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How Technology Can Help Improve Clients' Financial Literacy

Financial institutions and wealth management advisors can help clients better understand their finances by using digital solutions.
Stephen Chen
April 19, 2022
3 min

The need for individual confidence in personal financial planning has never been more paramount. Managing debt, navigating ever changing economic conditions, investment risks, rising inflation, and the increasing need to build a savings habit are compounding the personal financial planning landscape. A lack of understanding of financial planning and the basics of personal finance lead to a perpetual cycle of poor financial decisions. Poor financial decisions have a negative impact on people’s entire lives, and with parents’ financial behaviors being mimicked by their children, the problem can last for generations. 

With a plethora of financial resources available online, you may think that individual financial literacy would be improving. However, a study from the FINRA Investor Education Foundation digging into people’s attitudes about their finances by surveying more than 27,000 individuals found that there was an 8% slip between 2009 and 2018 in the amount of people who could correctly answer most questions about interest rates, inflation, bond prices, mortgage rates, and financial risk (from 42% to 34%). 

Some believe the term ‘financial literacy’ is condescending and thereby preventing people from learning. Would people embrace learning more by using terms such as financial wellness or personal finance? Maybe they would, and many organizations are offering a financial wellness benefit to employees. But realistically, most people will only endeavor to learn about aspects of personal finance when they need something - like a loan, or have a problem - like the inability to pay their bills, or perhaps when they are presented with an opportunity - like how to save $1M by the age of 60. Thus, to be widely successful, the path to financial literacy has to include the immediate availability of digital solutions embedded in every aspect of a person’s financial life, including their needs, problems and opportunities. If we look at the example of a person looking for a loan, imagine that, in addition to information about a loan, a digital solution also provides them with information about how that loan would affect other aspects of their financial life over time - like their savings plan, their net worth, retirement plan, etc. In other words, showing them how every financial decision is part of an overall financial plan. 

There’s no doubt that people want this type of financial learning. But to be successful it will have to meet certain criteria to work. In reports from Capital One and The Decision Lab, they found that 77% of people surveyed worry deeply about their finances, and 82% want outside help but only if it were easily accessible, trustworthy, and affordable. 

Complex concept

Financial literacy is a complex concept encompassing many aspects of how individuals educate themselves to understand the mechanics of smart investing, managing risk in their finances, and engaging in effective financial decision making. Comprehending risk in uncertain financial outcomes is where literacy tends to be the lowest. 

Financial literacy across the masses also will only truly be solved when people have access to highly effective tools and relevant information in every aspect of their financial planning lives. That means educating is not accomplished simply by attending a class. Rather it is a lifelong, ongoing process across a person’s entire life, and embedded in their plan. From early career to later in their career, all the way to early and post retirement, there are layers of opportunities for coaching, education, and advice to help individuals firmly grasp the complex fundamentals of effective financial planning. 

In order to improve financial literacy and make financial planning work, there also needs to be a paradigm shift in how people define their personal plan and get the advice they need. Leveraging technology is critical with a digital-first approach to personal financial planning. The best elements of digital experiences and human interactions must be brought together in a new integrated and collaborative way. This will be a win-win for individuals, financial advisors, and enterprises. 

Putting the personal back into finance

It starts with a plan, and planning is at the core of financial literacy that encompasses a broad spectrum of life events. This includes managing college and credit card debt, or buying a home for the first time, deciding between a Roth or traditional IRA, or managing the complexity of minimizing taxable income through a variety of deferred compensation arrangements. Building financial wellness is the goal, and having a solid plan is the starting point to making better financial decisions throughout life and into retirement. 

The recent SECURE Act (‘Setting Every Community Up for Retirement Enhancement’ Act) signed in 2019, now requires defined contribution plan providers to provide individuals more meaningful personal information in the form of “Lifetime Income Illustrations” that provide an estimate of how much guaranteed retirement income an individual could expect. This is a good start in helping people understand their retirement potential. But much more needs to be available to change individual behaviors with regards to personal finance. 

Imagine that this type of real-time illustration with digital planning capability was ubiquitous and at each individuals’ finger tips in every financially-related experience in their life. Applying for a credit card online with pop up advice and a debt calculator to educate individuals as they are planning their finances. Opening a new savings or brokerage account online with digital advice on the basics of investing and how best to get started. People would be learning on the go and at the moment individuals needed it most. 

Changing people’s behavior is hard, very hard. As such for financial literacy, expecting individuals to stop and go to classes or teach themselves financial concepts is unrealistic. This is where digital solutions for financial planning are best positioned to improve every individual’s financial acumen. Digital planning technology takes people on a journey into the world of financial planning, where they learn as they go by doing, not just in the planning process but in every stage of life. They can experiment and see what’s possible and then they can access help when they need it most and in line with their plan. Leveraging technology with embedded coaching and real-time advice provides the path to true financial literacy.   

This article was written by Stephen Chen from Forbes and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.

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Stephen Chen

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