By Robert Kerzner
LIMRA recently tested Americans’ financial literacy and I have to say, while I was not surprised by the results, I was certainly disappointed. One third of Americans answered less than half of the answers correctly, and when asked to measure their own level of knowledge, the majority said they had little to no knowledge of financial matters.
Why does this matter? Behavioral economic research suggests when people are unsure what to do with their finances, they often do nothing — and certainly our research attests to that. More than 50 percent of U.S. households say they need life insurance, yet fewer than one quarter will actually shop for it in the next year. Half of Americans are not contributing to a personal retirement plan, yet two-thirds say they are concerned they aren’t saving enough for a secure retirement.
Today, consumers have more access to information than they ever had in the past. The Internet offers pages and pages of information about financial products and services. There are financial advice columns and calculators available online — all targeted at helping consumers make the right financial decisions. So, why are fewer Americans protected against the risk of living too long, dying too soon or becoming disabled? I believe — and behavioral economics proves — that information alone will not provoke people to take the steps to ensure they and their families are financially secure.
LIMRA research has shown that consumers who use advisors are more likely to save for retirement (78 percent versus 43 percent), they are likely to save at a higher rate (61 percent versus 38 percent) and more feel confident that their savings will last throughout their retirement (71 percent versus 43 percent). This is great news. We finally have solid proof that advice matters. Unfortunately, the most common advice model — commission-based advice — is under attack and the casualties are likely to be middle income consumers.
Throughout the world, legislators and regulators are banning commission-based advice. Norway, Finland, Netherlands, Australia and the UK have all banned commissions. In Asia, Singapore is looking at limiting or changing management and producer commissions. Even here is the U.S., there has been much discussion about instituting a universal fiduciary standard, which would effectively ban commission-based advice. The problem is, our research has shown that most people are willing to spend far less than the cost of providing that advice. LIMRA research reveals 8 out of 10 Americans say they only would pay $100 or less for financial advice. We know that $100 would not cover the cost of providing financial advice. So, who suffers? Those who need the most help — middle income Americans who are facing growing financial responsibilities, like funding their own retirement, with fewer resources and less knowledge to know how best to achieve their financial goals.
We know how important advisors are to the equation. Too many people are living on the edge. Despite recognizing the importance of a financial safety net, only 30 percent of Americans believe they have an adequate safety net in place1. I am not saying that commission-based advice is the only solution. I just hope U.S. regulators will continue to allow people to have choices about how they should get their advice, and that commission sales people will continue to have a valuable role as part of the advice model.
1 MetLife Study of the American Dream