There is an old saying that describes the difficulty of interacting with someone who claims to be the most knowledgeable person in the room:
“Nobody likes a know-it-all”.
Advisors know the struggle that comes with dealing with an investor who thinks he or she knows more about investing and financial matters than the advisor sitting across from them in a meeting room or office. What’s worse is when that “know-it-all’’ isn’t as knowledgeable as he thinks he is.
There is no old saying about interacting with people who don’t know anything. But, when it comes to advising investors, it might be more likely that the investor is not very knowledgeable at all. Advisors dealing with “know-nothing” investors are often required to do double-duty – educating the investor on investment products and services before getting around to the recommending part of the program.
From a financial literacy and education standpoint, most investors enter conversations with advisors from a point in between “know-it-all’’ and “know-nothing”. For advisors, who spend a significant amount of time getting to know investors on their first meeting, determining the financial intelligence and knowledge of an investor takes up a major portion of an initial discussion.
Understanding the true knowledge level of investors is the engine that drives Spectrem’s upcoming study Educating Millionaires: How Much Do Investors Really Understand? In the study, Spectrem quizzes Millionaire investors regarding their knowledge of various investment products. Using financial products like mutual funds and exchange-traded funds as well as financial terms like alpha and beta, the study demonstrates to advisors what they are likely to deal with when having a conversation with the average Millionaire investor.
There are dozens of questions advisors can ask investors to determine their level of understanding investments and investing. It starts with asking the investor to self-describe their level of understanding. Some may claim greater knowledge than they actually have because they fear being taken advantage of (plus, no one likes to admit they don’t know anything). Some may be self-aware enough to be upfront and truthful about their level of expertise. Either way, advisors must determine what an investor knows before proceeding with determining strategies.
Advisors need to determine where new investors received their personal education on matters of finance and economics. Did they actually learn anything on the topic in school (which is less likely today than it was 20 years ago, as schools often fall short of financial literacy instruction)? Have they received their financial education from family or friends or co-workers? Have they worked with other advisors who attempted to educate them on investment matters?
Does the investor want to be educated? Does the investor expect the advisor to provide a certain level of investment knowledge before proceeding? How much does the investor want to know about the details of their investments, and how much instruction will it take to get the investor to the level of knowledge they profess to desire?
It is not just new investors who can learn from their advisors about investment matters. Life events often create the need for financial education. People whose parents pass away early, those who receive a sizable inheritance when a loved one dies, married investors who divorce, investors who just added to their family with a child for the first time – all of these are investors who find themselves needing education. Advisors who already work with investors can provide all sorts of new information to assist investors who have seen a change in their family structure.
And, of course, advisors are a primary source of information for investors who are in a position to prepare for retirement. Because the financial life of a retiree is so different from that of a working investor, many people can be confused or flustered by the events that surround the change in working status, and advisors are required to provide education to those who may think they are past the day of being taught something new.
Thanks to the internet, investors can self-educate on most financial products and services. That does not mean that they do self-educate, or that the information they receive is accurate. Advisors need to determine what a new client knows, what the new client doesn’t know, and whether the new client knows that he doesn’t know.
© 2018 Spectrem Group