Financial Fluency
What Consumer Understanding of the Language of Finance Means for Advice, Retirement and Asset Management
Order Report - Financial Fluency: What Consumer Understanding of the Language of Finance Means for Advice, Retirement and Asset Management
Overview
The language of investing is complex. Despite all the efforts within the industry to simplify it and make investing concepts and more easily understood, we are failing. Investors are still confused - 81% consumers lack financial fluency.
More specifically, fluency is much higher for consumers with higher assets and higher education levels; men have better understanding than women across all asset levels and Consumers who feel “experienced” at investing are decidedly more fluent. Retirement plan participants have the most challenges and lack the fluency to select investments.
The new 62 page report features 49 exhibits. See table of contents and sample pages below.
Key Findings
- The language of investing is poorly understood. One way to improve fluency is to work with advisors
- Most workplace retirement plan participants face a challenge because most lack sufficient fluency to select investments required or allowed by most plans
- Lack of language clarity causes financial damage. Consumers confused by competing definitions for “passive investing” save less and use fewer products
- The complexity of taxes presents an opportunity for higher value-add advice
- When the technical language to explain complex choices is too difficult to understand, new concepts are needed
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Sample Pages
Table of Contents
Executive Summary
Methodology
1-6
Key Findings and Implications
7
Favorite Statistics
8
Related Research
9
Key Findings
10-58
1: The language of investing is poorly understood. One way to improve fluency is to work with advisors
10-24
1.1: The language of investing is poorly understood. Only 53% of Americans know a “mutual fund” is an “investment product with multiple stocks or bonds overseen by a portfolio manager.”
10
1.2: Most consumers (81%) lack fluency with investing terms
11
1.3: Age improves understanding of investing language, but only ever so slightly
12
1.4: Pre-Retirees are the most fluent, but only slightly more than other lifestages
13
1.5: Fluency is higher among married respondents
14
1.6: Consumers with more education are more fluent than consumers with less education
15
1.7: Three of 10 consumers (30%) who identify as self-directed investors did not know the best definition for even one term
16
1.8: Consumers with higher assets are more fluent than lower-asset consumers
17
1.9: Gender affects fluency. Twice as many men as women got 5 or more correct. One in 3 female respondents got none correct
18
1.10: Men have better understanding than women across all asset levels
19
1.11: Women are more likely than men to respond “don’t know” for two or more terms
20
1.12: Consumers who feel “experienced” at investing are decidedly more fluent
21
1.13: One way to gain experience with investing is by working with an advisor
22
1.14: Consumers who use advisors regularly are more fluent than consumers who do not
23
1.15: Being in regular communication with a paid investment professional improves fluency among lower-asset groups
24
2: Most workplace retirement plan participants face a challenge because most lack sufficient fluency to select investments required or allowed by most plans
25-35
2.1: The four basic investment selection terms are important for retirement plan participants because participants are responsible for picking their own funds and these terms are fundamental to their ability to select investments
25
2.2: One in 3 (29%) potential participants in workplace retirement plans did not know any of the definitions for the 4 basic investment selection terms
26
2.3: Language barriers may be deterring eligible participants from plan participation. More participants who are eligible but not participating do not know the best definition for any of the terms vs. participants (38% vs. 29%)
27
2.4: The language barrier is most acute among plan participants with less than $100K in total assets. Many participants with $100K-<$500K also face language barriers
28
2.5: Millennial plan participants need the most help in understanding basic concepts, but results are low across all generations
29
2.6: Understanding of basic investment selection terms is lower among female participants than male participants. Less than 1 in 3 women (29%) correctly understood 3+ terms vs. 43% of males
30
2.7: In a distressing twist, participants with no pensions are less likely to understand basic definitions than participants with at least some pension income
31
2.8: Unfortunately, workplace programs, as currently structured, do not improve fluency with basic investment selection terms
32
2.9: Building fluency with basic investment selection terms will provide benefits to financial behaviors that extend beyond the retirement plan
33
2.10: Better fluency with basic investment selection terms is associated with better financial wellness, including better funded emergency funds
34
2.11: Within the income range $48K-<$96K, participants who are more fluent in basic investment selection terms have more months of funded emergency funds
35
3: Lack of language clarity causes financial damage. Consumers confused by competing definitions for “passive investing” save less and use fewer products
36-48
3.1: Turning to the term “passive investing,” a nuanced concept that guides investing strategy, half of all consumers do not know the definition. Of consumers who chose a definition, more picked ”buy and hold” than “invest in an index”
36
3.2: “Buy and hold” resonated more than “invest in an index” across all generations as the best definition of “passive investing.” Then again, half of consumers did not pick between the two definitions and instead selected “don’t know"
37
3.3: Consumers who consider themselves “experienced” investors are more likely to pick the technical “invest in an index” definition rather than the intuitive “buy and hold” definition.
38
3.4: Consumers who “don’t know” the definition of “passive investing” are more likely than consumers who picked a definition to have high cash allocation and lack exposure to the stock market
39
3.5: Consumers who “don’t know” what “passive investing” means are unlikely to own mutual funds, historically one of the easiest products retail investors can use to gain access to capital markets
40
3.6: Consumers who “don’t know” what ”passive investing” means save less than consumers who pick either “invest in an index” or “buy and hold"
41
3.7: Consumers who “don’t know” what “passive investing” means are less likely to have online brokerage accounts than consumers who picked “invest in an index” or “buy and hold”
42
3.8: Consumers who “don’t know” what “passive investing” means are less likely to “have a retirement savings plan and contribute to it regularly"
43
3.9: Consumers who “don’t know” what “passive investing” means are less likely to allocate any savings to IRAs
44
3.10: Consumers who “don’t know” what “passive investing” means are more likely to not “feel on track to accumulating the savings I’ll need to retire"
45
3.11: Most stores have a significant number of customers who “don’t know” and are therefore at risk of language confusion holding them back from being engaged with saving and capital markets, both necessary to achieve financial success
46
3.12: The intuitive definition is displacing the technical one to such a degree that even 37% of consumers who own exchange-traded funds (ETFs) selected “buy and hold"
47
3.13: Most stores can expect that most of their customers embrace the intuitive “buy and hold” definition of “passive investing"
48
4: The complexity of taxes presents an opportunity for higher value-add advice
49-55
4.1: The complexity of taxes presents an opportunity for higher value-add advice
49
4.2: Inside Advice® Benchmarking finds that almost no advice and guidance experiences currently offer tax optimization
50
4.3: A key reason for participating in employer-sponsored retirement plans is “benefit from tax deferral"
51
4.4: “Benefit from tax deferral” is more important to workplace plan participants in upper income levels
52
4.5: Consumers are likely to prioritize immediate tax considerations over longer-term tax optimization when they allocate saving across account types
53
4.6: As they near retirement, older people become more aware of the importance of taxes and want to optimize taxes
54
4.7: Tax optimization advice is a big unmet need once consumers become aware of it
55
5: When the technical language to explain complex choices is too difficult to understand, new concepts are needed
56-58
5.1: The car industry provides an interesting example of how developing new, easier-to-understand concepts, such as categories, can relieve the difficulty of explaining complex language necessary for consumers to understand technical features
56
5.2: Complex concepts require complex language. In investing as in cars, consumers will likely be more empowered by new shared concepts for which language can be more intuitive vs. attempting to provide fluency in existing technical language
57
5.3: The simplicity of the concept and the language is why the majority of consumers like Inside Advice® Grid, and 1 in 6 likes it very much. The remainder are largely neutral and open, ready to hear more
58
Data Dictionary
59-60
Appendix
61
Glossary
62
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