people would pay with gold, either physically with gold coins or using a currency that was pegged to the value of gold. However, during the past few decades, particularly since the U.S. abandoned the gold standard in 1971, fiat currencies have decoupled from real assets. After more than a decade of ‘quantitative easing’ by Central Banks, combined with current supply chain disruption, countries are experiencing high inflation, thereby eroding the purchasing power of cash.