Financial literacy for a better advice sector

Financial advice is a specialist service. As much as the rule makers may wish to make it affordable and accessible to everyone, it’s not a service everyone needs. It’s a service for those who can afford it.

What we all need is financial literacy. Which, like financial advice, is a specific thing. Financial advice and financial literacy are two very distinct things that should not be confused.

Financial advisers educate their clients. It’s part of their service. But how much of this is client education and how much is financial literacy? Is it generally assumed that those who seek the services of a financial adviser are already financially literate?

The Australian Government defines financial literacy as the ability to make informed judgements and take effective decisions regarding the use and management of money.

The OECD says it is a combination of awareness, knowledge, skills, attitude, and behaviours necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.

In 2016, the Household, Income and Labour Dynamics in Australia (HILDA) survey included a series of questions testing knowledge of basic financial literacy concepts. They were:

Q1: Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2 per cent per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?

Q2: Imagine now that the interest rate on your savings account was 1 per cent per year and inflation was 2 per cent per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?

Q3: Buying shares in a single company usually provides a safer return than buying shares in a number of different companies. [True, False]

Q4: An investment with a high return is likely to be high risk.

Q5: Suppose that by the year 2020 your income has doubled, but the prices of all of the things you buy have also doubled. In 2020, will you be able to buy more than today, exactly the same as today, or less than today with your income?

Less than half (42.5 per cent) of Australians got all five questions correct, clear evidence that there is plenty of room for improvement on the financial literacy front.

But should financial advisers be the ones imparting this knowledge? Personally, I don’t believe so. Not because they can’t, but because they are running financial advice businesses — not educational programs.

Financial literacy, not financial advice, is what should be affordable and accessible. Keeping those distinctions clear is critical. Financial literacy is an education issue for society. Financial advice is a service for those who can afford it.

I don’t have the answers when it comes to making Australians more financially literate. But it is something that needs to be considered in any conversation about the future of financial advice. Because financially literate Australians are far more willing to see the value in advice than those unable to make informed decisions about their money.

Others may argue the opposite is true, that it is the financially illiterate who need advice. But they miss the point. The financially illiterate need education.

If the government really cared about the financial wellbeing of Australians they would educate them. And they would leave the advice sector alone.