How Financial Literacy Adds Value

How Financial Literacy Adds Value

Here’s the case for why advisors should think about clients’ financial literacy.

Only 15% of affluent Americans feel knowledgeable about financial products. This creates a huge opportunity for advisors.

By emphasizing timely and relevant financial education, you can help clients understand the value you add, strengthening your relationship.

How do you test client financial literacy?

Financial literacy is the ability to make educated and informed decisions about your financial situation. Clients who don’t have that ability often create more work for advisors.

How can you test a client’s financial literacy? Difficult conversations about overspending or insufficient saving are simple cues that demonstrate a client’s knowledge gap. They also open the door for advisors to provide the necessary education. You can use value-added services like financial planning to both educate and serve your client’s broader needs.

Why is financial literacy important?

First, it increases client confidence. Clients with written financial plans are more likely to feel confident and knowledgeable about their financial situation. They’re also more likely to have a budget, rainy day fund and monthly savings goal and, as a result, to be on track to meet their retirement needs.

Second, it encourages goals-based planning. Research suggests that a goals-based approach can lead to increased wealth accumulation. However, effective goals-based planning requires clients to have a baseline level of financial knowledge. Advisors who assess their clients’ financial literacy and provide some basic training can increase the value their clients receive throughout the planning process.

How can you add financial literacy to your practice?

Adding financial literacy initiatives to your practice is simple. Here are a few ways to get started:

  • Begin relationships with due diligence and client profiling to set a baseline for how to gauge client understanding. Client profiling will uncover a client’s areas of concern as well as any knowledge gaps.
  • Communicate the “why” and “how” of everything you do for clients so they understand the benefits you provide. 
  • Adopt an educational mindset by implementing financial wellness initiatives. Many Broker-Dealers already offer materials for this purpose. If yours does, take advantage of them! You can also offer seminars or speaking engagements that address prospects and clients alike. Both audiences can benefit from your wisdom—just remember to adhere to compliance requirements when giving advice.
  • Create written financial plans for clients. Only 14% of baby boomers have a written retirement strategy. Clients need to see all the available information before they can ask the right questions. A written plan can help clients see their entire financial picture with more clarity.

How does this benefit you?

An education-first mentality can help you demonstrate additional value beyond your asset management or planning services. First, it can clearly position you as an expert, setting up new opportunities to communicate. These become opportunities to demonstrate value and broaden relationships. Additionally, adopting such a mentality builds trust, as it indicates your intent to put the client’s needs first. You might become the client’s go-to expert for any major life event. And when it comes down to it, better-informed clients are often more appreciative clients. It goes without saying that clients who appreciate you are more likely to refer you to friends and family.

Use technology to boost financial literacy

It can be difficult to fully grasp a client’s financial wellness if you can’t see the whole picture. Implementing data aggregation technology can help you capture and report on assets and liabilities you don’t manage, like bank accounts or home loans—ensuring that you have well-rounded and comprehensive discussions. Aggregation tools can also capture the information you need to create conversations about tricky topics, such as overspending.

In addition, technology makes it easier for you to visually illustrate important yet confusing concepts like compounding, volatility and diversification. By using graphs that provide real-time feedback on how potential changes would impact their ability to meet financial goals, you can keep clients engaged and give them a more comprehensive picture.