Investor 'risk illiteracy' a headache for advisers

Aaron Bruhn from Australian National University is studying how financial failures affect the lives of investors, looking specifically at the collapse of Queensland-based advisory business Storm Financial, which left 14,000 investors about $A3 billion out of pocket when it fell over in 2009.

In a seminar for Auckland University's Retirement Policy and Research Centre yesterday, Bruhn said one of the themes that had emerged from his research was a general lack of understanding of risk by investors.

Advisers needed to make sure they explained risk in terms investors actually understood, and in many cases should emphasise the potential downside of investments ahead of the upside, the expat New Zealander said.

"Most people don't have any idea what risk means," he said.  "We all talk about numerical illiteracy - don't underestimate how little maths most people can do properly - and financial illiteracy, but there's also a lot of risk illiteracy.