Consumer protection – the financial literacy challenge with older Australians

08 Nov 2023

From AdviserVoice - this Regulatory Compliance and Consumer Protection article is proudly brought to you by Perpetual Investments

Financial literacy of older clients is a key pillar of financial consumer protection.

Our ageing population represents one of the most significant policy challenges our nation has faced in decades. The burden on our health and social security systems will grow at the same time that the proportion of working, tax-paying Australians shrinks. Against this backdrop the focus by policymakers on retirement incomes and the superannuation system is understandable – in simple terms the more financially secure older Australians can become, the less reliant they will be on government safety nets.

The retirement incomes framework in Australia compares well to its international peers, with the compulsory superannuation system and the Innovative Income Streams legislation paving the way for more Australians to be able to live comfortably in retirement. Australia has amassed the 5^th largest pool of superannuation savings in the world^[1], and Australian retirees have access to an ever-increasing range of solutions that can help them optimise their retirement savings.

There is however, one major problem. The financial literacy of older Australians is poor, while the system designed for their benefit is complex. Recent research^[2] went so far as to describe Australians as being ‘financially illiterate when it comes to retirement’.

This article will explore the phenomenon of low financial literacy among older Australians. The most recent research will be discussed, along with its implications. The opportunities for financial advisers to help improve the financial literacy of older clients – and thus reinforce a key pillar of financial consumer protection – will also be examined.

The retiree financial illiteracy problem

Several recent research studies have laid bare the scale of the financial literacy problem among older Australians.

A 2022 survey^[3] of 3400 members of National Seniors Australia, conducted by Bond University, found that financial illiteracy among older Australians was at ‘dangerous levels’.

Around 90% of those surveyed failed to correctly answer all three questions, and around a third got all three questions wrong.

Also released in 2022 was research^[4] by the Centre of Excellence in Population Ageing Research (CEPAR). That study concluded that financial mistakes are more common in old age due to the complexity of information available lack of financial literacy, and cognitive decline.

Headline findings from that study included:

less than half of all Australians have high financial literacy (which places us above the US, but below other countries, including Holland, Switzerland, and Germany
financial literacy peaks at 54 and then declines
at the same time, responsibility for making household financial decisions and overconfidence in one’s own financial knowledge increases with age
between 5 and 20% of the population aged 60 and over is estimated to have mild cognitive impairment, characterised by problems with memory, language, thinking or judgement, which can affect complex financial decisions, and
older Australians lose more to financial scams.

The general implications of poor financial literacy

Poor financial literacy is often associated with a wide range of adverse outcomes, both financial and psychological.

US financial literacy research^[5], for example, found that people with low financial literacy were less likely to plan, save, and invest in stocks, and as a result, accumulated lower levels of wealth. Similarly, those with lower financial literacy were more likely to have credit card debt, more likely to pay the minimum due amount, more likely to use higher cost credit facilities, and less likely to refinance their home loans.

Locally, the Household, Income and Labour Dynamics in Australia (HILDA) survey^[6] found low financial literacy usually translates to poor financial health. Poverty rates among the least financially literate are twice as high as the most literate group. Those with low financial literacy are also less likely to get involved in household budget decisions, have a lower propensity to save, and are consequently more vulnerable to experiencing financial stress.

Those with low financial literacy, and therefore less able to understand complex financial products, are also more susceptible to being taken advantage of, by scammers and unscrupulous product peddlers, and even by their own family members (a phenomenon we now understand as elder/financial abuse).

Looking through a retirement lens

The implications of poor financial decision making are greatly amplified in retirement when the ability to financially recover from mistakes is much lower.

In July 2020, the final report of the Retirement Income Review⁷ was handed to the federal government. That report found lower levels of financial literacy were associated with:

lower super balances
lower willingness to take financial risk
shorter savings horizons
being less likely to set up a retirement plan
being less informed about pension rules
paying higher investment fees
not diversifying pension assets.

Consistent with the above, CEPAR^[8] found that among 45–54-year old’s, only 18% think beyond 5 years, compared to 35% among the high-financial-literacy group.

The Review’s findings have been reinforced by several, more recent, studies, which found many retirees were leaving a lot on the table, due to their lack of knowledge and understanding.

2023 research^[9] by AMP, for example, found that, of Australians over 50:

3 in 4 find the retirement system complex
2 in 5 don’t know if they’ll be eligible for aged-pension benefits
7 in 10 don’t know what an account-based pension is
3 in 4 have not sought financial advice for retirement planning
3 in 5 wish they’d started planning for retirement earlier in life
3 in 5 are ‘extremely concerned’ about the rising cost of living

The extent to which this lack of literacy is leading to sub-optimal retirement product selection was also found in research^[10] by SMSF administrator Class, showing that only half of APRA regulated super fund members over age 65 have taken advantage of rules allowing them to move into a tax-exempt retirement income product (compared to around 86% of SMSF members, the majority of whom would be advice clients).

Complexity is a problem

Efforts to improve the financial literacy of Australians have generally failed to shift the dial. But so have efforts to make financial products and documents simpler and more accessible.

The complexity of superannuation and retirement income products is especially problematic, and was also highlighted by the Retirement Income Review:

“System complexity prevents people optimising their retirement income. Navigating different parts of the retirement income system, combining income sources, and managing the multiple risks faced in retirement is challenging. People need assistance with complex financial decisions. Interactions between the retirement income system and other systems, such as the aged care system, increase complexity.”^[11]

Advisers themselves know all too well how complex rules around superannuation, tax, and Centrelink are, and how complex some of the newer innovative income stream products are. What hope does the average person have of navigating such a system.

