financial literacy chart

A Huge Disconnect

Paula Vasan in Financial Planning magazine highlights a striking FINRA Investor Education Foundation report about consumer attitudes toward, and need for financial literacy. The findings show a huge disconnect between consumers’ perceptions vs. reality when it comes to financial planning:
  • 75% of Americans have “positive perceptions” of their own financial knowledge and math skills.
  • Yet just 14% were able to correctly answer five financial literacy questions compiled by FINRA’s investor education foundation.
These startling findings are based on surveys of more than 25,000 adults conducted across the US between 2012 and 2009, in which an online test was used to evaluate the financial knowledge of participants. You can view the full results of FINRA’s quiz here.

Who’s Most At Risk?

FINRA’s survey found that financial capability varies by geography and demographic groups:

Geographical Disparities: The Coastal States Do Better

  • Citizens of California, Massachusetts and New Jersey were the most financially capable, ranking in the top five in at least three of five measures of financial capability.
  • Mississippi was the least financially capable state, placing in the bottom five in four out of five measures, while Arkansas ranked in the bottom five in three out of five measures, and Kentucky ranked in the bottom five in two out of five measures.

Generational Disparities: Younger Americans at Risk

  • Younger Americans, especially those 34 and under, are more likely to show signs of financial stress, including taking a loan or hardship withdrawal from their retirement account or making late mortgage payments.
  • Younger Americans are more likely to have unpaid medical bills. The breakdown is as follows:
    • 31% of those aged 18-34.
    • 17% of those aged 55 or older.

Gender Disparities: Women at Risk

Other studies have shown women to be at risk.  A report by workplace financial education provider Financial Finesse, 2012 Gender Gap in Financial Literacy Researchshows women still lagging in in key areas of financial planning, and, further, the report identified that the gap between the genders is widening in nearly every area of financial planning.

A Widespread Societal Problem

Despite these disparities, the national averages show a serious across-the-board need for financial planning help.  Of the five basic financial literacy questions tested, the national average was just 2.88 correct answers.

  • Only 41% spend less than their income.
  • 26% report having unpaid medical bills.
  • 56% do not have sufficient savings to cover three months of unanticipated financial emergencies.
  • 34% paid only the minimum credit card payment during the past year.

Unfortunately, these are not isolated findings, but have been corroborated by numerous studies over the years. For instance:

  • A 2012, the SEC report on financial literacy concluded that “American investors lack essential knowledge of the most rudimentary financial concepts: inflation, bond prices, interest rates, mortgages, and risk.”
  • 69% of 1,664 participants in a 2010 Northwestern Mutual Life Insurance study to determine Americans’ general financial knowledge  failed the quiz.
  • In a 2008 study of high school seniors, only 36.2% knew that “retirement income provided by a company” is called a “pension.”
  • An Ariel study of 401(k) savings disparities found that African-American and Hispanic workers in the U.S. have lower 401(k) balances and participation rates than their white and Asian counterparts.

Serious Economic Implications

This paints a grim picture of the state of American financial literacy. The implications of the financial literacy disconnect are twofold:

  1. Consumers who are unable to understand their financial planning needs are unlikely to realize their full financial potential.
  2. An uneducated public lowers the bar for financial planners, leaving consumers at risk.

Ms. Vasan interviewed fiduciary advocate Ron Rhoades, program chair of the Alfred State Financial Planning Program. He emphasized the need for a strong fiduciary standard of conduct requiring planners to act in the best interests of the client. According to Mr. Rhoades:

Sadly, 80% or more of ‘financial advice’ and ‘investment advice’ provided today is not provided in the best interests of consumers, but rather is — often unknown to the consumer — designed to sell expensive investment products to unsuspecting consumers.

A 2009 National Financial Capability Study found that only 15% of respondents indicated that they had “checked an advisor’s background or credentials with a state or federal regulator, ” and an alarming 43% of investors in a 2007 MoneyTrack/IPT Investing Secrets Survey demonstrated a susceptibility to fraud.

An April 9, 2012 Op Ed by Time Business and Money titled Improving Financial Literacy is Essential to Our Nation’s Economic Health written by Roger W. Ferguson Jr., president and CEO of TIAA-CREF, and a former vice chairman of the U.S. Federal Reserve, sums it up well:

Why It Matters: People with low levels of financial literacy suffer from that lack of knowledge at every stage of their lives: Another study from the TIAA-CREF Institute shows that people with a high degree of financial literacy are more likely to plan for retirement, and that people who plan for retirement have more than double the wealth of people who don’t.

Conversely, people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. They are less likely to invest, more likely to experience difficulty with debt, and less likely to know the terms of their mortgages and other loans. 

The cost of this financial ignorance is high, leading many people to incur avoidable charges and fees from things like making late credit card payments or paying only the minimum amount due, overspending their credit limit, and using cash advances.

Calling All Planners

Consumers Need Help: The problem is likely to become worse as Generations X and Y head into middle age. And the educational response has been negligible. 26 states have no financial literacy requirements at all in their K-12 education systems, and only four states require students to take a personal finance class in high school.

The Disconnect Makes Financial Planning a Hard Sell: A more complex financial environment coupled with an enormous disconnect between consumer needs and attitudes creates a huge challenge for financial planners. The services of Financial Planners are more needed than ever, but getting people to face these sensitive matters remains a hard sell.

What Planners Can Do: Given this disconnect, astute financial planners can help to bridge the gap between need and perception by offering to conduct financial planning classes at local schools, civic groups (like Lion’s and Rotary), local businesses and other public forums.

A Business Development Opportunity For Planners Too

Not only does this meet a vital need, but it provides invaluable opportunities for financial professionals to increase their business in the community. Financial literacy classes can help financial planners to :

  • Introduce and advertise their practice.
  • Differentiate themselves as credible, trusted professionals in a crowded field.
  • Network within community-based associations and organizations where they can increase their visibility, gain referrals, and become trusted, influential resources.

Financial literacy classes provide an entry point for planners to get involved with community organizations and expand their influence, and can open up opportunities that can lead to networking, referrals and sales, by:

  • Serving on organization committees.
  • Buying tickets or a table for their functions.
  • Buying adds in their programs.
  • Submitting an informational article to their newsletters.
  • Assisting in or sponsoring events.
A financial literacy program provides opportunities for planners to be seen as thought leaders and trusted resources, making organization members receptive to a request for a networking meeting or an appointment to explain the services they provide. At the same time, planners will gain great confidence that they are helping consumers to make better financial choices, starting with the choice to engage a trusted advisor for the support they need.

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