By reducing the incidences of poor consumer decision making and poor consumer outcomes, financial literacy can be seen as protecting both clients and advisers.
Teach a person to fish
Financial literacy – along with financial advice, product disclosure, and product regulation – is one of the four pillars of financial consumer protection.
Financial literacy has been shown to drive improved mental and financial wellbeing, as well as lowering susceptibility to financial scams, financial abuse, and poor financial decisions. In an advice context, better informed clients are likely to be more open, provide more meaningful answers during fact finds, and better understand the advice you provide them (meaning consent is truly informed).
Indeed, by reducing the incidences of poor consumer decision making and poor consumer outcomes, financial literacy can be seen as protecting both clients and advisers.
With that in mind, and against a backdrop of recent evidence that Australians’ financial literacy may be declining, this article will examine:
- the state of financial literacy in Australia
- the main ways financial literacy protects financial consumers
- the benefits to advisers from prioritising client education, and
- the tools and channels advisers can use in their client education efforts.
Financial literacy in Australia
Financial literacy and financial capability are topics which have received ongoing, yet variable, attention from policymakers over the years.
Whilst there is a fundamental appreciation amongst most stakeholders that improved financial literacy can have community and economy wide benefits, our national strategy seems ad hoc at best, with efforts to embed financial education into the national school curriculums as yet unsuccessful.
Literacy v capability
Financial capability refers not only to the knowledge needed to make sound financial decisions, but to a combination of financial knowledge, skills, attitudes, and confidence that leads to positive financial behaviours and money management decisions that fit the circumstances of one’s life.
(The current flagship of financial literacy policy is the National Financial Capability Strategy[1], released by ASIC in 2018, and which aims to help all Australians control their financial lives.)
In financial literacy, as in sport, Australians punch above their weight. For example, in the 2014 Standard & Poor’s Ratings Services Global Financial Literacy Survey of 140 economies[2], Australia, ranked in the top 10 countries for financial literacy. But this doesn’t mean there isn’t widespread financial illiteracy through Australia, especially among young people.
And it may be getting worse.
A recent survey[3] of over 1,000 Australians, conducted by Greater Bank and the University of Newcastle, found more than one third (38%) would be classed as financially illiterate. Alarmingly, this suggests an almost 10% drop in financial literacy since a similar study was conducted as part of the Federal Government’s 2021 Australian Financial Capability Survey.
A standard technique for assessing financial literacy is to ask respondents to answer a series of questions around basic financial concepts such as compound interest. The well-respected HILDA survey used this approach when it found that financial literacy rates varied greatly by age, gender, and demographic and socioeconomic indicators[4].
Amongst its headline findings were that financial literacy rates were significantly lower for females, younger Australians, and migrants, findings which have undoubtedly shaped the national policy response.
Why does this matter?
At a high level, there is ample research showing that improving financial literacy leads to better financial outcomes, which in turn leads to higher overall life satisfaction.
But it is at the more detailed level – where we see the impact on everything from superannuation balances to share trading activity to financial abuse – that understanding the benefits of financial literacy becomes more interesting.
For example, academic studies[5] from around the world have found:
- financially literate people are more likely to accumulate wealth
- answering just one more financial question correctly correlates with a 3-4% greater probability of planning for retirement
- those who plan their retirement (regardless of whether that is with an adviser or not) retire with 2-3 times the wealth of those who don’t
- 30 to 40% of US retirement wealth inequality can be accounted for by differences in financial knowledge
- those who are more financially literate are less likely to have credit card debt and more likely to pay the full balance of their credit card each month rather than just paying the minimum due
- the least financially literate are also more likely to have costly mortgages.
Access to emergency funds
Another frequently assessed metric in this area is the ability to raise funds in an emergency, and in Australia, the HILDA survey already referenced found that financially literate individuals were significantly more likely to be able to raise $3,000 in emergency funds, with around 80% of financially literate men and women saying they could easily raise such funds, compared to around 60% of those classed as ‘not financially literate’.
Superannuation balances
More likely to panic sell
Unsurprisingly, a lack of financial knowledge has been associated with more panicked reaction in the face of stock market volatility.
A 2020 study by the Ontario Securities Commission[6] into trading behaviour in response to Covid found that individuals with low (21%) or very low (27%) financial knowledge were more likely to have significantly sold down their portfolio, compared to those with moderate or high levels of financial knowledge of whom only 12% and 14% respectively, liquidated a significant portion of their portfolios.
Lower susceptibility to financial scams, fraud, and financial abuse
Financial fraud is pervasive and can be devastating for its victims. The better people understand money and money concepts, the less likely they are to be taken advantage of.
US research[7] has showed that educational interventions amongst intending investors can meaningfully reduce fraud susceptibility. Similarly, a study[8] of the effectiveness of state-mandated personal finance education for high school graduates showed that improvements in women’s’ financial literacy can significantly reduce the rates of financial abuse and physical violence perpetrated against women by their male partners.
Financial literacy in an advice context
Financial literacy is a foundational concept in financial advice, underpinning a number of important topics, including compliance, client communication, and advice effectiveness.
A quick search of the FPA’s guide to Understanding the FASEA Code of Ethics[9] shows financial literacy featuring prominently, especially in the context of Standards 2 and 4.
A client’s level of financial literacy will impact their:
- current financial circumstances and their understanding of their financial circumstances
- ability to understand and fully answer any questions you ask them during the fact find process
- ability to understand your advice and product recommendations
- ability to understand any ongoing communication and documentation you provide them.
