Watch your language: Advisors should adjust to lack of financial fluency by most investors
Lack of understanding of the words that plan participants need to make decisions may affect their retirement preparedness.
The lack of financial fluency among most Americans may result in reduced savings and lower use of investment products.
In a survey, Hearts & Wallets examined consumer understanding of the language of investing, the connection to financial needs and behaviors, and the implications for advice, workplace retirement and asset management businesses.
The analysis covered consumer groups by asset level, gender, generation, marital status, investing experience, participation in workplace retirement plans and the positive impact of advice on fluency, identifying opportunities for solution improvements and high value-added advice, such as tax optimization.
Among the significant findings:
- Four in 10 Americans chose the best answer four or fewer times for seven key investment selection terms.
- Only 19 percent achieved a passing grade by selecting the best answer for five or more terms.
- One in three potential participants in workplace retirement plans did not know any definitions for the four basic investment selection terms fundamental to their ability to select investments within a plan.
“Many surveys assess consumer financial literacy,” said Laura Varas, CEO and founder of Hearts & Wallets. “Our goal was to extend the conversation into investing. Lack of understanding of the words that plan participants need to make decisions has implications for our national retirement system and improving plan design.”
Fluency is much greater for consumers with higher education levels. Being a consumer of advice also helps. Consumers who rely on paid investment professionals as their “go-to/primary” or usual sources of investing information and advice are more likely to know the best definitions for five-plus terms. Conversely, 30 percent of consumers who identify as self-directed investors did not know the best definition for even one term. Men have a better understanding than women across all asset levels.
“Consumers, financial services firms and advisors should speak the same language,” said Beth Krettecos, Hearts & Wallets subject matter expert. “An intuitive definition will often take on a life of its own, as shown with the term ‘passive investing.’ Firms may want to use a more description term, like ‘indexing,’ to avoid misunderstanding.
“Where complex choices require technical language for explanation, firms may want to consider introducing new, more intuitive concepts to help consumers become more confident about investing. Advice also plays a role in helping consumers succeed in saving and investing.”
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