Tamara Kostova, CEO of Velexa, empowers institutional clients through customized and embedded investing services.
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Various surveys and tests have been conducted to determine the financial literacy level of the U.K. population. Despite differing methods and quantities of people surveyed, the numbers paint a similar picture: The U.K. is mostly financially illiterate, and the problem is worse among the younger generation, with 26% of those those aged 18-24 seeking financial advice from TikTok. The scene isn't much better in the 55-plus demographic, where 36% obtain the majority of their financial "education" from TV shows.
Financial literacy is important not just to financial institutions, as this impacts everything from consumer spending to retirement to healthcare. When consumers are more financially literate, they often have greater spending power and engage with businesses more sustainably.
Recent surveys include the Shepherds Friendly survey of 2,000 British adults referenced above, the OECD's ranking of 29 countries according to their financial literacy (the U.K. ranked 15), and Wealthify and the CEBR's (Centre for Economics and Business Research) financial literacy benchmark test, which surveyed 2,250 Britons.
In light of this overarching financial illiteracy, it perhaps shouldn't be surprising that the U.K. ranks 11th in the world for having the highest household debt, measured as a percentage of net disposable income—the average U.K. household debt is almost 1.5 times its disposable income.
In 2014, the U.K. made financial education part of the national curriculum, but the subject isn't mandatory in many schools and is often squished in between other topics.
The Impact Of Financial (Il)literacy On The Wealth Sector
Consumers today have more choices than ever for managing their finances and wealth. DIY investing and a preference for robo-advice are on the rise. The sum of these trends equals more accessibility for investors, opening the door wide to people who haven't invested in the past. Even large investment funds are now targeting retail investors to make their revenue goals.
Despite these technological advances, the role of the wealth adviser might be more important than ever. New technology coupled with vastly altered market dynamics mean that the adviser-client relationship depends a lot more on a symbiotic, cooperative approach than it once did.
As mentioned in Brendan Kenalty's NASDAQ article, financial literacy is crucial for successful wealth management. He cites the importance that financial literacy plays in helping investors make informed decisions and the value of approaching financial advice as a collaborative effort. Investors need solid financial literacy to help them set realistic financial goals and also to appreciate more deeply the role that the wealth adviser plays.
In a world of "everything done for you," a lack of financial literacy can lead to an over-dependence on automated tools and finger-pointing when things go wrong.
The Macroeconomic Impact Of Financial Illiteracy
Improved financial literacy has macroeconomic impacts as well. If Britons invested only a quarter of their savings, it could inject £740 billion into the economy.
A lack of financial literacy can spark a more anxious state of mind for retail investors during bear runs, prompting mass withdrawals, which further depresses the market. Retail investors typically have less tolerance for volatile markets and are thus less comfortable with long-term holding strategies, but we've seen Warren Buffet's "think long-term" advice too often proven true to ignore it completely. Prices fall, and prices rise. When they're falling, bank runs can make them fall faster, negatively impacting both macro- and microeconomic positions.
A comprehensive financial education, covering both historical and modern markets, and truly empowering the individual, means that we reduce both personal and national risks to wealth through uninformed, gut-reaction decisions.
U.K. Portfolios Pounded By The Market
U.K. portfolios decreased in value by a third on average in the first nine months of 2022, reports the Financial Times. They note the losses are due to soaring inflation, a struggling sterling, and market losses. Interestingly, foreign investors have taken a larger slice of the U.K. equity pie, possibly motivated by the favourable USD/GBP rate. The interest by foreign investors in owning U.K. stocks indicates a bull attitude about the sterling, the U.K. stock market or both.
A weaker pound can make foreign stock purchases expensive for local investors. However, a portfolio that includes a healthy chunk of foreign stocks and currencies that could out-balance local pressures would hedge against local losses.
This is financial literacy 101—a diversified portfolio.
Wealth management under the current landscape is an intricate dance requiring up-to-date information and an in-depth understanding of markets. Trying to attain that level of acumen from social media and web articles in the absence of a solid grounding in the greater subject is impossible. Whereas many respectable companies do share vital knowledge on social media, I think the difference between expert knowledge and fumbling skills is the groundwork that U.K. investors are missing as a result of a lack of effective financial education.
How Financial Institutions Can Help
Many financial institutions already have internal programs to upskill their employees, but they have a further responsiblity to engage with the public as well, given the resources and priorities to the government. They can offer public seminars and online content that is both accessible and reliable, or begin to work with local school districts to create an ethos of discussing finances from a young age.
Furthermore, financial institutions can also provide products that have embedded education. This is not providing financial advice, as it is not "what" to invest in, but rather "how" to invest smartly. Consider options such as customized content, relevant news and even robo-advisory.
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