Targeting Advice Based on Financial Literacy

For more information about this topic, please read the accompanying article in this issue of Advisor Perspectives, The Debt Burden Facing Retirees.

A George Washington University professor says advisors should target clients based on how financially literate they are rather than on their level of assets.

I caught up with Annamaria Lusardi, the Denit Trust chair of economics and accountancy at The George Washington University School of Business, to get her thoughts on how the findings of the new working paper, “Understanding Debt in the Older Population,” more specifically relate to financial advisors. Lusardi coauthored the study with Olivia S. Mitchell, the IFEBP Professor of Insurance/Risk Management & Business Economics/Policy at The Wharton School of the University of Pennsylvania, and Noemi Oggero, a post-doctorate fellow in the School of Management and Economics at the University of Turin in Italy.

I found it very interesting that even answering one additional financial literacy question correctly is associated with better credit records and retirement planning. Can financial advisors make a bigger difference with financial literacy by doing more to evaluate clients? Would it help address some of the issues you raise? Should more advisors target the groups that need the most help?

We have done a lot of research on financial literacy and have shown that it helps in every dimension: It helps people to plan more for their retirement, to invest better, to accumulate more wealth, to have precautionary savings, to better manage debt and much more. If advisors want to help people in all of their decision-making, improving financial literacy would be a way to do it. Moreover, clients who are more financially literate are better clients; they would be able to better appreciate the advice that is offered to them and also to follow through on that advice.

Financial literacy is the missing link; without some financial literacy, it will be hard for clients to get the full value of the advice. What this means is not that advisors should bring people back to a classroom, but that advice should be accompanied with explanations and information, so that clients better understand what is provided to them. And advisors should target their clients in that sense. It would be good to differentiate among types of clients depending on their level of financial literacy (which I do not think it is currently done): If people have the same income and the same wealth, but different levels of financial literacy, the advice should not be the same. Olivia Mitchell and I have devised a list of questions that provide a simple test (called the “big three” or the “big five”), so it is very easy to do so now.