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The Challenge of Financial Literacy in the Information Age

Experienced advisors detail ways to boost the financial literacy of their clients.

By Lindsay Faussone

Investing is one of the most important ways to achieve financial security and a worry-free retirement. Yet, many Americans are winging it with little in the way of financial knowledge or long-term planning. As those of us in the financial services industry already know, the U.S. is far from leading the pack in financial education, and a lack of financial literacy is a major stumbling block to improving client outcomes.

Consider these harrowing figures:

  • The U..S ranks 14th in terms of financial literacy, well behind many developed-market peers.
  • Only 16.4% of U.S. students are required to take a personal finance class in school.
  • More than three-fourths of millennials lack basic financial knowledge.

Why does financial literacy matter?

Studies show a correlation between financial literacy and making sound financial decisions. According to the FINRA Investor Education Foundation, residents of states with high financial literacy rates are less vulnerable to predatory lenders, have fewer underwater mortgages and are more likely to establish rainy-day funds.

What do advisors think?

Many of the advisors we work with make financial literacy a priority, and they say the numbers don’t lie.

Amber Miller is a senior financial planner with The Planning Center in suburban Minneapolis who works primarily with mid-career professionals. Amber encourages clients to ask questions about their finances and to feel empowered to make smart decisions. Unfortunately, she says investors can initially be reluctant to reach out for help.

“A lot of confusion”

“There’s a lot of confusion these days,” she says. “I make it clear that it’s okay not to know the answer and to seek out help. People shouldn’t feel bad about being confused. After all, no one really teaches us this stuff in schools. We become adults and we’re just expected to be good at it.”

In fact, admitting to a lack of financial literacy may be a necessary first step.

John Hagensen is a Phoenix-based financial advisor with Keystone Wealth Partners. He says clients who admit they don’t have all the answers can achieve better outcomes.

“People who, quite frankly, admit they don’t know much about money and the markets often end up in a better spot than the folks who come in and think they know everything,” he says. “It’s that overconfidence that can really create problems.”

Overconfidence can lead to bad decisions

Karl Frank, president of A&I Financial Services in Englewood, Colo., echoes those thoughts.

“There’s a lot of misinformation out there and some people feel educated who really aren’t,” says Frank, who believes false confidence can cause investors to try and time the markets. He points to the fourth quarter of 2018 as an example. Many investors, panicked by rising volatility, bailed out of the markets, only to see stocks more than recover those losses in the first quarter of 2019:

Frank makes no bones about it: “Ouch. That’s a big whammy that could take a while to recover from.”

In fact, we saw in our advisor sentiment tracking study fielded last month that the biggest mistake clients make is trying to time the markets.

What can we do to improve financial literacy?

These experienced advisors prioritize financial literacy and have years of experience working with clients. Here are just a few steps they recommend:

  • Start by establishing a plan: Clients may be intimidated by even basic financial concepts, but they can more easily relate to their own financial situations. Hagensen believes establishing a financial plan can personalize what may otherwise seem arcane: “That sounds obvious, but the majority of Americans don’t have a plan,” he added. “How do you know if you’re on or off course if you don’t have a plan in the first place? When investors don’t have conviction, they tend to act on emotion.”
  • Ask questions and don’t judge: “Even if clients come in with massive amounts of misinformation, be respectful and help them see through the cloud. We ask a lot of questions of our clients,” Frank says. “There’s clarity on the other side of complexity.”
  • Set up workshops and events: The advisors we work with are also increasingly setting up their own investor education events to help overcome shortcomings in financial literacy.We run one or two events every month,” Miller says. “We also do education on the web and put out lots of information on social media, including a timely issue of the day. But we always try to bring things down to a client level.”

The irony is, of course, that we live in the information age—a time when investors have unlimited resources, but still seem as confused as ever.

“The information age is a terrifying but awesome opportunity,” says Frank. “People are going to come in with all kinds of different ideas. It’s not our responsibility to change their minds, but to ask questions, provide counsel and act in their best interests. Most investors are simply looking for honesty and confidence from their advisor.”

In the final analysis, it’s up to advisors to set the standard. Clients don’t need to be grounded in monetary policy, earnings multiples or the various asset classes. But they should have a good handle on their own risk tolerance, time horizon and personal financial goals. That alone can cut through a lot of clutter.

Lindsay Faussone is Vice President Strategic Programs, E*TRADE Advisor Services

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