A review of financial literacy programs shows that many are not producing the results hoped for.
In March this year the Beddoes Foundation – a new not-for-profit organisation affiliated with the Beddoes Institute – launched
the Getting Sorted study to underpin the design of two new financial literacy initiatives. We wanted to find the missing link before we finalised the design of the new programs.
Designed as an interactive tool, the study aims to reach 10,000 consumers within the next three months. It has already engaged nearly 8000 consumers, three-quarters of whom do not have an adviser.
This makes it the largest consumer study linking advice and financial literacy with health and wellbeing in Australia. Working with Dr Rebecca Sheils, a psychologist, the foundation developed the study following a review of scientific publications on thinking dispositions, heuristics, problem-solving, and behavioural economics.
The study found that four key thinking styles create either psychological barriers or accelerators to better management of money, investments, superannuation and risk.
Thinking style
It’s about how clients think through financial problems and what thinking style they use.
This brings in factors such as impulsivity and intuition. It has really highlighted the importance of financial advisers addressing the whole person, not only the intellectual part.
What is now clear is that without helping consumers improve their natural or predisposed thinking style, no amount of advice, information or education will enable them to become better at making good financial decisions.
When someone’s thinking style is successfully improved by an adviser, these people’s lives turn around. They start making better decisions; they sign on as clients who are loyal and who actively recommend their adviser to others.
Eleanor Dartnall, principal at Dartnall Advisers, recently reported that by focusing on education, her client referral rate has improved from 2 per cent to 88 per cent. Financial literacy now has a strong business case to support its adoption by advisers.
And in a surprise finding, the study also revealed that financial thinking styles not only impact people’s financial decision-making
but also profoundly affect their emotional, psychological and physical health.
People with healthy financial thinking styles are less likely to let thoughts about their finances harm their relationships. It’s as if healthy financial thinking protects relationships.
Unhealthy financial thinking styles
Importantly, we observed that unhealthy financial thinking styles have detrimental emotional, social, vocational, psychological, and physical health impacts on individuals – independent of financial literacy.
The study showed that thinking about finances negatively affects one in five relationships in Australia – and it doesn’t stop there. People whose relationships were adversely affected by thinking about money also had reduced emotional wellbeing, lowered satisfaction with life and worse physical health.
In addition to the health benefits of improved financial thinking, we now understand how people’s financial thinking styles either inhibit or support the translation of new knowledge into changed behaviour. This is particularly important in the design and roll-out of new financial literacy programs.
We can see that without a healthy financial thinking style, new financial knowledge and skills taught by financial literacy programs produce disappointing results due to unchanged behaviour, despite better knowledge and skills.
Certain financial thinking styles may either create slippage or give traction to new knowledge, skills and advice. If knowledge is the fuel and intellect is the engine, a person’s thinking style is the gearbox. With the car in neutral, it doesn’t matter how fast the engine goes or how full the tank is, the car won’t move without first putting the gearbox into drive. Thinking styles are just that important.
We believe that advisers are in a good position to help people improve their financial thinking style – not only to improve their financial future but also to improve their future health and wellbeing.
A clear picture
The Getting Sorted study has produced the clearest picture to date of how consumers think about money, how this affects their financial decisions as well as their emotional and psychological wellbeing. (Other studies in this area include the ASIC Australian Financial Attitudes and Behaviour Tracker and the ANZ Survey of Adult Financial Literacy in Australia, both of which are ongoing projects.)
The Beddoes Foundation believes it has found the missing link. Using this study, it is now able to improve the delivery of advice and financial literacy, track the impact of advice on advisers’ clients, and track the impact of financial literacy programs
on large groups of consumers.
We now have some international benchmarks and are seeking expressions of interest from potential partners in developing the Getting Sorted study further – as an ongoing tracking tool, or for profiling consumers.