The concept of ‘informed consent’ a critical one within financial advice, featuring in legislation, and both the FASEA and FPA Codes. In simple terms, advisers must ensure that clients understand the scope of the services provided to them, the terms and the associated record keeping. Ultimately, clients must give you their informed consent to implement your advice recommendations.
In the words of ASIC[10], “Better informed investors make better clients”. Certainly, the incentives to strengthen your clients’ financial literacy are numerous, being positively correlated with:
- more accurate risk profiling
- more genuinely informed consent
- more likelihood of sticking to plans rather than panicking
- less likelihood of complaints related to misunderstandings
- more appreciation of the value your advice has added to their circumstances.
On top of all of this, better informed clients are likely to derive greater psychological benefits from your advice, driving both positive mental wellbeing and a stronger adviser-client relationship.
The 6-actor model of Psychological Wellbeing[11], developed by psychologist Carol Ryff, identified the six drivers of wellbeing and happiness as autonomy, environmental mastery, personal growth, positive relations with others, purpose in life, and self-acceptance. Two of these drivers – autonomy and environmental mastery – are related to the concept of being empowered, and in control of one’s circumstances. High mastery individuals are adept at managing their environments and everyday affairs and making effective use of opportunities.
The relevance of this? Well, research[12] by Australian academics Hunt, Brimble, and Freudenberg – ‘Determinants of Client – Professional Relationship Quality in the Financial Planning Setting’ – found client empowerment was an important driver of adviser-client relationship quality.
The client education imperative
The benefits accruing to advisers who make client education a priority seem obvious. But in addition to the client level benefits already described, there are more macro level benefits to be had.
The quality of your educational offering can be a point of differentiation in the market, especially that part of your offering that is visible, and available online, when prospective clients are doing their initial research and shortlisting advisers to approach. Advisers offering a broad range of freely accessed and easily understood educational resources will attract more interest than those who don’t.
But perhaps the bigger reason to prioritise client education is that people want financial education – lots of it. And the most powerful indicator of this is the immense popularity of finfluencers. A recent study by YouGov[13] revealed that more than a third of Australians who currently use an investing app say they turn to both social media/’finfluencers’ and online communities/forums to research and learn about investing (both 35%) – making them the joint second most popular information sources (after ‘friends and family’).
Notwithstanding questions about their qualifications and the quality of their ‘wisdom’, the popularity of finfluencers has proved beyond doubt that Australians are actually interested in financial topics, and willing to invest their time (and in some cases, money) in improving their financial knowledge.
Strengthening your education game
The view that educating your clients will somehow lessen their dependency on you is, thankfully, now a seldom seen anachronism, and advisers understand that the resources dedicated to client education are an investment.
For those advisers looking to strengthen their educational offering, there are a number of key considerations, including the focus, channels, scalability, and creation of suitable content.
Focus
The focus of your educational content will vary with the nature of your clients and your proposition. For example, educational content related to share markets is not relevant to risk only practices. Basic content around budgeting and credit card usage may be more suitable if your client base skews younger.
Choose the right channel
A decade ago, the phrase ‘client educational resources’ evoked images of face-to-face seminars, flip charts, whiteboards, and workbooks. Today’s world is digital, and even older clients prefer more contemporary resources, including online calculators, quizzes, and video content.
Video, in particular, is popular, given the convenience with which it can be accessed, and numerous studies, including the YouGov survey referenced above, the ASX 2020 Investor Study[14], and UK research[15] into new investors, all reinforce the popularity of video content as a preferred source of financial information and education.
In terms of channel choice, studies show YouTube to be the standout overall, ahead of more ‘social’ platforms such as Facebook, Instagram and TikTok. Such channels can be an effective way of reaching both prospective, and existing clients, so you should bear this in mind when you are deciding where to host, and how to disseminate, video content.
Podcasts are also having a renaissance, with the daily commute providing a convenient window to consume audio content and provided there isn’t a heavy reliance on visual content, most videos can easily be repurposed as audio content.
Scalability also feeds into channel selection. Delivering education on a one to many – rather than one to one – lacks personalisation but allows massive efficiency gains. The seminar still has its place, although in this day and age, a webinar, or even a video recording is likely to prove more popular.
Your ongoing client communication, such as regular newsletters, is an ideal channel through which to deliver regular educational content.
Of course, central to all educational content delivery strategies will be your website, and priority should be given to ensure the design, content and navigation of your site will support, rather than undermine, the effectiveness of your educational resources.
Sourcing content
It is easy to become overwhelmed by the thought of creating your own educational content, with the lack of capability and/or capacity being frequent stumbling blocks. For some, even the relative ease with which videos can be recorded and edited using mobile phones and standard software isn’t enough to overcome these barriers.
Advisers looking to outsource content have a number of options, including:
- the resources, including calculators and videos, contained on the ASIC Moneysmart website[16]
- content produced by product providers (including market update content)
- the tools included in many adviser software platforms such as Astute Wheel, Midwinter, and others
- resources provided by professional associations and licensees.
In addition to these free resources, advisers also have the option to commission their own content from external copywriters and web developers.
Remember to drop the jargon
A key driver in the popularity of finfluencers is the way they communicate in a simple, easy to understand, jargon free, way. Keeping your communication jargon free doesn’t undermine its legality, on the contrary it makes it more likely that your message is understood, and therefore consent is genuinely more informed. It also makes you and your advice more accessible, and the client more empowered.
Summary
Financial literacy is a critical pillar of financial consumer protection, being positively correlated with both improved mental wellbeing and better financial outcomes. Financially literate clients are better able to focus on the strategy and advice you are giving, making interactions more productive for both you and the client. Advisers who place a priority on educating and clients stand to benefit from greater market differentiation, and deeper relationships with more loyal, empowered, financially successful clients.
