Your Clients Are Less Financially Literate Than You Think

Lack of financial literacy is “not limited to lower income, lower education [consumers]. It is quite pervasive across all income ranges.”

Those sobering words came from Sarah Newcomb, behavioral economist at Morningstar, who said recently that regulators and other stakeholders dedicated to boosting Americans’ financial literacy “have a tough challenge ahead.”

After speaking at a financial literacy event held at the Treasury building in Washington, Newcomb told me that a good start for advisors would be “to understand that clients likely know a lot less than they let on.”

While FINRA’s seventh annual National Financial Capability Study found an increase in the nation’s adults who report not having difficulty covering their monthly expenses, financial literacy levels continue to be low, with only 37% of respondents considered “highly financially literate,” meaning they could answer four or five basic questions correctly on a five-question financial literacy quiz.

Overall financial literacy, the survey found, is down slightly since 2009.

SEC Chairwoman Mary Jo White noted at a mid-July event at George Washington University in Washington that the survey’s financial literacy quiz revealed there continues to be “a lack of some basic investor knowledge.” For instance, she said, most Americans are still not aware that market interest rates and bond prices move in opposite directions or that a mutual fund usually provides a safer return than a single company’s stock, two of the questions on the FINRA quiz.

White stated that the clear “headline” lesson from the study “is a familiar and critical one: In today’s increasingly complex world, Americans need the financial skills to tackle life’s everyday challenges,” and they should have “an understanding of how savings and investing can help meet their life goals and achieve a secure retirement.”

Investors must be “well-informed” in order to understand risk and to detect and avoid fraud, White said. Improving literacy is not simply a financial issue, White said, but also a “moral imperative.”

Among the study’s most notable findings:

• More than one in five Americans (21%) have unpaid medical debt, and women are more likely than men to put off medical services such as seeing a doctor, buying needed prescriptions or undergoing a medical procedure due to cost.

• Nearly half (45%) of respondents with a high school education or less could not come up with $2,000 in 30 days in the event of an emergency, compared to only 18% for respondents with a college degree.

• Twenty-nine percent of 18- to 34-year olds with a mortgage have been late with a mortgage payment, compared with 7% for the 55-plus age group.

• Hispanics and African-Americans are much more likely to use high-cost forms of borrowing like pawn shops and payday loans compared to whites.

As Richard Ketchum, FINRA’s outgoing CEO, noted at the event at GWU, debt continues to be a problem for many Americans, with more than one in five having unpaid medical debt. What’s more, he noted, more than one in five Americans with credit cards have been contacted by a debt collection agency in the last year.

The College Debt Issue

College debt is another big worry that has gotten the attention of lawmakers as well as the Treasury Department.

Deputy Treasury Secretary Sarah Bloom Raskin said at the GWU event that while the National Financial Capability Study reveals “cracks in many Americans’ sense of financial security,” the results also point out the opportunities “for addressing these cracks.”

She noted how the survey results “resonated” with the findings of Treasury’s student loan team, which has been conducting field surveys for more than two years of college students and their experiences with college loans. Too many student loan borrowers still in school don’t know how they will pay off their loans, Raskin said, which has the effect of “stigmatizing student loan borrowing — to the point that students might consider dropping out of school.”