A new report from J.D. Power finds that while Americans realize the importance of financial literacy, many are not as skilled as they suspect, and there is an opportunity for advisors to help clients learn more about the industry.
Last month, the company released its intelligence report, based on monthly data collected from more than 4,000 banking consumers. While half the questions are boilerplate, the other half focus on a particular topic, the most recent of which was financial literacy.
An overwhelming majority of those surveyed, 91%, agreed that poor financial literacy is a problem with those under the age of 25, although 58% said they do not have any significant doubts about their own level of financial literacy.
Upon closer examination, the study found that they should. Those surveyed answered three questions developed by a leading academic that tested their individual financial knowledge. Only 37% answered all three questions correctly, and 13% could not answer any of them correctly, according to Jennifer White, a senior director for J.D. Power’s banking and payments intelligence practice and author of the study.
“There is a gap between self-awareness and actual awareness,” she said. She adds that the gap is exacerbated when it’s not clear what financial literacy looks like.
While it might appear that the lack of financial literacy is prevalent only among banking customers with limited exposure to finances, those on the investor side of the business have similar problems. J.D. Power will be releasing another study next month that surveys investors, and the results are not much different.
“Preliminary findings would say that levels of literacy are disturbingly low among investors,” said Mike Foy, senior director and head of J.D. Power’s wealth intelligence practice. “When a customer has lower financial literacy, we know that their overall satisfaction with a financial institution is lower.”
There is a connection between a person’s financial literacy and their financial well-being, though the two are not always related. There are plenty of individuals who have wealth and investments, but are not particularly financially literate, White pointed out.
The intelligence report also examined how people felt about their overall financial health. Only 34% fell into the “healthy” category, which White defined as a person who has short- and long-term investments, is fully insured, and is not living month to month.
The remaining 66% fell into three various degrees of financial unhealthiness. The key toward better financial health is through financial literacy, according to White.
“Financial literacy is one of the first hurdles toward financial health,” she said. “You need to know where you are in order to improve your financial life.”
People who want to understand their financial health need to be mindful of certain vital signs: How much do they have in short-term accessible deposits? Do they have a long-term savings plan such as a retirement account? Do they understand whether their spending exceeds income? Financial literacy can help them identify those signs and let them know what to look for when evaluating their personal circumstances, White explained.
There is a tremendous opportunity among advisors to help clients improve their financial literacy, though many are not taking advantage of the resources readily available to them, Foy said.
“All financial institutions have resources designed to help educate the client, but many of them are not using it,” he said.
He quoted his firm’s 2022 full-service investor survey of 4,396 investors who work directly with a dedicated financial advisor or team of advisors. It found only 9% of advisors spoke with their clients about educational resources available to them.
Another problem investors had was with jargon. About 36% agreed that their advisor was using language that they couldn’t understand. Advisors use jargon for a variety of reasons and others may not even realize that they are doing it, but they need to do a better job of speaking to clients with more casual language, Foy pointed out.
“When you’re talking to your client, be sure that you are using ordinary language as much as possible,” he said. “Even if your client is wealthy, sophisticated, and highly educated doesn’t mean they have the same level of understanding that you have about the markets and financial products.”
By not seizing the opportunity to take on the role of a coach or a teacher with clients, financial advisors run the risk of minimizing their impact on clients, Foy said. As more technology comes online that can handle the functions advisors perform, they are going to need to stay relevant in a fast-growing technological world.
If an advisor’s core value proposition is still investment management, they “are going to be challenged to attract and retain clients going forward,” Foy said. “On the flip side, advisors who really lean into their role as teachers and coaches … are going to be the ones who have greater success in the future for being able to attract and retain clients.”