To find a long-term solution to “the advice gap”, we must focus on early intervention within our educational system. Recent findings from the Education Committee highlight that British children are receiving a financial education deemed “insufficient.” Early interventions to support financial literacy are required or future generations may lack the skills to make informed decisions.
People who have high financial literacy are more likely to build up wealth by making good financial decisions early on. Behavioural Finance tells us that consumers tend to have loss aversion so once wealth is built up are much more likely to seek help in managing that wealth from financial advisers.
The lack of financial education in the UK means many Britons reach adulthood with insufficient understanding of crucial topics like saving, investing, and debt management.
This gap in knowledge often leaves individuals unaware of the importance of seeking financial advice.
Improving financial literacy – and thereby boosting financial engagement – is key to ensuring long-term resilience among UK consumers.
Our abrdn Savings Ladder Index, launched this July, provides the first ongoing barometer of UK adult financial literacy. It revealed that 44 percent of people could not correctly answer at least two of the ‘Big 3’ financial literacy questions, an international standard for comparison.
These are very basic questions – in part on just how interest and inflation work. So, this is really measuring the first base of financial literacy – which is only the start to understanding you need help.
This translates to 23.3 million people, or nearly half of UK adults, being classified as having ‘poor’ financial literacy.
Low financial literacy can lead people to disengage from money matters, posing a significant challenge for advisers. Our research indicates people with high financial literacy were more likely to have used, or be currently, using a financial adviser.
What’s more, if we were able to improve financial literacy levels across the population, advisers would be less likely to have to “unteach” misconceptions or habits.
A good example of this was with Defined Benefit Pension transfers where advisers used to tell me the first stage in the advice process was resetting the client to neutral – moving them to having an open mind rather than “knowing” they were going to transfer before even approaching the adviser.
Reducing the need to educate clients on basics could increase capacity in the industry and help to solve the advice gap.
Improving financial literacy is crucial not only for individual financial well-being but also for the advisory industry. By fostering a financially informed population, we ensure long-term resilience and a more robust client base for financial advisers.
More engaged clients
Our findings show that 34 percent of financially literate individuals have used a financial adviser, compared to just 25 percent of those with poor financial literacy.
Higher financial literacy enables individuals to build wealth more effectively, increasing their need for professional advice to manage their assets.
For advisers, clients with a solid understanding of financial concepts make for more efficient and productive consultations. These clients are more engaged, leading to two-way conversations that save time and enhance the advisory relationship.
Informed clients can better articulate their goals, ask relevant questions, and understand advice, allowing advisers to focus on providing the best solutions. This collaboration not only improves financial outcomes but also increases client satisfaction, fostering stronger, long-term relationships.
Engaged clients are more likely to follow through with recommendations and take proactive steps towards their financial goals.
This active participation benefits both the client and the adviser, as it leads to better financial outcomes and a more rewarding advisory experience.
And it will also make meeting the Consumer Understanding part of Consumer Duty easier overall. Overall a well-informed client base allows advisers to deliver higher-quality advice, operate more efficiently, and achieve better results, ultimately benefiting both parties.