Is the key financial literacy or products? CHASM Professor Adele Atkinson shares insights from the Florence School of Banking & Finance Annual Conference.
Education alone - and especially optional education - will not make people do something they didn’t know they wanted to do
I am recently back from the Florence School of Banking & Finance Annual Conference “The EU Savings and Investments Union: Opportunities for European Savers and European Companies”. The Savings and Investments Union (SIU) includes plans intended to redirect private savings into productive investments – something that has also been discussed in the UK.
Initiatives like the SIU require the willing participation of consumers. The EU has therefore developed a multipronged approach to motivate the people of Europe to change their savings habits, incorporating an overarching Financial Literacy Strategy and improved access to savings and investment accounts (SIAs) with low minimum contribution rates.
At the conference, we were asked whether financial literacy or financial products were the key to unlocking European savings. This is not an easy question to answer, but my years of research and experience suggest that for an approach to have a high chance of success it should:
Aim for Awareness, Inclination, Action. Education works – high quality education imparts knowledge and skills, and this is true whether the topic is financial literacy or chemistry. But education alone - and especially optional education - will not make people do something they didn’t know they wanted to do. Any communication campaign needs to raise awareness of the potential benefits of investments, improve people’s inclination to find out more, and then provide them with the skills to act.
Work on improving Competencies, Confidence and Opportunity. Plenty of research shows that financial literacy levels are not the only thing that matters. People also need to have confidence in their own abilities, and opportunities to act. In this case, the opportunity must come from ready access to appropriate financial products that are designed to meet their needs.
Remember that people are not only seeking security. An over emphasis on long-term investment policies may prevent people from using their savings to meet their need for freedom and pleasure, consequently reducing their overall financial wellbeing.
Even so, I am also concerned that consumers are risk-weary. They face ever more risks, from war and environmental risks, through to the stubbornly high cost of living and increased likelihood of falling victim to scams and fraud. From this perspective, much of the private savings that people hold can be seen as money that has been accumulated for peace of mind, and trying to incentivise them to take financial risks on top of everything else may have unintended consequences on wellbeing.
Consumers are risk-weary. They face ever more risks, from war and environmental risks, through to the stubbornly high cost of living and increased likelihood of falling victim to scams and fraud.
With this in mind, I feel that the best policy mix would start with some form of opt-out SIA (probably provided via payroll), that facilitates tentative steps into investment combined with a consumer-friendly dashboard that shows investment performance and supports education and guidance. This mix ensures that people can easily choose not to save or invest, but also helps them to learn by doing, whilst simultaneously improving their understanding and skills through education, and pointing them to advice when relevant.
Whichever approaches are tried, it is just as important to explain the mechanics of moving money into and out of an investment as it is to cut through the jargon and help people to understand the options. Some may be locked into savings products that pay lower interest when withdrawals are made or as balances reduce, leaving them uncertain about making withdrawals. They will need help to assess the potential gains from switching in such circumstances, even if they are inclined to do so. First time investors will also need to know how to invest their money - and crucially - how they can access their funds if the need arises. They will also benefit from clear actionable steps to help them to stay calm when markets dip.
As with most things, it is best to start early. Providing financial education in schools means that future generations of adults will be better prepared to make informed decisions about their finances, including whether to invest. But exactly how schools should incorporate financial education into the classroom is still an open question. Research from the US suggests that standalone classes are needed to change credit scores and improve financial wellbeing. More research is urgently needed to explore whether this is the case globally, and whether it is the same for other outcomes such as investment behaviour (studies of adults suggest that it is easier to change investment behaviour than borrowing behaviour).
Whilst we might talk about financial security in the context of adult’s financial wellbeing, for students and young people ‘growth’ could be a more enticing aim. A focus on growth could encompass personal development and discussions around learning, entrepreneurship and employment, as well as investing, passive and diversified income streams. Furthermore, talking about plausible paths to realistic growth provides widespread opportunities to prepare young people to be future orientated, allowing them to contemplate the economic and environmental implications of their decisions and potentially choose career paths or build portfolios that are consistent with their ethical stance. That really would be an investment worth making.
Upcoming research on financial education
CHASM is partnering with The Money Charity for a financial education initiative co-designed and delivered with ClearScore UK. The project seeks to determine the impact that targeted financial education can have on people’s financial wellbeing and resilience.
Professor of Practice in Financial Literacy and Wellbeing (CHASM)
Professor Atkinson's research interests are primarily around understanding the needs of financial consumers.
