Dr. Annamaria Lusardi (left), the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College and a research associate at the National Bureau of Economic Research, spoke on conference call with the news media on Dec. 8 about the findings of a survey on financial capability by FINRA Investor Education Foundation. The survey is a long-term project that offers a tremendous amount of data on the financial capabilities of Americans and how their knowledge affects their behavior—as well as how the effect of geographic location affects people’s financial literacy.

AdvisorOne spoke with Lusardi separately after the conference call for more insights on people’s financial behavior.

Q: What did the overall results of the survey tell you?

A: People have difficulty understanding risk diversification. That was a really important finding: [whether they understand] how much we are exposed to risk and how important it is to insure against it. It’s the type of concept people have difficulties with. [We learned that] not just by people answering incorrectly, but also from a large proportion saying, “I do not know the answer.” … We have organized the questionnaire [so that the choices are] correct, incorrect, or “do not know.” That “do not know” [answer] is important evidence.

We looked at capability. When we looked closely at the risk-related concept of whether people put money aside as a rainy day fund, we found another lack of financial capability: Americans do not have a precautionary savings fund, which is defined as three months of income.

Q: Have you found any indication that people who know better do the wrong thing anyway?

A: Yes. It’s like having a driver’s license: even if you’ve passed the test, it doesn’t mean you’ll never have an accident. We do see data that indicate people with high financial knowledge do things of which they’re financially incapable, and vice versa. It’s not surprising, because there are lots of factors that influence behavior. [People aren’t] just driven by knowledge, but by a variety of factors. … [The data] allow us to understand behavior, taking into consideration financial knowledge and other factors.

Q: Were there data that surprised you?

A: Yes. One thing I was surprised about is behavior towards debt. We see high-cost borrowings—payday loans, rent-to-own, things like that . . . [O]ne in five has used these high-cost methods of borrowing in the past five years. A lot of people rely on these very high-cost methods.

Also, credit card behavior: it was amazing to see how much [it] can cost in expenses and fees. People ages 45 to 60 should be working on wealth accumulation and shouldn’t be carrying a lot of credit card debt and paying a lot of fees.

Q: What didn’t surprise you?

A: The data confirm what we see in other surveys: financial knowledge is very, very low. The surprising result is not that people do not know, but how little people know. I’m almost worried that this lack of financial knowledge might prevent people from going to an advisor, and prevent them from appreciating the financial advice they get.

Q: What do you suggest for advisors?

They need to have a holistic approach. They should look at many decisions that people make, rather than focusing on one. When we look at the data, we see that people might have assets, but also carry debt that generates a lot of fees and interest. It’s really important for an advisor to add holistic knowledge of all the things people do and do not do. . . .

The other thing that is important for financial advisors is related to financial knowledge. People display very little knowledge, and when they’re asked how much they think they know, they think they know a lot. They tend to give themselves very high scores, even though when we look at them [we see them] with overdrawn checking cards, and credit cards used for cash advances—people think they know, but when they are tested, they don’t seem to know very much.

My recommendation is [for advisors to direct clients] to the website. Add the link; ask people to do the test. It’s important for people to test themselves, so they can figure out how much they know. The nice thing about the data [in this survey is that they] provide comparisons with the average population, so they can compare themselves [to how other people did across the country].

I think it’s important that before we ask them to make difficult financial decisions, we find out how much they know.