It is a contradictory gap that the next wave of ASIC’s National Financial Capability Strategy, which is set to be released shortly, can help bridge.
In my career as a financial adviser and, before that, an accountant, I experienced first-hand the challenge of helping people become more adept at managing their money. Long before goals-based advice became a core element of the financial planning profession, I saw the difference goals made to my clients in developing the confidence and resilience to change their financial situation.
Knowledge and skills have long been the cornerstone of financial literacy. But as the global conversation evolves to focus on the behaviours that contribute to financial capability, there’s an equally critical element that is often overlooked.
Building lasting financial wellbeing needs goals. Without tangible personal goals, sustaining behavioural change will remain a struggle. Goals are central to transforming theoretical knowledge into practical strategies for achieving them.
There’s a big difference between simply setting a goal and having a meaningful connection with it.
Advisers have a key role to play. Using a combination of coaching, tools and advice, they can increase people’s self-awareness of their financial behaviour and boost their motivation. Combined with their expertise in developing robust financial plans, they can help people develop all three essential elements of financial wellbeing.
Building financial capability isn’t a ‘one-and-done’ process. While it centres on how we accumulate money and how we spend it, our choices and circumstances throughout life make the reality of financial capability at different ages and stages very different.
Again and again, research shows that it’s easier to become proficient at new skills when we start young.
That might begin with saving up pocket money for a special purchase, or accompanying parents on a visit to their financial adviser. Kids learn that their financial health needs to be looked after, just like they need regular medical check-ups.
Technology offers new opportunities to engage with children and teenagers and help them build financial capability.
Interactive tools such as Banqer, a financial education platform supported by the Financial Planning Association of Australia and Netwealth, use practical real-world examples and the ability for children to earn rewards in a safe environment. Outside the classroom, apps can help children earn pocket money and practice safe spending and saving in an increasingly cashless economy, including Spriggy and Pennybox.
However many tools and lessons we give children, though, watching what the adults in their lives do is still one of the most powerful influences. That’s one more reason why it’s never too late to make a change for the better.
Even if we set out on the right foot, making perfect financial decisions all the time is impossible. Life has too many curveballs and temptations to make that anything beyond an unrealistic ideal. Everything from rocketing property markets to ill health or unemployment can derail the best laid plans. Under increased pressure, people can revert to bad habits or the path of least resistance.
Technology has made it easier than ever to spend what we have – and haven’t – got. From contactless payments to online buy-now pay-later systems like AfterPay and instant online micro-loans, a wave of new businesses has been created from getting consumers to part with more of their hard-earned money with less friction.
Our financial behaviour is often hampered by strong emotions and our inherent personal biases. Small nudges in the right direction are the place to start. But they need to be given time.
Incremental changes accompanied by positive reinforcement have been proven to effectively influence behaviour. They are easier to keep up, and successfully maintaining them in turn provides a spike in motivation that drives further change. Behavioural economist Richard Thaler was awarded a Nobel prize earlier in 2017 in recognition of his pioneering work developing this concept.
Just as technology has accelerated spending, it also offers solutions to reduce the pain points we face in establishing healthy financial habits.
Technology has created powerful connections between people through social media platforms. Equally, it has heightened the immediacy of those connections, enabling people to interact instantly at any time of day, from virtually anywhere in the world. It has the same ability to develop powerful connections between people and their finances, along with greater convenience and real-time behaviour.
Likewise, it offers the potential to build stronger connections between people and their financial goals. Regular visual reminders, alerts, and updates indicate progress – or gently nudge people back on track. Part of that lies in increasing visibility of their actual behaviour, which can differ markedly from their perceived actions.
The current propensity to take on high levels of debt is one behaviour that regulators are increasingly keen to rein in. APRA Chairman, Wayne Byres, said at the Australian Securitisation Forum in November that “household indebtedness is high: perhaps more importantly, the trajectory is clearly for it to rise further.”
Advisers must play a crucial role in bridging any financial capability gaps their clients have given the risks inherent in high debt. If official interest rates increased by just 2% today, it would have the same impact as when rates were 18% in 1989, according to Frontier Advisors.
Developing financial capability delivers both personal and broader economic benefits. When industry collaborates with consumers, regulators, and innovators, the outcomes can improve our collective wellbeing.
This article was also published in Professional Planner on Monday 8th January, 2018 under the title ‘Goals make clients keen to master money'.