The role for financial advice is obvious

Along with financial literacy, financial advice is seen as one of the four main pillars of financial consumer protection (regulation and disclosure being the other two).

For retirees, one could argue that financial literacy and financial advice are almost completely interdependent. The role of advisers is not just to help their retiree navigate a complex retirement landscape (comprising choppy investment markets and complex products and regulations), but it is also to educate their clients, to help them make better financial decisions, to help them feel more confident and in-control, and to prevent them making poor/irrational financial decisions.

This is not just a matter of adviser self-interest; it is also because – despite what is at stake with our ageing population hurtling towards retirement – the focus and resources devoted to the financial literacy of older Australians have been sadly lacking.

As far back as 2004, the Federal Government’s Consumer and Financial Literacy Taskforce (CFLT) identified the most critical cohorts to focus on as high school children, Indigenous Australians, and those of a cultural or linguistically diverse (CALD) background^[12].

Fast forward to today, and the complete absence of financial literacy resources aimed at older Australian is telling. Table 1, adapted from the CEPAR’s Financial decision making in and for old age report, analysed the programs designed to improve financial capability, and found that few, if any, were actually targeted at older Australians.

But advice anxiety among older Australians can be a barrier

In the same way that the possibility of embarrassment can be a barrier to individuals seeking medical assistance – even in the face of serious symptoms – so too do some people become extremely anxious at the thought of visiting a financial adviser.

Experts believe this ‘adviser anxiety’ stems from one of two different sources (or both):

Expectations of being negatively judged by the financial professional (what researchers refer to as evaluation anxiety), or
Feelings of discomfort at the prospect of sharing personal information with a professional adviser (disclosure anxiety).

Even if this anxiety doesn’t prevent an individual seeking advice, it can still cause them to be more guarded in the information they share with the adviser, which can lead to sub-optimal advice outcomes, and a less trusting, more shallow client/adviser relationship.

This phenomenon was studied in more detail by National Seniors Australia, and Productive Ageing Australia, in their paper The Role of Financial Literacy and Financial Adviser Anxiety in Older Australians’ Advice Seeking^[14]. Based on a sample of 2,200 Australians aged 40 – 74, the study set out to quantify ‘Adviser Anxiety’, via a range of detailed questions.

These questions, shown in Table 2 below, as well as helping capture the underlying drivers of respondent’s anxiety about seeking advice, also provide a ‘how to’ template for financial advisers seeking to make their clients feel more relaxed and at ease throughout their interactions.

The prevalence and outcomes of financial adviser anxiety

By asking respondents to rate their agreement with each of these 15 questions on a scale of 1 (low) to 5 (high), the study was able to quantify the extent of financial adviser anxiety.

Around 28% of the sample, with an average score under 2, were found to have little or no adviser anxiety. A further 46% were found to have mild anxiety, 21% were classified as moderate adviser anxiety, and 4% were classified as severe.

Who is likely to experience adviser anxiety?

Findings from the study revealed financial anxiety scores were significantly higher for those who:

were less educated
had limited financial knowledge
were in the younger age groups of the sample
had lower incomes, and
had limited knowledge of retirement issues.

The study also found that adviser anxiety was negatively correlated with the likelihood of seeking retirement planning advice, and financial advice generally. This can be seen in Figure 1 below:

Implications for financial advisers

For many advisers, financial literacy has been a core part of their approach. Not purely a response to compliance obligations around informed consent, many recognise that a more financially educated client is more likely to understand, and appreciate, the value of advice. As such, improving the financial literacy of your clients can pay dividends in the form of more engaged, forthcoming, and trusting clients.

In the context of retirement planning being the largest single sector of advice – with around 90% of advisers actively advising pre retiree and retiree clients^[16], there are some specific considerations in relation to the challenge of low financial literacy among older Australians:

When building financial education resources for your clients, it is worth prioritising your older clients, as their needs are arguably greater
Consider the causes of financial adviser anxiety, discussed in Table 1 above, and ensure your processes and engagement style are designed to mitigate these anxieties
Remember that client stress levels are compounded at retirement, as many grapple with a perceived loss of purpose, as well as loss of salary
Consider the physical limitations of your ageing clients, and ensure educational materials are accessible, being easy to read and easy to understand
Even older clients are reasonably tech savvy, so make your educational resources available through multiple channels
Gamification can be a very effective way of educating clients on complex financial concepts
Treat financial education as an ongoing journey, incorporating educational resources into client reviews and client communication (seminars, newsletters etc)
Use your client surveys to determine which concepts your older clients would like to learn more about
In addition to your own resources, tap into those from your licensee, product providers, professional associations, and freely available external resources, such as ASIC’s Moneysmart website.

In conclusion

In the words of ASIC, “Better informed investors make better clients”^[17]. 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, and
more appreciation of the value your advice has added to their circumstances.

But as important as it is to educate all your clients, it is arguably even more imperative to invest in improving the financial literacy of your older clients.

Financial decisions around retirement come with much higher stakes, and low financial literacy and high adviser anxiety among older Australians, combined with the highly complex rules and products associated with retirement, amplify the likelihood of poor outcomes for retirees. Outcomes financial advisers are well equipped to mitigate.