Quiz Time: Do Investors Understand How Financial Services Really Works?

Some 15 years ago, or so, a veteran financial planner told me that he didn’t take on new clients who were under 50 years old. He had created this rule, he told me, after years of experiencing younger clients constantly challenging his advice with their own “knowledge” and/or “experience,” resulting in a higher than average turnover rate among younger clients. “Until clients are 50 or so,” he told me, “they haven’t made enough mistakes, and had enough bad ‘advisor’ experiences, to realize how much they don’t know. They just aren’t ready to take advice.”

Since that time, I’ve raised the issue with a number of other veteran advisors, and found quite a few who have similar rules about taking “younger” clients; give or take a few years. This is one of the reasons that I’ve been skeptical about all the recent hoopla over “the need” for independent advisors to attract Millennials (ages 21 to 36) as clients (see my last blog; Is the Future of Financial Advice as Dim as Millennials’ Finances?). 

That blog was about a white paper released by big four accounting firm PwC (formerly Price Waterhouse Coopers) on the present state of Millennials’ finances. By way of follow up, I asked the folks at PwC to send me the data on Millennials’ financial literacy, which had been referenced in the study as being equally as dismal as Millennials’ financial lives. The actual data doesn’t disappoint and raises two important questions for the advisory community:

1) How important is “financial literacy” to good advisor/client relationships?

2) what kind of “financial literacy” would improve client relationships?”

To determine the “financial literacy” of Millennials, the PwC study used data collected by the George Washington University Global Financial Literacy Excellence Center in its 2012 National Financial Capability Study, which asked some 5,525 Millennials five basic financial questions:

1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

a) More than $102
b) Exactly $102
c) Less than $102
d) Don’t know
e) Prefer not to say

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

a) More than today
b) Exactly the same
c) Less than today
d) Don’t know
e) Prefer not to say

3) Buying a single company’s stock usually provides a safer return than a stock mutual fund.

a) True
b) False
c) Don’t knowd) Prefer not to say

4) A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.

a) True
b) False
c) Don’t know
d) Prefer not to say

5) If interest rates rise, what will typically happen to bond prices?

a) They will rise
b) They will fall
c) They will stay the same
d) There is no relationship between bond prices and the interest rate
e) Don’t know

According to the Survey, “Individuals are considered to have a basic level of financial literacy if they answered the first three question correctly; and an advanced level of financial literacy if they answer all five questions correctly.” (In case you’re playing along at home, the answers are: a,c,b,a,b.)

How did the Millennials do?