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An Investigation of the Demand for Financial Advice in China s Retail Investment Markets

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An Investigation of the Demand for Financial Advice in China s Retail Investment Markets by Haowei Ren 2006 A Dissertation presented in part consideration for the degree of MA Finance and Investment Abstract
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An Investigation of the Demand for Financial Advice in China s Retail Investment Markets by Haowei Ren 2006 A Dissertation presented in part consideration for the degree of MA Finance and Investment Abstract In recent years, there are more and more investment products available on the Chinese financial retail market. Such as bonds, unit trusts, life and health insurances, futures and foreign currencies etc. They are relatively new and complex to ordinary Chinese individuals. It is not easy to just understand all these products, how to use them is even harder. So people start to consider: maybe I should ask a professional investment advisor in person. The role of Financial Advisor was existed for over 30 years in those developed western countries, their financial advisory markets are therefore very well developed and mature. For example, in the UK we have IFA Independent Financial Advisor; in America, they have CFP Certified Financial Planner. Compare to China, it has only started. In early 2003, the Ministry of Labour and Social Security of China has promulgated The National Standards for Financial Planners, it marks Financial Planner as a new and raising profession in China. The first experimental professional financial planners training course began in July 2005 which enrolled only 50 trainees after strict selection. This study investigated new empirical insights into the consumer demand for financial advice in China s retail investment markets, particularly private professional financial advice. 1 Table of Contents Abstract...1 Acknowledgement...4 Chapter 1. Introduction The Market Background The Aims...6 Chapter 2. Literature Review What Is a Retail Investment Product? The Role of Financial Advice The Individual Investors The Consumer Decision Making Process Need Recognition Search for Information Pre-purchase Evaluation Purchase Consumption Post-consumption Evaluation Divestment Information Search and Advice Seeking Behaviour The Impact of Consumer Confusion Conclusion...37 Chapter 3. Methodology Questionnaire Design Data Collection The Sample Measurements Data Analysis and Results...44 Chapter 4. Findings and Discussions Consumer Characteristics Consumer Investment Behaviour Consumer Knowledge and Confidence Consumers Willingness to Pay and At What Price...58 Chapter 5. Conclusion References...64 Appendix A:...70 Definition of Core Terms...70 Appendix B Questionnaire...71 Appendix C...75 Statistical Tables Consumer Characteristics Consumer Investment Behaviour Consumer Knowledge and Confidence Consumers Willingness to Pay and At What Price Acknowledgement I would like to take this opportunity to thank those individuals who have given me their personal information and thoughts. I want to thank my parents and all my friends who not only helped me to distribute and getting back the questionnaires but also encouraged me to keep going, especially to Yilin, Wanglin Lixia and Yutong. This dissertation could not have been written without Professor Devlin who served as my supervisor, guided me through the dissertation process, thank you! 4 Chapter 1. Introduction 1.1 The Market Background China has the world s fastest growing major economy but it has been a long and capricious journey. It all began in 1978, an ambitious programme of economic reform aimed at raising rates of foreign investment and growth. This reform led to rapid growth and a more market-based economy. Following this principal, new institutions were set up, new laws were prepared, and new channels of financial intermediation were established, various kinds of non-banks financial institutions, such as trust & investment companies, finance companies and insurance companies were re-established as well (Gemert, 2001, p3-7). In 1992 economic freedom was renewed and growth has continued apace since 2001 China joined the World Trade Organisation (WTO). Gemert (2001) finds that at the time China joint the WTO, one major obstacle is the performance of the financial system. Serious weaknesses in the allocation of savings and the distribution of financial services hampered China s future economic development. He then points out that the great challenge for China is to continue its comprehensive and ambitious reform process of improving financial efficiency and enhancing financial discipline. According to Neftci and Xu (2006), China s financial markets represent about $2 trillion and are expected to grow to about $10 trillion by Financial services industry has been growing significantly in the last two decades, Yang (2001) suggests this is due to financial deregulation, new telecommunication technology, financial innovations, as well as global financial integration. Pre and post entering the WTO, the restrictions on China s retail investment market have been continually relaxed. With more considerations in efficiency, steadiness and transparency, the Chinese government has started to dismantle all kinds of political walls and financial barriers that private investors face. The door to retail investment market is now fully open, the border of this market is becoming wider and wider, new products emerge all the time 5 and therefore the private investors have more and more choices. McMeel and Virgo (2001) recognise the existence of a distinct financial services industry which constitutes a significant component of the modern market economy. It is composed by three main sectors: banking; insurance; and investment business. This paper is focused on China s financial services in retail investment sector. McMeel and Virgo (2001) suggest that in modern times some of the most significant purchases by the typical, middle-income citizen will be financial products; such an individual may have a large proportion of wealth tied up in securities, life insurance, collective investment schemes and other contracts for the purpose of saving, investment, pension provision or the acquisition of real property. However, the current legal texts have focused on the supposedly paradigm instances of economic exchange, namely the sale of land and the sale of goods, with a resulting wealth of treatise writing on these time-honoured topics. Traditionally it may have been the case that the vast majority of Chinese national wealth was invested in tangible assets. However in more modern times intangible property interests and other contractual entitlements such as company shares and government bonds have also constituted an important source of capital, although historically limited to a minority or elite of society. 