Financial literacy in the United States is low. And things don’t look to be getting better anytime soon.
Because of that, financial advisors play a crucial role in ensuring that the nation’s most vulnerable communities are protected against those who wish to take advantage of that lack of understanding, and shielded from making bad decisions that could leave them penniless in their golden years.
That was the message delivered Thursday morning by FINRA Senior Vice President of Investor Education Gerri Walsh as she testified before the Senate Special Committee on Aging. During a hearing called Financial Literacy: Addressing the Unique Just-in-Time Decisions Older Americans and People with Disabilities Face, Walsh explained what’s at stake when Americans don’t fully comprehend the ins and outs of their finances.
“For investors, moving from the asset accumulation phase of life to the decumulation phase is typically characterized by increased uncertainty and the need to make point-in-time, highly consequential decisions on the one hand, and limited or no experience upon which to draw to make these decisions on the other,” Walsh said in her testimony. “Investors do not know, for example, how long they will live. Nor can they predict how their health will evolve, how they will occupy their time in retirement and what financial demands they will face as they age.
“The decumulation phase of life requires investors to make important financial decisions they have not previously encountered and will not likely encounter a second time, all while having little or no opportunity to correct mistakes.”
The hearing was led by U.S. Senators Bob Casey and Tim Scott. The Pennsylvania Democrat and South Carolina Republican are urging seniors and people with disabilities to prioritize financial readiness as Americans craft their 2022 resolutions.
Other witnesses at the hearing included Cindy Hounsell, president of the Women’s Institute for a Secure Retirement; Dorothea Bernique, executive director of the Increasing H.O.P.E. financial training center in South Carolina; and Patti Szarowicz, an aging and disability resource counselor for the Atlanta Regional Commission.
In conjunction with the hearing, Casey and Scott released a bipartisan report that examines the real-time information and help aging and disabled Americans need when life events throw their financial plans into disarray.
“This year, more than 10,000 Americans will turn 65 every day. Around kitchen tables all across the country, retirees and seniors are asking, ‘Should I take my Social Security or should I wait?’ and ‘Do I need to sign up for Medicare, or can I wait?’ These are not simple decisions,” Casey said.
“Financial literacy is key to making the most out of the financial opportunities our country has to offer,” Scott added. “And much like education, it never loses its power, no matter your stage of life.”
In her role at FINRA, Walsh oversees the organization’s investor education program. She is also President of the FINRA Investor Education Foundation where she manages initiatives to educate and protect investors.
Walsh said the nation’s financial literacy decline is steady and staggering. In 2009, 42% of adults demonstrated high levels of financial literacy as measured by a widely used five-question financial literacy quiz available on the FINRA website.
The quick quiz asks respondents questions to test their knowledge about interest rates; inflation; the relationship between interest rates and bond prices; the difference in payments between a 15-year mortgage and a 30-year mortgage; and if buying a single company’s stock provides a safer return than a stock mutual fund.
The number of Americans who exhibited high financial literacy via the test dropped to 34% in 2018, and Walsh said an early look at the 2021 data suggests that number is even lower today.
“While the full reasons for the decline are not known and likely manifold, the drop is driven, in large part, by younger Americans,” Walsh said in her testimony. “The financial literacy of Americans 55 and older has been stable, though we do see financial literacy levels among the 70 plus population falling. Despite increasingly low levels of financial literacy, 71% of Americans believe they have a high level of financial knowledge, suggesting widespread overconfidence.”
Financial knowledge varies across demographic groups, Walsh said. Women and people of color generally exhibit lower levels of financial literacy than their white, male counterparts.
She added that low levels of financial knowledge pose a particular risk to people with disabilities. Walsh highlighted a FINRA Foundation-funded study by the National Disability Institute, Stony Brook University School of Social Welfare and the University of Tennessee College of Social Work that found the cost of living for Americans with disabilities to be 29% higher than those without.”
“The findings suggest that Americans with disabilities, perhaps even more than Americans without a disability, need to have the tools and knowledge to make effective and informed financial decisions,” Walsh said.
But the lack of understanding goes beyond traditional demographic groups. For example, Walsh said one in 10 gig economy workers report not understanding how to save for retirement was the main reason they are not interested in saving in a hypothetical retirement plan.
Factors beyond financial literacy can affect decision-making in older age as well, Walsh said. Studies indicate that loneliness, when paired with low cognition, is associated with poor financial and health decision-making in older adults.
That makes some senior investors prime targets for criminals and con artists looking for marks.
“Impaired decision-making can result in financial fraud victimization,” Walsh said. “For older adults, understanding and preventing fraud is particularly important, as they typically lack sufficient time to recover from the toll of financial fraud.”
Financial literacy is important in all of life’s stages, but Walsh said it plays a critical role as we age and suffer cognitive decline or health complications that can lead to impaired decision making.
Advisors being mindful of client health, the uncertainty it creates and the role it plays in their portfolios was the focus of a recent study from Hamilton College Professor of Economics Stephen Wu. Health is also expected to become a commonly discussed topic between advisors and investors as the pandemic continues.
With so many factors to consider, advisors are invaluable resources when it comes to keeping Americans financially healthy. Walsh said FINRA is more committed than ever to supporting advisors who are serving their clients well through training, and making sure the bad actors are quickly identified through regulation.
“Tackling the issue of financial literacy and building financial wellness in our country will take multiple players on multiple levels,” Walsh said. “And what we have seen is that financial education does work.”