April is Financial Literacy Month, although recent events remind us that understanding the basics of finance is essential no matter what month it is.
Multi-decade inflation is driving central banks to hike interest rates, taking its toll on consumer confidence. There’s no better time for the financial services industry to communicate the basics and educate investors.
The financial industry is constantly changing. And while it is exciting to talk about the assets that are in vogue, a return to basics is helpful for many investors—even those who think they know the market.
Exactly how much do individuals know about investing basics? The TIAA Institute recently conducted sample research across the US adult population, examining knowledge across several basic financial concepts: budgeting, saving, investing, borrowing, risk, and insuring.
The study found that the uncertainty created by the pandemic has motivated a greater majority of generations—specifically Gen Z, Gen Y, and Gen X—to improve their financial literacy.
So, how can financial professionals help prospects and clients across all generations expand their knowledge and acumen of financial concepts? Firms should start by communicating the need for financial savviness in an increasingly uncertain environment.
Back to Basics
Meme stocks and Reddit communities were all the rage in 2021. But with rising inflation and increased volatility, investors may need to reassess their financial situation and manage their assets, including making decisions about retirement or paying off student debt. In this landscape, getting back to basics may help.
What About Inflation?
With inflation approaching double digits, investing in periods of high growth and low inflation requires a different strategy than in a higher inflationary environment.
Why Interest Rates Matter
As central banks seek to manage inflation, one of their tools is interest rate policy—which impacts more than just bank accounts. Interest rate changes have a direct impact on consumer behaviour.
Educating clients on the differences between fixed and variable rates, as well as the impact of compounding, is essential given the impact on consumer expenses.
Higher interest rates also impact businesses, making new development and expenditures more expensive. And certain companies do better in higher interest rate environments.
Patterns tend to repeat themselves, and educating clients on the phases of business cycles and what types of industries or assets have historically outperformed can provide useful guidance about future investment decisions. Educating clients on factors affecting interest rates and movements—whether up or down—is vital.
How Can Investment Professionals Help?
Investors today have a wide array of investment choices beyond standard stocks and bonds. The metaverse, NFTs, and crypto-coins are captivating topics that are increasingly in the financial press.
But before investors begin to look at alternatives like these, a solid investment foundation is essential—including the impact of risk.
Only 37% of individuals surveyed by the TIAA Institute answered questions correctly about comprehending risk, and this was true across all generations. While alternative assets can have a place in a diversified portfolio, investors should have a better understanding of the volatility and risk involved.
To help clients with financial literacy, investment professionals should begin with the building blocks of knowledge. Clients’ financial prowess can be enhanced by offering them clear, concise, and consistent investment materials.
At Copylab, we specialize in helping asset managers create original and engaging content. Get in touch to find out more.
Evamarie Augustine has spent her entire career in financial services as an investment writer, editor, and content creator. She enjoys putting financial jargon into plain English and loves nothing more than explaining the capital markets to her five children. More articles from Evamarie Augustine