April is National Financial Literacy Month, and for advisors and their clients, the timing couldn’t be better to focus on this particular type of financial literacy.
Most standard financial literacy programs concentrate on the very important basics. Whether game-like, multimedia or part of a now seemingly old-fashioned print-based effort, the programs often have an air of “eat your vegetables” to them — and maybe that’s not so bad. All Americans, rich and poor, young and old, should understand the basics of credit cards, interest rates, loans (personal, auto and school), and saving and investing. Learning how not to be snookered by financial predators is also a must-have skill.
Financial advisors who engage in pro bono financial literacy education efforts to spread understanding of the ABCs of money in today’s economy are to be commended. Over the years, their commitment to consumer financial education has helped change the public’s perception of the industry from one pushing stocks and bonds to a profession that tries to improve people’s lives through sound financial planning.
For clients, explaining what’s going on under the hood of the financial system can be especially helpful.
Nevertheless, the content of many financial literacy programs consists of subject matter that most advised clients — who tend to be affluent and older — already have mastered. Most know about workplace savings programs, the need for insurance and how to get a good deal on a car loan. Sure, they can use assistance in those and other areas, but few are apt to become ensnared in a mess of payday loan debt, for example.
For advised clients, financial literacy that explains what’s really going on under the hood of the financial system can be especially helpful since that knowledge can help allay fears, keep emotions under control and inform better decision-making. The current banking crisis is a case in point.
General media coverage of recent bank failures was filled with images of depositors standing in line outside bank branches and sound bites of bank regulators saying everything was OK. Clear explanations of what precisely caused Silicon Valley Bank and Signature Bank to go under, however, required some effort to find. For many people, the concept that SVB’s Treasury securities — presumably, the safest investments in the world — had dropped in value probably seemed incomprehensible. In fact, for many advised clients, the situation was analogous to the confusion they felt when their stock and bond holdings dropped in value last year as the Fed started raising interest rates.
While understanding the inverse relationship between interest-rate moves and the direction of bond prices should be a given for investors, any financial advisor can probably attest to the fact that many clients are befuddled by bond math (and are loath to admit they don’t understand what’s going on.) Similarly, many clients probably don’t know where the cash in their account is being held, how FDIC coverage works, or what SIPC is and what it does and doesn’t do.
At a time of financial stress, an advisor’s plain-language explanation of financial system intricacies may not attract clients, but it certainly is likely to help cement ties to current ones.
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