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Financial Literacy Is Key to the Client/Advisor Relationship

An advisor’s role should include helping clients become more fluent in what may be the world’s most consequential language.

Understanding the basic tenets of managing money is critical in today’s economy. Yet too few Americans make an effort to fully understand the vocabulary of finance, leaving them ill-equipped to make informed decisions.

What Is Financial Literacy?

In the simplest terms, financial literacy is an ability to understand and use various financial skills. While that includes personal financial management and investing, it also encompasses basic matters such as effective budgeting and managing credit card debt among many other things.

To become financially literate, a person must understand why it is critical to their well-being and those close to them. Without a desire to understand the financial underpinnings of our life, it is unlikely one will achieve literacy. Unfortunately, the language of money can seem overly technical—something to investigate “later.”

Financial Literacy Is Often Overlooked By Advisors

Because financial matters are often perceived as daunting and, yes, boring, people often outsource their decisions to a financial professional. Unfortunately, not all advisors see themselves as educators. And education is at the center of financial literacy.

Many advisors assume their clients have more understanding of the financial landscape than they do. They view their role as an investment manager with a mandate to build portfolios, grow assets and help their clients reach a “magic” number for retirement. They see themselves as being responsible for investing—not educating their clients on the nuances of how it all works. As a result, clients may unknowingly be making financial decisions based on an incomplete understanding of their options, the implications of their choices or the potential risks they are taking.

Other advisors have taken on the role of financial planner, which is terrific in theory. They create plans and tell clients how much money they need to achieve their goals. Or what types of insurance coverage they might need. But do they provide clear guidance on how to create and stick to a budget? Do they explain the nuances of mortgage products? Do they discuss why it is better to buy or lease a vehicle given the client’s specific situation? Are there regular check-in points or does the client know which type of purchase should trigger a call and why?

Technology Can Help Enhance Financial Literacy

Digital tools can be a great help. Large financial institutions now embed budgeting and spending tools in their apps to help educate and guide. And, of course, most of the financial planning tools have interfaces to track spending if a client chooses to use them.

The challenge for advisors is to motivate their clients to use these tools. Wherever possible, help with the heavy lifting by helping clients connect their accounts—banking, credit cards, mortgages, etc.—to these tools to gain transparency. But remember, it’s not a “set it and forget it” proposition. You need to track activity together to understand how and where they are spending it. It is important to identify any patterns that could derail the plan you put in place. This is also a valuable opportunity to educate on the potential impact of decisions they are making.

Challenges Faced By Advsiors

Time is a significant issue, along with cultivating and encouraging the client’s interest in better understanding their financial underpinnings. When creating a client service model, include ample time for education. Assess up-front how much education is needed and appropriate. Include this education component as part of regular check-ins. Helping clients raise their understanding and confidence around their money story will usually lead to a more trusting and sticky relationship.

The challenge has always been that if clients are not actively educated by their advisors, they will get their information somewhere else. It could be a talking head on TV, a neighbor, a misinformed family member, another financial professional or, worst of all, a nefarious financial predator. You will not be able to control those inputs and it’s harder to move someone from a mindset that is already developed. Artificial intelligence will also play a bigger role as more financial data is tracked and aggregated. That can be good or bad, but as the advisor you should be the primary financial guide and educator.

Financial literacy is a core component of a successful client/advisor relationship. Without an understanding of the core tenets, clients may get themselves into financial trouble and you’ll have fewer assets to manage. 


Laura Hanichak Gregg is Director of Practice Management and Advisor Research at FlexShares Exchange Traded Fund

TAGS: Technology
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