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By Jeremy Cooper, Deputy Chairman, ASIC
(reproduced in the Company Directors magazine, May 2009)

The market downturn has highlighted how exposed many Australian retail investors are to flawed business models and failed investments. In too many cases, this has caused them devastating financial losses.

There are many dimensions to poor financial outcomes for retail investors including lack of access to quality advice, poor product design, poor investor behaviour and low literacy levels (both financial and general literacy), conflicts of interest and poor disclosure.

This column looks at just one possible solution: how retail investors might be prompted, in a very simple way, to ask themselves how much risk they think they are taking before they invest. A sort of 'Slip! Slop! Slap!' campaign for retail investors.

ASIC believes that all retail investors should know about basic things like asset allocation, diversification and the concept of risk-adjusted return. The problem is that, to many people, those terms sound like mumbo jumbo and they switch off.

So, to sidestep the jargon problem, ASIC is using the image of 'swimming between the flags', a metaphor suggesting a type of investment behaviour that should keep most people out of trouble, most of the time. All investing involves some risk, so investing between the flags, just like at the beach, is never risk-free.

This recognisable Australian image aims to help retail investors understand when they are 'swimming between the flags' and so in 'patrolled waters', and when they are 'outside the flags', and so taking more risk. Many of the retail investors who have suffered losses in failed investments in recent times have been swimming well and truly outside the flags, but without realising it.

At its simplest, swimming between the flags is investing in a diversified way between bank deposits, your super, blue-chip shares, vanilla managed funds (and other investments with relatively low risks) or with independent, professional advice. Outside the flags is investing in more complex, illiquid, undiversified investments or leveraged products, all the way to outright scams. Each person's flags might be a slightly different width apart and some people are better swimmers than others, but the point is not to split hairs about what is inside and what is outside the flags; it detracts from the simplicity of the message and the force of the metaphor.

If investors ask themselves whether they might be about to swim outside the flags, they can decide their next move. Should they swim back between the flags, get a stronger swimmer to go with them (i.e. get independent advice) or simply take the risk? You are allowed to swim outside the flags; you just need to be aware that's what you are doing and be ready for the consequences.

For the 'flags' message to be truly successful, advisers need to use it as well. Margin lending by retail investors is nearly always outside the flags, but how many financial advisers explain this to their clients in such simple and clear terms? We also want clients to remember to ask advisers whether their advice is 'between the flags'.

What else do we think is outside the flags? Here are a few examples:

(There are many other examples and investment experts will no doubt share their views with us on this, a process that we welcome.)

Our 'swimming between the flags' initiative is part of our financial literacy program. Financial literacy is a vital part of ASIC's work. It is also a responsibility we share with the financial services industry more generally. Further information is available from our consumer website at www.fido.gov.au.

We will be looking to major participants and industry associations alike to help us make this image work for the benefit of Australia's retail investors.