Financial advice is a specialist service. As much as the rule makers may wish to make it affordable and accessible to everyone, it’s not a service everyone needs. It’s a service for those who can afford it.
What we all need is financial literacy. Which, like financial advice, is a specific thing. Financial advice and financial literacy are two very distinct things that should not be confused.
Financial advisers educate their clients. It’s part of their service. But how much of this is client education and how much is financial literacy? Is it generally assumed that those who seek the services of a financial adviser are already financially literate?
The Australian Government defines financial literacy as the ability to make informed judgements and take effective decisions regarding the use and management of money.
The OECD says it is a combination of awareness, knowledge, skills, attitude, and behaviours necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.
In 2016, the Household, Income and Labour Dynamics in Australia (HILDA) survey included a series of questions testing knowledge of basic financial literacy concepts. They were:
Q1: Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2 per cent per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?
Q2: Imagine now that the interest rate on your savings account was 1 per cent per year and inflation was 2 per cent per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?
Q3: Buying shares in a single company usually provides a safer return than buying shares in a number of different companies. [True, False]
Q4: An investment with a high return is likely to be high risk.
Q5: Suppose that by the year 2020 your income has doubled, but the prices of all of the things you buy have also doubled. In 2020, will you be able to buy more than today, exactly the same as today, or less than today with your income?
Less than half (42.5 per cent) of Australians got all five questions correct, clear evidence that there is plenty of room for improvement on the financial literacy front.
But should financial advisers be the ones imparting this knowledge? Personally, I don’t believe so. Not because they can’t, but because they are running financial advice businesses — not educational programs.
Financial literacy, not financial advice, is what should be affordable and accessible. Keeping those distinctions clear is critical. Financial literacy is an education issue for society. Financial advice is a service for those who can afford it.
I don’t have the answers when it comes to making Australians more financially literate. But it is something that needs to be considered in any conversation about the future of financial advice. Because financially literate Australians are far more willing to see the value in advice than those unable to make informed decisions about their money.
Others may argue the opposite is true, that it is the financially illiterate who need advice. But they miss the point. The financially illiterate need education.
If the government really cared about the financial wellbeing of Australians they would educate them. And they would leave the advice sector alone.
Totally agree. If someone (at the extreme) has no awareness of a simple concept such as budgeting for example, how can they reasonably understand any complex advice around structuring investments or tax effective strategies, etc. This then leads to misunderstanding, heighted risk exposure relative to personal comfort level, and inappropriately puts the burden of investment outcome on the Financial Adviser, rather than having the client make an informed risk decision and subsequently able and required to take and accept the consequences of those decisions.
Well said. Financial literacy is at issue in this debate. If someone could successfully answer the HILDA questions, they could possibly also do their own research to derive simple financial advice such as contribution to super, the mechanics of starting a super pension, and the other advice areas that are being used to prosecute the case to extend the categories of financial advisers. It is often suggested that these simple financial concepts should be taught at high school but generalised learning is possibly not as effective as contextualised learning whereby it is provided at the point where a financial decision is being contemplated. Question 1 in the HILDA survey could be done by banks when a person enquires about a savings account, for example. The ASX offers online training about financial products, I doubt it is well known. It is the superfunds that are lagging on member education. They have the resources to provide a lot of education material that could supersede the need for them entering into the financial advice arena to provide “simple advice”. The challenge will to be wean off jargon and use plain English as this is the biggest first step most take on their financial literacy journey, simply understanding what is what.
I think Mortgage Brokers are very well placed to give financial literacy