Most Americans don’t get it. They are overwhelmed by simple money concepts. That means advisors have lots of work ahead of them. That’s because advisors are facing a basic question.
Who will be the clients in the next generation when millions of Americans don’t have a clue about financial issues?
The American Money Problem:
Many Americans don’t have basic financial knowledge, many advisors say, and don’t seem to acknowledge that the lack of savings, investments and planning are critical issues in their lives.
“It is an epidemic problem,” says Christopher Kuehne, a certified financial planner (CFP) in Pound Ridge, New York.
Indeed, FINRA’s Investor Education survey, what it calls its National Capability study, said two thirds of Americans don’t understand basic financial concepts. They can’t compute the interest on a $20,000 loan with a 10 percent interest rate.
“Only 37 percent of respondents are considered to have high financial literacy,” according to FINRA. That means they could not correctly answer four or more questions on a basic five-question financial literacy quiz.
These distressing facts mean the most important work for many financial professionals is to be a financial educator.
“I think we have an obligation to do a better job of educating clients and would be clients,” says Charles Hughes, a CFP in Bayshore, New York.
Financial Pros Should Help More
Kuehne says financial professionals should do as much pro bono work as possible, especially with the young, an under-served segment of the advisory industry, yet a segment that is likely to need the most help.
“Many young starting out in their 20s carry huge amounts of debt. I know of two doctors starting out who have a half million dollars in student debt. I am helping them,” he says.
But Kuehne also says advisors should try to work with people starting their first jobs on how to use their 401(k)s effectively.
“They need to understand how important stocks are over the long term,” he said. Kuehne said that many young people don’t have enough stock exposure.
Scared by Wild Stock Market Swings
“They are spooked by volatility. They need someone to explain the long-term benefits of these investments, he says.
However, Kuehne adds that advisors should be proactive in helping those starting out; those likely not getting any professional advice. “Many people are intimidated by the subject of investing and need our help. They are often too afraid to ask.”
But another part of the problem of widespread financial illiteracy, he concedes, is that many people don’t even understand how they are at risk. Kuehne, in a common sentiment of most financial professionals, says part of the solution to this financial information gap, this widespread financial illiteracy, will come from education.
Hughes, one of the founders of the financial planning profession in the United States, said planning professionals should try to volunteer at high schools and community organizations. They should take every opportunity, he said, to explain the ABCs of financial planning to the general public.
Hughes also believes that, in meeting with clients on specific planning issues, “we should provide a better general background on why decisions are made.”
Don’t Forget the Schools
Besides that, advisers say that basic financial education should be a requirement for everyone going through high school and on into college.
“Years ago, when I was in high school, I remember taking a course in high school in basic budgeting and how to balance a check and a few other things. Now I don’t think they even have that simple course anymore,” said Ronald Roge, a CFP in Bohemia, New York.
Roge said he offered to a teach a free financial planning course in a local high school. “There seemed to be an initial interest, then the interest sputtered out,” he said.
The interest in needing financial advisers could also sputter out. What is the danger if advisers can’t significantly close the financial information gap that affects so much of the nation?
You’re Trillions of Dollars Short
One problem is today Americans are some $4 trillion short on retirement savings, according to Employment Benefit Research Institute (EBRI).
Roge recently encountered the problem. A would-be client, who had gone through decades without giving any consideration to retirement planning, asked for advice.
“I had someone come in and had done no planning and now wanted to retire in his 50s. After talking it over, this person suddenly decided that maybe he should work for one more year and that would solve the problem.”
But that would not, Roge said.
One year of extra work would not come anywhere near solving the problem. This person was going on without an effective plan. And millions of others do the same or don’t even want to consider the problem.
So what will happen to advisors and their businesses if they can’t reach a new generation of Americans who take an ignorance is bliss approach to retirement planning?
“Good question,” Roge said.