Rethinking Financial Literacy

Perhaps “financial literacy” needs new branding. It sounds — and dare I say often is — boring. It is often impersonal and irrelevant. The term also sounds condescending — throwing around statistics such as only 22% of men and 15% of women possess basic financial literacy is not helpful in a vacuum and makes us feel “illiterate”. It’s like the days in school when someone told us we are bad in math (or physics or some other subject), which turned us off it for good rather than motivating us to do better. We need to reach people in authentic ways, in an approachable manner and “in the moment”. Hoping that those lacking financial “literacy” will become spontaneously interested and start reading the plethora of materials produced by financial organisations, companies and governments is just not realistic.

Financial Information Is Complex

Financial products and services, and therefore the information about them, is complex. Even the most simplified and gamified education materials are not easy to absorb, and even harder to retain in the long run. That does not mean we can’t all learn more about managing our financial needs and be more successful in setting and achieving goals. It just means that we need to change our mindset around what financial literacy means and bring it down to the individual level rather than looking at it as a societal score-card. Not everybody needs to understand the whole enchilada of products and services, practice how to calculate compound interest, be able to set target rates of return, etc. But everybody deserves to understand their own needs, have basic tools to set financial goals and have positive reinforcement along the way. Let’s not try to shame people into being financially literate but instead, nudge them to become financially successful.

Let’s not try to shame people into being financially “literate” but instead, nudge them to become financially successful.

In her paper The Financial Education Fallacy, Lauren E. Willis describes how the complexity of financial decisions and the heterogeneity of consumer financial circumstances and values makes it impossible to offer mass public education campaigns effectively. Instead, intensive, audience-tailored instruction would be required, Willis argues. But she then points out that delivering such personalised financial education would be too expensive and too intrusive. I agree with Willis’ articulation of the problem, but I disagree that her solution is unachievable. If we have all gone the way of one-to-one marketing for the consumption of virtually any product, why would we not provide one-to-one consumer education to improve personal financial outcomes and personal financial knowledge? The key to doing so is to factor in the role that financial advisors can play to educate the public.

The reality is that most consumers are unable to make good financial decisions by themselves and need help. But accessing and processing the information to make good decisions is more challenging for some consumers than for others, such as elders suffering cognitive decline and those with language and educational barriers. There is even a gap in financial knowledge between men and women.

Given that a higher level of financial knowledge is correlated with a greater degree of retirement preparation, as well as other desirable financial behaviours, isn’t it time we take more effective action on increasing personal financial awareness? Although poor financial decision-making cuts across socio-economic categories, it is most pronounced among the poorest, oldest, youngest, least financially literate, least educated consumers — in other words, those most vulnerable financially to begin with.

Role of Financial Advisors

Access to financial advice has positive benefits for consumers of all income and education levels, but it has the most profound impact on consumers who lack financial knowledge. Advice can significantly improve financial outcomes as well as improve general financial literacy. Advisors provide consumers with information and choices relevant to their particular circumstances at the time of planning rather than a consumer reading theoretical and generic information with “what if” scenarios. Advisors assist clients by applying their expertise, guiding clients away from common behavioural biases and encouraging the development of positive financial behaviours, ultimately leading to better financial outcomes. A longitudinal study of Canadian households found that after four years, advised households’ assets are 190 percent greater than those of unadvised households. This gap rises to 390 per cent after fifteen years (Montmarquette and Viennot-Briot, 2016). A recent survey of advised investors in Canada finds that clients’ perception of the value of advice is aligned with the empirical evidence. More than 80% of respondents credit their adviser for their improved savings and investment habits (Pollara 2015).

By reaching consumers with information that is personalised and presented in the moment needed, knowledgeable professionals can make great strides in improving household financial outcomes.

Financial advice can be the key to better financial knowledge and better personal financial outcomes. New regulatory initiatives such as the Client Relationship Model in Canada, for example, provide for improved, expanded yet simple disclosures for Mutual Funds clients. This can help tremendously in informing investors of the products and services that they are accessing, the costs associated with their choices as well as their rights and responsibilities. Similar initiatives could be helpful in other financial services areas. By reaching consumers with information that is personalised and presented in the moment needed, knowledgeable professionals can make great strides in improving household financial outcomes.

Research, Insights, Strategy