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The report provides an overview of the existing work on financial literacy by collating wide-ranging, independent expert analysis. This analysis confirms widespread ignorance of financial matters, with consumers baffled by concepts such as interest rates and inflation.
Perhaps the most alarming findings came from Professor Annamaria Lusardi, of The George Washington School of Business. She said: “Financial illiteracy is both widespread and particularly severe among specific demographic groups. Low levels of financial literacy are not specific to a given country or stage of economic development. They are found everywhere.”
Research found that asked the impact of a 2 per cent interest rate on a deposit of €100, those giving the correct answer of €102 ranged in Europe from more than 85 per cent in some countries to less than 40 per cent in others. The best-performing nations were the Netherlands, with 84.8 per cent giving the correct answer, Germany, with 82.4 per cent answering correctly, and Switzerland, where 79.3 per cent gave the correct answer.
While understanding of risk and risk diversification is important and affects financial decisions, only a minority of individuals have a good grasp of risk diversification. Not only is the proportion of correct answers low, but a high share of people in many countries respond that they “do not know”. In addition, there seems to be a troubling mismatch between what people believe to be their financial literacy level and what it actually proves to be.
The report highlights the importance of developing partnerships between governments, the financial industry, European institutions and the media in order to promote financial education in an effective manner. The report also confirms the key role that the industry can play in enhancing the quality of financial training of staff and financial intermediaries - brokers, advisers, sales people and others – to help them enable potential investors to make better-informed investment decisions. This is viewed as an effective way for investment managers, who are not in regular contact with end-investors, to contribute to improved investor education.
Additionally, the sweeping review encompasses concrete initiatives undertaken by professional associations and investment managers to promote financial education. These initiatives form the primary material that allowed EFAMA to define detailed guidelines for getting the most out of investor education initiatives. The over-arching message is straightforward: decide what you want to say, to whom you wish to say it, and then keep the message engaging and simple.
The guidelines suggest that the starting point ought to be to ask where most good can be done. Based on analysis of investor education issues and needs, it is necessary to set realistic goals to determine where a company or association can make a difference to the objective of more and/or better investor education in each country. Once this has been achieved, the message needs to be defined and the audience identified. The guidelines state: “Make investor education personal, fun and interesting”, adding: “Plain language will help to ensure that the message is understood and remembered.” Finally, the material must be strictly neutral. “Investor education content that does not promote specific products or brands will inspire more engagement and trust from investors.”