1.2 The Aims Much of the literature to date has mostly approached either the current situation and future trends or problems of China s financial system. In effect some current studies approach the banking system, the equity futures and bond markets, the insurance sector and the regulations etc; very few have attempted to examine consumers buying behaviour in the retail investment market as a whole. Although other similar empirical studies have been undertaken in China s stock market, the issue of consumer demand for financial advice in China s retail investment markets has been relatively under-researched. 6 As there is a huge potential within China s financial advisory market and as a finance and investment student who has been working in a UK IFA firm for two years, I desire to find out my own career perspective when I go back to China and work in this industry. This paper intends to investigate Chinese consumers demand for professional financial advice. Chapter 2 is literature review; it applies the popular seven stages of consumer decision making process and other marketing theories with examples of and links to Chinese consumers behaviour in retail investment markets. Chapter 3 discusses the methodology of this research, analysis of the results are continued in Chapter 4. The paper ends by realising limitations and focusing on the priorities and suggestions for further research. 7 Chapter 2. Literature Review 2.1 What Is a Retail Investment Product? According to Financial Services Authority (June 2005, p39-40) retail investment products can be created in a number of forms and the main ways in which wider range investment products have been created in practice are as follows: Collective investment schemes The UK definition of collective investment scheme is intended to be wide ranging in nature, and sweeps up arrangements that amount to pooled investment vehicles that are not corporate in nature. It includes, for example, vehicles such as unit trusts, open-ended investment companies and partnerships. Listed companies Investment companies and other investment entities can be admitted to the Official List, enabling shares to be traded on the London Stock Exchange. An investment trust savings scheme is an arrangement where investors make periodic, perhaps monthly, payments to the scheme provider, and the scheme provider makes a block purchase of shares which are then allocated to the investors in proportion to their contributions. Life insurance products Life insurance products are included although they do not seem to provide a significant opportunity to create wider range investment products. 2.2 The Role of Financial Advice Traditionally in China, the most common form of investment was saving money in a bank. It was so common that people did not even consider it as an investment. Nevertheless, in more recent years some investors, mostly from the middle class 8 choose to invest in the stock and security markets and most of them do not take the initiative in seeking professional advices, but they sometime follow advices from the experts on TV, newspaper and other media. The reason is because there have been very few professional expertises available to investors privately. Wei (2001) finds that there are only 100 qualified investment consulting institutions in China, 97 for securities and 3 for futures. Even such advices are available, most people do not seek them, they think it is too expensive to consume and they do not have much to invest anyway. So in general, private investors made their invest decisions purely on their own or maybe based on the opinions from the media, family and friends. In modern times, there are more and more investment products available on the market. Such as bonds, unit trusts, life and health insurances, futures and foreign currencies etc. They are relatively new and complex to ordinary Chinese individuals. It is not easy to just understand all these products, how to use them is even harder. So people start to wonder: maybe I should ask a professional investment advisor in person. Advice plays a more important role in decision making in financial services than in practically any other market. Consumers use advisors as a source of information in investment markets (Devlin and McKechnie, p40). The role of Financial Advisor is existed for over 30 years in those developed western countries, their financial advisory markets are therefore very well developed and mature. For example, in the UK we have IFA Independent Financial Advisor; in America, they have CFP Certified Financial Planner. Whereas in China the development has only started in early 2003 when the Ministry of Labour and Social Security of China promulgated The National Standards for Financial Planners. This event marks Financial Planner as a new and raising profession in China. The first experimental professional financial planners training course began in July 2005 which enrolled only 50 trainees after a strict selection process. 9 2.3 The Individual Investors The individual investors group is expanding rapidly, according to Wei (2001), by the end of 1998, investors had opened million investment accounts, of which 38,951,200 were in the name of individual investors (see table 1, table 2). Table 1: Expansion of Investors (10,000) Shanghai , Shenzhen Total , , , , , (Source: Wei, 2001, p118.) Table 2: Structure of Investors in 1998 (10,000) Shanghai Shenzhen Total Institution Individual 1, , , Total 1, , , (Source: Wei, 2001, p118.) The focus of this paper is aspects of consumers demand for financial advice in China s retail investment markets. Similar studies have been done on US and UK base and McKechnie and Devlin (2005) summarise the findings as below: The US based evidence suggests that financial services consumers search for more information when they judge themselves to be more knowledgeable, when they are more tolerant of risk, when they are younger and when they have a higher level of 10 income. However, those who judge themselves to be less knowledgeable, have higher incomes and greater assets invested are more likely to use an advisor. In the UK, consumers perceive the need for financial advice due to lack of knowledge about financial services in general, a lack of up to date knowledge and a need for specialist guidance for certain products. Evidence in the UK tends to suggest that an Independent Financial Advisor is the most popular source of advice, although many state that they would also be willing to source advice from a bank or building society, due to an existing relationship being present. Consumers decisions regarding the