Over the past five years there have been repeated calls for the government and educational bodies to step up and tackle financial illiteracy. These have largely fallen on deaf ears, and the crisis has continued to deepen. While we must continue to urge institutionalised action across the board, it’s time the industry took matters into its own hands. With this in mind, here are the five things financial advisers need to know about the financial illiteracy crisis in order to make a difference.
1. The problem runs deep
According to a recent YouGov survey, 50 per cent of millennials have no emergency savings and are incapable of explaining basic financial terms. This means they are blissfully ignorant of crucial aspects of financial management, such as how to evaluate a mortgage, the effects of compounded interest, or how inflation can negatively impact their savings. This is a significant contributor to consumers making poor financial decisions, for instance, buying something using a credit card when a loan would have been a better choice, or taking a fixed rate mortgage when a tracker would be the better bet for them. The negative financial impacts of this might seem localised to the individual. However, as financial illiteracy prevents them becoming productive members of the economy it has a dramatic impact on our collective financial state.
2. Instant gratification
We live in a world of instant gratification, the effects of which have seeped into the financial sphere. This means individuals focus on how to meet their current needs rather than planning for what their future self will need. While millennials are often regarded as the worst offenders, a survey by Financial Lives recently found that only 35 per cent of those aged 45-54 have prepared for retirement, meaning that financial illiteracy cannot be pinned on one generation alone. Unless the standardised retirement age is pushed back in line with life expectancy, a lack of planning will mean that a significant proportion of society will outlive their savings. This would spell economic crisis for the country as a whole. As a result, it’s crucial that education to eradicate financial illiteracy focuses on encouraging long-term thinking.
3. Fighting an invisible beast
Numerous studies have found a negative correlation between financial literacy and an individual’s likelihood of consulting an adviser. While this is highly problematic, it’s unsurprising – after all, who seeks advice for a problem they don’t realise they have. The key way to tackle this is by increasing awareness of basic financial issues in the public space, so individuals can recognise when they need to seek help. Disseminating relatable scenarios that propose a financial challenge and show how individuals can take charge across digital avenues is a great way to do this. It also presents an opportunity to debunk the financial industry’s reputation as unapproachable and impossible to understand through using simple, accessible terminology.
4. People need to be educated, not instructed
Financial advisers are, by design, significantly more financially aware and educated than the clients they serve. As such, they must be mindful of bridging the educational gap with their clients, explaining what they would advise doing and why, rather than just stating the best option. This is particularly important as there is a tendency for people to approach advisers and expect them to make miracles happen. If the client is helped to understand the various tools available to their adviser and how they plan to use these to achieve the best results for their client, this will avoid their relationship being strained by unrealistic goals that cannot be met.
5. Don’t be afraid of losing work by eradicating illiteracy
It’s undeniable that as clients become more educated the most simplistic financial decisions will be taken away from advisers. However, the opportunity lies in the fact that a more educated client is a more engaged client, capable of discussing increasingly complex and varied products. Financial illiteracy is endemic across all generations of society. Numerous studies have revealed that individuals fail to understand the importance of basic financial planning and are often incapable of recognising when they are in distress, which could spell disaster for the economy at large. However, by acknowledging this, and taking on the role of educator, financial advisers are in a strong position to tackle the problem within the remit of their everyday job.
Read more of Rajiv Nathwanis article at FT Adviser