When I was in high school I was forced to take home economics. At that time, I found this requirement to be offensive…even discriminatory. I argued that I didn’t intend to be a housewife. I wanted a career and it was much more important to my future life (as perceived by my 16-year-old brain) to take Russian Literature than Home Economics. Clearly, looking back on it with a significant number of years under my belt, learning how to boil an egg and even to sew on a button has provided much more value than Russian Literature ever could have.
And while home economics did include cooking and sewing, it’s the “economics” portion that provided additional benefits. We learned how to write a check, keep a budget, create a savings account and other tasks that in retrospect seemed relatively obvious…but in actuality, I don’t know who else would have taught me those things if I hadn’t learned them at school. But sometime between when I graduated from high school and now, most high schools dropped the requirements for home economics or similar types of classes. Perhaps the need for Russian Literature was seen as more important. But the reality is that many individuals have never had any type of financial literacy training. And while my home economics course did not teach me about the difference between a stock or a bond, at least I had a baseline knowledge of how to manage my money.
In research recently completed by Spectrem Group, we found that only 37 percent of investors have taken any type of financial literacy course. Fortunately, that percentage is somewhat higher for younger investors. But half of investors (53 percent) are looking to their financial advisor to educate.
As part of our research, investors with more than $1 million of net worth were given a quiz to test their knowledge of financial terms and concepts. More than half of millionaires “failed” the financial literacy quiz, scoring less than 70 percent. So what do Millionaires understand? They understand what a Certificate of Deposit is with 91 percent answering the question correct. Other high scores included the definitions of mutual funds (90 percent), IRAs (98 percent), ETFs (81 percent) and even Term Life Insurance (82 percent). An additional 82 percent understand the concept of Asset Allocation.
But investors did not score as well in their understanding of which markets track which stocks (Dow vs. NASDAQ, etc.)(33 percent) and the concept of Whole Life Insurance (68 percent). The concepts of Alpha (35 percent) and Beta (29 percent) were also low. Only 29 percent of investors understand FDIC insurance.
So why is this important for advisors to know? Primarily because advisors often use terminology that they presume investors understand. Additionally, they may not ask the right questions of investors. Do they know how many CDs a household owns, the value and if they are properly titled to insure the greatest amount of FDIC insurance? When investors hear that that the NASDAQ is taking a beating…do they know the impact on the stocks they might own? Maybe they don’t even have any stocks that are traded on the NASDAQ.
Financial literacy is complex. For those of us in the industry, we make assumptions about what investors understand and fail to adequately explain the terminology we are using. Advisors and providers need to gain a greater understanding of what customers actually know and how to educate them on important concepts that they might not understand. After all, more than half of investors are relying upon you for their education.
Support financial literacy initiatives in your community. In the interim, check out our new report entitled The Financial Literacy Gap Among Millionaires. It will help you to design materials and initiatives that will educate and influence both existing and prospective clients.
© 2018 Spectrem Group