use of advice in China will be taken in the context of the decision making process. To understand the theoretical context in which decisions about advice are taken, it is important to understand the various stages of the decision making process comprehensively. Therefore, the main focus of this literature review will be on consumer decision making with particular reference to information search and advice seeking behaviour. As noted above, Chinese retail investment markets are not as mature as they are in the West and Financial Planner has only been created as a new occupation in China, there appears to be confusion over which sources of information and advice to use, and how best to relate the information and advice available to an individual s unique financial circumstances. For this reason, the literature review will also address what has been written on the phenomenon of consumer confusion and the impact on information search behaviour. The following section 2.4 outlines the main stages of the decision making process, whilst section 2.5 focuses in particular on information search and advice seeking behaviour. Section 2.6 discusses the impact of consumer confusion before brief conclusions are offered in section 2.4 The Consumer Decision Making Process Consumer decision making process has been a focal interest in consumer behaviour for around 40 years (e.g., Engel, Blackwell and Miniard ; Bettman 1979; Hansen 1972; Howard and Sheth 1969 etc.) In general, consumer decision making is a process of information scanning, whereby consumers collect information on the product and alternative products as much as possible and as precise as possible, then rationally evaluate the advantages and disadvantages of each product, hopefully a clear difference can be seem and a decision can be easily made; otherwise consumers have to make a difficult judge that whether the disadvantages can be compensated sufficiently by the advantages before arriving at a final and satisfactory decision. According to Gabbott and Hogg (1998), there appears to be an assumption in the consumer behaviour literature that consumer behaviour related to goods is the same for all products include intangible products like services. However, the idea of services as problematic for marketers has been argued across a broad range of literature since 1970s. Then till recently, a well recognised acknowledgement has been developed that service products are distinctive and that service-based industry is an increasingly important part of developed countries. Nevertheless, services products and goods still share a number of common characteristics, whatever the academic argument concerning the differences between these product forms Gabbott and Hogg suggest that these two forms only demand a different managerial approach and that they elicit a different response from consumers. Therefore, in this paper I endeavour to use general consumer s behaviour theories but relate them to financial services and the consumer s behaviour response. In practice, consumer decision making processes vary considerably in their complexity. For example, the purchase of daily food requires rather simple processes whereas the purchase of a life insurance policy involves comparatively complicated processes and the purchase of a first home extends the processes even further. The 12 range of consumer problem solving approaches can be catalogued as (Loudon and Bitta, 1993, p ): Routine Problem Solving (RPS) --- When consumers buy a product they have purchased before, it usually involves little or no information seeking and is performed quickly. Saving money in a bank fits into this catalogue. Limited Problem Solving (LPS) --- When consumers buy a new brand in a familiar product category, it usually involves a moderate amount of information seeking and time in choosing. For example, choose a particular stock or fund to invest. Extensive Problem Solving (EPS) --- When consumers buy in an unfamiliar product category, it usually involves the need to obtain substantial information and a longer time to choose. Buying new investment products requires this problem solving approach. Table 3 illustrates the major characteristics of each of these decision approaches. Table 3. Characteristics of Consumer Problem Solving Approaches RPS LPS EPS Purchase involvement level Low Medium High Problem recognition Automatic Semiautomatic Complex Information search and evaluation Minimal Limited Extensive Purchasing orientation Convenience Mixed Shopping Postpurchase Very limited Limited Complex processes Habit Inertia to repurchase Loyalty if satisfied Brand loyalty (Source: Loudon and Bitta, 1993, p486) Brand switching if dissatisfied Complaint if dissatisfied 13 For financial services buying behaviour, this particular variant of buying decision behaviour has often been mistaken for the manifestation of brand loyalty (Colgate and Lang, 2001; Ennew and Binks, 1996). Blackwell et al (2001) developed a model of consumer decision making process which provides a comprehensive frame. It comprises seven discrete stages: need recognition, search for information, pre-purchase evaluation, purchase, consumption, post-consumption evaluation and divestment Need Recognition Recognition of consumption need is the simulation that leads to possible future consumption. Consumers only consider a purchase and start to collect information when need recognition has occurred. This occurrence depends on how much discrepancy exists between the actual state and the desired state; when this difference meets or exceeds a certain level or threshold, a need is recognised. (Blackwell et al 2001) For example, a middle class person who currently saves all his disposable income into a bank account (actual state) and wants to raise income from his savings (desired state) will experience the need recognition when the discrepancy is sufficient. When the actual state changes significantly, the desired state is also likely to change to a great extent. Imagine the same person has won a lottery; his desire is not likely to be the same. He may now want to hire a financial adviser to manage his new fortune. At the other extreme side, his house has been burned down and he has not had any home insurance. His new desired state is to spend all his savings to recover and perhaps to buy a home insurance. However, a consumer s desired state may still change when the actual state stays the same Search for Information When need recognition has occurred consumers then put their desires in action by start searching for information. Blackwell et al (2001) define search as the motivated 14 activation of knowledge stored in memory or acquisition of information from the environment concerning potential need satisfi
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